    [Senate Hearing 107-144]
    [From the U.S. Government Publishing Office]

                                                    S. Hrg. 107-144 (Pt. 3)

                             NATIONAL ENERGY ISSUES

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

                                    HEARING

                                   before the

                                  COMMITTEE ON
                          ENERGY AND NATURAL RESOURCES
                              UNITED STATES SENATE

                          ONE HUNDRED SEVENTH CONGRESS

                                 FIRST SESSION

       TO RECEIVE TESTIMONY ON PROPOSALS RELATED TO REMOVING BARRIERS TO
          DISTRIBUTED GENERATION, RENEWABLE ENERGY AND OTHER ADVANCED
      TECHNOLOGIES IN ELECTRICITY GENERATION AND TRANSMISSION, INCLUDING
      SECTION 301 AND TITLE VI OF S. 597, THE COMPREHENSIVE AND BALANCED
     ENERGY POLICY ACT OF 2001; SECTIONS 110, 111, 112, 710, AND 711 OF S.
    388, THE NATIONAL ENERGY SECURITY ACT OF 2001; AND S. 933, THE COMBINED
      HEAT AND POWER ADVANCEMENT ACT OF 2001 AND TO RECEIVE TESTIMONY ON
     PROPOSALS RELATING TO THE HYDROELECTRIC RELICENSING PROCEDURES OF THE
     FEDERAL ENERGY REGULATORY COMMISSION, INCLUDING TITLE VII OF S. 388,
      TITLE VII OF S. 597; AND S. 71, THE HYDROELECTRIC LICENSING PROCESS
                            IMPROVEMENT ACT OF 2001

                   PROPOSALS RELATED TO GLOBAL CLIMATE CHANGE

                    COMPREHENSIVE ELECTRICITY RESTRUCTURING

                                   __________

                                 JULY 19, 2001

                                 JULY 24, 2001

                                 JULY 25, 2001

                                 JULY 26, 2001

                                   __________

                                     PART 3

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

                                     ______

                        U.S. GOVERNMENT PRINTING OFFICE
    76-057 PDF                  WASHINGTON : 2001

    For Sale by the Superintendent of Documents, U.S. Government Printing Office
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                   COMMITTEE ON ENERGY AND NATURAL RESOURCES

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

                        Robert M. Simon, Staff Director
                          Sam E. Fowler, Chief Counsel
                   Brian P. Malnak, Republican Staff Director
                   James P. Beirne, Republican Chief Counsel
                             Deborah Estes, Counsel
                         Mary Katherine Ishee, Counsel
                         Shirley Neff, Staff Economist
                     Leon Lowry, Professional Staff Member
                        Bryan Hannegan, Staff Scientist
                 Howard Useem, Senior Professional Staff Member

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearings:
        July 19, 2001................................................     1
        July 24, 2001................................................   109
        July 25, 2001................................................   169
        July 26, 2001................................................   261

                                   STATEMENTS
                                 July 19, 2001

    Bettenberg, William, Deputy Director, Office of Police Analysis,
      Department of the Interior.....................................    58
    Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     1
    Birnbaum, S. Elizabeth, Director, Government Affairs, American
      Rivers.........................................................    78
    Boyd, Robert T., Vice President, Enron Wind Corporation..........    21
    Craig, Hon. Larry E., U.S. Senator from Idaho....................     2
    Demeter, Christian P., Chief Executive Officer, Antares Group,
      Inc............................................................    25
    Garman, David K., Assistant Secretary, Energy Efficiency and
      Renewable Energy, Department of Energy.........................     5
    Gray, Gerald J., Vice President for Policy, American Forests.....    90
    Hall, Mark, Vice President, External Affairs, Trigen Energy
      Corporation....................................................    29
    Keil, Julie, Director of Hydro-Licensing and Water Rights,
      Portland General Electric Company..............................    95
    Murkowski, Hon. Frank H., U.S. Senator from Alaska...............    12
    Robinson, J. Mark, Director, Office of Energy Projects, Federal
      Energy Regulatory Commission...................................    68
    Starrs, Thomas J., J.D., Ph.D., Senior Partner, Kelso Starrs and
      Associates, L.L.C..............................................    36
    Thomas, Hon. Craig, U.S. Senator from Wyoming....................     4

                                 July 24, 2001

    Bingaman, Hon. Jeff, U.S. Senator from New Mexico................   109
    Blake, Francis, Deputy Secretary of Energy.......................   113
    Burns, Hon. Conrad, U.S. Senator from Montana....................   127
    Campbell, John B., Vice President, AG Processing, Inc., Omaha, NE   138
    Cassidy, Frank, President and COO, PSEG Power LLC, Newark, NJ....   143
    Domenici, Hon. Pete V., U.S. Senator from New Mexico.............   133
    Gebolys, Gene J., President, World Energy Alternatives, LLC,
      Chelsea, MA....................................................   149
    Hagel, Hon. Chuck, U.S. Senator from Nebraska....................   110
    Hill, Gardiner, CO2 Program Director, BP..............   146
    Johnson, Hon. Tim, U.S. Senator from South Dakota................   136
    Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............   132
    Lyons, James R., Professor, Yale School of Forestry and
      Environmental Studies, New Haven, CT...........................   151
    Murkowski, Hon. Frank H., U.S. Senator from Alaska...............   111
    Risbrudt, Christopher, Acting Associate Deputy Chief for Programs
      and Legislation, Forest Service, Department of Agriculture.....   116

                                 July 25, 2001

    Ayers, Jeffrey D., Senior Vice President and General Counsel,
      Aquila, Inc....................................................   184
    Bingaman, Hon. Jeff, U.S. Senator from New Mexico................   169
    Blake, Francis, Deputy Secretary of Energy.......................   170
    Burns, Hon. Conrad, U.S. Senator from Montana....................   182
    Cook, David N., General Counsel, North American Electric
      Reliability Council............................................   245
    Craig, Hon. Larry E., U.S. Senator from Idaho....................   177
    Dushaw, James L., Director, Utility Department, International
      Brotherhood of Electrical Workers..............................   225
    English, Glenn, Chief Executive Officer, National Rural Electric
      Cooperative Association, Arlington, VA.........................   204
    Hamilton, David, Policy Director, Alliance to Save Energy........   228
    Murkowski, Hon. Frank H., U.S. Senator from Alaska...............   175
    Nugent, William M., Commissioner, Maine Public Utilities
      Commission, and President, National Association of Regulatory
      Utility Commissioners..........................................   219
    Rouse, James B., Associate Director of Energy Policy, Praxair,
      Inc., and Chairman, the Electricity Consumers Resource Council.   235
    Rowe, John W., President and Co-Chief Executive Officer, Exelon
      Corporation, on behalf of the Edison Electric Institute........   189
    Thilly, Roy, Chief Executive Officer, Wisconsin Public Power,
      Inc., on behalf of the American Public Power Association.......   195
    Ward, Stephen, Public Advocate, State of Maine, and President,
      the National Association of State Utility Consumer Advocates...   240

                                 July 26, 2001

    Bingaman, Hon. Jeff, U.S. Senator from New Mexico................   261
    Breathitt, Linda, Commissioner, Federal Energy Regulatory
      Commission.....................................................   280
    Brownell, Nora Mead, Commissioner, Federal Energy Regulatory
      Commission.....................................................   292
    Craig, Hon. Larry E., U.S. Senator from Idaho....................   262
    Hebert, Curt, Jr., Chairman, Federal Energy Regulatory Commission   274
    Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............   302
    Massey, William L., Commissioner, Federal Energy Regulatory
      Commission.....................................................   283
    Salisbury, Jennifer, Secretary of Energy, Minerals and Natural
      Resources, State of New Mexico, on behalf of the Western
      Governors' Association.........................................   263
    Wood, Patrick III, Commissioner, Federal Energy Regulatory
      Commission.....................................................   288

                                   APPENDIXES
                                   Appendix I

    Responses to additional questions................................   313

                                  Appendix II

    Additional material submitted for the record.....................   317

                             NATIONAL ENERGY ISSUES

                                  ----------

                            THURSDAY, JULY 19, 2001

                                           U.S. Senate,
                     Committee on Energy and Natural Resources,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 9:30 a.m., in
    room SD-366, Dirksen Senate Office Building, Hon. Jeff
    Bingaman, chairman, presiding.

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

        The Chairman. We have a two-part hearing today. In the
    first half we will discuss legislative proposals to address
    some of the barriers that currently inhibit the market
    penetration of distributed generation technologies, including
    distributed power from renewable energy.
        This cluster of clean and efficient technologies includes
    fuel cells, wind, photovoltaics, and microturbines. In contrast
    to electricity produced at large central powerplants, which
    travels over transmission and distribution lines to reach the
    ultimate consumer, distributed generation is smaller in scale
    and produces electricity at or near the site where it is to be
    used.
        Distributed power is automatically 7 to 10 percent more
    efficient than central station power, because that is how much
    electricity is lost in the transmission process. It has become
    an increasingly attractive option for customers who demand a
    power source with high reliability and who want to control
    their peak demand or to use renewable energy.
        The second half of the hearing will address hydroelectric
    relicensing legislation. Non-Federal hydropower represents 5
    percent of all electric power generated in the United States.
    It provides a far greater percentage of the electric power
    generated in California, in the Pacific Northwest, and in New
    England. Relicensing of non-Federal hydropower projects
    involves many stakeholders and raises significant energy and
    resource protection issues.
        Now we have been working with Senator Craig to try to craft
    legislation to provide an appropriate balance on these issues.
    We look forward to the testimony to help flesh out all the
    issues involved.
        Let me call on Senator Craig for any opening statement that
    he has.
        [The prepared statement of Senator Bingaman follows:]
     Prepared Statement of Hon. Jeff Bingaman, U.S. Senator From New Mexico
        Good morning.
        We have a two part hearing today. In the first half we will discuss
    legislative proposals to address some of the barriers that currently
    inhibit the market penetration of distributed generation technologies,
    including distributed power from renewable energy.
        This cluster of clean and efficient technologies includes fuel
    cells, wind, photovoltaics and microturbines. In contrast to
    electricity produced at large central power plants, which travels over
    transmission and distribution lines to reach the ultimate consumer,
    distributed generation is smaller scale and produces electricity at or
    near the site where it will be used.
        Distributed power is automatically 7 to 10% more efficient than
    central station power because that is how much electricity is lost in
    the transmission process. It has become an increasingly attractive
    option for customers who demand a power source with 99.999 percent
    reliability, want to control their peak demand, or to use renewable
    energy.
        While some electric utilities view DG as competition, many can see
    its benefits. Here's what one CEO of a major electric and gas utility
    has to say about distributed generation. ``NiSource believes that as
    the PC was to the mainframe, distributed generation will be to
    traditional power generation. Distributed generation will create a new
    electric industry by mitigating transmission gridlock, diminishing the
    need for siting and funding new generating stations, easing the strain
    on distribution, providing for premium or back-up support services and
    improving the emissions profile of generation portfolios.'' (Gary
    Neale, CEO of NiSource, Inc., ``Utilities Benefit from Distributed
    Generation'', utilitybusiness.com, January 2001.)
        This hearing will also explore the potential for increasing the
    contribution renewable energy can make to our energy supply portfolio.
    Renewable energy resources are plentiful throughout the United States
    as the maps on this chart from the President's National Energy Plan
    demonstrate. New Mexico for example has abundant wind, geothermal, and
    solar resources which can be particularly important for those who live
    far from existing power lines or gas pipelines. I should also note that
    eight of the ``Big 12 Wind States'' are represented on this committee.
    (ND, SD, MT, NE, WY, OK, CO and NM).
        The second half of the hearing will address hydroelectric
    relicensing legislation. Non-Federal hydropower represents 5 percent of
    all electric power generated in the United States, but provides a far
    greater percentage of the electric power generated in California, the
    Pacific Northwest, and New England.
        Relicensing of non-Federal hydropower projects involves many
    stakeholders, and raises significant energy and resource protection
    issues. I have been working with Senator Craig to try to craft
    legislation that will provide an appropriate balance on these issues,
    and I look forward to today's testimony to help further flesh out some
    of the issues involved.

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

        Senator Craig. Well, Mr. Chairman, thank you very much. I
    do appreciate the work that is going on in an effort to address
    these important issues. I am, as you know, particularly
    interested in the panel that will address the hydro-licensing
    reform.
        I appreciate your support in helping to resolve the
    problems currently and pending through an effort to create an
    efficient review of the non-Federal hydroelectric licensing
    applications at FERC.
        Mr. Chairman, Congress has been reviewing FERC's hydropower
    relicensing program for the better part of 4 years. The
    Senate's hearing record on this issue is replete with evidence
    that FERC's process lacks balance, is costly, cumbersome, and
    often convoluted. And a few examples, I think, include a
    typical project can take 8 to 10 years, as compared to a gas
    fired project that takes 18 months.
        Federal resource agencies set environmental conditions
    without equal consideration of projects, economies, the energy
    benefits, the flood control, the navigation and other values
    protected by different Federal statutes. The inability of FERC
    to act as a referee to reconcile these conflicting requirements
    and a process that often results in higher and higher cost with
    major loss in project operational flexibility that adversely
    affect the ability to meet critical peak loads has to be a
    major concern of this committee.
        We have learned with this painstaking review, Mr. Chairman,
    that the commission's hydroelectric licensing process does not
    produce optimum decisions because of, in the words of some
    courts, this rather unorthodox system of shared authority that
    is sanctioned by the Federal Power Act is a problem. I have
    introduced legislation, as you know, in the 105th, 106th and
    now the current Congress to address the problem. The latest
    iteration of that legislation is S. 71.
        Like its previous forms, it does nothing to erode the
    environmental principles established by Congress in the
    Electric Consumers Protection Act of 1986. It emphasizes, or, I
    should say, reemphasizes, the Federal Power Act's requirement
    for balance in government review of licensing applications.
        Indeed, Mr. Chairman, S. 71 underscores the requirement
    mandated in the Electric Consumers Protection Act that the
    Federal Government equally consider all of the issues
    associated with hydropower projects throughout the Nation. The
    precise language added to section 4(e) of the Federal Power Act
    by the Electric Consumers Protection Act reads in part as
    follows: ``In deciding whether to issue any license under this
    part of any project, the commission, in addition to the power
    and development purposes for which licenses are issued, shall
    give equal consideration to the purposes of energy,
    conservation, the protection mitigation of damage to and
    enhancement of fish and wildlife.''
        Mr. Chairman, what is often overlooked is that Congress
    separated the word power from the word development. Development
    purposes under the Federal Power Act include navigation,
    irrigation and flood control, words that define issues of
    commerce, food production, and safety. What is truly
    astonishing, Mr. Chairman, is the fact that, under current
    practice and policy, Federal resource agencies have no legal
    requirement to consider effects on commerce, food production,
    and public safety when developing conditions for hydro
    projects.
        In my judgment, this is an absurd statutory requirement
    that simply cannot stand. Congress must require that Federal
    resource agencies consider these issues before developing and
    issuing conditions that will be imposed on licensed projects.
        Well, Mr. Chairman, I have more to say, and I will add it
    to the record. But I think very clearly what we are all wanting
    to achieve is accountability. And that has to be the
    cornerstone of a responsible government and a responsible
    government process. Federal resource agencies must be held
    accountable, not only for the protection of fish and wildlife,
    but also for public safety and commerce consequences of the
    conditions they ultimately impose on hydro projects.
        We are going to hear from witnesses this morning on this
    issue, both the pros and cons of the issue, and legislation
    that I have introduced and the cooperative effort that we are
    working under now to try to see if we cannot resolve this to
    make the process at least in the whole less costly, more
    predictable and, I would trust, more accountable.
        Thank you, Mr. Chairman.
        The Chairman. Thank you very much.
        Let me ask if Senator Thomas has any opening statement.

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

        Senator Thomas. Thank you, Mr. Chairman. I will just try
    and be very brief. I am very much interested in this hearing
    and what you are doing.
        Welcome to the Assistant Secretary. Nice to see you, sir.
        I think it is a good idea to talk about this approach to
    some of our electric needs. I do, however, want to share with
    you that I hope we can also focus on that portion of our
    electric production that is most important, that brings us the
    most, and that is what comes from larger generator plants. And
    so I hope we do not get diverted entirely over into these other
    things, which are there in the future but are not really--we
    need to be talking about the kind of fuels we are going to use
    for generation.
        If coal is our longest lasting fuel and one that can be
    most used there, are we going to be able to use it in this
    distributed generation? I do not think so. So we ought to take
    a look at that, it seems to me.
        We ought to have more research, perhaps, on the ones that
    are providing generation now. I mean, you look out there at
    wind, and I am all for that. I think we ought to be looking at
    it. But here all these are, and here is 40 megawatts, you know,
    when we are really knocking about 2,500 is what we really ought
    to be having somewhere.
        A power grid. We have to be talking more about the power
    grid. I think it is up to us to deal with a nationwide one. Who
    is going to own it? You mentioned the efficiency of distributed
    generation. Perhaps that is the case. Maybe we ought to be
    looking at line loss. There is line loss. But I have to tell
    you, I think a 2,500 megawatt generator is probably more
    efficient than a 15 or 20 in most any circumstances. And so we
    have to take a look at those things.
        I think we have to look at the re-regulation thing. We have
    not talked about that much in terms of distribution and what we
    are going to do with electricity.
        So I guess my point is, I think this is very important, and
    I am very much a part of it. But when we are talking about
    resolving the demands for power needs this year, next year,
    five years from now, this is not going to be the total answer.
    And we also need to be looking at that base supply that I think
    is so very important. So I am interested in what you are doing
    here.
        The Chairman. Well, thank you very much. I appreciate that
    statement.
        Secretary Garman, you are a regular here. You are here as
    much as you used to be when you worked here. But we are very
    glad to see you again. Why do you not go right ahead?

       STATEMENT OF DAVID K. GARMAN, ASSISTANT SECRETARY, ENERGY
         EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY

        Mr. Garman. It is a pleasure to be here. Thank you for this
    opportunity to testify on legislative provisions designed to
    address some of the barriers that exist to the deployment of
    distribution generation and renewable energy technologies. The
    time is right for us to be thinking about these issues, not
    only because energy supplies and price issues are so acute, but
    because we have to confront important decisions about an aging
    electricity and energy infrastructure.
        Half of the installed transformer banks in the United
    States are reaching retirement age. More than two-thirds of our
    boilers in electrical plants are at least 30 years old and more
    than 40 percent are 40 or more years old or older. Electric
    energy losses are increasing as we try to push more power
    through transmission and distribution systems where, at their
    maximum, losses can be 10 times higher than normal.
        The decisions we make over the next several years will
    strongly influence the energy supply, energy security, economic
    strength and environmental future of our country for years to
    come.
        With regard to the legislation before the committee today,
    we are likely to support much of it provided it is part of a
    balanced, comprehensive approach that also addresses energy
    efficiency, supply, and infrastructure issues, as in the
    national energy policy document.
        At this time, I would like to address each of the major
    provisions under consideration. First, with respect to
    renewable energy resource assessments, these are extremely
    useful tools that are used by developers, landowners, local
    officials to determine their options and renewable resource
    potential.
        [Chart.]
        You can see some representations of very large-scale
    efforts here in this chart. And we have to continue, and in
    some cases intensify, our efforts in these areas. A suggestion
    about the legislation: The requirement in the legislation that
    has us do these things on an annual basis could divert
    resources from other high-priority efforts.
        In the case of solar, wind and geothermal, the resource
    really does not change that much from year to year. And
    updating these assessments once a decade using 30-year averages
    is probably adequate. So we request that the language be
    modified to allow the department to undertake these assessments
    on an as-needed basis, taking into account market conditions,
    cost, available technology to do them, and other relevant
    factors.
        Second, with respect to Federal renewal purchase
    requirements that are in the legislation before us, section 602
    of S. 597 would require from 3 to 7.5 percent of the Federal
    Government's electric power be purchased from renewable energy
    resources. We share the view that the Federal Government offers
    significant potential as the Nation's largest electricity buyer
    in this area. And we support the establishment of goals.
        Just a couple of weeks ago, the Secretary of Energy
    announced that the Department, through Bonneville Power
    Administration, would sign pre-development agreements for seven
    new wind power projects to provide an additional 830 megawatts
    of generating capacity in the energy-strapped West. This
    initiative would provide us with enough electricity to power
    270,000 homes and would represent about 20 percent of increase
    in the Nation's wind power supply.
        So we are working to make these purchases for ourselves and
    our customers of our power marketing administrations. And we
    are doing it because it makes good economic and environmental
    sense. However, because the choice of purchasing renewable
    power does not yet exist in many areas of the country, absolute
    percentage purchase requirements, such as those contained in
    the bill, could unduly benefit the seller in a Federal power
    purchase negotiation.
        Therefore, until such time that retail competition and
    greater purchaser choice is available, we urge that the
    committee express renewable energy use goals rather than
    absolute requirements in their legislation. We also recommend
    that section 602 be modified to add renewable energy
    derivatives, such as renewable energy credits or green tags,
    under the definition of renewable energy source.
        Third, with respect to residential renewable energy grant
    program, as I think is proposed in S. 389, we recognize that
    higher initial capital costs are often a barrier to the
    purchase of renewable energy systems. But rather than a grant
    program, as proposed in the Murkowski bill, we favor the
    alternative approach, a tax credit, as recommended in the
    national energy policy document.
        Fourth, with respect to interconnection standards, the
    administration supports the concept of uniform and enforceable
    interconnection requirements that will apply to both
    distribution and transmission systems. We have been working for
    the past couple of years supporting industry through the
    Institute of Electrical and Electronic Engineers, or IEEE, to
    develop voluntary national interconnection standards.
        As we proceed with the consideration of legislation, it is
    important to take into account potential jurisdictional issues,
    particularly with regard to providing backup service and the
    requirement that distributed facility owner-operators pay costs
    associated with the interconnection. Those are issues that have
    traditionally been under the purview of State utility
    regulators. In the legislation, you might want to consider
    providing some guidance about how the State utility regulator
    can act to determine the reasonableness of cost terms and
    conditions related to interconnection standards.
        Fifth, net metering. The administration supports the
    concept of net metering, but recognizes that these decisions
    have also historically fallen under State jurisdiction. As with
    interconnection standards, net metering will improve the
    economic viability of wind, geothermal, solar and other
    renewable and distributed energy projects.
        To conclude, because I see the red light, today's energy
    system was designed in a regulated environment around central
    power stations. It was not designed to send real pricing
    signals to consumers, nor was it designed to accommodate
    distributed generation or consumer choice. Our shared challenge
    is to transform that system into a more efficient one that can
    do all of these things and more.
        Fortunately, with some of the tools of the information age,
    we are starting to envision just how a more open, flexible, and
    responsive market might be created. The provisions in the
    legislation under consideration today are thoughtful attempts
    to address some of the key obstacles to the widespread adoption
    of renewable and distributed generation technologies, as cited
    in the President's National Energy Policy. And we look forward
    to working with the committee and the staff on this
    legislation.
        I will be pleased to answer any questions that the
    committee has either this morning or in the future. Thank you.
        [The prepared statement of Secretary Garman follows:]
      Prepared Statement of David K. Garman, Assistant Secretary, Energy
             Efficiency and Renewable Energy, Department of Energy
        Thank you for the opportunity to testify on S. 597, Title VI;
    Sections 710 and 711 of S. 389; and S. 933. These legislative
    provisions propose to address some of the barriers that exist to the
    deployment of distributed generation and renewable technologies.
        The President's National Energy Policy (NEP) contains a discussion
    of distributed energy technologies particularly relevant to today's
    hearing. Interconnection standards, net metering, land-use zoning codes
    and other barriers to distributed generation are discussed in chapter
    six of the NEP. Other barriers to distributed generation are also
    highlighted; including the difficulty of permitting some combined heat
    and power projects.
        By removing barriers related to interconnection standards, net
    metering, purchases of renewable energy, and combined heat and power,
    we can increase the efficiency of our electric system by making
    distributed energy resources more practical in the marketplace. Because
    distributed resources put electricity generation closer to its point of
    use, they can help overcome some of the generation, transmission and
    distribution problems we are experiencing today in some areas of the
    country.
        This is a critically important time, not only because energy supply
    and price issues are acute, but because demand is growing even as we
    confront important investment decisions with respect to an aging
    electricity infrastructure. For example:

       Half of the installed transformer banks in the U.S. are
            reaching retirement age;
       More than two-thirds of our boilers and electric power
            plants are at least 30 years old, and more than forty percent
            are 40 years or older;
       Electric energy losses are increasing as we try to push ever
            more power through our electric power transmission and
            distribution system where, at maximum capacity, losses can be
            ten times higher than normal;
       By 2009, 6 of the country's 10 electricity regions--serving
            about 65 percent of U.S. customers--will fall below the
            traditional power industry standard of a 10 percent ``safe
            reserve'' capacity margin without substantial increases of new
            power generation; and
       By 2020, EIA estimates that U.S. electricity requirements
            will more than double from today's 700,000 megawatts to
            approximately 1,500,000 megawatts.

        The decisions we make over the next few years will strongly
    influence the energy supply, energy security, economic strength, and
    environmental future of our country for years to come. Our goal should
    be to replace and expand our domestic energy supplies, develop advanced
    and highly efficient systems to deliver this energy, and improve end-
    use energy efficiencies. As we revitalize and expand our national
    energy infrastructure, renewable and distributed energy technologies
    can help reduce transmission system congestion and energy losses by
    placing energy generation at or near the point of consumption.
        With respect to the specific provisions in legislation before the
    Committee today, I would note that they are all thoughtful and well
    intentioned. With some modifications, we are likely to support many of
    them if they are part of a balanced, comprehensive approach that also
    addresses energy efficiency and infrastructure issues as contained in
    the National Energy Policy document.
        At this time I would like to address each of the major provisions
    under consideration.
         renewable energy resource assessment [sections 601 of s. 597,
                               and 711 of s. 389]
        Section 601 of S. 597 and Section 711 of S. 389 call for an annual
    assessment of renewable energy resources. These sections focus on
    development of a renewable resource inventory that would create a
    useful tool for project developers, landowners, and state and local
    elected and appointed officials to determine their resource potential
    as well as future development options.
        We have already developed some renewable energy resource
    inventories that have been used to site wind farms and other renewable
    energy projects. However, the requirement in the legislation that these
    be done on an annual basis would divert resources from other high
    priority efforts. In the case of solar, wind and geothermal, for
    example, the resource does not change appreciably from year to year.
    Updating these resource assessments once a decade using 30-year
    averages is probably adequate. Biomass, on the other hand, might
    benefit from more frequent updates due to changes in annual crop yields
    and types.
        Also, a solar resource assessment is far different than a
    geothermal assessment, which in turn is different than a wind or
    biomass assessment. Current approaches to doing these assessments cost
    up to $5 million each and take from two to three years to complete. We
    hope to employ new technologies to reduce costs and/or enhance the data
    collected. We request that the language be modified to allow the
    Department to undertake these assessments on an as-needed basis after
    periodic reviews, taking into account market conditions, cost,
    available technology, and other relevant factors.
              federal purchase requirement [section 602 of s. 597]
        Section 602 of S. 597 would require from 3 percent to 7.5 percent
    of the Federal Government's electric power be purchased from renewable
    energy resources.
        We share the view that, as the nation's largest single energy user,
    the Federal Government offers a significant potential market for
    renewable energy products, and the Administration supports the
    establishment of goals for this purpose. The existing goal pursuant to
    Executive Order 13123 is that 2.5 percent of the federal government's
    electricity use should be derived from specified renewable resources by
    the year 2005.
        Last month, Secretary Abraham announced that the Department of
    Energy, through the Bonneville Power Administration, would sign pre-
    development agreements for seven new wind power projects to provide an
    additional 830 megawatts of generating capacity in the energy-strapped
    West. This initiative would produce enough electricity to meet the
    needs of nearly 270,000 homes, and it represents an approximately 20
    percent increase in the nation's wind power capacity.
        Just this week, I signed a letter of intent to purchase renewable
    power under the EPA's Green Power Partnership for the National
    Renewable Energy Laboratory. It is my hope that more than 7 percent of
    the power supplying this facility will be from renewable resources by
    the end of the year, the bulk of it coming from new resources. So we
    are working to make these purchases for ourselves and for the customers
    of our power marketing administrations, and we are doing it because it
    makes good business and environmental sense.
        However, because the choice to purchase renewable power does not
    yet exist in many areas of the country, absolute percentage purchase
    requirements such as those contained in section 602 of S. 597 could
    unduly benefit the seller in a federal power purchase negotiation.
    Therefore, until such time that retail competition and greater consumer
    choice is available, we urge that the Committee express renewable
    energy use goals rather than absolute requirements in legislation.
    Moreover, these goals should be for electricity used, not just
    electricity purchased as some federal entities might have the ability
    to generate electricity from their own renewable resources on federal
    land. Finally, the renewable power purchase costs should be reasonable.
        Section 602 limits hydroelectric generation to include only the
    capacity achieved from increased efficiency or additions of new
    capacity at an existing hydroelectric dam. We believe all hydroelectric
    can be properly termed renewable energy. However, if the purpose is to
    promote new renewable generation, we recommend modifying the language
    in order to avoid precluding Federal power purchases either from an
    existing dam that presently has no hydroelectric capability that could
    be developed, or hydroelectric power from any new facility that might
    be developed.
        We also recommend that section 602 be modified to add ``renewable
    energy derivatives, such as renewable energy credits or green tags''
    under the definition of ``renewable energy source.''
       residential renewable energy grant program [section 710 of s. 389]
        Residential renewable energy systems dependent on solar or wind are
    free of the fuel price volatility problems associated with conventional
    energy technologies. However, higher initial capital costs are often a
    barrier to wider acceptance and usage of these systems. Section 710 of
    S. 389 would establish a Residential Renewable Energy Grants program,
    which would provide incentives for the purchase and installation of
    residential renewable energy systems.
        Because such a grant program would be subject to annual
    appropriations, the uncertainty of consistent appropriations would send
    confusing signals to the market. Small manufacturers offering
    residential renewable energy systems would find it difficult to
    anticipate appropriations levels and subsequent demand. Thus, they
    would face difficulty planning capital expenditures to ensure that
    enough systems would be available in the marketplace.
        The alternative approach of a tax credit, as recommended in the
    National Energy Policy document, is not subject to the uncertainty of
    the annual appropriations process and would send a stronger, more
    certain signal to the market. Specifically, we believe that a 15
    percent tax credit for residential solar, up to a maximum of $2000, is
    a superior approach to a grant program that may or may not be funded on
    a consistent basis.
     interconnection standards [section 603 of s. 597 and section 4 of s.
                                      933]
        The Administration supports the concept of uniform and enforceable
    interconnection requirements that will apply to both distribution and
    transmission systems.
        Distributed electricity generation can offer customer benefits such
    as increased reliability, uninterruptible service, energy cost savings,
    and on-site efficiencies. However, adding new small grid-connected
    generating facilities to an existing electricity grid developed around
    centralized generation will require innovative approaches to managing
    and operating new distributed energy resources. Customers, vendors and
    developers of these new technologies cite interconnection barriers
    including technical, institutional and regulatory policies as some of
    the principal obstacles separating them from commercial markets.
        Current interconnection requirements vary from state to state. In
    addition, except in the few states that have enacted legislation or
    regulations to address the interconnection of distributed energy
    resources with the utility system, interconnection standards can also
    vary from utility to utility. A national interconnection standard would
    reduce uncertainty, lower costs, and facilitate deployment of modern
    distributed generation technologies such as fuel cells, photovoltaics,
    wind, and microturbines. It would also remove one of the barriers to
    combined heat and power, a technology that has the potential to double
    the efficiency of our energy production by utilizing the heat that
    would normally be wasted by combustion technologies or fuel cells in
    the process of generating electricity.
        The Department has been supporting efforts by industry through the
    Institute of Electrical and Electronic Engineers (IEEE) to develop
    voluntary national interconnection standards. This effort has been in
    effect for the past several years and has involved extensive working
    group deliberations involving staff from electric utilities as well as
    equipment manufacturers and distributed energy project developers. The
    technical standard being developed by the IEEE could very well provide
    a basis for the rule making process called for in both bills and, at
    the minimum, should be referenced to ensure that the progress that has
    been made by this group is not lost or duplicated unnecessarily.
        In addition, there are potential jurisdictional issues that should
    be considered, especially with regard to providing back-up service and
    the requirement that the distributed facility owner or operator pay
    costs associated with the interconnection. Such service and rate issues
    traditionally have been the jurisdiction of State utility regulators.
    In this regard, the legislation perhaps should provide clearer guidance
    about how the State utility regulator can act to determine the
    reasonableness of costs, terms and conditions. We also should be aware
    that several States have already established rules which not only
    address the technical requirements for interconnection, but also
    address in some detail the related business terms and conditions and
    allocation of costs. These generally treat small distributed generation
    projects very favorably, exempting them, for example, from the costs of
    engineering studies or liability insurance. We would not want any
    Federal legislation to undo this progress.
                      net metering [section 604 of s. 597]
        The Administration supports the concept of net metering,
    recognizing that these decisions have historically fallen under state
    jurisdiction. As with interconnection standards, net metering will
    improve the economic viability of wind, geothermal, solar and other
    renewable and distributed energy projects, help meet our growing
    electrical demand and cut power bills for small businesses and families
    across the country.
        To increase the economic viability of a distributed renewable
    energy project, an effective net metering provision should ensure a
    fair market price for power generated on site, and remove the burden
    for an on-site generator to procure, install and maintain additional
    equipment. Section 604 of S. 597 has attempted to address those issues.
        We would note, as a technical observation, that the definition of
    ``net metering service'' is overly specific. In some cases, multiple
    meters need to be used to correctly account for time of use charges or
    when electronic meters (which do not spin backwards) are in use.
    Consequently, we suggest striking the words ``through the same meter
    through which purchased electricity is received.''
        Additionally, under subsection (a) (2), the Committee might wish to
    consider removing fuel cells as part of the definition of a ``renewable
    energy resource'' and creating a separate clean energy category. Fuel
    cells in and of themselves are not a renewable resource, but rather
    fuel cells utilize hydrogen that can come from a variety of sources.
    While cost-effectively producing hydrogen in large quantities from
    renewable resources is a long-term DOE Hydrogen Program objective, most
    fuel cells today use either a reformate or hydrogen extracted from a
    fossil fuel such as natural gas. Using fuel cells in combined heat and
    power mode increases fuel use efficiency for electric generation from
    33 percent efficiency to more than 70 percent efficiency. Thus, you
    might want to consider a separate category for other specified high
    efficiency residential energy systems such as fuel cells and other
    micro combined heat and power.
     access to transmission by intermittent generators [section 605 of s.
                                      597]
        The Administration supports the goal of ensuring fair access to
    transmission by intermittent generators such as wind and solar energy.
    I am informed that the Federal Energy Regulatory Commission is actively
    looking at this matter, and thus we should avoid being overly
    prescriptive in the statute to give FERC needed flexibility to address
    this problem.
                                   conclusion
        Today's electricity system was designed in a regulated environment
    around central power stations. It was not designed to send real pricing
    signals to consumers, nor was it designed to accommodate distributed
    generation or consumer choice. Our shared challenge is to transform
    that system into a more efficient one that can do all that and more.
    Fortunately, with some of the tools of the information age, we are
    starting to envision just how a more open, flexible, and responsive
    market might be created.
        The provisions in the legislation under consideration today are
    serious and thoughtful attempts to address some of the key obstacles to
    the widespread adoption of renewable and distributed generation
    technologies cited in the National Energy Policy. We look forward to
    working with this Committee and its staff on legislation in this area.
    I will be pleased to answer any questions you may have in this regard
    both this morning and in the future.

        The Chairman. Thank you very much. Let me ask about a
    concept that I have become increasingly focused on here just in
    the last few weeks, as I have studied this whole set of issues.
    And that is a proposal that has been kicking around now for
    several years, to try to impose something in the nature of a
    fossil fuel efficiency standard so that we would not be picking
    as between one source of power versus another.
        We would essentially be saying that it is in our national
    interest to have power produced efficiently. And whether that
    was from a large generating plant that Senator Thomas referred
    to that produces 2,500 megawatts or a small plant and whether
    it used coal or whether it used natural gas or whether it used
    some other source, our interest is seeing that there is more
    efficiency.
        This chart that you brought the other day and that you have
    again, typical electricity losses, I think makes the point very
    persuasively that an awful lot of what goes in in the way of
    fuel to produce power and heat winds up being lost in
    conversion. And it seems to me that we have a real interest as
    a Nation in reducing that inefficiency and promoting more
    efficiency.
        Is this something you have looked at or you have any
    position on?
        Mr. Garman. Well, I have in the context of climate change.
    I remember when former Senator Bennett Johnston was kicking
    around a very similar idea. And there are some interesting
    notions to it. And it is intriguing in the sense that driving
    efficiency upward is a good goal. But there are a couple of
    cautions.
        One has to be very careful in looking at the intersections
    of existing environmental statutes with an efficiency goal. You
    could kind of think of it as cafe standards for fossil fuel
    powerplants in a way, where you have good performers and bad
    performers, but your goal would be to drive the efficiency
    level upward.
        You have to look very carefully at the interaction with
    existing environmental laws. For example, the Clean Air Act
    requirement that you drive down the oxides of nitrogen requires
    you to use selective catalytic reduction that actually uses a
    lot of energy and, similarly, the impact of new source review.
    Right now, new source review is an impediment, a regulatory
    impediment, to trying to drive efficiency in a plant upward
    because you are afraid to make your plant more efficient
    without triggering new source review.
        The Chairman. Well, would that not be a--I mean, could you
    not argue that if we were to adopt a fuel efficiency standard,
    that would then bring pressure to bear to change the new source
    review process?
        Mr. Garman. It easily could, because if you did not, if you
    failed to consider the existing environmental laws, if you on
    one hand had one law that says we want you to make your plant
    more efficient, and you had another law that said we are going
    to force you to use selective catalytic reduction, you know,
    imposing an energy penalty and making your plant less
    efficient, you really squeeze this plant. So you would have to
    deal with some of those aspects to be successful.
        The Chairman. Okay. I think those are very good comments. I
    appreciate those. Let me ask about your comments here about the
    Department of Energy support for the IEEE process to develop
    uniform technical standards for interconnection. I obviously
    favor anything being done on a voluntary basis that we can get
    done on a voluntary basis.
        I am just wondering, though, when we expect this standard
    to be promulgated and implemented. And is there something that
    we should be doing in the Congress or in the administration to
    see to it that it happens sooner rather than later?
        Mr. Garman. We are watching this very carefully. The IEEE
    is trying to promulgate this standard during this calendar
    year. I think they are going to miss it. I think they will
    probably promulgate the standard very early in the next
    calendar year.
        They are working on a variety of technical requirements and
    is an important point. Texas, New York, California, Delaware,
    Vermont and others have implemented or are considering a
    distributed generation rule. And they are looking to the IEEE
    with a view of adopting those standards when it is ready. I
    think the States are looking for some uniform guidance in this
    area. And they will take advantage of it when it is available.
        In terms of--you know, the one thing that we want to be
    very careful with in the context of Federal legislation is that
    the States have done some very good things on distributed
    generation. Some of them have said, we are not going to charge
    pre-interconnection study fees for people who want to do
    distributed generation, and we are not going to charge stranded
    charges for distributed generation.
        So we want to be very careful not to undo with Federal
    legislation some of the very good things that have been done at
    the State level.
        The Chairman. Are you confident that the IEEE standard that
    is being developed is not going to undo some of those good
    things?
        Mr. Garman. No, because it is just a technical standard, as
    I understand it, in and of itself. It looks at items such as
    voltage regulation, distribution, frequency disturbances,
    harmonics, and other kinds of technical aspects of the actual
    interconnection.
        The Chairman. So if the IEEE were able to get a uniform
    technical standard, is it your thought that we should look at
    having a uniform set of provisions built on the best practices
    that have been adopted in the States?
        Mr. Garman. At the technical level, perhaps. I am a little
    concerned about the one-size-fitting-all aspect. Different
    areas and different utilities have different situations. And I
    am not certain that a Federal uniform standard that deals with
    some of the ancillary nontechnical issues, like cost of service
    charges, backup power provisions, and some other things that
    probably should be handled at a more local level.
        The Chairman. Okay. Thank you very much.
        Senator Murkowski.

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

        Senator Murkowski. Thank you very much, Senator Bingaman.
        And good morning, David. How are you?
        Mr. Garman. Good morning, Senator.
        Senator Murkowski. Recognizing that the purpose of the
    hearing today is to address FERC's hydroelectric licensing
    process and those related so-called distributed generation, it
    is my opinion that we are going to have to make some changes in
    procedure. I gather that over the next decade we are going to
    be looking at about 200 existing projects with a capacity of
    some 24,000 megawatts come up for relicensing.
        There is probably going to be some new projects proposed.
    And many of these are going to be out west. As a consequence, I
    would appreciate, and perhaps you have already commented--and
    if you have, I apologize. But nevertheless, I think it is fair
    to say that FERC's licensing and relicensing process needs a
    significant and dramatic improvement. It takes too long, costs
    too much. Decision making is scattered among different Federal
    agencies. And the end result is often a reduction of the
    project's ability to produce power when needed.
        We were able, through your efforts and others, to get a
    five megawatt exemption in our State of Alaska simply because
    the cost of pursuing FERC licensing could almost run as high as
    a quarter of the project cost, as we saw in Cordoba, I believe.
    I am wondering if we could address through FERC some changes
    and still maintain the adequate oversight of something like a
    one-stop-shopping procedure that would balance the competitive
    interests. This has been advocated for some time by both the
    Democratic and Republican Chairman of FERC. But I am aware that
    it is controversial.
        I think Senator Craig, Larry Craig, has introduced such
    legislation, which would restore balance by requiring the
    Federal resource agencies, the Department of the Interior,
    National Marine Fisheries, and the Forest Service, to consider
    the economic, as well as the energy, impact on the mandatory
    terms they impose on FERC licensed projects. This certainly
    seems reasonable to me, because, you know, we have a tremendous
    conflict from time to time by these agencies based on their
    philosophical role or turf areas or so forth.
        We have seen situations in Glacier Bay National Park where
    you are familiar with the opportunity to have a small hydro
    project in a wilderness or, in effect, have extended diesel
    generation provide the necessary power source. And you get into
    the merits of, well, now what are you better off with, and are
    you breaking a covenant by making exception for carving out
    this small hydro. And it is a terrible, terrible, costly,
    lengthy process. And we do not seem to be able to get to a
    level where somebody can make a decision and move on with it.
        And we all support renewable energy as part of the overall
    energy mix. But when we consider proposals, I think we have to
    be mindful of the consequences. And I wonder what your comments
    are on that.
        And then I will conclude with a reference to PURPA. Of
    course, it was enacted to promote alternative energy generation
    without adversely affecting consumers. That was--of course,
    hindsight is 20/20. And PURPA probably could not be enacted
    today knowing what we know now. Some have seen the opportunity
    to take advantage of PURPA and simply finance their project
    based on the take or pay clause. And as a consequence, that was
    not what it was intended to do.
        Accordingly, before we act on these provisions, we want to
    be sure that we have full understanding of the potential long-
    term consequences for consumers and customers as well. So I
    guess among our concerns with witnesses later is to judge the
    various proposals on the benefit to the consumers by reducing
    price. Do they reduce regulation and do they streamline
    regulation?
        I would appreciate any comments you might care to make. And
    I am holding an article that appeared in the New York Times
    today. It says, ``California's new problem is suddenly a
    surplus of energy.'' We seem to go from feast to famine around
    here.
        I guess any forecasts you could care to make, commenting on
    whether this is a temporary euphoria or simply a misprint,
    would be appreciated.
        Mr. Garman. You have raised a number of questions. Let me
    start with hydro. And while I was not invited or asked to talk
    about the hydro bill, I do have a comment about it. Currently,
    hydro produces nine percent of our electricity. Our total
    renewable production is around 11 percent.
        My goal, of course, is to increase the use of renewable
    energy. It would be a terrible thing to see the amount of
    renewable energy that we generate decline during our watch. I
    could triple wind, double solar. But if the problems associated
    with hydro relicensing drove down hydro, we could have a net
    loss of renewable energy in this country during my tenure. And
    that is the last thing that I want to see.
        So I applaud the Congress, as you work, try to work,
    through this problem, because it is incredibly important that
    we solve it to keep hydro a viable resource.
        You alluded to PURPA, which is not a very elegant way of
    dealing with the renewable energy issue. A more elegant way,
    and the focus of our efforts, frankly, is research and
    development to bring down the cost of renewable energy
    resources and make them competitive in the marketplace. We have
    a tremendous success story with respect to wind. Wind energy in
    some areas of the country is competitive head-to-head with gas.
        And the focus of our effort will continue to be to focus
    research and development in our national lab to bring down the
    cost of these technologies so that they can compete head to
    head in the marketplace.
        And I see the red light. So I had better stop there.
        Senator Murkowski. And you are not going to comment on
    California?
        Mr. Garman. I am not going to be a forecaster because I
    would be in a different line of work.
        Senator Murkowski. You would be in the fortune-telling
    business.
        The Chairman. I would just point out, it is not feast to
    famine, it is famine to feast.
        Mr. Garman. That is fair enough.
        The Chairman. Senator Thomas.
        Senator Thomas. Thank you. You know, we talk about these
    things that you cannot help but wonder, since our job is to, I
    think, is to try and set policy so that the private sector will
    have a basis in which to operate. You talked about efficiency.
    If you go ahead and get some competition, if you have an
    electric grid where people can enter to compete, then they are
    going to be efficient, because the market will drive that.
        So I guess my question basically is, what do you see as the
    division between our energy that is placed here on probably our
    future things, as opposed to the more immediate needs? And we
    are not going to be able to fill the need with the growth in
    demand, I do not think, do you, with wind energy?
        Mr. Garman. Well, you know, wind has an important role to
    play.
        Senator Thomas. Sure.
        Mr. Garman. But you are right. Currently, the wind
    generation and solar together is producing a very tiny fraction
    of our total energy.
        Senator Thomas. That does not mean it is not important and
    that we ought not to do it. But I think we need to--I think we
    are sometimes letting ourselves get a little diverted away from
    doing the things that we can do now to meet our needs, as we
    look at things that are at this point a little in the future.
        For example, you talked about the efficiency and the line
    loss. Is there not an opportunity to reduce line loss
    considerably and perhaps even reduce the need for transmission
    lines by making the capacity of those lines much higher? Is
    that not a possibility?
        Mr. Garman. There are those possibilities. And also, the
    possibility of employing new technology, such as the super
    conducting cables that we have in place today under the streets
    of Detroit in one example, in an R&D program, in a
    demonstration program, that we have going on. There are
    technologies that can address some of these issues.
        Senator Thomas. I guess that--and I am like you, I am all
    for these--I always remember somebody saying we never run out
    of fuel in our history. We always found something different.
    And we will find something different. But I hope we do not
    divert our attention entirely from doing what needs to be done
    to meet needs as we look at the future.
        This distributed--I was just reading something from home
    that is kind of interesting, Mr. Chairman. In the new methane
    gas fields, they need electricity. And it is very difficult to
    build lines in there. So they are using generators in a
    distributive way. This lady, she is complaining about the
    noise. ``I think my horses are going deaf,'' she says, ``from
    all the noise of these generators that are around doing this
    small part.'' Kind of interesting.
        At any rate, thank you. I hope we can divide our focus to
    the future and what we need and not get out of line with doing
    the things that have to be done.
        Mr. Garman. But if I could just make one point, because
    this is an important point. Because so much of our electricity
    infrastructure is nearing the time of its retirement, this is
    an important time to think about the future. And it is an
    important time to think about the way we can refashion our
    energy delivery system to allow for a more perfect market and
    allow market forces to really come into play.
        Right now, market forces are not really allowed to come
    into play. We have----
        Senator Thomas. In some places.
        Mr. Garman. Well, yes. But for instance, there is a big
    difference in time of use power. Peak power obviously costs a
    lot more than base load power. And yet the bill that consumers
    get in most areas of the country, the overwhelming majority of
    the country, is one flat rate. If consumers had a market signal
    that would allow them to differentiate the cost of peak power
    and the cost of non-peak power, they might be inclined to do
    some load shifting and some other things that would save them
    money.
        Senator Thomas. The fact of the matter is, for most
    residences the cost is not the power, the cost is the
    distribution. You are not going to change--now a large user,
    what you are saying is, of course, exactly right. But I am a
    little concerned that, you know, you are right about the fact
    that we have not upgraded facilities. But largely because we do
    not have a policy that encourages people to invest. And if we
    continue to act like we do not need these basic facilities,
    then we are not going to have the investment in them. And I
    think we are going to find ourselves in real problems.
        Anyway, thank you.
        The Chairman. Senator Hagel.
        Senator Hagel. Mr. Chairman, thank you. And I am glad my
    distinguished colleague from Wyoming with the write up of the
    lady's horses. We have the same problem in Nebraska. It is a
    real problem.
        It is nice to see you again, Mr. Secretary.
        Mr. Garman. Good to see you, Senator.
        Senator Hagel. Picking up a bit on what Senator Thomas was
    talking about, could you develop a bit what you see as long-
    term possibilities in the sense of, as you have laid out this
    morning in your testimony, potential for renewables? But
    Senator Thomas was getting into an area that I think is pretty
    important. How much tax incentive, government incentive,
    dynamic will be required in the out-years to develop
    renewables, such as solar and wind? Are we kidding ourselves a
    little bit here on it is all kind of interesting and new and
    fresh, and we must pursue it absolutely?
        But have you lined out at all over the next 25 years asking
    the ultimate question when and if these renewable sources of
    energy, of power production, will be able to stand on their own
    in fact in the marketplace, as the Senator from Wyoming talked
    about? Develop that a bit for us.
        Mr. Garman. Okay. And it is a very complicated question
    because there is no one or two policies that we can pursue
    that, by themselves, will make a huge impact in renewable
    energy. We actually have to do a lot of things. Some of you may
    have seen, for instance, the solar house on the mall not too
    long ago. That solar house was destined for a place, an
    electric cooperative, in Loudoun County, where there was an
    interconnection standard and that metering allowed.
        Suddenly here is a homeowner that found it to be in his
    economic self-interest, because there were--a lot of the other
    aspects were in place. We will not know what the real potential
    for renewable energy generation is until we understand fully
    and have taken steps on interconnection and net metering in
    part, because that is really, I believe, going to be the thing
    that helps bring them into fruition.
        And, of course, you know, we are understandably--I have
    watched this committee in the past try to make the decisions
    about electricity and transmission generation and restructuring
    the electricity supply system. And as Senator Thomas pointed
    out, there has been very little incentive to invest in some of
    these things until some of these basic decisions are made.
        So it is--you know, I cannot give you a number and say we
    will--I can tell you that our R&D efforts are designed to bring
    down the costs in anticipation of the time where we have a
    distribution system that is more friendly to renewable systems
    and distributed generation system. But I cannot tell you how
    much they are going to come into the marketplace until that
    system is fixed.
        Senator Hagel. Will you be coming forward with proposals?
    You mentioned in your testimony here ``distributed generation
    is a new concept and has therefore faced a number of regulatory
    and institutional barriers.'' Will we see from the Department
    of Energy your suggestions, policies, to deal with those in
    order to get to what you have just laid out on the untapped
    potential for these new renewable resources?
        Mr. Garman. We are studying that. But again, we are also
    going to school a little bit on the States, as I mentioned
    earlier, New York, California, Delaware, Vermont, Texas, and
    others. We are looking particularly closely at Texas.
        Senator Hagel. Is that an accident or----
        Mr. Garman. No. Actually, Texas has been working on its
    restructuring. It has done some groundbreaking work on
    renewables. Most of the new wind generation that has been put
    into place in the past year has been done in Texas. So,
    frankly, we are looking at Texas very closely and some of the
    things that they have done. And I will tell you that the
    Department has actually reached out to some of the talent that
    was a part of that and brought them in-house.
        Senator Hagel. Well, Texas had a pretty good governor, I
    think----
        Mr. Garman. Yes, sir, I agree with that.
        Senator Hagel [continuing]. At one time. Your projections
    of growth in the renewable areas, you mention specifically
    biomass, landfill gas, geothermal, wind power, would you
    develop that a bit in where you see the Department of Energy
    going with trying to frame those in a way that connect the
    reality of the development and what you will do in the way of
    coming forward with policy recommendations?
        Mr. Garman. I do not want to be in a position of trying to
    tell the committee that we are going to be in a position
    anywhere in the foreseeable future where fossil fuels do not
    provide the overwhelming majority of our energy. That is not
    what I am--I do not want to leave you with that impression,
    because those are the realities that we face. We are working
    mainly through research and development to bring down the cost,
    to let these things come into the marketplace on their own
    accord.
        Again, I cannot give you a good estimate. And my crystal
    ball--any more than I can predict what the energy prices in
    California are going to be. And it is our goal within my
    office, of course, to increase the power generated from
    renewable energy resources. And, frankly, I am given about $400
    million a year to do that. And most of that effort goes toward
    research and development to bring down costs and make those
    things available in the marketplace, and that is our goal.
        Senator Hagel. It is considerably more than Senator
    Murkowski gave you when you worked up here. Best regards to the
    secretary. Thank you.
        Mr. Garman. Yes, sir.
        Senator Murkowski. Mr. Chairman, if you would yield, I have
    had the opportunity to visit Texas, some of their wind
    facilities. And as has been pointed out, they have a State
    provision that requires, I think, 5 to 6 percent of their
    energy to come from renewables. So what the utilities have done
    is simply accepted that.
        But the return on investment does not suggest that it is a
    money maker. They have subsidize it with their other source
    power. In other words, there are cheaper sources of power. But
    they have made a conscientious commitment to proceed with 5
    percent or 6 percent alternative. And it is primarily in wind
    power. It works, but the cost return to the utilities is
    something that is subsidized within the rate structure. And
    that is just the way it is.
        So the point is, there is no free ride here just because
    the wind is free, or the hot air around here.
        The Chairman. Senator Smith.
        Senator Smith. Thank you, Mr. Chairman. I would like to
    give special welcome to Julie Keil from Portland, Oregon, who
    is with the Portland General Electric Company. She works on
    hydro relicensing and water rights. And I am glad that she is
    here to testify.
        Mr. Secretary, I apologize, I was not here during your
    testimony, but I wonder if you spoke to the future of wind
    power. The reason I ask this question is where I live in
    eastern Oregon there is a lot of wind. And Florida Power and
    Light is putting in a huge wind system there. But on the Oregon
    side, it has all been halted due to a ground squirrel. Are you
    finding that----
        The Chairman. Ground squirrel?
        Senator Smith. The ground squirrel, yes.
        The Chairman. Do you need more ground----
        Senator Smith. Well, I guess the bottom line is, are you
    having difficulty getting windmills development sited around
    the country?
        Mr. Garman. There have been instances, and you mentioned
    Oregon. I know that there is one instance where a wilderness
    study area has precluded development of a very promising wind
    site in Oregon. It is something that we are beginning to work
    very closely with the Department of the Interior on. There are
    tremendous geothermal resources, for instance, in Nevada, all
    on public lands. There are tremendous wind resources around the
    country on public lands. And gaining access to do the necessary
    study and validation is proving to be pretty difficult. And one
    of the recommendations in the President's national energy
    policy is to try to work cooperatively with the Department of
    the Interior and break through some of those issues.
        Senator Smith. Do you see wind as a renewable?
        Mr. Garman. Yes, sir.
        Senator Smith. And what is the resistance? What is
    developing against that now? I cite the ground squirrel in my
    State, but what are the other resistances to wind?
        Mr. Garman. There have been in the past, particularly in
    California, concerns about birds. But I think a lot of these
    have been addressed. Candidly, we actually did some research,
    worked with the Audubon Society and were able to demonstrate
    that the wind resource was not as damaging to aviary
    populations as had been thought at one time.
        Wind has advantages and disadvantages. One of the
    advantages is you can get a lot of it up relatively cheaply and
    quickly. One of the disadvantages is that it is an intermittent
    resource. And whenever you have an intermittent resource, you
    have issues with both transmission and others that come into
    play, as with any intermittent resource. So it has advantages
    and disadvantages.
        It is, of course, immune from fuel price changes. And wind
    has actually, in some areas of the country over the past year,
    become the cheapest available. But when natural gas prices came
    back down, wind was no longer in that position. So there are
    advantages and disadvantages that can be exploited.
        Senator Smith. Are you aware of a situation in the Pacific
    Northwest with the Bonneville Power Administration and their
    desire to have bonding authority increased so as to improve
    transmission lines?
        Mr. Garman. Not as much as I need to be to answer the
    question that I think is coming.
        Senator Smith. Just so you put on your radar screen, there
    is a lot of new production going in right now. It is wind. It
    is also natural gas. But, frankly, there is a big bottleneck in
    terms of just wheeling this to markets. And so the need for
    this bonding authority is critical. And it is being bottled up
    in the Congress by the Appropriations Committee, who wants to
    evaluate it annually and make it subject to annual
    appropriations. And no one is going to invest in such a system.
        And, frankly, it is of little value to put in new
    production, if you cannot get the power to the markets that
    need it. And so I really think the Department of Energy needs
    to talk to OMB fast, because this is really dumb what is
    happening right now.
        And I know there are objections to public power, but this
    is an old issue in some parts of our country, and in my part
    especially. It is not going to go away, and we need to make
    sure that the power that is produced, either privately or
    publicly, can get to markets. And I hope that we will have the
    support of the administration on this, because we can put in
    lots of renewables in Oregon, but it does not do any good if we
    are running over the old lines.
        And I will tell you my suspicion, that there is opposition
    to this in some private sectors, who are able to game the
    system, to drive up prices, because there is a bottleneck. And
    we ought not to be creating that artificial situation.
        I wonder if the administration will support classifying
    hydropower as a renewable.
        Mr. Garman. We consider hydropower a renewable resource.
    Absolutely.
        Senator Smith. No plans to tear out Snake River dams?
        Mr. Garman. I think that would come under the jurisdiction
    of the Department of the Interior.
        Senator Smith. It would.
        Mr. Garman. But no plans in the Department of Energy, I can
    assure you of that.
        Senator Smith. The Star Program, are you familiar with
    that? It would certify buildings and appliances and----
        Mr. Garman. Energy Star, yes. In fact, this afternoon we
    are welcoming Canada into the Energy Star Program.
        Senator Smith. You will be pushing that----
        Mr. Garman. Yes, sir.
        Senator Smith [continuing]. As the Government? Thank you.
        I recently toured a plant, a cold storage plant, in
    Portland, Oregon, that is generating remarkable efficiencies of
    40 to 50 percent above industry averages. And they have worked
    with Portland General Electric to do this. And I would
    encourage your consideration of any Federal policies that could
    encourage marketers to do those kinds of things. We have to
    start valuing the saving of a kilowatt as much as the use of a
    kilowatt.
        I look forward to hearing what Julie has to say about that
    and commend it to your attention, as well.
        Thank you, Mr. Chairman.
        Senator Murkowski. May I ask my colleague from Oregon a
    question? You know, we had a discussion that I observed the
    other day regarding the sucker fish. And you brought up a
    squirrely issue relative to the squirrels having some objection
    to wind power. And I never quite got the connotation of whether
    the squirrely aspect was related to those who objected. But I
    wonder if you could bridge the gap to explain what the wind has
    to do with the squirrels.
        Senator Smith. I wish you could explain that to me.
        Senator Murkowski. You brought it up. I am just curious.
        Senator Smith. I went home, and this big wind project is
    probably 20 miles from my home in eastern Oregon. You can
    literally see it from my home. And I suppose if there is any
    objection to windmill farms is that some people do not find
    them very attractive.
        But there is, under the Oregon Endangered Species Act, a
    listing of the ground squirrel. So I do not know that they know
    the difference between the Washington and the Oregon border,
    but all of the production has gone to the Washington side now
    because of the listing of the ground squirrel and apparently
    the effect of the windmill on the ground squirrel.
        Senator Murkowski. Maybe you could put bark on the tower so
    the squirrel could climb up.
        Senator Smith. Well, I think it has to do with the
    vibration of the blades and how that might affect the ground
    squirrel. So that is what I am told.
        Senator Murkowski. I appreciate but do not understand the
    explanation.
        [Laughter.]
        The Chairman. Senator Craig, did you have questions for
    Secretary Garman?
        Senator Craig. I do not. Dave, I am sorry I missed your
    testimony. I had to run out. I am back. I will only add that
    what the Senator from Oregon has talked about, about Bonneville
    Power bonding, is critical, not only for Oregon, Washington,
    Idaho and Montana, but we spent a lot of time bailing
    California out in the last while by sending a lot of energy to
    them over some of these lines. And they have returned energy
    during their surplus times, believe it or not. There once was
    that situation.
        The point is it is a regional situation that needs to be
    addressed in the overall energy package. And I am as concerned,
    as is the Senator from Oregon, that we have an OMB that somehow
    has not communicated with the White House that there is a
    concerted energy effort underway by the part of this
    administration and by this government. Thank you.
        Senator Smith. I think they are asking that it be increased
    by $2 billion of bonding authority. This is all money that I
    guess to be accounted a certain way that is of concern to OMB.
        Senator Murkowski. Counted and paid back.
        Senator Smith. It is all paid back by rate payers. But the
    truth of the matter is you cannot plan to these kinds of
    capital expenditures if they are subject to annual review.
        The Chairman. But you are willing to cap it.
        Senator Smith. Oh, of course. Absolutely. But I would just
    follow up, if I may, Mr. Chairman, on Senator Craig and just
    say that I really think this is important for the
    administration to get right. They need to be seen on the west
    coast as helping on energy issues. And I want to highlight that
    I think some take advantage of the bottleneck on wheeling of
    energy. And that is wrong. And we need to make sure that we
    have the infrastructure there that can keep power flowing and
    keep it affordable and available.
        And for some reason, it is being held up, and I do not like
    it.
        Mr. Garman. Senator, I will follow up with Valerie of your
    staff this afternoon on this issue.
        Senator Smith. Thank you.
        The Chairman. Well, thank you very much for your testimony.
    It is very useful.
        And we will move on to the second panel at this point.
        Mr. Garman. Thank you, Mr. Chairman.
        The Chairman. Oh, I am sorry. I did not see Senator Graham
    come in here. Go right ahead, Senator Graham. Did you have
    questions of Secretary Garman?
        Senator Graham. No questions and no opening statement.
        The Chairman. Okay. Well, then we will move to the second
    panel.
        Let me go ahead and introduce this panel. We have Mr.
    Robert Boyd, who is the vice president at Enron Wind
    Corporation. We appreciate you being here very much.
        We have Mr. Demeter, is that correct?
        Mr. Demeter, Mr. Chairman.
        The Chairman. Demeter, excuse me. Mr. Demeter, who is the
    chief executive officer with Antares Group, Inc.; Mr. Mark
    Hall, who is the vice president for external affairs with
    Trigen Energy Corporation; and Mr. Thomas Starrs, who is the
    senior partner with Kelso Starrs and Associates in Vashon, is
    that right, Vashon, Washington?
        Thank you all very much for being here. Why do we not--if
    each of you could--we will introduce your entire statement into
    the record. If you could take about five minutes each and tell
    us the main points you think we need to understand about what
    you are testifying about.
        Mr. Boyd.

             STATEMENT OF ROBERT T. BOYD, VICE PRESIDENT,
                         ENRON WIND CORPORATION

        Mr. Boyd. Thank you, Mr. Chairman. I appreciate the
    opportunity to be here today.
        The Chairman. Would you pull that microphone right in front
    of you? That way you do not have to lean over.
        Mr. Boyd. Okay. I just want to be able to see my notes.
        The Chairman. Thank you.
        Mr. Boyd. I am from California, and I am happy to hear the
    power situation is improving. And it is nice to lights and air
    conditioning for a change.
        The Chairman. Good.
        Mr. Boyd. My company, Enron Wind Corp., is a wholly owned
    subsidiary of Enron Corporation of Houston, Texas. And we
    manufacture wind turbines, and we build wind powerplants, and
    we operate and maintain them. I was happy to hear that there is
    so much interest in wind, and I hope that I can shed some light
    on some of the questions that you all had.
        Wind energy is really the most rapidly growing renewable.
    And the reason for that is because we have been driving the
    cost down. In the early eighties, it was over 25 cents a
    kilowatt hour. Now we are down between, well, 4 to 6 cents
    without a tax credit in a very good site. So we have done a
    good job of getting our cost down.
        A lot of that is due to having a wind production tax
    credit, which has been helpful in getting our costs close to
    the conventional technologies. The other thing has been the
    good efforts of the Department of Energy. They have helped
    considerably in some of the research and development efforts.
    And they have a fine lab out in Colorado that has equipment
    that most manufacturers would not have that can do testing. So
    appreciate their efforts.
        Wind is going to grow here. I think we probably will double
    this year the amount of wind in the United States. And over the
    next five years worldwide wind is estimated to grow by about
    40,000 megawatts, which is considerable.
        Why wind energy?
        The Chairman. After this year, how many megawatts of power
    will we be producing from wind energy in this country?
        Mr. Boyd. I think that we will be close to 5,000.
    California, for example, about 2 percent of our electricity
    comes from wind. And now that is spreading to other parts of
    the country.
        I think it has been alluded to that wind does not have any
    fuel. And as such, we can give a fixed price contract for 20
    years or whatever to the power buyer. And what that is then is
    a hedge against price increases in different fossil fuels. And
    it helps somebody plan.
        Also, you know, it takes away the price volatility and
    potential of tax increases. There can--and I look at taxes like
    some of the air quality credits and things that you have to
    have in different parts of the country.
        Another area that is benefitting from wind energy is the
    agricultural sector in the United States. And the reason for
    this is that wind is primarily in a lot of the unsettled or
    unpopulated parts of the country. And a landowner that has wind
    on its property is going to get a significant amount of money,
    if he has many turbines. It can amount to about $4,000 for each
    turbine. And that is considerably more than he would make on a
    per acre basis for his crops.
        The other thing is the property tax benefits that these
    rural communities derive. There is one county in Texas,
    Culbertson County, I think, that gets about 25 percent of their
    tax revenues from two wind projects in their county.
        What are some of the things that can help wind and bring
    down some of the barriers that we face? The wind production tax
    credit has been the most successful. Yesterday in the Ways and
    Means Committee there was a billion passed out that has a 5-
    year extension of that credit. And we would appreciate your
    support when it comes over here to the Senate.
        The second thing is, you were talking about a Federal
    purchase requirement in your bill. We would like to see that
    broadened to a renewable portfolio standard. This is the type
    of thing that has been used in Texas. And what this does is
    allow a seller of power to offer a certain amount of renewable
    energy. And they can do it either by putting in a plant, they
    can buy the power from a renewable plant, or they can buy a
    credit from somebody that has more renewables than they need.
        This is, as I say, what Texas has been doing. They are
    going to put in about 800 megawatts of wind this year, which
    represents about an $800 million investment in the State of
    Texas primarily in rural lands.
        Transmission has been talked about here today. And this is
    a key issue for all electric generation. There is a recent EPRI
    study that said that between $10 million and $30 million are
    going to be needed just in the West alone in the next 10 years
    to keep the system stable. And we look at wind as--or not
    wind--but transmission as being similar to the Federal highway
    system. And we should be addressing it, perhaps, in that way to
    make sure that we have adequate transmission around this
    county.
        Public benefits fund. We would encourage that, too.
    California's program has resulted in a lot of projects ready to
    be developed. Unfortunately, the market situation out there
    right now does not let us finance them. The assessment of
    renewable resources, the Secretary addressed, and we think that
    is a very valuable program.
        Also, small wind turbines are also important. I think it
    was Mr. Thomas who mentioned the diesel generator sets in the
    gas fields. In Oklahoma, they have actually used small wind
    turbines to do the same thing with batteries.
        One other thing on the transmission, too, that I forgot to
    mention is that FERC had a decision a week or so ago creating
    four regional RTOs around the country. And we would support
    that. We think that is a good thing to do.
        I have been personally somewhat disappointed to see what
    has been happening in the West with each area going their own
    way, because we are an interdependent system out there, and we
    trade power all over the West. And it makes sense that we have
    the RTO as a western RTO.
        And I guess I had better conclude, because I got the red
    light. We would love to see the United States move towards a
    more competitive marketplace, and not only in the wholesale
    level, as we have done, but on the retail level as well. We
    want to see customers have a choice. And we believe that when
    they do that they will choose renewables.
        Thank you.
        [The prepared statement of Mr. Boyd follows:]
             Prepared Statement of Robert T. Boyd, Vice President,
                             Enron Wind Corporation
                                  introduction
        Enron Wind Corp. (Enron Wind) is pleased to offer testimony on
    removing barriers to wind energy development in the United States.
        Enron Wind is a wholly owned subsidiary of Enron Corp. The company
    has been in business for over two decades and has installed over 4500
    wind turbines comprising more than 1,600MW of electric generation
    capacity. As a manufacturer of wind turbines, our current product line
    ranges from 600kW to 1.5MW with new 3.2MW onshore and 3.6MW offshore
    models under development. During 2001 our U.S. facility in California
    will manufacture 300 1.5MW turbines which will be deployed in Texas,
    Wisconsin, New York and Pennsylvania.
                             status of wind energy
        Wind Energy has become the most rapidly growing renewable
    technology because it has moved rapidly down the cost curve from over
    25 cents/kWh in the early 1980's to between 4 and 6 cents today in good
    sites without a tax credit. The major factors on the federal level
    driving down the cost of wind have been the creation of a U.S. market
    by using the Wind Production Tax Credit (PTC) to help equalize costs
    with conventional generation technologies and technological advances
    made possible through DOE cost-shared research and development and
    deployment programs. State renewable power requirements have also
    helped wind energy growth. The American Wind Energy Association
    estimates that installed wind capacity will almost double in the U.S.
    this year. BMT Consult ApS estimates that close to 40,000MW of wind
    will be installed throughout the world between 2001 through 2005.
                                why wind energy?
        Wind energy is close to becoming competitive with conventional
    fuels. With additional R&D funding and the continuation of the
    Production Tax Credit for the next five years wind should become price
    competitive with conventional generation technologies. One primary
    advantage of wind technology is that because it burns no fuel long term
    fixed price contracts can be offered. This is a hedge against both fuel
    price volatility and potential pollution or CO2 taxes. We
    have certainly learned the value of fuel diversity during the energy
    crisis and we should put that lesson into practice by adding non-fuel
    dependent technologies like wind into our electric generation mix. A
    balanced portfolio approach helps mitigate risk.
        The agriculture sector has been impacted significantly during the
    energy crisis and the value of wind energy should not be overlooked in
    the rural farming communities. Some of the best wind resources are
    found in sparsely populated areas used for farming and ranching. The
    landowners benefit by receiving significant land rent payments which
    far outstrip the value of agricultural income on a per acre basis. The
    host Counties also receive additional property tax revenues with very
    little increase in the services they must provide.
                   recognition of the barriers to wind energy
        We appreciate the chairman and ranking member's consideration for
    renewables in drafting their bills. Energy policy is a very complex
    issue in the U.S., but renewables must be a part of our long-term
    strategy to satisfy U.S. energy needs. The issues we have highlighted
    below are those we view to be most significant in the future
    development of wind energy.

    1. Wind Production Tax Credit (PTC)

        By far the most important issue for wind energy is the extension of
    the Wind Production Tax Credit which has been included in your bills.
    The PTC has helped wind become more competitive with conventional
    generation technologies while we continue to reduce our costs. The PTC
    is vital to the long-term success of wind energy. This program has been
    the most effective tool in increasing the use of wind energy in the
    country. The extension of the PTC is a priority for this year as it
    expires on December 31, 2001.

    2. Renewable Portfolio Standard

        A federal purchase requirement is also a part of S. 597. The
    federal government can play a leadership role as a consumer of clean
    renewable energy. There has been a particular interest from the
    military in using renewables on their bases for energy security
    reasons. We would like to see the purchase requirement expanded to a
    nationwide Renewable Portfolio Standard (RPS) which would require all
    power sellers to have some percentage of their electricity be
    renewable. This is a quasi-market based program which offers choices to
    the sellers in how they satisfy the requirement. Power sellers would
    have the option of owning renewables, buying and reselling renewable
    power or buying tradable credits from renewable sellers. There are
    several states with this type of program. Under the Texas RPS program,
    over 800MW of wind will be added this year. This will be an $800
    Million investment in rural Texas.

    3. Transmission

        Transmission is a key issue for all electric generation, including
    wind power. Transmission upgrades and new lines are needed throughout
    the country. EPRI recently released a study which concludes that $10 to
    $30 billion needs to be invested in the western states transmission
    grid over the next 10 years just to bring the system to a stable
    condition. Wind energy, like hydro facilities and mine mouth coal
    plants, is often found in areas remote from load centers. We must have
    adequate access to transmission facilities on a non-discriminatory
    basis to reach the markets where wind power is needed. Transmission of
    electricity is much like the interstate highway system for the
    transportation of goods. We need a national electric grid just as we
    need a national highway system to get goods to market. FERC's decision
    last week to create four Regional Transmission Organizations (RTOs) is
    vital to the development of that national grid. We strongly urge
    Congress to support the FERC's RTO plans.
        Intermittent resources such as wind have some difficulty accurately
    scheduling their deliveries and penalties can result from transmission
    providers for not meeting schedule. Wind generators are working to
    develop methods to better forecast delivery schedules, but we are not
    there yet. Your prohibition of such penalties is vital to future wind
    energy development.

    4. Public Benefits Fund

        We support the proposed Public Benefit Fund for renewables. Some
    states have adopted this type of program, which has been successful in
    bringing more renewables on line. The cost for renewables is spread
    over all the electricity purchasers in proportion of how much they use.
    Projects then bid for funding which is awarded to the lowest cost bids.
    California's program has resulted in a significant amount of new
    renewable projects under development. Federal funding would ensure that
    all states have the opportunity to participate in renewable
    development.

    5. Assessment of Renewable Energy Sources

        The Department of Energy has done wind resource assessment in the
    past. It has proven valuable in siting wind projects around the
    country. We believe there are similar DOE programs for most renewable
    resources. The key to their being successful is adequate funding.
                                   conclusion
        The U.S. has begun to move toward a competitive electricity market.
    Many states have already opened the door to competition, some with
    better results than others. There are many ways this committee and the
    Congress can help steer this emerging competitive market. We would hope
    to see competition not only at the wholesale level but at the retail
    level as well. The retail customer should be able to choose his
    supplier and product, which should include renewables. We appreciate
    your consideration of the renewable issues that the bills before this
    committee have already addressed. We request that you also consider
    some of the other issues we have raised in this testimony.

        The Chairman. Thank you very much.
        Mr. Demeter, why don't you go right ahead?

      STATEMENT OF CHRISTIAN P. DEMETER, CHIEF EXECUTIVE OFFICER,
                          ANTARES GROUP, INC.

        Mr. Demeter. Thank you. Mr. Chairman, members of the
    committee, I thank you for the opportunity to address you today
    on legislative proposals related to removing barriers to
    distributed generation, renewable energy, and other advanced
    technologies.
        In general, I am encouraged by the proposed actions
    contained in the legislation that we are discussing here today.
    Congress, working with the administration, can enhance
    competition in energy markets now by removing market barriers
    to renewables, allowing them to compete fairly. This is why I
    am supportive of legislative language in title 3 of S. 597,
    which calls for a review of existing regulations and standards
    that act as barriers to market entry for emerging energy
    technologies.
        Renewable energy technologies, such as biomass, geothermal,
    wind, solar, and hydro, have met important measures of success
    relative to declines in the cost of electricity production.
    Other factors out of control of the renewables energy industry,
    such as changing market conditions, the ability of competing
    technologies to also improve, and existing barriers to market
    entry, account to much of the difficulty in expanding market
    share.
        Although commercial success of renewables in terms of
    market penetration has perhaps not lived up to expectations, in
    fact, performance of these technologies is higher, and costs
    have been lower than expected in this document, Resources for
    the Future, a study that was released a couple years ago.
        Title 4 of S. 597 contains other provisions which would
    help to enhance market acceptance of renewables and distributed
    generated systems. Section 601 calls for an assessment of
    renewable energy resources available in the United States. This
    information is important to both policy makers and to private
    developers. Accurate knowledge of the quality, quantity, and
    location of these resources is important to public decision
    making.
        The private sector may also fail to carry out the optimal
    amount of energy investment because of lack of knowledge about
    resources. I know from my own personal business experience that
    it was only 2 years ago that the Department of Energy's Energy
    Information Administration included biomass supply curves in
    their national energy modeling system. We helped them develop
    that data.
        Section 602 of S. 597 seeks to advance provisions of
    Executive Order 13123 to encourage Federal procurement of
    renewable energy. Although that executive order set a positive
    tone, section 602 would do much more by mandating Federal
    procurement. The United States has done this in the past to
    stimulate the demand for transistors and to expand the supply
    of uranium. The advantage to this approach is that the
    government can include the cost in the budget so the commitment
    to the program can be reviewed annually.
        We are working on a project currently in central New York
    which can take waste biomass to produce low sulfur diesel
    fuels, a home heating oil substitute, or a liquid turbine fuel
    for the production of electricity. In fact, General Electric is
    working with us on the latter. A Federal contract to buy
    electricity from renewable resources such as this would help us
    to seed that market.
        A policy to encourage renewable energy use at Federal
    facilities, as outlined in this section, would overcome many of
    the weaknesses of the existing executive order and compensate
    for some of the past adverse effects of barriers to entry for
    renewables.
        S. 933 is particularly important legislation, as we attempt
    to enhance competition in energy markets and electricity
    markets. Antares Group is currently working with a project
    developer on a combined heating power project using a
    proprietary distributed generation technology. As we proceed
    with the development of this project, we are encountering many
    of the issues described in S. 933.
        To avoid high standby or backup charges by the utility, our
    project would incur from a 30- to 50-percent charge in addition
    of added capital expense in order to create a redundancy in the
    system. If after this increased cost for redundancy is incurred
    and the utility company charges us an exit fee for leaving the
    grid, our project quickly becomes uneconomic as we could no
    longer afford to provide our on-site customer with less
    expensive heat and power.
        Should we choose to stay on the grid and the project
    developer wants to make a business of expanding a market for
    this new DG technology, we face the potential for site-by-site
    interconnection studies, which can quickly become costly. A
    consistent interconnect standard would further develop
    distributed generation and combined heat and power
    technologies, be they renewable based or not.
        It would also make more sense to be able to negotiate
    reasonable standby charges and not to have our customers
    charged onerous exit fees. Although this bill does not
    completely correct these problems, the potential exists through
    this legislation to encourage States and municipal authorities
    to not impose excessive fees on small generators.
        Section 604 of S. 597, net metering, and section 111 of S.
    388, innovative financing, contain language which will help
    consumers of electricity become competitors in the electric
    supply business, thereby enhancing competition further. My
    company recently installed a small 12 kilowatt distributed
    solar cell array on a county office building in Maryland to
    convert sunlight to power. The system reduces county energy
    costs by about $2,500 a year and emits no pollution.
        The county government, the U.S. Department of Energy, and
    the States of Maryland and Virginia provided funds for a total
    cost of about $78,000 for the system. While the fuel is free,
    the high up-front capital costs would have killed this deal
    without the Federal support. But rather than providing outright
    grants of Federal funds for these systems, I think a more
    efficient method would be to develop innovative financial
    mechanisms and allow customers who generate electricity to sell
    electricity to the grid at market rates in times of peak
    demand.
        In conclusion, I support the proposed legislative changes
    be discussed here today. They are key components to ensuring
    market acceptance of renewable energy and a viable renewable
    energy industry.
        Thank you, Mr. Chairman, members of the committee. I would
    be happy to answer any of your questions.
        The Chairman. Thank you very much.
        [The prepared statement of Mr. Demeter follows:]
     Prepared Statement of Christian P. Demeter, Chief Executive Officer,
                              Antares Group, Inc.
        Mr. Chairman and members of the Committee, thank you for the
    opportunity to address you today on legislative proposals related to
    removing barriers to distributed generation, renewable energy and other
    advanced technologies in electricity generation and transmission,
    referred to in S. 388, S. 597, and S. 933. My name is Christian
    Demeter, and I am Chief Executive Officer of the Antares Group
    Incorporated in Landover, Maryland. I work daily with engineers,
    economists, scientists, and lawyers taking a systematic approach to
    solving energy problems. I founded Antares Group nine years ago with
    the objective of assisting private-sector developers in commercializing
    advanced energy technologies, renewable and otherwise, and advising
    state and Federal clients on where and how emerging technologies can
    enter the market.
        My interest in energy dates back to 1973 and the first oil embargo.
    I clearly recall the difficulties then of utilities meeting peak demand
    in summer months, intermittent threats of gasoline or home heating oil
    shortages, closing of aluminum plants in the Northwest, and the
    inability of new homeowners to get natural gas connections. At that
    time, the nation responded by embarking on a significant set of energy
    policies. It seems now we are facing similar challenges in the energy
    sector. In general, I am encouraged by the proposed actions contained
    in the legislation we are discussing today.
        My remarks emphasize the need for Congress to pass legislation to
    ensure that private and public investments made in renewable energy R&D
    are successfully commercialized in the marketplace. Much of this
    legislation emphasizes the need to reduce institutional barriers and
    thus costs of renewable technologies in the marketplace. Competition
    among all energy technologies is good if society is the ultimate
    beneficiary of reduced costs. Congress working with the Administration
    can enhance competition in energy markets now by removing market
    barriers to renewables allowing them to compete fairly. This is why I
    am supportive of the language in Title III of S. 597 which calls for a
    review of existing regulations and standards that act as barriers to
    market entry for emerging energy technologies and for recommendations
    for changes in laws or regulations which may impede market development.
        Renewable energy technologies such as biomass, geothermal, wind and
    solar, have met important measures of success relative to declines in
    cost of electricity production. Other factors out of the control of the
    renewable energy industry such as changing market conditions, the
    ability of competing technologies to also improve, and existing
    barriers to market entry, account for much of the difficulty in
    expanding market share. A recent study performed by the not-for-profit
    research organization, Resources for the Future (RfF), found that
    although commercial success of renewables in terms of market
    penetration has not lived up to expectations, in fact, performance of
    these technologies is higher and costs have been lower than expected.
    To their credit, the competitive energy sources such as mature fossil
    technologies continue to innovate and thus produce a moving and
    declining cost baseline. Fossil technologies have also benefitted from
    energy policy in the form of deregulation in the oil and natural gas
    pipeline and railroad industries.
        Title IV of S. 597 contains other provisions which would help to
    enhance market acceptance of renewables and distributed generation (DG)
    systems. Sec. 601 calls for an assessment of renewable energy resources
    available within the United States. The language is substantially
    similar to Sec. 112. of S. 388. This information made publicly
    available is important to both policymaker and developer. In most
    cases, the sunlight, wind, water, and even biomass on public lands are
    public resources. Accurate knowledge of the quality, quantity, and
    location of these resources is important to public decision making. The
    private sector may also fail to carry out optimal energy investment
    because of lack of knowledge about resources. I know from my own
    business experience that it was only two years ago that the Department
    of Energy's Energy Information Administration began incorporating
    biomass supply curves into their National Energy Modeling System
    because they previously did not have the data. My company developed the
    data for them under contract to the National Renewable Energy
    Laboratory.
        Sec. 602. of S. 597 seeks to advance provisions of Executive Order
    13123 issued in June 1999, to encourage Federal procurement of
    renewable energy. Although agencies were encouraged to purchase
    electricity generated from renewable energy, that electricity would
    have to be priced at or below existing alternatives. Thus although E.O.
    13123 sets a positive tone, Sec. 602 would do much more by mandating
    Federal procurement. Through long-term contracts, government can
    guarantee companies a market of any size. The United States has done
    this in the past to stimulate the demand for transistors and to expand
    the supply of uranium. The advantage to this approach is that the
    government can include the costs in the budget so the commitment to
    such a program can be reviewed annually. We are working on a project in
    central New York which can take waste biomass, i.e., wood chips, paper
    mill sludge, segregated municipal solid wastes; and convert them to a
    platform chemical called levulinic acid which can be combined with
    ethanol to produce an ultra-low sulfur diesel fuel, a home heating oil
    substitute, or a liquid turbine fuel for electricity production.
    General Electric Company is working with us on the turbine fuel's
    market potential. A Federal contract to buy electricity from renewable
    sources such as this would help seed the market. Although I oppose
    mandating private purchases of electricity generated from renewable
    sources, a policy to encourage renewable energy use at Federal
    facilities as outlined in Sec. 602 would overcome the weakness of the
    E.O. 13123 and compensate for the past adverse effects of barriers to
    entry for renewables.
        S. 933 and a related item, Sec. 603, Interconnection Standards of
    S. 597, is particularly important legislation as we attempt to enhance
    competition in electricity markets. Antares Group is currently working
    with a project developer on a combined heat and power (CHP) project
    using a proprietary distributed generation technology. To my knowledge,
    not even the DOE is currently funding such technology. The technology
    is similar to steam turbine technology, but it can convert lower-
    temperature and pressure steam into electricity more economically than
    currently available technologies. The project will have a total cost of
    about six million dollars and generate both heat and power at about 10
    MWe equivalent.
        As we proceed with developing this project, we are encountering
    many of the issues described in S. 933. To avoid high standby or backup
    charges by the utility, our project will incur $2-$3 million of
    additional capital expense in redundant systems. If we were to incur
    the cost of redundancy to avoid high standby charges then leave the
    grid, we could not reduce our customer's cost of heat and power as much
    as planned. If after this increased cost for redundancy were incurred
    and the utility company charged an exit fee for leaving the grid, our
    project becomes uneconomic as we could no longer afford to provide our
    on-site customer less expensive heat and power. Should we choose to
    stay on the grid and the project developer wants to make a business of
    expanding the market for this new DG technology, we face the potential
    for site-by-site interconnection studies which can quickly become
    costly.
        A consistent interconnect standard would further develop DG and CHP
    technologies, be they renewable based or not. It would also make more
    sense to be able to negotiate reasonable standby charges, not have our
    customers charged onerous exit fees particularly after stranded costs
    have already been recovered in electricity rates. Although this bill
    does not completely correct these problems, the potential exists,
    through this legislation, to encourage states and municipal authorities
    to not impose excessive fees on small generators.
        Sec. 604 of S. 597 (net metering) and Sec. 111 of S. 388
    (innovative financing) contain language which will help consumers of
    electricity become competitors in the electric supply business thereby
    enhancing competition further. For example, my company recently
    installed a small 12kW distributed solar cell array on a county office
    building in Maryland to convert sunlight to power. This is the
    equivalent of about three average home systems. The system reduces
    county energy costs by about $2,500 per year and emits no pollution.
    The county government which owns the building paid half the cost of the
    system. The U.S. Department of Energy and the States of Maryland and
    Virginia provided additional funds for a total project cost of about
    $78,000 or about $6,500 per kW. While the fuel is free, the high up-
    front capital costs would have killed the deal without the Federal
    support - in this case, it would take almost 40 years to payback based
    solely on capital costs. Rather than providing outright grants of
    Federal funds for these systems, a more efficient method would be to
    develop innovative financial mechanisms and allow customers who
    generate electricity to then sell electricity to the grid at market
    rates in times of peak demand.
        In conclusion, I support the proposed legislative changes being
    discussed here today and appreciate this Committee's attention to
    addressing our Nation's energy needs while we also move toward more
    competitive electricity markets. Along with Federal funding of long-
    term R&D, Federal energy policies discussed here today are key
    components to ensuring market acceptance of renewable energy
    technologies and a vibrant renewable energy industry.
        Thank you, Mr. Chairman and members of the Committee for this
    opportunity to present these views. I look forward to answering your
    questions.

        The Chairman. Mr. Hall, why don't you go right ahead?

       STATEMENT OF MARK HALL, VICE PRESIDENT, EXTERNAL AFFAIRS,
                       TRIGEN ENERGY CORPORATION

        Mr. Hall. Good morning. Thank you, Mr. Chairman and members
    of the committee, for having me here this morning to testify
    predominantly in support of S. 933 that is before the committee
    and also to address other legislative proposals to address
    barriers to combined heat and power and distributed generation.
        My company is Trigen Energy Corporation. We are based in
    New York, but we have operations in 22 States and the District
    of Columbia. And more than half of those projects would be
    characterized as distributed generation or combined heat and
    power projects, and in some cases both.
        CHP, which is combined heat and power, CHP and modern
    distributed generation provide significant economic and
    environmental benefits. And to the point that was raised
    earlier, there has been quite a lot of analysis by both the
    private sector and the U.S. Environmental Protection Agency and
    the U.S. Department of Energy that backs up the very
    significant environmental benefits, as well as the economic
    benefits that can be derived from more widespread deployment of
    combined heat and power and distributed generation.
        In addition, the point that was raised earlier about being
    in the here and now versus thinking about that which might come
    in the future, combined heat and power and distributed
    generation is very much in the here and now. And although we
    certainly do face a shortfall of electric capacity in the near
    term and in the future, it is going to be much more efficient,
    to the extent that we are going to continue to rely very
    heavily on fossil fuels, to leverage modern technologies that
    can produce both electricity and thermal energy much more
    efficiently than just producing electricity alone.
        To answer the question that was not directed to me earlier,
    but to the Secretary, a 2,500 megawatt powerplant will never be
    as sufficient as a smaller scale combined heat and powerplant
    and modern distributed generation that recovers the heat simply
    because all fossil-based electric generation produces excess
    heat. And if we can find ways to use that, then we reduce the
    need to burn fossil burn someplace else in the economy where
    the heat is needed.
        And with the lone exceptions of hydroelectric and solar
    energy, which are going to be topics widely discussed today,
    all other forms of generation will have that leftover heat. And
    so the issue is, as we are going to continue to be reliant on
    fossil fuels into the near term certainly, and to a large
    extent the large term, we need to find ways that we can most
    efficiently use our fossil fuel resources. And if we can use
    our fossil fuel resources more efficiently, then we should be
    able to reduce our overall cost.
        That brings us to those things that do not relate directly
    to fuel cost and technology that do stand in the way of the
    more widespread deployment of these technologies. And
    interconnection is high on the list of those issues that need
    to be addressed and need to be addressed in a thoughtful way at
    the Federal level that is symbiotic with those activities that
    need to be taken at the State level.
        I think interconnection is a very well-known and very well-
    researched barrier to distributed generation and
    interconnection. There is a DOE report that was published in
    May 2000 entitled Making Connections that memorializes an array
    of instances where interconnection barriers--where developers
    have come up against interconnection barriers in various
    projects. It documents cost, lost environmental benefits, et
    cetera. And to the extent that this committee has not seen that
    DOE report, a request could be made of DOE or we could
    certainly make it available to you as well.
        I think it is also important to recognize that S. 933 is
    the result of a pretty lengthy process of ongoing dialogue that
    included not only members of this committee and members of the
    Senate, but a lot of interested stakeholders in this issue. And
    as it was characterized to me, there was a search high and low
    to find someone that could represent an opposing viewpoint
    today on the need for a uniform interconnection standard.
        And I do not think that you will hear from one today,
    because I think we have struck the right balance in this
    language that will allow everybody to get what they need at
    both the distribution and the transmission level, and also to
    assure that backup power, which is sort of the hand-in-glove
    partner on interconnection, that backup power is also made
    available to those entities that are going to be
    interconnecting with the transmission and distribution system.
        To reiterate a comment made earlier, S. 933 focuses on
    technical interconnection standards. It does not address the
    process for interconnection. That is left appropriately at the
    State level, where local conditions should dictate the
    appropriate process.
        I would also just like to highlight that we are also very
    supportive of the provisions in a couple of the other bills
    that are before the committee this morning, the subject of this
    hearing, S. 597, section 301, and section 112 of S. 388, both
    which require the cataloging of additional barriers, many of
    which you have heard about and many of which are discussed in
    more detail in my testimony that you have before you.
        I would like to close by thanking you again for your
    interest in these issues. And I am certainly available to
    answer any questions.
        The Chairman. Thank you very much.
        [The prepared statement of Mr. Hall follows:]
      Prepared Statement of Mark Hall, Vice President, External Affairs,
                           Trigen Energy Corporation
        Mr. Chairman and members of the Committee, thank you for allowing
    me to testify before you today on Senate Bill 933 and other legislative
    proposals to remove barriers to combined heat and power (CHP) and other
    forms of distributed generation (DG). My name is Mark Hall, and I am
    the Vice President of External Affairs for Trigen Energy Corporation,
    based in White Plains, NY. Trigen owns and operates some of the most
    efficient power plants in the world. We accomplish this by deploying
    CHP, DG and leveraging other modern technologies in innovative ways.
        Trigen currently owns, operates or otherwise manages fifty-one
    plants located in twenty-two states, and the District of Columbia.
    Trigen is the proud recipient of many prestigious awards recognizing
    our innovation, leadership in the energy industry and commitment to
    environmental protection. This includes two awards from U.S agencies:
    the Energy Star Award from the U.S. EPA in recognition of our
    leadership in CHP projects and the Climate Protection Award from the
    U.S. EPA for corporate leadership in reducing greenhouse gas emissions.
    But more important than awards recognizing our environmental
    stewardship is the fact that we would not be selected to design, build
    own or operate on-site CHP projects for our customers if we were not
    able to provide substantial economic and reliability benefits in
    addition to outstanding environmental performance. The nearby
    University of Maryland College Park is an excellent example. Trigen and
    a partner were selected by the University to build and operate a new
    state-of-the-art CHP facility for the campus as well as to manage the
    on-site utilities while working with the campus staff to improve
    overall efficiency. The project is expected to save the University of
    Maryland system $6 million dollars per year while reducing regional
    nitrogen-oxide emissions by 9,800 tons per year and carbon dioxide
    emissions by 3.5 million tons over the 20 year life of the contract. We
    were the recipient of the 1999 Project Award from the National Council
    for Public-Private Partnerships because of our ability leverage
    technology in ways that were both economically and environmentally
    beneficial to all parties.
        Despite these economic and environmental benefits, there are a
    variety of institutional and regulatory barriers that prevent CHP from
    achieving its full potential. These barriers inappropriately reduce the
    economic viability of CHP projects, slow their development and
    implementation and in some cases simply make them impossible to
    complete. S. 933 is an attempt to remove the interconnection and backup
    power barriers and allow Trigen and other companies to increase the
    beneficial application of CHP. Although S. 933 covers some of the
    issues, there are additional factors that must be addressed to fully
    remove the barriers. The cataloguing and systematic treatment of these
    barriers as suggested in S. 597 Sec. 301 A & B and S. 388 Sec. 112 are
    also critically important.
        Mr. Chairman, Trigen's plants and employees are at work every day
    showing how efficient energy production is both good for business and
    good for the environment. By removing the barriers to utilizing CHP and
    other highly efficient DG, Congress can reward investors, benefit
    consumers, strengthen our economy and clean up our air.
        The issues you have asked this panel to address are of critical
    importance to all of us. Energy sector competition is already upon us,
    with the States leading the way. The Federal government must rise to
    the task of addressing the barriers to competition that inherently lend
    themselves to national legislation, matters that cannot be responsibly
    dealt with in a piecemeal, State-by-State manner.
        S. 933 is the result of many months of thoughtful work that
    reflects the benefit of numerous parties working together to arrive at
    consensus language that addresses the need for a uniform nationwide
    interconnect standard. S. 933 marks a critical step in efforts to
    improve the environment and electricity markets by encouraging the
    deployment of CHP and other DG. I would like to point out that H.R.
    1945 is the companion bill to S. 933 from the House of Representatives.
    Trigen offers its full support of both.
        In addition to addressing why there is a critical need for uniform
    nationwide interconnection standards, I would also like to highlight
    five other issues that must be addressed if we want to remove the most
    formidable barriers to deploying CHP and other highly efficient DG
    technologies. They are: Backup power as related to PURPA repeal,
    clarifying tax depreciation schedules, establishment of investment tax
    credits, rethinking new source review and establishing output-based
    standards. First, I will address interconnect standards and the
    immediate need for S. 933.
                                interconnection
        The National Energy Policy proposal recently released by the White
    House, like similar proposals of the last Administration, recognizes
    the economic and environmental benefits of CHP and other highly
    efficient DG systems. One formidable barrier to taking advantage of
    those benefits is the lack of uniform nationwide interconnection
    standards.
        The current process for determining the appropriate technical
    requirements for the interconnection of new energy projects with the
    distribution or transmission system is often unnecessarily lengthy and
    expensive and the specific requirements can vary arbitrarily from state
    to state, utility to utility, site to site. Incumbent utilities that
    may not want to face competition may attempt to cloak anti-competitive
    behavior in the guise of technical disagreement over interconnection.
    We recognize that it is essential for interconnections to be safe and
    reliable, but interconnection standards can be both safe and reliable,
    and uniform. Bringing uniformity to interconnection through a uniform
    nationwide technical standard will reduce uncertainty, lower costs, and
    facilitate deployment of modern CHP technology, across the country.
    Interconnection language must be sufficiently broad to help all
    generators connect to the distribution and/or transmission grids. S.
    933 provides for interconnections at both levels. The language does not
    pick winners and losers, but maximizes flexibility for determining
    whether the facility is connected to the transmission grid or the
    distribution grid. In addition, it is important that the language does
    not unnecessarily infringe upon States' rights to manage their
    respective distribution grids. The benefits of uniformity require that
    the standards apply to all states.
        I think it is important to give you an example of the
    interconnection problem. Trigen has a great deal of experience
    interconnecting various sized generators with the distribution and
    transmission grid. We have done it literally dozens of times.
    Technically, it is a pretty straightforward task but in practice it can
    be a slow painful process that raises costs and delays projects that
    otherwise could be delivering important economic and environmental
    benefits. In 1998, Trigen approached a utility to request
    interconnection for a 703 kW generator to be installed in a downtown
    office building. The small system would supply the building's electric
    load and air conditioning. Yet, two years later, we were still
    negotiating with the utility over so-called ``technical'' issues.
    Months after receiving our initial request for interconnection, the
    utility asked that Trigen design a different, specialized
    interconnection. Trigen completed the new design at a significant
    additional cost. The utility rejected the design. In response, Trigen
    offered to use guidelines developed by Consolidated Edison in New York
    City, even though the ConEd guidelines were disproportionately
    burdensome and expensive given the very small size of the installation.
    The utility agreed, but after Trigen complied with these requirements,
    the utility imposed further ``technical'' restrictions on Trigen's
    ability to operate the facility. It took over two years to resolve this
    issue. The barrier related costs of completion were over $88,000.
        One would strongly suspect that this was anti-competitive behavior
    masquerading as technical disagreement which successfully prevented the
    unit from operating for two years. This is but one of countless
    examples. In fact, DOE published a report in May of 2000 entitled
    Making Connections that memorialized this example and numerous others
    from across the country. S. 933 would address many of the
    interconnection barriers highlighted in that report. Passage of S. 933
    will help manufacturers of CHP and DG technology achieve a plug and
    play economy of scale, lower costs and encourage investment in CHP and
    DG technology.
               the shortcomings of s. 597 regarding interconnect
        Like S. 933, S. 597 recognizes the need for a uniform interconnect
    standard. However, S. 597 falls short of addressing the entire scope of
    that need. S. 597 calls only for a standard for interconnect to the
    distribution grid. Failure to address transmission interconnect would
    result in an enormous lost opportunity to ensure all the same benefits
    S. 597 seeks to achieve at the distribution level. Stream-lining
    interconnect at the transmission level will be one more encouragement
    to investing in larger scale DG like on-site CHP plants whose
    efficiencies can bring immediate large scale reductions in fuel
    consumption and emissions.
        In addition, S. 597 does not include a provision addressing the
    right to back-up power at just and reasonable rates. Most CHP and DG
    assets require back-up power as insurance to the DG/CHP customer that
    they will have electricity in the event the DG/CHP asset has scheduled
    or unscheduled down time. Without a guaranty of affordable back-up
    power many DG/CHP projects will never get off the ground. I will
    address this issue in more detail below.
        Finally, S. 597 includes limiting language that the DG asset must
    be designed to serve retail customers ``at or near the point of
    consumption''. S. 933 does not include any such limitation. If we want
    to encourage the deployment of highly efficient CHP and DG assets we
    should not place any limitation on what customers are served or where
    it can be located in order to take advantage of uniformity.
       backup power and the prospective repeal of purpa's ``must-sell''
                                   provision
        Hand-in-glove with the issue of interconnection standards is the
    availability of reasonably-priced back-up power. Historically, back-up
    power was guaranteed at just and reasonable rates to facilities that
    met either the Qualifying Facility or Small Power Production Facility
    definitions under PURPA. However, as technology and markets have
    evolved, the need for back-up power at rates that are just, reasonable
    and not unduly discriminatory is important to a wide-range of projects
    that might not meet these historic definitions, regardless of whether
    the project is interconnected to the transmission or distribution grid.
    S. 933 remains respectful of state authority by allowing States to
    determine the just and reasonable rate for back-up power at the
    distribution level. The Bill also ensures that until there are open
    markets where a facility can competitively purchase backup power, the
    local utility must provide such backup power at nondiscriminatory
    rates.
        CHP and other DG systems rely on the ability to purchase backup
    power from the grid in the event that they temporarily fail to operate
    or must shut down for maintenance. Under current PURPA laws the local
    utility ``must sell'' backup power to qualified stand alone CHP
    facilities. Many proposed restructuring bills would repeal both the
    ``must buy'' and the ``must sell'' requirements of Section 210 of
    PURPA. The ``Right to Back-up Power'' provision of S. 933 is a safety
    measure that will ensure back-up power at just and reasonable rates if
    the ``must sell'' provision of PURPA is repealed and there is no open
    access to purchase of electricity in a given state. Elimination of
    PURPA's ``must sell'' requirement without the protection of the right
    to back-up power will leave new entrants and existing DG at the mercy
    of the local utility, subject to discriminatory pricing or outright
    denial of back-up power.
                           tax depreciation schedules
        The current tax code, based on an somewhat obsolete view of the
    energy industry, currently does not allow depreciation of CHP and DG
    technologies in ways that reflect those assets physical and economic
    lives. This inappropriate treatment can discourage investments in CHP
    and DG technology. For example, the IRS allows a gas turbine located
    inside a building for on-site generation use to be depreciated over a
    39-year period while the same gas turbine used for transportation
    (e.g., on an airplane) depreciates in one quarter of the time. The
    moving parts of the turbine used for electricity and heating may be
    replaced as many as five times while the owner continues to depreciate
    the original investment. Shortening the time over which this equipment
    depreciates would remove an impediment to investment in what is
    otherwise an efficient and environmentally beneficial technology.
        New and small turbines have different physical properties and will
    generally operate under quite different conditions than large turbine
    units employed by traditional electric utilities and, consequently,
    will have different service lives. Further, the competitive marketplace
    will force energy suppliers to replace or ``upgrade'' standing
    equipment before it fails, since installation of more efficient
    technology offers lower costs to customers and the opportunity to hold
    or capture market share for competitive energy suppliers. We expect
    that energy generation equipment will come and go in the marketplace in
    a manner that strongly resembles that of modern computers assets which
    outlive their economic lives long before they cease to work properly.
        Congress should direct the Internal Revenue Service (IRS) to set a
    depreciation schedule of seven (7) years for industrial and utility
    facilities and ten (10) years on Building CHP (BCHP) assets, which
    reflects the true technical and economic life of most systems. I have
    attached to this testimony, recommended modifications to the Internal
    Revenue Code from the U.S. Combined Heat and Power Association
    (Attachment A).* Trigen is a member of the USCHPA and supports all of
    its recommendations.
    ---------------------------------------------------------------------------
        * Attachments A and B have been retained in committee files.
    ---------------------------------------------------------------------------
                 combined heat and power investment tax credit
        Tax credits are typically offered by the Federal government to
    obtain public benefits by prompting private parties to make capital
    investments that they would not so readily make otherwise or to
    overcome other short-term barriers to otherwise feasible activities. As
    such, an investment tax credit (ITC) is a good short-term mechanism to
    promote CHP systems, which offer very significant public and private
    economic and environmental benefits, but can often be more difficult
    for the private sector to deploy than electric-only projects because of
    the complexity inherent in assembling a ``thermal load'' or set of
    heating/cooling customers.
        Congress should direct the IRS to provide a ten (10) percent ITC
    for met thermal energy distribution systems at district energy CHP
    facilities. I have attached to this testimony, recommended
    modifications to the Internal Revenue Code form the US Combined Heat
    and Power Association (Attachment A). Trigen supports all of its
    recommendations.
                               new source review
        The new source permitting program known as New Source Review (NSR)
    was developed over 20 years ago to reduce air pollutant emissions. At
    the time the focus was on reducing smokestack emissions and NSR focuses
    primarily on requirements for end-of-pipe, add-on control technologies.
    Add-on controls reduce emissions but add cost and reduce efficiency.
        Over the last 20 years, we have learned that a much better approach
    to pollution control is to entirely avoid the generation of pollution
    through lower emitting processes and reduce their impact through
    increased efficiency. Pollution prevention (P2) and increased
    efficiency reduce emissions while also reducing capital and operating
    costs. They result in processes that are cleaner and cheaper with lower
    demand on all natural resources. This is clearly the direction that we
    need to move in order to achieve a vital economy and a healthy
    environment and CHP is perhaps the best example of this opportunity.
        Unfortunately, NSR does not give any credit for efficiency and
    gives little or no credit for pollution prevention. It is constantly
    driving projects away from these positive approaches and back to the
    old sidetrack of add-on controls. It discourages the application of
    existing P2 technologies and the development of new technologies. U.S.
    companies have learned that they should not invest in the development
    of cleaner and higher efficiency technologies because they will not be
    able to permit them. This is a multidimensional loss to the U.S.
    economy. In contrast, our foreign competitors have made great strides
    in these areas, which are reflected in their high efficiency use of
    energy.
        As an example, several of our recent projects have been based on a
    particular small gas turbine generator. As an electric generator only,
    the turbine is less than 30 percent efficient. However, our CHP
    applications using that same piece of equipment are anywhere from 80 to
    over 90 percent efficient. Put another way, we provide more than three
    times as much energy to the customer from the system for the same
    amount of emissions and energy input.
        It is only common sense that our regulatory system should recognize
    this energy and environmental benefit. But it doesn't. In the eyes of
    NSR, there is no difference between the two systems. Since NSR is a
    cost-based system, it is requiring us to duplicate capital investment
    to use add-on controls where we have already provided a reduction
    through efficiency. In many cases, the project ``won't pencil'' if we
    have to pay twice, and a beneficial project is cancelled.
        This fundamental flaw of NSR is only one of several ways in which
    the regulation has outlived its usefulness. The program relies on a
    variety of highly technical standards to determine which new or
    existing units will be required to apply emission controls. Over the
    years, these standards have become more and more arcane and
    contentious. The very high cost and uncertainty involved in the
    application of NSR to both new and existing units has created a huge
    disincentive for operators to maintain and improve the performance of
    these units. By holding out for the maximum possible improvement at all
    times, the program has discouraged even the normal improvement that
    should happen without regulation. By excluding the effects of pollution
    prevention and efficiency, it has excluded the best possible solutions
    from consideration and left us with proliferating lawsuits as the only
    result.
        Because CHP, by definition, produces two types of energy output
    (steam & electricity) from one fuel input, its treatment under NSR is
    especially difficult. The system sometimes tries to force us to combine
    our facilities with those of our clients in ways that are commercially
    impossible. In other cases it deprives us of credit for emission
    reductions that are legally verifiable and creditable.
        Output-based regulation, which relates the emissions to the useful
    energy produced is another regulatory concept that would help to
    address these problems. There has been growing acceptance of this
    approach as a way to send the proper signals through environmental
    regulation. Unfortunately, it seems to be difficult to integrate this
    approach into the structure of NSR.
        We have been working with the EPA for more than three years to find
    appropriate ways to achieve the universally recognized benefits of CHP
    within the NSR structure. I am sorry to report that our progress to
    date has been limited. In large part this is due to the fundamental
    structure of the program. In the end, we are forced to conclude that,
    at least for the generation of heat and power, the NSR program is a
    grandfathered regulation that has outlived its usefulness and needs to
    be replaced with a more modern and efficient regulatory structure. We
    believe that a properly designed cap and trade program that provides
    guaranteed emission reductions over the entire sector would provide
    better environmental results and encourage new, more efficient
    technology. I have attached a copy of a multi-pollutant strategy
    (Attachment B) that Trigen and four other energy companies have
    developed as a substitute for NSR as it applies to heat and power
    generation.
                             output-based standards
        Currently, efficiency is measured by an input-based standard that
    measures fuel consumption as opposed to energy output. Under this
    approach, the efficiency of CHP is not recognized. By way of example,
    for every one unit of fuel consumed by a CHP plant two units of energy
    are produced--steam and electricity. CHP is twice to three times more
    efficient than a typical central generation plant that only produces
    one unit of energy for every one unit of fuel consumed because it is
    not capturing the heat off the combustion process.
        The establishment of output-based standards would allow facilities
    to count their fuel to end use energy efficiency toward their
    environmental compliance requirements. Output-based standards encourage
    efficient and inherently cleaner plants. Trigen has been an active
    participant in numerous venues established to develop output-based
    standards. Trigen seeks establishment of progressive regulations that
    replace BACT and LAER with a cap and trade program coupled with a
    universal allowance allocation of pounds of pollution per megawatt hour
    of electricity produced and pounds per megawatt hour of thermal energy
    produced.
                                   conclusion
        Given the inevitability of competition in the electricity market,
    and both national and global trends that will guide the future of
    energy production in this country, I believe that emerging technologies
    are serving and will serve an indispensable purpose in meeting goals of
    energy efficiency and environmental demands. I urge this committee to
    pass S. 933 and to take a proactive stance on addressing the other
    concerns I have raised here today. We would also like to reiterate our
    support for Sec. 301 A & B of S. 597 and Sec. 112 of S. 388. I thank
    the committee for the opportunity to appear before you. Thank you, Mr.
    Chairman.

        The Chairman. Mr. Starrs.

      STATEMENT OF THOMAS J. STARRS, J.D., Ph.D., SENIOR PARTNER,
                  KELSO STARRS AND ASSOCIATES, L.L.C.

        Mr. Starrs. Thank you, Mr. Chairman, members of the
    committee. My name is Tom Starrs. I am a partner in the energy
    and environmental consulting firm of Kelso Starrs and
    Associates.
        My business focuses on the design, analysis, and
    implementation of legal and regulatory incentives for the
    development of renewable energy technologies, particular solar
    and wind energy. I also serve on the board of directors of both
    the American Solar Energy Society, which is a national,
    nonprofit membership organization dedicated to the advancing
    the use of renewable energy, and the Schott Applied Power
    Corporation, which is one of the largest distributors of
    renewable energy equipment in the United States. I very much
    appreciate the opportunity to testify before you this morning.
        I am going to focus my testimony on a few details of the
    bills that are currently before this committee, specifically
    interconnection standards, net metering, and business
    practices. Starting with interconnection standards, we have
    heard quite a bit about this already from the other witnesses,
    so I will not belabor this. But this is perhaps the most
    significant barrier to the broader commercialization of
    distributed technologies.
        The problem, the absence of national technical standards
    for the interconnection of these facilities, arises because
    utilities historically have had substantial discretion over
    interconnection requirements and have often used that
    discretion to develop requirements that varied considerably
    from one utility to the next without any appropriate technical
    or economic justification.
        These utility-specific requirements were of relatively
    little concern for the developers of large-scale generating
    facilities whose projects were big enough that they could
    justify the cost of hiring consulting engineers and attorneys
    to negotiate project-specific requirements for their
    facilities. However, for smaller systems, just as residential,
    rooftop, solar electric systems, or farm-scale wind energy
    systems, these costs are an absolute deal breaker.
        The solution to this problem as we have already heard
    today, is the adoption of national standards developed by
    appropriate authorities, such as the Institute of Electrical
    and Electronics Engineers, or IEEE, the Underwriters
    Laboratories, or UL, and the National Fire Protection
    Association, which writes the national electrical code.
        The States are already pursuing this approach. As figure 1,
    which is attached to my testimony, indicates, over 20 States
    have passed laws or enacted regulations requiring the
    development of standardized interconnection requirements for at
    least some categories of distributed generation facilities. I
    am delighted to see that this is the approach adopted in both
    S. 597 and S. 933.
        Section 603 of S. 597 requires the FERC to establish
    safety, reliability and power quality rules for distributed
    generation facilities. It also--and I think this is
    particularly important--states that the FERC may prescribe
    different rules for different classes of facilities, which I
    think is essential for recognizing the distinction between
    residential and small commercial-scale facilities for which we
    should be striving to achieve as close as we can to plug and
    play-type simplicity, and larger commercial- or industrial-
    scale facilities for which some project-specific engineering
    may be appropriate. Section 4 of S. 933 similarly calls for the
    FERC to develop reasonable and appropriate technical standards
    for interconnection.
        With respect to net metering--Mr. Garman mentioned this
    morning, and a couple of the other witnesses have mentioned it
    as well--net metering is a simple, inexpensive and easily
    administered mechanism for encouraging the use of small-scale
    distributed generation. Net metering allows utility customers
    to spin their meter backwards when they produce more
    electricity than they need to power their own lights and
    appliances.
        Under existing Federal law, the PURPA law, utilities are
    already required to interconnect with certain distributed
    generation facilities and to purchase the excess electricity
    produced by those facilities. But under PURPA, the utility
    purchases that excess electricity at an administratively
    determined avoided cost price, which is usually a fraction of
    the retail price the consumer pays for power.
        Net metering provides a modest economic incentive for
    eligible facilities by crediting them for this excess
    electricity at the retail rate. Now metering policies have been
    tremendously popular at the State level. Just 5 years ago, only
    fourteen States allowed net metering, and most of those
    requirements were adopted pursuant to State implementation of
    the Federal PURPA law.
        Today, the total stands at 34 States which 4 new States,
    Arkansas, Georgia, Hawaii, and Wyoming, enacting net metering
    laws just this year. And figure 2, which is attached to my
    testimony, shows how much inroads we have made on the net
    metering issue with respect to the penetration among the
    States.
        In most cases, these laws were enacted by legislation.
    Although in a few cases, net metering policies have been
    adopted by regulation and, in most cases, with broad bipartisan
    support. In my home State of Washington, for example, the 1998
    net metering law passed unanimously in a then Republican-
    controlled legislature and was signed into law by a Democratic
    governor.
        Of the bills currently before the committee, only S. 597
    currently includes a net metering provisions. Section 604 of S.
    597 requires utilities and other retail electric suppliers to
    offer net metering services to customers using renewable energy
    resources with a maximum generating capacity of 100 kilowatts
    for residential customers and 250 kilowatts for commercial
    customers.
        I want to mention one other element of the net metering
    language in S. 597. It includes a provision prohibiting
    utilities and other retail electric suppliers from
    discriminating against net metering customers by imposing
    additional fees or charges or otherwise treating them
    differently from non-net metering customers in the same
    customer class.
        This is an important provision that should be retained
    because it prevents suppliers from imposing charges that would
    circumvent the intent of net metering, which of course is to
    encourage these facilities.
        The third area I want to touch on today is the area of
    business practices. None of the proposals before the committee
    address this fundamental barrier to the interconnection of
    distributed facilities, the failure to adopt simplified
    interconnection agreements and routine procedures for
    processing interconnection requests. Again, the goal should be
    plug and play simplicity, at least for the smaller scale
    facilities, in order to eliminate unnecessary delays and
    inappropriate expenses.
        For guidance on this subject, I would urge the committee to
    consider language in a bill introduced in the House by
    Congressman Jay Inslee, H.R. 954, entitled the Home Energy
    Generation Act. Mr. Inslee's bill also includes net metering
    and interconnection requirements but goes further in requiring
    the FERC to develop ``consumer friendly contracts'' for the
    interconnection of distributed generating facilities up to 250
    kilowatts. A comparable provision would be an appropriate
    addition to any bill coming out of this committee.
        Thank you very much.
        [The prepared statement of Mr. Starrs follows:]
     Prepared Statement of Thomas J. Starrs, J.D., Ph.D., Senior Partner,
                      Kelso Starrs and Associates, L.L.C.
        Mr. Chairman, members of the committee, ladies and gentlemen: My
    name is Thomas Starrs. I am a senior partner in the energy and
    environmental consulting firm of Kelso Starrs & Associates LLC, based
    on Vashon Island, Washington. My consulting practice focuses on the
    design, analysis and implementation of legal and regulatory incentives
    for the development of renewable energy technologies, with a focus on
    solar and wind energy. I also serve on the Board of Directors of both
    the American Solar Energy Society, a national non-profit membership
    organization dedicated to advancing the use of renewable energy; and
    the Schott Applied Power Corporation, one of the largest distributors
    of renewable energy equipment in the United States. I am the author of
    over thirty publications regarding renewable energy and distributed
    energy policy. In addition, I have made invited presentations on energy
    policy to numerous national organizations, and to legislative
    committees, public utility commissions, and state energy offices in
    over a dozen states. This is my first time testifying before the U.S.
    Senate. The opinions I offer here are my own and not necessarily those
    of any of the organizations with which I am associated. I very much
    appreciate the opportunity to testify this morning on this important
    element of our nation's energy future.
                       overview of distributed generation
        Continuing technology innovation is creating new market
    opportunities for decentralized or `distributed' power generation. The
    distributed generation paradigm emerged in the early 1990s out of
    research suggesting that the use of small-scale electric generating
    facilities dispersed or ``distributed'' throughout the utility network
    provided technical and economic benefits to the electricity system that
    were not available from traditional central-station generation.
        A number of studies--including several sponsored by utilities--have
    identified direct, measurable economic benefits of having generation
    sources located close to the end user.\1\ Distributed generation
    reduces energy losses in transmission and distribution lines, provides
    voltage support, reduces reactive power losses, defers substation
    upgrades, defers the need for new transmission and distribution
    capacity, increases reliability of electricity supply and reduces the
    demand for spinning reserve capacity.\2\ In fact, several studies have
    concluded that under many circumstances (particularly where the
    utility's distribution system is operating near capacity) non-
    traditional distributed benefits are comparable in scale to traditional
    energy and capacity benefits.\3\
    ---------------------------------------------------------------------------
        \1\ See D. Shugar, Photovoltaics in the Utility Distribution
    System: The Evaluation of System and Distributed Benefits, Pacific Gas
    & Electric (July 1991); R. Lambeth & T. Lepley, Distributed
    Photovoltaic Evaluation by Arizona Public Service, 23rd IEEE PV
    Specialists Conference (May 1993).
        \2\ Howard J. Wenger, Thomas E. Hoff & Brian K. Farmer, Measuring
    the Value of Distributed Photovoltaic Generation: Final Results of the
    Kerman Grid-Support Project, Conference Proceedings, First World
    Conference on Photovoltaic Energy Conversion (December 1994), p. 793.
        \3\ See E. Prabhu, Finding High Value for Grid-Connected PV:
    Southern California Edison's Innovative Solar Neighborhood Program,
    American Solar Energy Society Annual Conference (1995); J. Oppenheim,
    PV Value Analysis: Progress Report on PV-COMPACT Coordinating Council's
    Consensus Research Agenda, American Solar Energy Society Annual
    Conference (1995); H. Wenger, T. Hoff & B. Farmer, Measuring the Value
    of Distributed Photovoltaic Generation: Final Results of the Kerman
    Grid-Support Project, First World Conference on Photovoltaic Energy
    Conversion (1994); D. Keane, Grid-Support Photovoltaics: Summary of
    Case Studies, Pacific Gas & Electric (1994).
    ---------------------------------------------------------------------------
        The increasing availability of distributed technologies will
    provide residential, commercial and industrial customers with
    economically viable options for using locally-available energy
    resources to meet their own electricity needs. In addition, I believe
    the public interest is best served by encouraging the use of solar
    energy, wind energy, and other environmentally-preferred renewable
    energy resources in distributed applications.
        Where the distributed technology is fueled by a renewable resource,
    it offers the additional benefit of displacing fossil-fuel generation
    or other generation technologies with greater environmental impacts.
    Solar and wind energy are the quintessential distributed resources,
    allowing homeowners, businesses and industries to capture additional
    economic value from two natural resources that flow freely and nearly
    ubiquitously over the Earth. The use of solar and wind energy requires
    no mining or processing of natural resources, no shipping or pipelining
    of a fuel, no combustion, and no pollution control. Rather, these
    resources require only the technology needed to capture and convert the
    available sun or wind into electricity or other forms of useable
    energy. Solar electric and wind energy technologies can be located
    anywhere the sun shines or the wind blows, and can be used to generate
    power on any scale, from watts to megawatts.
        From its modest start in the research and development departments
    of utilities a decade ago, distributed generation has emerged as one of
    the most-discussed aspects of the electricity industry. Electric and
    gas utilities are investing in distributed technologies; venture
    capital is pouring into companies focusing on distributed generation;
    and utility regulators are exploring the policy implications of
    integrating distributed generation into existing electric utility
    systems.
             advantages and disadvantages of distributed generation
        A recent report from the Worldwatch Institute lists eight benefits
    of distributed generation (which it refers to as ``micropower''
    technologies). The following table describing these benefits is from
    the Worldwatch paper, with an additional column I prepared explaining
    their applicability to solar and wind energy.

                       EIGHT HIDDEN BENEFITS OF MICROPOWER
    ------------------------------------------------------------------------
                                                          Applicability to
               Benefit                 Description         solar and wind
    ------------------------------------------------------------------------
    Modularity..................  By adding or          Solar and wind
                                   removing units,       technologies are
                                   micropower system     among the most
                                   size can be           modular, available
                                   adjusted to match     from watts to
                                   demand.               megawatts
    ------------------------------------------------------------------------
    Short Lead Time.............  Small-scale power     Solar and wind
                                   can be planned,       systems have
                                   sited and built       shorter lead times
                                   more quickly than     than any other
                                   larger systems,       generating
                                   reducing the risks    technologies
                                   of overshooting
                                   demand, longer
                                   construction
                                   periods, and
                                   technological
                                   obsolescence.
    ------------------------------------------------------------------------
    Fuel Diversity and Reduced    Micropower's more     As non-depletable
     Price Volatility.             diverse, renewables-  renewable
                                   based mix of energy   resources, solar
                                   sources lessens       and wind energy are
                                   exposure to fossil    freely available
                                   fuel price            and cannot be
                                   fluctuations.         exhausted,
                                                         eliminating their
                                                         vulnerability to
                                                         fuel price
                                                         fluctuations
    ------------------------------------------------------------------------
    ``Load-Growth Insurance''     Some types of small-  Solar energy is well
     and Load Matching.            scale power, such     correlated with
                                   as cogeneration and   electricity demand,
                                   end-use efficiency,   particularly for
                                   expand with growing   summer-peaking
                                   loads; the flow of    utilities whose
                                   other resources,      peak is driven by
                                   like solar and        air conditioning
                                   wind, can correlate   demand
                                   closely with
                                   electricity demand.
    ------------------------------------------------------------------------
    Reliability and Resilience..  Small plants are      Solar and wind
                                   unlikely to all       energy systems use
                                   fail                  modular components
                                   simultaneously;       that are easy to
                                   they have shorter     repair and replace,
                                   outages, are epsier   and can be
                                   to repair, and are    dispersed over the
                                   more geographically   landscape
                                   dispersed.
    ------------------------------------------------------------------------
    Avoided Plant and Grid        Small-scale power     Solar energy systems
     Construction, and Grid        can displace          can be sited in
     Losses.                       construction of new   locations designed
                                   plants, reduce grid   to maximize these
                                   losses, and delay     benefits
                                   or avoid adding new
                                   grid capacity or
                                   connections.
    ------------------------------------------------------------------------
    Local and Community Choice    Micropower provides   Solar and wind
     and Control.                  local choice and      energy development
                                   control and the       is usually the
                                   option of relying     preferred choice of
                                   on local fuels and    local communities,
                                   spurring community    and small-scale
                                   economic              applications often
                                   development.          can be permitted
                                                         without
                                                         environmental
                                                         impact review
    ------------------------------------------------------------------------
    Avoided Emissions and Other   Small-scale power     Solar and wind
     Environmental Impacts.        generally emits       energy systems
                                   lower amounts of      produce no
                                   particulates,         emissions and have
                                   sulfur dioxide and    a minimal
                                   nitrogen oxides,      environmental
                                   heavy metals and      impact
                                   carbon dioxide, and
                                   has a lower
                                   cumulative
                                   environmental
                                   impact on land and
                                   water supply and
                                   quality.
    ------------------------------------------------------------------------
    Source: Seth Dunn, Micropower: The Next Electrical Era, Worldwatch Paper
      No. 151 (Worldwatch Institute, July 2000), p. 33 first two columns);
      third column by the author.

        By contrast, there are relatively few disadvantages of distributed
    generation. The principal one is that distributed generation remains
    more expensive than central-station generation. For example, while
    installed cost of new central-station generating facilities is between
    $500 and $1,000 per kW, the cost of combustion-based distributed
    technologies ranges from $600 to $1,500 per kW, and the cost of cleaner
    non-combustion technologies such as solar cells, wind turbines, and
    fuel cells range from $900 to $10,000 per kW.\4\ It appears likely,
    however, that with mass production the cost of many distributed
    technologies will drop significantly, making them more competitive with
    central-station generation.
    ---------------------------------------------------------------------------
        \4\ S. Dunn, Micropower: The Next Electrical Era, Worldwatch Paper
    No. 151 (July 2000), pp. 19 & 24.
    ---------------------------------------------------------------------------
        The second disadvantage of distributed generation is that most
    fossil-fueled distributed technologies are not currently as clean as
    their central-station counterparts, which means that distributed
    generation does not necessarily represent an improvement in the
    environmental characteristics of the electricity industry. According to
    the U.S. Environmental Protection Agency, the electricity industry in
    the mid-1990s was responsible for approximately:

       72% of sulfur dioxide (SO2) emissions;
       33% of nitrogen oxide (NOX) emissions;
       32% of particulate matter (PM) emissions;
       23% of emissions of mercury, a toxic heavy metal, and
       36% of all human-caused emissions of carbon dioxide, the
            most dominant `greenhouse' gas.\5\
    ---------------------------------------------------------------------------
        \5\ Comments of the U.S. Environmental Protection Agency to the
    Federal Energy Regulatory Commission, Promoting Wholesale Competition
    Through Open Access Non-Discriminatory Transmission Services by Public
    Utilities, August 7, 1995, p. 7.
    ---------------------------------------------------------------------------
        Innovations in larger-scale generating facilities, such as
    combined-cycle gas turbines (CCGTs), have resulted in substantial
    reduction in emissions per kilowatt-hour from these facilities. Unless
    and until distributed technologies can match the environmental
    performance of these larger-scale facilities, increased use of
    distributed generation may not provide any incremental improvement in
    the environmental characteristics of the electricity industry. For
    example, recent studies prepared for the California Air Resources Board
    and the Energy Foundation \6\ indicate that the diesel-fueled internal
    combustion engines used in some distributed applications are 60-100
    times more polluting than CCGTs. Even fuel cells, when powered by
    hydrogen extracted from natural gas, may offer little if any
    environmental advantage over CCGTs.
    ---------------------------------------------------------------------------
        \6\ See Air Pollution Emission Impacts Associated with Economic
    Market Potential of Distributed Generation in California, Prepared for
    the California Air Resources Board and the California Environmental
    Protection Agency by Joseph Iannucci et al., Distributed Utility
    Associates (June 2000); and Can We Have Our Cake and Eat It Too?:
    Creating Distributed Generation Policy to Improve Air Quality, Prepared
    for the Energy Foundation by James Lents, Center for Environmental
    Research and Technology, University of California, Riverside
    (Distribution Draft November 2000).
    ---------------------------------------------------------------------------
        It is important for policymakers to understand that not all
    distributed technologies are equal from an environmental perspective,
    and that among distributed generating technologies, only solar
    photovoltaic and wind energy systems currently offer clear
    environmental benefits compared to other newer, more efficient
    generating resources. Policymakers should recognize and account for the
    significant differences in the environmental characteristics of various
    distributed technologies in determining to what extent these
    technologies deserve support. Rules encouraging the use of distributed
    technologies without regard for their environmental performance may do
    a disservice to the public. As a result, public policies should favor
    those distributed technologies that offer significant environmental
    benefits relative to other generating technologies.
               the public interest in a distributed energy future
        The transition to a distributed energy future is likely to result
    in an electricity system that is less polluting and more efficient,
    reliable, and resilient.
        Distributed technologies are the electrical equivalent of the
    personal computer. Computing power used to be concentrated in large-
    scale mainframe computers with access via ``dumb'' terminals at the
    end-user's location. The last two decades have seen a near-complete
    transition to microcomputers or minicomputers, each able to operate
    independently but also frequently linked to other computers to create
    electronic networks of information. Similarly, the generation of
    electric power has been concentrated in large-scale central-station
    facilities with the power transmitted, for the most part
    unidirectionally, to end-users. Increased reliance on distributed
    generation ultimately will result in a complex web of generating
    sources, with power flowing in multiple directions through the
    distribution system. Although for the foreseeable future this
    transition will not be complete, in that distributed generation will
    supplement rather than replace existing central-station generation,
    some industry analysts believe that new central-station plants on the
    order of 1,000 MW (typical of large nuclear and coal-fired power
    plants) will soon be unheard of.
        Much of the promise of the transition to a distributed energy
    future stems from potential improvements in the efficiency of energy
    conversion and in the environmental performance of the energy supply
    system. On-site generation allows the capture of waste heat, increasing
    the overall systems efficiencies of many combustion and non-combustion
    distributed technologies, including fuel cells, to as much as 80-90
    percent. In addition, some distributed technologies--with the
    exceptions noted earlier--offer substantial environmental benefits
    relative to existing energy conversion technologies. The Worldwatch
    Institute notes that micropower technologies that rely on cogeneration
    and cleaner fuels--either renewable energy or the cleanest of the
    fossil fuels, natural gas--have 50 to 100 percent fewer emissions, on a
    per-kilowatt basis, of particulates, nitrogen and sulfur oxides,
    mercury, and carbon dioxide than traditional fossil-fuel generation.\7\
    ---------------------------------------------------------------------------
        \7\ Micropower, pp. 36-37.
    ---------------------------------------------------------------------------
        The threat of human-caused climate change alone is reason enough to
    encourage the structural changes necessary to support a distributed
    energy system. Under a business-as-usual approach, the construction of
    new generating facilities would triple the carbon emissions from the
    electricity sector in developing nations alone. Widespread adoption of
    distributed renewable generation could reduce these projected emissions
    by 42 percent.\8\
    ---------------------------------------------------------------------------
        \8\ Micropower, p. 37.
    ---------------------------------------------------------------------------
        A distributed energy future also will help to resolve reliability
    and power quality concerns. Electricity reliability problems recently
    have reached crisis proportions, turning energy issues into front-page
    headlines for the first time in over two decades. Transmission
    constraints and capacity shortages in some regions have resulted in
    power disturbances and outages. An outage in Chicago during the summer
    of 1999 cut power to 2,300 businesses, including the entire Board of
    Trade on a mid-week afternoon.\9\ Supply problems in San Diego
    contributed to a doubling and even tripling of electricity prices
    during the summer of 2000.\10\ These problems increasingly are seen not
    as isolated instances, but as indications of a power supply system that
    has eroded as demand has grown.
    ---------------------------------------------------------------------------
        \9\ Micropower, p. 38.
        \10\ Testimony of San Diego Mayor Susan Golding to the Board of
    Governors of the California Independent Systems Operator (ISO)
    Regarding Wholesale Electricity Rate Price Caps (August 1, 2000).
    ---------------------------------------------------------------------------
        Contributing to reliability and power quality concerns are the
    increasing demands placed on the electricity system by the digital
    economy. Utilities traditionally sought to provide ``three 9's'' of
    reliability--99.9 percent availability, equivalent to about eight hours
    per year of outages. However, the proliferation of computers and other
    electronic equipment that is highly sensitive to even momentary
    disruptions in power has created a demand for ``six 9's'' or even
    ``nine 9's'' of reliability. The existing distribution system is unable
    to provide this level of performance, forcing e-commerce companies and
    other participants in the digital economy to look elsewhere for their
    reliability needs. Among the options to which they turn is distributed
    generation, where innovations in power electronics, storage systems,
    and communications networks have enabled distributed technologies to
    meet the most stringent needs for power quality and reliability.
              barriers to increased use of distributed generation
        A recent report prepared for the National Renewable Energy
    Laboratory describes the barriers to distributed generation encountered
    in 65 different case studies, ranging from a 300 Watt solar electric
    system to a 26 MW gas turbine project.\11\ I was one of the authors of
    that report. In it, we identified and described a wide range of
    technical, business practice, and regulatory barriers encountered by
    the developers and owners of the distributed generation facilities.
    ---------------------------------------------------------------------------
        \11\ B. Alderfer, M. Eldridge and T. Starrs, Making Connections:
    Case Studies of Interconnection Barriers and Their Impact on
    Distributed Power Projects, National Renewable Energy Laboratory,
    Publication NREL/SR-200-28053 (May 2000).
    ---------------------------------------------------------------------------
        Technical barriers arise from utility requirements intended to
    ensure engineering and operational compatibility between the utility
    grid and the distributed generator. Most of these requirements focus on
    the utilities' safety, power quality, and power reliability concerns.
    For solar and wind energy systems, the most prominent technical barrier
    is the failure to adopt uniform technical standards for interconnection
    to the utility system. Although applicable standards for solar
    photovoltaic systems have been approved by the Institute of Electrical
    and Electronics Engineers (IEEE 929-2000), the Underwriters
    Laboratories (UL 1741), and the National Fire Protection Association
    (NEC Article 690), these standards have yet to be adopted in most
    states.
        Business practice barriers consist of contractual and procedural
    requirements for interconnection of distributed generation facilities.
    Among the most common complaints of owners and developers of
    distributed generation facilities is the absence of simple,
    standardized procedures among local jurisdictions and utilities for
    processing permitting and interconnection requests. According to the
    NREL study, more than 25% of the case studies cited project delays
    greater than four months. Many facility owners and developers also
    objected to application and interconnection fees that were seen as
    arbitrary and disproportionate. In one extreme case, the owner of a
    single-module solar electric system expected to produce approximately
    $40 per year worth of electricity was asked to pay up to $400 in
    application and processing/inspection fees, thereby offsetting ten
    years' worth of anticipated energy savings.\12\
    ---------------------------------------------------------------------------
        \12\ Making Connections Report, Case #26, pp. 77-78.
    ---------------------------------------------------------------------------
        Regulatory barriers include rate and tariff issues, including the
    imposition by utility regulators of backup or standby charges on
    distributed generation facilities; distribution wheeling charges for
    the delivery of power to wholesale or retail customers other than the
    utility itself; exit fees to discourage efforts to reduce dependence on
    utility power through self-generation or even demand-side management;
    and administratively determined buyback rates that do not reflect the
    economic benefits of distributed generation or clean power generation.
    For example, solar energy advocates had to appeal to the California
    Public Utilities Commission to prevent a utility from imposing a
    standby charge on net metering customers that would have offset nearly
    90 percent of the anticipated energy savings from a 1 kilowatt solar
    electric system.\13\
    ---------------------------------------------------------------------------
        \13\ Making Connections Report, p. 24.
    ---------------------------------------------------------------------------
        Another fundamental barrier to a distributed energy future is the
    apparent absence among U.S. policymakers of the political will needed
    to support the infrastructure investments necessary to enable the
    widespread adoption of distributed technologies. Upgrades to the
    distribution system are essential for proper integration of distributed
    technologies into existing electricity networks. However, many
    utilities, instead of embracing the opportunity to create the
    electrical equivalent of an ``open architecture'' system, hesitate to
    make the necessary utility investments, perhaps fearing the loss of
    physical or economic control over the electricity system. Similarly,
    many utility regulators appear reluctant to allocate the costs of
    bolstering the distribution system among all customers, perhaps fearing
    the lack of public support for such expenditures. Although these issues
    are just starting to be addressed among the states, early evidence
    suggests that much of the cost of making the transition to a
    distributed energy future will be shouldered by private developers of
    distributed generation facilities, even while the benefits of a
    renewed, more resilient distribution system accrue to the public.
              comments on proposals currently before the committee
        Today's witnesses have been asked to focus their testimony on
    certain sections of five bills currently before this Committee: S. 597,
    S. 388, S. 933, S. 388 and S. 71. In the interest of time, I have
    further narrowed my testimony to the sections of these bills that are
    likely to shape the future development of markets for distributed
    generating technologies. The three topics I will discuss in some detail
    are the development of interconnection standards for distributed
    generating technologies, net metering, and business practices.
    Interconnection Standards
        One of the most significant barriers to the broader
    commercialization of distributed technologies is the absence of
    uniform, national technical standards for the interconnection of
    distributed generating facilities. The problem arises because utilities
    historically have had substantial discretion over interconnection
    requirements, and have often used that discretion to develop
    requirements that vary considerably from one utility to the next
    without appropriate technical or economic justification. These utility-
    specific requirements were of relatively little concern for the
    developers of larger-scale generating facilities, whose projects were
    big enough that they could justify the cost of hiring consulting
    engineers and attorneys to negotiate project-specific interconnection
    requirements for their facilities. For smaller systems such as
    residential `rooftop' solar electric systems or farm-scale wind energy
    systems, these costs are an absolute deal-breaker.
        Utilities play a tremendously important role in our society by
    maintaining the safety and reliability of the grid, and as a result
    they have legitimate concerns about the interconnection of non-utility
    generating equipment to their networks. On the other hand, utilities
    face a conflict of interest because they have an economic incentive to
    discourage customers from generating their own electricity: the more
    customers self-generate, the less those customers are buying from the
    utility.
        The solution to this problem is the adoption of national standards
    developed by appropriate authorities, such as the Institute of
    Electrical and Electronics Engineers (IEEE), Underwriters Laboratories
    (UL), and the National Fire Protection Association (which writes the
    National Electrical Code, or NEC). The states are already pursuing this
    approach: As figure 1 indicates, over 20 states have passed laws or
    enacted regulations requiring the development of standardized
    interconnection requirements for at least some categories of
    distributed generating facilities.
        I am delighted to see this approach adopted in both S. 597 and S.
    933. Section 603 of S. 597 requires the Federal Energy Regulatory
    Commission (FERC) to establish safety, reliability and power quality
    rules for distributed generating facilities. It also specifically
    states that the FERC may prescribe different rules for different
    classes of facilities, which I think is essential for recognizing the
    distinction between residential- and small commercial-scale facilities,
    for which we should be striving to achieve `plug-and-play' simplicity;
    and larger commercial- or industrial-scale facilities, for which some
    project-specific engineering may be appropriate. Section 4 of S.933
    similarly calls for the FERC to develop ``reasonable and appropriate''
    technical standards for the interconnection of distributed generating
    facilities. I commend Senator Bingaman and Senator Jeffords, as well as
    their co-sponsors, for recognizing the importance of this issue in
    their bills.
    Net Metering
        Net metering is a simple, inexpensive, and easily-administered
    mechanism for encouraging the use of small-scale distributed
    generation. Net metering allows utility customers to spin their meter
    backwards when they produce more electricity than they need for their
    own lights and appliances.
        Under existing federal law (the Public Utility Regulatory Policies
    Act of 1978), utilities are required to interconnect with certain
    distributed generating facilities, and to purchase the excess
    electricity produced by those facilities. But under PURPA, the utility
    purchases that excess electricity at an administratively-determined
    `avoided cost' price, which is usually a fraction of the retail price
    the customer pays for power. Net metering provides a modest economic
    incentive for eligible facilities by crediting them for this excess
    electricity at the retail rate.
        Net metering policies have been tremendously popular at the state
    level. Just five years ago, only 14 states allowed net metering, and
    most of those requirements were adopted pursuant to state
    implementation of the federal PURPA law. Today the total stands at 34
    states, with four new states--Arkansas, Georgia, Hawaii and Wyoming--
    enacting net metering laws just this year (see figure 2). In most
    cases, these laws were enacted by legislation (although in a few cases
    net metering policies were adopted by regulation), and in most cases
    with broad bipartisan support. In my home state of Washington, for
    example, the 1998 net metering law passed unanimously in a then-
    Republican controlled legislature and was signed into law by a
    Democratic Governor.
        Of the bills currently before this Committee, only S. 597 currently
    includes a net metering provision. Section 604 of S. 597 requires
    utilities and other retail electric suppliers to offer net metering
    service to customers with eligible on-site generating facilities,
    defined as those using renewable energy resources with a maximum
    generating capacity of 100 kilowatts for residential customers, and 250
    kilowatts for commercial customers.
        I respectfully suggest that this Committee revisit the question of
    these system size limits, which I believe are too large in the case of
    residential customers, and too small in the case of commercial
    customers. For residential customers, a size limit of 10 kilowatts
    should be more than adequate for all but the largest homes. For
    commercial customers, on the other hand, a limit of 1,000 kilowatts (or
    1 megawatt) would be more appropriate. California expanded its net
    metering law to include facilities up to 1 megawatt earlier this year,
    and the response has been tremendous, with a number of utility
    customers pursuing the installation of larger-scale facilities. This
    size limit also enables the use of utility-scale wind turbines (which
    typically are sized around 1 megawatt) in distributed applications,
    allowing large customers to capture some of the economies of scale
    associated with these larger wind turbines, where they have the wind
    resources available to support the use of these turbines.
        Three other elements of the net metering language in S. 597 deserve
    mention:
        First, it includes a provision prohibiting utilities and other
    retail electric suppliers from discriminating against net metering
    customers by imposing additional fees or charges, or otherwise treating
    them differently from non-net metering customers in the same customer
    class. This is an important provision that should be retained because
    it prevents suppliers from imposing charges that would circumvent the
    intent of net metering.
        Second, it includes a provision requiring utilities and other
    retail electric suppliers to provide a carryover credit for any excess
    generation during a billing period, with the kilowatt-hour credit
    appearing on the bill for the following billing period. This provision
    is particularly valuable for resources such as solar and wind energy,
    which are subject to seasonal variations that may cause customers to
    produce more than they need to offset their own use in some months, and
    less than they need in other months.
        Third, it spells out specific technical requirements for
    interconnection of net metering facilities, based on IEEE and UL
    standards and NEC requirements, which dovetails nicely with the
    requirement in the bill that interconnection standards be developed for
    all distributed technologies. These requirements are consistent with
    those already in place in over a dozen states.
    Business Practices
        None of the proposals before the Committee address another
    fundamental barrier to the interconnection of distributed generating
    facilities: the failure to adopt simplified interconnection agreements
    and routine procedures for processing interconnection requests. Again,
    particularly for small-scale facilities, the goal should be to attain
    ``plug and play'' simplicity that eliminates unnecessary delays and
    inappropriate expenses. Unfortunately, many utility customers across
    the country have had the experience of contacting their local utility
    seeking information on interconnection procedures, only to be ignored
    or rebuffed or otherwise discouraged. In response, some states have
    explicitly required the development of simplified agreements and
    specific timelines for the processing of interconnection requests.
        For guidance on this subject, I would urge the Committee to
    consider language in a bill introduced in the House by Congressman Jay
    Inslee, H.R. 954, titled the ``Home Energy Generation Act.'' Mr.
    Inslee's bill also includes net metering and interconnection
    requirements, but goes further in requiring the FERC to develop
    ``consumer-friendly contracts'' for the interconnection of distributed
    generating facilities up to 250 kilowatts (see Section 215(i)). A
    comparable provision would be an appropriate addition to any bill
    coming out of this Committee.
    Conclusions
        Twenty years ago, the telecommunications industry in the U.S. was a
    cumbersome, heavily regulated business dominated by regulated
    monopolies that demonstrated little appetite for innovation. Today, the
    telecommunications industry is highly competitive and highly
    innovative, with consumers able to choose among a remarkable array of
    products offered by many different manufacturers. One of the key
    elements in that transformation was overcoming the telephone utilities'
    institutional resistance to interconnecting facilities and equipment
    from competing providers into the wireline network under fair, non-
    discriminatory terms and conditions.
        The electricity industry in the U.S. is in the early stages of a
    similar transformation. The traditional paradigm of large, central-
    station generating plants feeding a network of high-voltage
    transmission lines and local distribution systems in a geographic
    region, all owned by a single, vertically-integrated company, will
    evolve in the coming decades to a complex web of interconnected
    facilities for generating and storing electricity, owned by many
    different companies and even individuals. The utilities' role will
    shift to the management of electricity flowing in every direction
    through the network. Fortunately, this transition has the potential to
    provide substantial benefits for all Americans, including a more
    efficient, more responsive, more reliable, and more environmentally-
    benign electricity system. But our nation's ability to make this
    transition efficiently and smoothly is threatened by the same
    reluctance on the utilities' part--except that it is the electric
    utilities this time--to integrating these facilities into their
    distribution networks. The bills cuurently before this Committee can
    help overcome this reluctance and encourage the utilities to embrace
    this new era.
        I would like to thank Senator Bingaman and the others members of
    the Committee for expressing interest in distributed technologies and
    in demonstrating leadership by proposing specific initiatives to
    encourage the development of viable, competitive markets for these
    technologies.
        Thank you for the invitation to appear before you today. I would be
    happy to answer any questions the Committee may have.

        The Chairman. Well, thank you very much. I think all of
    this is very good testimony.
        Let me ask the same question I asked Secretary Garman a few
    minutes ago. And that is, on the issue of fossil fuel
    efficiency, that is a concept, I know, that has been kicking
    around Washington for a long time and think tanks for a while.
        I would be interested in knowing whether any of you have
    looked at this, whether you think it would make sense for us to
    consider adopting a fossil fuel efficiency standard in order to
    try to ensure that the fossil fuels used in power generation in
    this country are, to the extent possible, used efficiently and
    that we incentivize investment in more efficient power
    production at every stage as we move forward.
        If any of you have thoughts about that, I would be anxious
    to hear them. Mr. Hall?
        Mr. Hall. Thank you, Mr. Chairman. I think the underlying
    premise of the fossil fuel efficiency standard is to come up
    with another way of thinking about energy production, its
    pollution prevention characteristics and the way that that
    relates to environmental regulations. So like what Mr. Garman
    said this morning, I think it is very important that we retain
    the connection between a fossil fuel efficiency standard or
    some other form of modernized environmental regulation along
    the lines of what I have included in my testimony this morning
    to replace new source review with a program that recognizes
    that there are better ways to address our environmental
    permitting of energy facilities in the country, that the
    addition of a fossil fuel efficiency standard without
    addressing the underlying environmental regulatory issues would
    add an additional layer of regulation, as opposed to
    simplifying our overall regulatory approach, which I think the
    fossil fuel efficiency standard is intended to do, similar to
    the proposal that you see in my testimony from the Clean Power
    Group.
        So my only comment is, to the extent that this committee
    would be able to address the underlying environmental
    provisions, that would be great. I do not believe that you are
    in a position to do that. So I would not encourage you to
    pursue the fossil fuel efficiency standard without the ability
    to address new source review at the same time.
        The Chairman. Anybody else have a thought? Mr. Demeter?
        Mr. Demeter. Mr. Chairman, I think it is an intriguing
    idea. I agree very much that we have to deal with new source
    review issues. Several projects which I am involved in, working
    with power companies to co-fire biomass fuels with coal, have
    dragged a bit because of the threat for new source reviews,
    these modifications being looked at perhaps major
    modifications.
        Even though we are not increasing the capacity of these
    boilers, and in fact we are reducing emissions, the NSR has
    been a barrier to this particular renewable energy and this
    particular conversion technology. So NSR is integral here.
        It also brings up another issue in terms of how renewable
    energy might be considered in this. I would have to look at
    exactly how you would calculate the energy in and the energy
    out. Perhaps on the energy out side you would give credits to
    some of the renewable energy production involved in the
    equation.
        And also, I think that it would be, again, just off the top
    of my head, worth at looking at how there might be interference
    with existing allowance markets, sulfur dioxide NOX
    emission traits. There might be an impact there on how those
    markets operate. It would require a little more thought at this
    point.
        The Chairman. Okay. On wind projects, Mr. Boyd, let me ask
    you, is there something needed? Should we be legislating some
    change in Federal law with regard to use of Federal lands for
    wind farms or wind power generation? I have anecdotes repeated
    to me in New Mexico where people have been looking for sites to
    locate wind farms and have felt that the delay in getting
    authority or permits to use Federal land were such that they
    really did not consider that option and instead went to private
    land. Have you encountered that problem at all, or do you think
    that is a problem worth worrying about?
        Mr. Boyd. My company has not really encountered the
    problem, but I know of some other companies that have. I think
    the biggest problem is that you trigger a NEPA review, which is
    at minimum a year and sometimes longer, depending on the agency
    that you are dealing with and how good they are at permitting.
        But certainly it is something worth looking at. I think
    that we have a lot of Federal lands that could bring income
    into the treasury, if they were used for wind energy.
        The Chairman. Okay. Mr. Starrs, let me just ask you a final
    question. The previous administration set a goal for the solar
    industry, to have a million solar roofs installed by 2020. Do
    you know if there anything going on to try to achieve that goal
    at the current time, or has this sort of gone by the board?
    What is your view on that?
        Mr. Starrs. Well, I know that under the prior
    administration there were a number of regional partnerships set
    up across the country. And I know that those regional
    partnerships are still in place. And there has been a lot of
    good work that has come out of the efforts at the Federal level
    in conjunction with these regional partnerships to support
    local and regional efforts to develop solar.
        I do not think that there has been any particularly strong
    statement of support by the current administration with respect
    to continuing the funding of that program. So I do not think
    there is a lot going on right now.
        Senator Craig.
        Senator Craig. Thank you, Mr. Chairman. I will be brief.
        But I want to thank all of you gentlemen for your
    testimony. I think our business here is to get the basket of
    energy full again. And that means with all different types of
    resource. And our business should not be to pick and choose but
    to create the flexibility to allow that to happen in the
    marketplace where there is a disadvantage or a disincentive to
    try to stop that.
        Mr. Boyd, I understand, or I think I understand, having
    talked with folks of your company and others that are in the
    business of wind, that this tax credit on a 5-year increment is
    critical, is it not?
        Mr. Boyd. Yes, sir.
        Senator Craig. Anything less than that probably deters the
    installation of wind.
        Mr. Boyd. Well, what happens is that we have to go out in
    the market to finance projects. And you know how skittish the
    financial community can be. And if we have short-term increases
    or extension when we do go out, people get nervous that the
    project will not get done in time for the credit. So they are
    unwilling to lend. So a longer extension, the 5-year program,
    we feel would be very helpful.
        Senator Craig. Are most of your projects now of the new and
    larger turbine design?
        Mr. Boyd. Yes. Our turbine, current-sized turbine, that we
    are building is a 1.5 megawatt. We will be putting 300 of those
    in, primarily in Texas, Pennsylvania, New York, and Wisconsin.
        Senator Craig. The wind also blows in Idaho.
        Mr. Boyd. I know. I lived in Idaho for 8 years.
        Senator Craig. Well, if you lived over in that southeastern
    toe of the boot that I see represented on that particular
    diagram, it seems there might be some opportunities there.
        Mr. Boyd. Yes. We are looking at Idaho.
        Senator Craig. Thank you.
        Gentlemen, thank you all.
        The Chairman. Senator Dorgan.
        Senator Dorgan. Mr. Chairman, thank you very much. I regret
    I was not here for the first part of the testimony today. But I
    really appreciate this hearing. I agree with Senator Craig that
    we have to produce more. I do not necessarily agree that we
    just let the market decide what we do here. I think in some
    respects, especially with respect to----
        Senator Craig. That is not really a constructive idea, the
    market.
        Senator Dorgan. Well, that cranky little Judge Judy makes
    $7.4 million a year on television. And the Chief Justice of the
    Supreme Court makes $180,000. So much for the market.
        Senator Craig. Then you and I are miscast.
        [Laughter.]
        Senator Dorgan. I think the market is a wonderful allocator
    of goods and services, but there are perversions in the market
    that require sometimes corrections and adjustments and
    incentives and stimulus. And I think with respect to renewable
    sources of energy and limitless sources of energy, I think we
    need to have public policies to stimulate it beyond market
    forces, stimulate it and give it an opportunity and an seed bed
    and some nurturing.
        And so again, while the market--I did not mention $255
    million for a shortstop in major league baseball in the market
    analysis. But wind energy is something that we are working on
    in North Dakota. And the charts from the Department of Energy
    say that we are number one in wind energy potential. North
    Dakota is the Saudi Arabia of wind.
        [Laughter.]
        Well, that is what they say, especially when I am home, I
    might suggest.
        [Laughter.]
        And we are very anxious to make good use of the wind energy
    potential, but limit it by transmission capabilities. And so we
    have to marry the opportunities that exist in some of these
    areas with the ability to transport the energy where the energy
    is needed. And I was interest in some of the discussions about
    wind energy. Mr. Boyd, I know that your company is very
    involved and very active around the country in these areas.
        But I think distributed generation, biomass, wind energy, a
    whole series of technologies that have always kind of been
    relegated as an afterthought by some. I think they can provide
    significant new sources of energy for our country. And I think
    the testimony that all of you have given is important
    testimony.
        We need to produce a piece of legislation that does use the
    market in an effective way and that always provide stimulus
    beyond the marketplace and other areas so that we have a
    balanced energy package. And we need to produce more fossil
    fuel and renewables and efficiencies. And a whole series of
    things need to come together in a balanced energy package. And
    your contribution, I think, in this hearing called by the
    chairman is a very significant contribution.
        Might I just ask one question? The issue of transmission, I
    assume all of you recognize that from a number of sources of
    energy that you describe in your testimony, the ability to
    transport that energy to where it is needed, except with
    respect to the testimony of Mr. Hall, I believe, which I find
    interesting.
        The chairman and I, and also Senator Craig, sat in a
    briefing on that subject within the last week or so. And I
    think you make some good points about the loss of efficiency
    and so on and some things we can do in that area in the power
    heat generation.
        But again, can you just again respond on the issue of the
    transmission capability? Mr. Boyd, you know. I mean, you are
    involved in wind. You know North Dakota is number one in the
    country, right?
        Mr. Boyd. Yes, sir.
        Senator Dorgan. And so you are not there because of
    transmission problems. Why are you not building wind turbines
    on the prairies of North Dakota?
        Mr. Boyd. Because we cannot get the power out of the State
    into the markets that need it. It is pretty simple.
        Senator Dorgan. But were it not for that, you would be
    there building some wind turbines and some blades.
        Mr. Boyd. Yes, because, you know, wind energy, the better
    the wind, the cheaper the cost. So we would certainly be there.
        Senator Dorgan. Can you give us just a description of how
    the new, more efficient wind turbine technology has improved
    our capability and brought down costs?
        Mr. Boyd. Well, the major way it has is just the increase
    in size. It turns out that the economics for wind are such that
    the cost that you pay to get larger is less than what you can
    generate from the turbines. So you make more revenues from
    larger turbines. And the cost is not in the same ratio.
        The second thing is that we have a power electronic system,
    which allows you to have variable speed. And that way you can
    get more power out of the turbine. We used to absorb a lot more
    of the forces into the frame of the machine. Now we are able to
    take those through and generate power.
        Senator Dorgan. Mr. Chairman, could I just good naturedly
    observe that there is no solar energy in these rooms. We always
    keep the drapes closed, presumably for television coverage. And
    even when there are no television cameras present, in every
    hearing room in the U.S. Senate we, who participate, have this
    gray pallor because we continue to have the drapes closed. And
    I hope that perhaps we can reform that as well.
        The Chairman. Well, I think that is a very good suggestion.
    We have talked about that once before. Why do we not try to fix
    that? We will try to fix that.
        Thank you very much.
        Senator Smith.
        Senator Smith. Thank you, Mr. Chairman. I wonder if any of
    you can comment upon the administration's proposal of offering
    up to $1,500 for residential solar power, whether you think
    that would be helpful and stimulating, solar power as a
    renewable.
        Mr. Starrs. Senator Smith, I can respond to that. The short
    answer is yes, that it would be helpful. And as Senator Dorgan
    just noted, I think that these kinds of modest incentives have
    played a role in the past in encouraging the development of
    some of these cleaner, locally available energy generating
    technologies. And solar is certainly no exception.
        In fact, comparable incentives that have already been
    adopted at the State level in some States are driving very,
    very substantial increases in the market for solar energy
    systems. California in particular has a rebate program in place
    that has spurred tremendous growth in the market there. And as
    we speak, there are solar electric systems going in in
    residences and businesses all over the State of California at a
    rate that is really unprecedented.
        Senator Smith. Mr. Boyd, can you talk to me about the
    windmill farms you are doing? What have you done to mitigate
    vibration and impact on wildlife and birds?
        Mr. Boyd. Well, the major thing that we have done is do
    biological studies before we put in a project to make sure that
    we are not going to affect the population of animals and birds
    that are in the area. That did not happen in some of the early
    projects in California. And we learned from that mistake.
        Senator Smith. And in doing that, you are doing that in
    private land.
        Mr. Boyd. Yes.
        Senator Smith. But you think the environmental impact is de
    minimis or----
        Mr. Boyd. Yes, I really do. I think the major impact of
    wind turbines is probably visual, as you mentioned. In terms of
    affecting the land, these larger turbines, you do not have very
    many of them on a piece of land. Wind turbines are kind of land
    intrusive more than land intensive.
        Senator Smith. That is all, Mr. Chairman.
        The Chairman. Thank you very much.
        Senator Carper.
        Senator Carper. Welcome. Thanks for joining us today. I am
    a new member of the committee. Some of these folks have been
    here for years; I have been here for days. And some of what you
    talked about, frankly, I do not fully understand. And I am
    going to ask us to go back, a couple of you, and ask you to
    give me a primer on some of what you have been taking about.
        Mr. Boyd, I missed your testimony entirely. I have another
    committee that is meeting at the same time. Could you just
    start off by taking a minute or so and just tell me, among the
    things that you said, I know a lot was important, but just hit
    me with some of the highlights, please.
        Mr. Boyd. Well, the wind is the fastest growing renewable
    technology in the world today. And that is primarily because
    the price has been driven down so it is as close to being
    competitive with other generation technologies. The growth that
    we will see will probably double, almost double, in the United
    States this year. Over the next 5 years, we will see about
    $40,000 megawatts go in around the world. Europe is much
    farther ahead in terms of deploying wind energy than we are
    here in the United States.
        Senator Carper. Why is that?
        Mr. Boyd. Because they have given a lot of incentives to
    wind energy. Germany, for example, has what they call a feed
    law. They pay 90 percent of the retail rate to people to put in
    wind. Other countries have different types, but pretty good
    incentive programs.
        The have decided that wind is a technology that they want
    to supply. I think in the case of Denmark now they are about 20
    percent is wind energy.
        Senator Carper. What kind of potential do you see in our
    country for utilizing wind energy?
        Mr. Boyd. Well, it is unlimited. I mean, in terms of
    resource, we could easily duplicate what the power generation
    capacity of the United States is right now. That is not likely
    to happen, because wind will just be a part of the mix; it is
    not going to take over the world.
        Senator Carper. In terms of what we should be doing in this
    country, in this body, to encourage the harnessing of wind
    energy, just, again, what further should we do?
        Mr. Boyd. Well, I think I mentioned two things in my
    testimony. Number one is we have a wind production tax credit,
    which is very valuable to us in terms of getting our costs
    down.
        Senator Carper. How would that work?
        Mr. Boyd. For each kilowatt hour of win energy, you get a
    tax credit of 1.5 cents. So this lowers the effective cost of
    wind energy when you sell it.
        Senator Carper. Would that credit have had to have been
    higher 5 or 10 years ago, in order to make wind competitive?
        Mr. Boyd. I am sorry, the question again?
        Senator Carper. Would that credit have had to have been
    higher 5 or 10 years ago, in order for wind to be competitive?
        Mr. Boyd. Actually, the credit was in the Energy Policy Act
    of 1992. That is when it started. And there was a time where it
    went away, and then it was reinstated. And it could have been
    higher. I think it would have been helpful if it was higher at
    the time. But, looking at the other side, I think that the
    technology had time to catch up with the market. So I do not
    think that it hurt us that badly.
        Senator Carper. Okay. Thank you.
        Anybody else want to comment in response to any of the
    questions I asked Mr. Boyd?
        Mr. Starrs. I would just like to mention one issue that has
    not really come up much, Senator Carper, and that is that, as
    Senator Dorgan mentioned, there may be reasons to encourage or
    discourage certain technologies. And one of the things that we
    have not really emphasized adequately, I think, is the
    importance of fuel diversity.
        Although we have somewhat diverse electricity resource base
    in this country today, the fact is that almost all of the new
    generating capacity coming on line is fueled by natural gas.
    And I think the evidence from the last 6 months or so
    adequately illustrates the fact that natural gas prices and
    other fossil fuel prices can be highly volatile.
        And one of the reasons that I think it does make good
    public policy sense to encourage the development of renewable
    technology, such as solar and wind energy, is that they are
    really immune from those sorts of supply price volatility
    issues. And even if they are at the margin incrementally more
    expensive--and as we have already heard, wind may not be. But
    even if they are, I think there is a strong public interest in
    encouraging the broader diversification of our energy resource
    base.
        Senator Carper. Thank you.
        Now for the primer for me. Probably everybody in the room,
    Mr. Chairman, understands what these fellows were talking about
    when they talked about interconnection standards and
    distributed generating facilities and net metering policies. I
    may be the only person who does not fully understand those
    terms.
        But for my benefit, alone perhaps, for my benefit alone,
    give me a primer on what we mean by interconnection standards.
    How are they relevant to this discussion? What should I
    understand about them, distributed generating facilities and
    net metering policies, those three?
        Mr. Starrs. Mr. Carper, let me jump in because I actually
    had a bit of testimony that I did not get to address in this
    context. And I think I am going to explain by offering what I
    hope is a useful analogy to the telecommunications industry.
        Twenty years ago, the telecommunications industry was a
    cumbersome, heavily regulated business dominated by regulated
    monopolies that had little appetite for innovation. Today, the
    telecom industry is highly competitive and highly innovative
    with consumers able to choose among a remarkable array of
    products from many different manufacturers. And one of the key
    elements in that transformation was overcoming the telephone
    utilities' traditional reluctance to allow competing companies
    to interconnect their equipment under fair and reasonable terms
    and conditions.
        The same kind of transformation is happening in the
    electricity industry today. The traditional paradigm of large
    central station generating plants feeding a network of high
    voltage transmission lines and local distribution systems,
    which are all owned, have been owned, by a single vertically
    integrated company is changing.
        And it is going to evolve in the coming decades to a
    complex web of interconnected facilities for the generation and
    storage of electricity that are owned by many different people,
    including residences, residential customers, and businesses,
    with the utilities role shifting to one of basically managing
    the flow of energy through the network.
        I believe that this transition has the potential to provide
    substantial benefits for all Americans, including greater
    efficiency, more responsiveness, more resilience, and a more
    environmentally benign electricity system.
        But probably the single biggest obstacle to that, to moving
    towards this new energy system, is the same reluctance on the
    utilities' part, except this time it is the electric utilities,
    to integrate these facilities into their distribution networks.
    And that is the basis for our interest in having the Senate and
    the Congress address this issue of interconnection standards.
        Senator Carper. That was helpful. That was helpful.
        Mr. Hall.
        Mr. Hall. If I could just add one additional element to
    that, which is that, unlike in the telecommunication debate,
    where there were not lots and lots of different companies that
    were controlling access to the distribution and transmission
    system in this case, the way that we have historically
    addressed interconnection, or those that wanted to
    interconnect, was a utility-by-utility activity.
        And there are certainly many cases of utilities that have
    been very open and willing to allow people to interconnect
    where they saw that there was value for them. But there is just
    as many cases, if perhaps not more, where they felt that the
    ability to disagree or the perceived disagreement over
    technical elements of the physical interconnection were used to
    drive the costs up for people that wanted to connect such that
    it became uneconomic to go forward with that project.
        Senator Carper. Okay. Mr. Chairman, is there going to be
    another round for this panel, or is this it?
        The Chairman. Well, we have two additional panels. And so I
    think this is it.
        Senator Carper. All right. Thank you very much.
        The Chairman. Senator Cantwell.
        Senator Cantwell. Thank you, Mr. Chairman.
        And, again, thank you, panelists, for being here today. And
    I apologize, too, for missing the earlier part of the hearing,
    given another markup in a committee that I serve on. I have
    read through some of your testimonies, and obviously some of
    you have mentioned in here the very fortunate focus of our new
    economy and the closeness of distributed power marrying up very
    well in the sense of having that power be uninterrupted power
    and close to the source. It ties in very well with a lot of the
    computing advances we have made.
        I did not see too much in--I saw mentioned in Mr. Starrs's
    testimony about hydrogen fuel cells. I do not know if you could
    comment on--I mean, a lot of the comments on developing
    standards, a uniform standard, at the national level have been
    focused on wind and solar and other comments. But any comments
    on the hydrogen fuel cells as it relates to us coming up with
    the standard processing for metering?
        Mr. Starrs. I will touch on that, Senator Cantwell. Fuel
    cells is a technology with tremendous promise. And I think that
    has been reflected in some of the recent efforts in the States
    to encourage these new energy technologies. For example, many
    of the recent net metering laws, which I mentioned earlier,
    and, by the way, which also tend to include interconnection
    standards, have made fuel cells an eligible technology. So
    there are maybe a dozen or so States right now----
        Senator Cantwell. Which States?
        Mr. Starrs. Well, they include Washington and Oregon. I
    cannot give you a complete list, but I am most familiar with
    ones in the Northwest, where I do most of my work. And so in
    those States fuel cells are eligible for these streamlined
    interconnection procedures that we have been discussing.
        Senator Cantwell. Any of the other panelists want to
    comment?
        Mr. Demeter. I would just add, Senator Cantwell, that, yes,
    fuel cells would be a technology that would benefit from all
    the issues that we have been discussing today. They tend to be
    a little more expensive as a conversion device than some
    others. So they require, I think, a little more Federal
    investment in the R&D side, as well as other policies.
        And when you mention hydrogen fuel cells, it is not only
    hydrogen gas that we are talking about here, but it is anything
    that carries hydrogen with it. Ethanol, for example, can be
    used. Another chemical derived from biomass, ethyl-levlionate,
    can be used as sources in these fuel cells. But the fuel cell
    device itself would benefit from much of what we have talked
    about today.
        Mr. Hall. And if I could just add, the language in S. 933
    for interconnection is really a technology agnostic or
    technology neutral standard for interconnecting any kind of
    technology to the distribution or transmission system. So in
    the case of the interconnection and the provision of backup
    power, it is not necessary to differentiate between one
    technology and another.
        Senator Cantwell. As we go through this process of marking
    up legislation, and there is riot of bills here, including the
    chairman's--and thank you, Mr. Starrs, for your detailed
    description about the positive aspects of a variety of pieces
    of legislation on this--we obviously have industry standard
    organizations like the IEEE and UL and NEC. And then we have
    FERC. And obviously, we are in these various pieces of
    legislation directing or saying let us direct FERC to move
    faster.
        So what do you think is the relationship in us moving
    forward on these in the sense of not an over-reliance on FERC,
    but not--it sounds like we will not get there unless we have
    some national standard. And yet these standard bodies probably
    have been the best--I am assuming. I would like your comment on
    that--have been the best in actually coming up with and
    eliminating the concerns and problems so that State standards
    could be established.
        So do these bills have the right balance in that equation?
        Mr. Starrs. That is a very good question, Senator. And I
    think it is a delicate balance to allocate the jurisdiction,
    the authority, between the FERC and the States on these topics.
    As we have heard from various speakers this morning, including
    Mr. Garman, there have been a number of States that really have
    demonstrated very substantial leadership on this topic and have
    really stepped out to the forefront and have established
    policies that are very encouraging while still being fair and
    balanced to these new technologies.
        So----
        Senator Cantwell. But in--I am sorry to interrupt.
        Mr. Starrs. Sure.
        Senator Cantwell. But in those cases, these standard-
    setting bodies probably have led the way and legislatures have
    been adopting them correct, as opposed to legislators really
    getting into the details----
        Mr. Starrs. Absolutely.
        Senator Cantwell [continuing]. Or a utility commission
    getting into the details. I am assuming that they have----
        Mr. Starrs. That has generally been the case. Although I
    will note that sort of the most important of the proceedings of
    the IEEE--IEEE is currently in the process of developing a
    standard called IEEE 1547, which is a broad standard for all
    distributed technologies. And that standard is not yet in
    place.
        So the States that have had to--well, who have been
    interested in stepping out in this issue, have not been able to
    rely on an IEEE standard with respect to these broader
    technologies. Now there is another IEEE standard called IEEE
    929 that is in place for, this is a technical issue, but for
    what are called invertor-based technologies, which include
    solar electric, some small wind systems, fuel cells, some gas
    turbines, and so on.
        And that IEEE 929 standard has been called out in many of
    these State laws as the basis for the technical standards that
    have been adopted there.
        So, some of the States have incorporated those national
    standards explicitly by reference. Others have not. I think the
    main issue is that we have a good start among the States in
    adopting these national standards, or the work that has been
    done by these national authorities. But I think that some of
    the manufacturers of equipment in this room and elsewhere would
    agree that it is still very cumbersome to have sort of the
    piecemeal adoption of different requirements in different
    States. And that is the main driver, the main interest, in
    having national standards.
        And so an equipment manufacturer can build something in
    Ohio or in Oregon or wherever and know with confidence that
    that equipment is eligible to be interconnected in any State in
    the country without having to go through a lot of State-
    specific or, even worse, utility-specific hoops.
        Mr. Hall. If I could just add to that, I think it is
    important to recognize that, first, IEEE is a voluntary,
    develops standards on a voluntary basis. And that process
    normally is a long process. I have not personally been involved
    with the IEEE process, but there--well, I do have someone from
    my company that has been involved in it. A lot of these
    standards often can take many, many years to evolve.
        And but for the investment by the Department of Energy in
    accelerating the development process of this particular
    standard, we would be much further away than we are right now.
        Correct me if I wrong, Tom, but the places where we do have
    standards that have been established in places like Texas and
    New York, those have been driven by the commissions,
    commission-driven stakeholder processes that do not rely on
    these sort of voluntary standard setting bodies. So it is in
    those cases that they have actually been driven by State
    legislatures or State commissions or some other legislative or
    regulatory body to make sure that they could move forward in a
    timely fashion.
        And it is for that reason that I think we really do strike
    the right balance here between what we need FERC to do, which
    is to be in a position to affirmatively say we are going to
    have uniform interconnection standards, we are either going to
    get it out of IEEE or we are going to get it out of another
    process that is equitable and open, but addresses the issues
    that we need to address so that we can move on. Otherwise we
    could be held hostage to a voluntary process that could take a
    very, very long time, some of those processes which evolve very
    slowly under normal circumstances.
        Senator Cantwell. Thank you.
        I see my time has expired, Mr. Chairman.
        The Chairman. Thank you very much. Why do we not go ahead
    and dismiss this panel? The second part of this hearing is on
    hydroelectric relicensing. Let us take about 5 minutes here
    while we bring forward the witnesses from panel three and panel
    four and ask them all to sit here at the front table. And we
    will commence again here in 5 minutes.
        [Recess.]
        The Chairman. Why do we not go ahead here? If the witnesses
    could take their seats, I would appreciate it.
        This portion of the hearing, as I indicated, is on
    hydroelectric relicensing. Our first two witnesses are from the
    administration. One is Mr. William Bettenberg, who is the
    Deputy Director of the Office of Policy Analysis in the
    Department of the Interior. And the second is Mr. Mark
    Robinson, who is the Director of the Office of Energy Projects
    with the Federal Energy Regulatory Commission.
        We appreciate you being here very much. And why do you not
    go ahead and begin? And then we will introduce the other three
    witnesses once you have completed your testimony.
        Mr. Bettenberg, why do you not start? If you would take one
    of those microphones and put it right in front of you, that
    would be a help.

      STATEMENT OF WILLIAM BETTENBERG, DEPUTY DIRECTOR, OFFICE OF
              POLICE ANALYSIS, DEPARTMENT OF THE INTERIOR

        Mr. Bettenberg. Thank you, Mr. Chairman. It is a pleasure
    to be here today to present a statement on behalf of the
    Department of the Interior. I have been working with Secretary
    Norton on energy issues for more than 5 months now and can
    assure you that she takes very seriously her charge to
    efficiently and effectively balance national interests and
    natural resource and environmental preservation with energy
    needs, and to do so through timely, cooperative, and efficient
    processes.
        You have my statement for the record. Let me simply
    highlight several sections of it.
        The committee has held several hearings on the hydropower
    licensing process, and many of you are quite familiar with it.
    For the sake of newer members, I thought I might simply point
    out, on page 2 of my statement I identify the primary roles of
    the Interior Department under the Federal Power Act. Basically
    under section 4(e) we set standards related to protecting lands
    and resources that Interior administers. Under section 18 we
    share with NOAA authority for setting conditions for fish
    passage. And then under section 10(j) we make other
    recommendations.
        On pages 3 and 4 we have summarized some results of a study
    that we did a few months back regarding processing times. And I
    would note that while applications are due 2 years in advance
    of license expiration, the average license process takes about
    4\1/2\ years. There is clearly room for improvement there.
        Out of 157 licenses issued over the past 6 years, it turns
    out that Interior and NOAA established conditions on about one-
    quarter of them. So there are about three-quarters that do not
    include Interior conditions. This included 4(e) authorities in
    only 9 cases.
        Interestingly, whether Interior establishes conditions or
    not, there is essentially no difference in the amount of time
    taken in the licensing process. FERC reached this same
    conclusion in their 603 report.
        On pages 4 through 6 the statement describes the
    interagency task force process and highlights commitments in
    that forum to improve the licensing process. We think these
    represent very substantial improvements on the part of all of
    the agencies that were involved in that. I would like to note
    here that I suspect that Mr. Craig's prodding and proposed
    legislation had a lot to do with Interior and the other
    agencies paying much closer attention to problems with the
    licensing process and working to improve it.
        On pages 7 and 8 the statement identifies key steps in the
    Department's undertaking or examining to continue to improve
    the process. I would like to draw your attention to three of
    those steps.
        At the top of page 7 we point out that Interior and
    Commerce have committed to filing preliminary conditions within
    60 days after FERC says the project is ready for environmental
    analysis, a modified condition 60 days after the close of the
    comment period on the draft IS. Interior agencies are available
    to work iteratively with applicants and others throughout the
    process.
        At the top of page 8 I cite the commitment to develop an
    interagency consistency mechanism. This recommendation is
    included in the President's national energy policy. For step 7
    on page 8, I note that Interior is currently reviewing
    mechanisms and criteria for its exercise of conditioning
    authority. This will include examination of higher level review
    mechanisms and consideration of various factors to be
    considered in making conditioning decisions.
        On pages 8 through 11 the statement reviews some key
    aspects of the bills under consideration. Let me just highlight
    three of those. S. 597, as well as the Tauzin bill marked up by
    the Energy and Commerce Committee 2 days ago, provided that
    parties can propose an alternative set of conditions and sets
    criteria for their acceptance. We find this useful, but point
    to the need to have some deadlines for this filing and to limit
    it to the applicants. Also with the filing, we need to include
    substantial evidence to back it up.
        On pages 9 and 10 we commend on the core process provisions
    of S. 71 and S. 388. Basically, we have concerns with the
    timetables in those processes and a few other issues as well.
    On coordinated environmental reviews in S. 71 and S. 388, we
    think those are promising, but need to overcome some problems
    with FERC's ex parte rules in order to be cooperators in their
    need for process while protecting our standing in their
    proceedings.
        Finally, on the last two pages we provide five additional
    areas where we think legislation could be helpful. These cover
    settlements, studies, deadlines, basin-wide assessments, and
    Indian trust responsibilities. We are available to work with
    the committee on these bills and legislation generally in
    search of improvements to the licensing process.
        Mr. Chairman, that concludes my summary. I will be pleased
    to respond to questions.
        The Chairman. Thank you very much.
        [The prepared statement of Mr. Bettenberg follows:]
     Prepared Statement of William Bettenberg, Deputy Director, Office of
                  Policy Analysis, Department of the Interior
        Good morning. My name is William Bettenberg. I am Deputy Director
    of the Office of Policy Analysis in the Department of the Interior and
    currently serve as the Hydropower Coordinator for the Department, as
    well. On behalf of Secretary Norton, I wish to reaffirm the commitment
    of the Department of the Interior (Department or Interior) to improve
    and streamline the hydropower licensing process. The Secretary takes
    very seriously her charge to efficiently and effectively balance
    national interests in natural resource and environmental preservation
    with energy needs, and to do so through timely, cooperative, and
    efficient processes. I will present the views of the Department on
    hydropower issues and legislation, and I have also been asked to speak
    to the practices of the U.S.D.A. Forest Service (USDA/FS) today.
        In this review, I will address S. 597, the Comprehensive and
    Balanced Energy Policy Act of 2001, S. 388, the National Energy
    Security Act of 2001, and S. 71, the Hydroelectric Licensing Process
    Improvement Act of 2001, all as they relate to hydropower. Because of
    its relevance, I will also refer to the Energy Advancement and
    Conservation Act of 2001 as marked up by the House Energy and Commerce
    Committee on Tuesday.
        The President's National Energy Policy (NEP) supports actions to
    streamline and improve the hydropower licensing process. I am pleased
    to report to you on the status of the progress being made by the
    resource agencies in effecting such improvements, to share with you the
    positions of the resource agencies on the legislation being considered
    by this Committee, and to suggest several additional legislative steps
    that could improve the licensing process. To begin, I will provide the
    Committee with some background on hydropower and a description of the
    responsibilities of resource agencies in the hydropower licensing
    process to place the issues in context.
                                 a. background
        Hydropower represents about 7 percent of annual generation and is
    almost always the lowest-priced source of electricity when compared to
    any other means of producing electricity. While subject to the vagaries
    of river flows and droughts, hydrogeneration plays a unique role in
    meeting power demands. While often presenting serious problems for fish
    migration and spawning, hydropower avoids production of air pollutants
    and a variety of other concerns compared to the use of other energy
    resources.
        About 45 percent of hydropower generation is administered by the
    Department's Bureau of Reclamation, the Corps of Engineers (Corps), and
    other Federal agencies. Non-federal projects account for the remaining
    55 percent of hydropower generation and about 4 percent of the nation's
    total electricity supply. The use of navigable rivers for non-federal
    hydropower is conditioned through licenses issued by the Federal Energy
    Regulatory Commission (FERC). These licenses also contain conditions
    set by Interior bureaus and the USDA/FS to address effects of the
    hydropower projects on Federal and Indian lands, by the U.S. Fish and
    Wildlife Service (FWS) and the National Oceanic and Atmospheric
    Administration (NOAA) with regard to fish passage, by the Corps with
    regard to navigation, and by States with regard to water quality. The
    process for obtaining a license can be time consuming and contentious.
    The licensing process, however, is itself complex. From the standpoint
    of the resource agencies--Interior, Agriculture and Commerce--it is
    important to ensure that appropriate safeguards are put in place,
    particularly given the fact that hydropower licenses authorize the use
    of public resources for 30 to 50 years. We believe substantial advances
    have been made recently in improving the process; more can be done and
    we are working together on that.
    Federal Power Act
        The resource agencies have the important assignment under the
    Federal Power Act (FPA) to participate directly in the hydropower
    licensing process. Our participation is intended not to interfere with
    licensing, but to ensure that key resources for which the resource
    agencies are responsible are protected when navigable waterways are
    used for hydropower generation.
        Since enactment of the FPA in 1920, it has been the responsibility
    of the Departments of the Interior and Agriculture to establish
    conditions for non-Federal hydropower licenses as necessary to protect
    the lands and resources that we administer. These lands include Federal
    reservations such as Indian lands, National Wildlife Refuges, Bureau of
    Reclamation projects, National Forests, some units of the National Park
    System, and certain lands and projects managed by the Bureau of Land
    Management. This responsibility includes protecting the structural
    integrity of Department of the Interior dams and canals, meeting trust
    responsibilities on behalf of Indian tribes and individuals, and
    otherwise assuring compatibility with the purpose for which the Federal
    reservation was made. These conditions are set pursuant to section 4(e)
    of the FPA.
        Also, since 1920, FWS and NOAA (or their predecessor agencies) have
    had responsibility for establishing the terms for safe passage of fish
    at licensed hydropower facilities. This authority is somewhat analogous
    to conditions set by the Corps to ensure passage of boats for
    navigation. Most hydropower facilities received their original licenses
    roughly 30 to 50 years ago; many of those facilities had actually been
    put in place many decades before then, long before the advent of
    national concern for environmental resources including fish, or
    widespread recognition of the cumulative impact of dams on fish
    resources. Of the dams licensed by FERC, only 9.5 percent include
    upstream fish passage; only 13 percent included downstream fish passage
    other than over the spillways or through the turbines.\1\ This
    responsibility for establishing conditions for fishways is carried out
    under section 18 of the FPA.
    ---------------------------------------------------------------------------
        \1\ Environmental Mitigation at Hydroelectric Projects, Volume II,
    Idaho National Engineering Laboratory, January 1994, DOE/ID--10360(V2).
    ---------------------------------------------------------------------------
        These agencies also make recommendations to FERC for other
    environmental protections which they believe should be considered for
    inclusion in hydropower licenses. These include additional
    recommendations for protection, mitigation, and enhancement of fish and
    wildlife resources, as well as recommendations related to recreation,
    cultural resources, and irrigation. This is done under sections 10(a)
    and (j) of the FPA.
    Hydropower License Conditions Frequency, Timeliness, and Contested
            Cases
        The licensing process has often been complex and resource intensive
    for all parties, including energy producers, property owners,
    recreationists, fisherman, and conservationists. Recently, the
    Department examined all licenses issued between 1994 and 2000, and
    found that the average processing time, from the time an application is
    filed with FERC to the time a license is issued, is just over four and
    a half years. A copy of that analysis is attached to this testimony.
    There are many steps that contribute to this lengthy process:

       The average time from filing by the applicant to acceptance
            of the application by the Commission is about one year;
       The average time from acceptance of the application by the
            Commission to the declaration by the Commission that the
            project is Ready for Environmental Analysis (REA) is about 11
            months; and
       The average time to conduct the environmental analysis and
            issue the license is a little over 2.5 years following issuance
            of the REA notice.
       Even after the license is issued, there are often motions
            for rehearing with the Commission, and sometimes even
            challenges in court.

        Ninety-one percent of new licenses at existing projects covered by
    the Department's analysis (144 of 155) were issued after the existing
    license expired, and 61 percent were issued more than one year after
    the expiration date. Clearly, there is room for improvement in this
    process.
        Many of the recent reform proposals have focused on federal agency
    conditions. While attention to the conditioning process is warranted,
    we believe that it may be too narrowly focused. Departmental conditions
    are issued less frequently and contested less frequently than may be
    commonly supposed. For the 157 new and existing projects licensed from
    1995 through 2000, the Department established section 4(e) conditions
    for only 9 projects--about six percent of the projects licensed by FERC
    during that period.\2\ Section 18 fishway conditions were established
    by FWS or NOAA for 32 projects, or 20 percent of the 157 projects
    licensed. When these Interior numbers (both section 4(e) and 18) are
    combined with those for NOAA, they still only account for about 25
    percent of the projects licensed during the period studied.
    ---------------------------------------------------------------------------
        \2\ Note that this differs from the 10 cited in the attached
    letter; the difference is that a proposed National Park Service 4(e)
    condition was converted to a settlement term.
    ---------------------------------------------------------------------------
        Interestingly, the process of Interior bureaus and NOAA
    establishing conditions does not appear to have lengthened the overall
    licensing process. The Department's analysis found that there was no
    significant difference between the time it took to process license
    applications for which mandatory conditions under Sections 4(e) and 18
    of the FPA were established, and the time to process those for which
    prescription authority was not exercised. FERC corroborated this
    conclusion in their May 8th Section 603 report.\3\
    ---------------------------------------------------------------------------
        \3\ Report on Hydroelectric Licensing Policies, Procedures, and
    Regulations, Comprehensive Review and Recommendations Pursuant to
    Section 603 of the Energy Act of 2000, prepared by the staff of the
    Federal Energy Regulatory Commission, May 2001 (cited hereafter as FERC
    603 report), p. 38.
    ---------------------------------------------------------------------------
        Also interesting is that of the 157 licenses issued during this
    period, 57--slightly more than one-third--were contested by the
    applicants; only 13 of those contested included Interior and NOAA
    conditions. The 13 challenges to Interior and NOAA conditions represent
    8 percent of the licenses issued. There were no contests of USDA/FS
    conditions at FERC during this period. Our understanding is that no
    relicensing applicant has rejected a license due to the setting of
    conditions by the resource agencies.
        What these numbers point to is that the length of the hydropower
    licensing process and the extent of contested licenses are less a
    function of the processes by which the resource agencies establish
    conditions, or even the nature of those conditions themselves, than
    they are a more pervasive artifact of the overall hydropower licensing
    process. The net needs to be cast more broadly to effectively
    streamline the process.
    Recent Progress on Improving the Hydropower Licensing Process
        In 1998, the Federal agencies responsible for key parts of the
    Nation's hydropower licensing process created the Interagency Task
    Force to Improve Hydroelectric Licensing Processes (ITF) to develop
    practical ways to improve the licensing process across all the
    agencies. The ITF was a coordinated effort between FERC, the
    Departments of Interior, Commerce, and Agriculture, the Environmental
    Protection Agency, and the Council on Environmental Quality. To ensure
    review and comment on the ITF work products by all stakeholders, the
    ITF convened an advisory committee comprised of industry, non-
    governmental organizations, tribes, and local, State, and Federal
    agencies. Numerous recommendations were developed and commitments made
    in a series of agency guidance documents that are posted on the
    www.doi.gov/hydro website. Most significantly, the commitments include:
        (1) the commitment of the Commission to alert the public and other
    agencies of proposed hydropower licensing actions to expedite issuance
    of notices and improve overall communication among Federal agencies;
        (2) the commitment of the Commission and resource agencies to
    changes that will facilitate better coordination among Federal agencies
    and enable all interested parties to understand and more efficiently
    work within the National Environmental Policy Act (NEPA) process;
        (3) the commitment of the Commission and resource agencies to
    provide basic guidelines on how to identify resource issues, identify
    and conduct necessary studies during the pre-filing stage, resolve
    disputes over studies, and address issues related to post-filing
    studies, making the licensing process more efficient and eliminating
    disputes early in the process. For example, the resource agencies have
    committed to identifying in any study request the nexus between study
    requests and licensing conditions and recommendations, on the one hand,
    and project operations and resource impacts on the other. In addition,
    in developing its conditions and prescriptions, the Departments have
    committed to reviewing alternatives including those submitted by the
    license applicant, and selecting the least cost alternative which meets
    the Department's management goals;
        (4) the commitment of the Commission and resource agencies to
    streamline the process by which they coordinate section 7 consultation
    under the Endangered Species Act and integrate it into the licensing
    process in order to facilitate timely licensing actions;
        (5) the commitment of the Departments of the Interior and Commerce
    to the publication of review procedures for their exercise of mandatory
    conditions under sections 4(e) and 18 of the FPA, and the Commission's
    commitment to identify and follow consistent procedures in implementing
    recommendations that it receives under section 10(j) of the Federal
    Power Act; and
        (6) the Commission's and resource agencies' guidance and
    recommendations for all participants in the newly evolving alternative
    licensing process.
        In the coming year we expect to realize further reductions in
    processing time as a result of continuing administrative reforms.
    Recent initiatives such as those stemming from the ITF have affirmed a
    commitment to collaborative processes, to setting and meeting
    deadlines, and to providing timely notifications. The Commission has
    already reported a noticeable reduction in the number of Additional
    Information Requests which they have had to issue.\4\ The Department
    and NOAA are committed to adhering to set deadlines for establishing
    their conditions under sections 4(e) and 18; preliminary requirements
    are provided within 60 days of FERC's REA notice, and any needed
    modifications are provided within 60 days of the close of the Draft
    NEPA document comment period. All reserve the authority to make final
    modifications when the final Environmental Impact Statement (EIS) is
    completed and reviewed, but changes at this point are rare.
    ---------------------------------------------------------------------------
        \4\ Personal communication with FERC staff.
    ---------------------------------------------------------------------------
        Both the Department and NOAA also now require that the conditions
    be the least-cost means of achieving the objectives. FWS and NOAA are
    also working on a fishway policy that will provide clearer guidance for
    the prescription process and improve consistency between the
    Departments of the Interior and Commerce. We are optimistic that the
    implementation of these and other administrative reforms will
    facilitate the licensing process.
        The established expiration dates for licenses make the licensing
    workload predictable. Over the next decade, about 220 FERC hydropower
    licenses will expire. These projects have a combined capacity of about
    22,000 megawatts, or 20 percent of the Nation's installed hydropower
    capacity. The relicensing process is focused primarily on bringing the
    30 to 50 year old projects into balance with current national
    standards. It also serves to remind operators to consider upgrades to
    their generating capacity. Compliance with current standards comes at a
    price, though the effect on generation is not as large as one might
    expect. FERC's estimate of the average annual generation loss due to
    new conditions established through licensing is 1.59 percent.\5\ This
    is substantially less than the annual variation in generation caused by
    changes in hydrologic conditions. This year's extreme drought in the
    Northwest is expected to adversely affect generation in that region by
    25 percent, and national hydroelectricity production by 4 percent.
    ---------------------------------------------------------------------------
        \5\ FERC 603 Report, p. 50.
    ---------------------------------------------------------------------------
          b. implementation of the president's national energy policy
        The Administration's National Energy Policy report included
    recommendations for hydropower reform. The Report recommended that the
    President encourage FERC, and direct Federal resource agencies, to
    pursue administrative and legislative reforms to make the licensing
    process more clear and efficient, while preserving environmental goals.
    More specifically, the NEP report called for federal resource agencies
    to reach interagency agreement on conflicting mandatory license
    conditions before they submit their conditions to FERC for inclusion in
    a license, and for FERC to adopt appropriate deadlines for its own
    actions during the licensing process.\6\
    ---------------------------------------------------------------------------
        \6\ President's National Energy Policy Report, May 2001, p. 5-18.
    ---------------------------------------------------------------------------
        The Department intends to implement the National Policy Group's
    recommendations by taking the following steps to continue to streamline
    the Department's actions and increase the consistency of decision-
    making and transparency of process for establishing hydropower
    licensing conditions:
        1. The Department will continue implementation of an accelerated
    decision and documentation schedule for establishment of mandatory
    conditions and prescriptions. The Departments of the Interior and
    Commerce have implemented the commitments made in the ITF including,
    particularly, implementation of deadlines for filing preliminary and
    modified conditions and prescriptions with FERC: within 60 days of
    FERC's REA Notice and within 60 days after the close of the Draft NEPA
    comment period, respectively. These deadlines expedite the Department's
    timing for developing conditions and dovetail with FERC's existing
    regulations and NEPA process. These commitments also include better and
    more consistent documentation of the basis for the conditions. These
    commitments are just beginning to be applied in individual proceedings.
    Interior has been conducting a review of guidance on these and other
    recently implemented measures to identify additional steps to
    streamline licensing decisions and to make those decisions and the
    decision process more transparent.
        2. The Department will continue implementation of public input
    processes. Departmental procedures contain provisions for participants
    in the licensing process and the general public to comment on
    departmental conditions, and require the Department to set forth the
    rationale for the preliminary conditions and prescriptions. They also
    provide for the review and signature of modified conditions and
    prescriptions at a level at least as high as the State director,
    regional director, or regional administrator. This approach encourages
    greater collaboration among agencies and licensees earlier in the
    process, thereby avoiding needless delays and costly litigation.
        3. The Department will increase consistency and transparency in
    fishway prescriptions. A joint Fishway Policy of the Departments of the
    Interior and Commerce was proposed to standardize general agency
    practices and procedures for developing fishway prescriptions. This
    proposed policy was intended to help facilitate consultation among the
    Departments, license applicants, and other interested parties in
    developing fishway prescriptions, and to ensure a consistent and
    effective fishway prescription process. The proposed policy outlines an
    interactive, collaborative process for arriving at fishway
    prescriptions. By providing clear guidance on how the fishway
    prescription process works, it was intended that the policy would
    improve predictability, ensure uniformity, and reduce uncertainty for
    applicants. The public comment period on the proposed Fishway Policy
    closed in February 2001. The agencies are in the process of reviewing
    and responding to the comments received. Particular attention in this
    review is being paid to the definitions of ``fish'' and ``fishway.''
    The proposed definitions generated substantial comment and controversy.
        4. The Department will continue to work with other agencies and
    process participants to identify additional opportunities for
    streamlining and process improvements. The Department will identify
    additional opportunities for streamlining and improving license
    processes with other agencies as well as continue efforts to identify
    improvements through collaborative, multi-stakeholder forums such as
    the National Review Group convened by the Electric Power Research
    Institute (EPRI). Representatives from industry, environmental
    organizations, FERC, and the three resource agencies are currently
    participating in an EPRI-sponsored forum examining some of the more
    difficult process issues.
        5. The resource agencies will develop an interagency consistency
    mechanism. Pursuant to the NEP, Interior will work with other resource
    agencies to develop a streamlined, interagency, issue-resolution
    process to resolve any inconsistencies that might develop between
    agencies in making recommendations or in establishing conditions. I
    expect that we will get this completed yet this year.
        6. Interior will issue more specific guidance and a hydropower
    licensing handbook to its bureaus and field offices to standardize and
    expedite its processes for establishing conditions and making
    recommendations. Initial training of management and field staff in new
    processes and commitments from the ITF process was just completed this
    spring. These will be reinforced with regular training sessions,
    specific departmental guidance, and a hydropower licensing handbook to
    better standardize the process, document considerations and expedite
    decisions throughout the Department. These are expected to be completed
    and implemented before the end of the year.
        7. Interior will examine alternative review mechanisms and criteria
    for its exercise of conditioning authority. Two issues that have
    received substantial comment involve the extent of the factors to be
    taken into account in establishing mandatory conditions and
    opportunities to contest those conditions. In the first case, the
    question is how project economics and other factors should be taken
    into account in the decision process. All three resource agencies now
    require that the least-cost alternative condition or prescription that
    achieves the agencies' objectives be adopted. Our bureaus also report
    that they take project scale and economics into account when
    establishing their conditions. This latter element is less transparent,
    however, and is being reviewed. Recent administrative changes and the
    anticipated fishway policy also provide an iterative process for
    consideration of alternative conditions and prescriptions proposed by
    project applicants and others, and consideration of those
    recommendations at the regional director level. This approach is also
    being reviewed and alternatives will be considered. For instance, it
    has long been the practice of USDA/FS to provide iterative comment and
    appeal opportunities regarding its mandatory conditions through both
    the FERC process and its own NEPA appeals process. As we see it, there
    are many alternative approaches to be considered in addressing these
    issues that would be consistent with agency responsibilities and good
    environmental practice, and they will be examined. We have had
    preliminary discussions about them, but have substantial work ahead of
    us.
                     c. discussion of legislative proposals
        There are a number of bills before this Committee and a bill marked
    up by the House Committee on Energy and Commerce on Tuesday dealing
    with hydropower licensing. Also, I should note that the issues
    identified below may not be an exhaustive list of all of the concerns
    of the agencies with provisions of various bills. Rather than take them
    up sequentially and in detail, I would like to address them more
    topically. Our sense is that members of Congress may be converging in
    their approaches. We would like to work constructively with both Houses
    and members on both sides of the aisle to produce legislation that will
    improve the hydropower licensing process.
        1. Alternative Conditions: All of the bills share one thing in
    common--they have as a major element a means of petitioning the
    resource agencies to modify their proposed conditions. Indeed,this is
    the core element of the bills. Both Sec. 701 of S. 597, and Sec. 201 of
    the House bill accomplish this, with minor variations in wording, by
    providing opportunity for a petitioner to propose an alternative set of
    conditions. Generally, if the alternative is at least as effective in
    meeting the objectives as that proposed by a resource agency, and less
    costly, then it must be adopted. Implicitly in S. 597 and H.R. 2458 and
    explicitly in S. 71 and S. 388, the basis of the decision must be
    documented. The House bill also provides a requirement to establish by
    regulation a means of resolving disputes if the decision on the
    petitioners' proposal is contested.
        We do not believe this approach can substitute for the give and
    take between applicants, agency resource personnel and others in
    attempting to examine alternatives and to fine tune the establishment
    of conditions, including reassessing goals, while proposals are being
    formulated. Once conditions are proposed by the resource agencies,
    however, we find the approaches in these bills to provide a reasonable
    balance between agency actions and an applicant's ingenuity, and they
    allow sufficient flexibility to craft a well-considered and expeditious
    review process. We would like to work with the Committee on wording--
    for instance, we believe proposal of the alternative condition should
    be limited to the applicant--but can generally endorse this approach.
    We also believe that there should be a time requirement for
    presentation of the alternative condition. Under the Department's and
    NOAA's current policies, draft conditions are due within 60 days of
    FERC's issuance of the REA notice and proposed final conditions are due
    within 60 days of the close of the comment period on a draft NEPA
    document. None of these bills specify a time period for filing
    alternative proposals, suggesting that alternatives can be proposed
    possibly after the NEPA process and long after the resource agencies
    have provided their conditions and prescriptions. All stakeholders
    should be consistent in early and full disclosure of alternative
    preliminary terms and conditions, both pre- and post-filing of
    licensing, and one party should not be given special approval or
    exemption to file alternatives late. Also, to help maintain an
    expedited process, we have attempted to nest the process for
    establishing conditions within the timetable established by the FERC
    regulatory process. Any proposed alternative conditions process should
    attempt to similarly minimize the amount of delay in FERC's process.
        Sec. 4 of S. 71 and the comparable section of S. 388 use a
    different approach, setting a requirement that conditions be
    established three months before an application for a license is
    submitted and establishing an expedited appeals process before an
    administrative law judge. If the administrative law judge doesn't
    render a decision within 6 months, the condition is converted into a
    section 10(j) recommendation. If the administrative law judge upholds
    the agency decision, it appears that it can still be overturned by
    FERC, though under more stringent criteria. This section also requires
    that all conditions be subjected to ``substantiated'' scientific review
    and establishes an extensive list of reviewable criteria that must be
    considered on the record in setting conditions.
        We think it would be extremely difficult, costly, and problematic
    to develop appropriate preliminary conditions, weigh and document the
    consideration of all of the factors set out in amended Sec. 32, subject
    the conditions to scientific peer review, and publish them three months
    before an application is filed. Currently, as documented earlier in
    this statement, it takes FERC approximately two years after the filing
    of a license application to conclude that the application is complete
    and that it is ready for environmental analysis. The filing of a final
    license applications formally commences the licensing proceeding, as
    well as FERC's preparation of environmental review of the application.
    Accordingly the final license applications contain the complete project
    proposal, from which the agencies measure the impacts of the proposed
    project on resources of concern. The Department's conditions are based
    upon the need to mitigate against such impacts. Among other things,
    many of the studies required to make condition and prescription
    determinations may not have been completed by the time of filing. We
    are also concerned that none of the factors to be weighed include
    protection of the resources for which the reservation was made or the
    need for fish passage.
        Also, the caseload and backlogs of the administrative law judges in
    Interior, at least, lead us to believe that it would be unlikely that
    review decisions could routinely be issued within 6 months. Indeed, the
    provision may create an incentive for the applicant to effect delay in
    the appeals process for the purpose of defeating the possibility of
    conditions. The effect is likely to be that all or most conditions are
    downgraded to the status of Sec. 10(j) recommendations.
        Additionally, the peer review requirement raises an additional
    concern in the case of Indian trust property held by the United States,
    and could conflict with the Secretary's role as a trustee. This is
    particularly problematic when the issue involves cultural resources or
    financial conditions.
        2. Coordinated Environmental Review Process: Amended Sec. 33 of S.
    71 calls for a single environmental review process. Subject to several
    reservations, we support such a single review process. Generally, the
    Department and NOAA rely on FERC's NEPA process, though somewhat
    reluctantly. We have not been willing to join that process as a
    cooperator because we would lose our right to intervene to contest a
    FERC license decision (among other things, this has particular
    relevance to decisions affecting Indian reservations). USDA/FS conducts
    its own NEPA review, but would be willing to use FERC's NEPA process if
    they could be treated as a cooperator in the development of the EIS
    without losing their right to intervene. In both cases, the agencies
    would want to assure that issues important to their decisions are
    covered in the single NEPA analysis.
        The executive branch agencies routinely conduct joint NEPA reviews
    for the purpose of assessing the effect of various alternatives before
    making decisions. FERC's interpretation of its ex parte communication
    requirements as an independent regulatory agency, however, has led FERC
    to insist that becoming a cooperator in their NEPA review comes at the
    cost of losing intervention rights. None of the resource agencies has
    been willing to pay this price. However, the resource agencies believe
    the intervention issue could and should be remedied so that a single,
    cooperative NEPA review could be conducted. We are willing to work with
    the Committee on language for that purpose. We would also like
    clarification in amended Sec. 33(b) that the broadly stated
    ``environmental review'' references reviews under NEPA, and would not
    be construed to eliminate the right of the agencies to conduct
    environmental studies and assessments as they develop their Sec. 4(e)
    and 18 conditions, and 10(j) recommendations.
        3. Disposition of Hydroelectric Charges: Sec. 702 of S. 597 changes
    the disposition of charges collected from licensees for the
    government's cost of administering hydropower licensing programs and
    for the occupation of government lands. Collected revenues would go
    directly to the agencies to reimburse them for their expenses or to
    protect and improve certain environmental resources in the reservation
    areas covered under Sec. 4(e). The administration is reviewing this
    provision, and it may have scoring implications.
        4. Relicensing Study: Sec. 703 of S. 597 directs FERC, in
    consultation with the Departments of Commerce, Interior, and
    Agriculture, to study all licenses issued since 1994, analyzing: the
    length of time that FERC has taken to issue new licenses, the
    additional cost to the licensees attributable to new license
    conditions, the change in generating capacity attributable to
    conditions, the environmental benefits achieved by conditions, and
    litigation arising from conditions. The Department recently offered to
    conduct a somewhat similar study jointly with FERC (see attachment,
    page 9).* The length and complexity of the licensing process make it a
    challenge to analyze and to determine the causes of specific outcomes.
    For this reason, we suggested applying an analytic technique known as
    ``event history analysis'' to the problem. We believe that this study
    would benefit from having all four agencies (FERC, Commerce, Interior,
    and Agriculture), as well as EPA, intimately involved in its execution.
    We find ``consultation'' as practiced by FERC as an independent agency
    to be much less inclusive than we expect of ourselves when we consult
    with other parties as executive branch agencies. Hence, we recommend
    amending section 703 to provide for the study to be done ``jointly''
    rather than ``in consultation.''
    ---------------------------------------------------------------------------
        * The attachment has been retained in committee files.
    ---------------------------------------------------------------------------
        5. FERC Data: Sec. 202 of the House bill would require FERC to
    revise its data collection procedures to provide much improved
    information about the licensing process. We suspect this section
    resulted from consideration of a recent report of the General
    Accounting Office indicating that systematic data for management
    decision-making on the licensing process was not available. We at
    Interior have been frustrated similarly by the lack of consistent time-
    series and other analytic data that would help us better understand the
    causes of process delays and uncertain schedules, and would welcome
    this requirement. We would suggest, however, that the requirement be
    bolstered by requiring that the data be made available to the public
    and the resource agencies routinely and regularly. It would also be
    useful to seek public and interagency comment on the most useful data
    to maintain.
                             d. interior proposals
        Although we acknowledge the complexity of the process, the
    Department is optimistic about the prospects for improvement. We are
    encouraged by the administrative reforms now being implemented by FERC
    and the resource agencies. We expect the cumulative effect of these
    initiatives to significantly improve the timeliness of the licensing
    process, the quality and cost-effectiveness of the decisions made
    through that process, and the promptness with which mitigation is
    implemented. Although the recent Interagency Task Force did not address
    all of the issues of concern, we believe that remaining issues are
    amenable to resolution through administrative reform. However, we have
    identified areas which warrant consideration for legislative action.
        Settlements: One of the great reforms of the past decade for the
    relicensing process was FERC's establishment of an alternative
    licensing process designed to bring participants together well before
    the license filing deadline to develop project conditions in a
    cooperative manner. While resource intensive at the front-end,
    substantial time and cost savings often result once the application is
    filed, and appeals and litigation are substantially reduced. The
    Department has participated in several landmark settlements within both
    the traditional and alternative processes and is committed to resolving
    complex licensing matters through settlement. Several recent FERC
    decisions, however, have created a high level of uncertainty as to
    which parts of an agreement become enforceable terms of the issued
    license. Because FERC maintains that its enforcement jurisdiction
    extends only to the licensee, it will not enforce any settlement
    provision that binds parties other than the licensee, such as
    provisions governing dispute resolution and management committees. This
    has impacted the Department's ability to effectuate meaningful
    settlements. Industry and NGOs share the view that uncertainty as to
    which elements of a settlement will ultimately be included as
    enforceable license terms is a deterrent to successful negotiations. We
    believe that it would be helpful if Congress authorized and required
    FERC to enforce settlement provisions entered into voluntarily by the
    parties. Doing so will help ensure the enforceability of settlements,
    thereby providing certainty, reducing litigation and streamlining the
    FERC licensing process.
        Studies: One of the more contentious and difficult to resolve
    issues is the extent and nature of the studies required to be completed
    by license applicants. FERC, States, and the resource agencies rely on
    the information generated by these studies to make decisions regarding
    potential license conditions. Unfortunately, licensees often fail to
    complete required studies in a timely manner or, alternatively, their
    timely studies fail to contain necessary data. In either case, delays
    in the process result. Applicants, on the other hand, complain that the
    studies can be expensive and that FERC and the resource agencies ask
    for more information than is necessary. In addition, FERC and the
    resource agencies also occasionally disagree about what studies need to
    be completed. In an attempt to address these conflicts, the Department,
    through the ITF process, has agreed on criteria designed to minimize
    its study requirements and ensure that they are based only on
    information needed for the decisions at hand. Still, issues remain. The
    Department would welcome a dialogue with Committee staff on whether a
    fair and expeditious approach could be developed--legislatively or
    administratively--that would reduce the level of contention surrounding
    this issue, while assuring that adequate information is provided in a
    least-cost, but timely manner.
        Deadlines: To ensure that the Department exercises its conditioning
    authorities without delaying the licensing process, the Department has
    adopted and is implementing tight schedules for submitting it
    conditions that coincide with deadlines contained in FERC's
    regulations. Through those regulations, FERC imposes strict deadlines
    on all participants in the licensing process except itself. The result
    is that both licensees and resource agencies are forced to provide
    information to FERC in a timely manner, only to wait indefinitely for
    FERC to respond. FERC's lack of deadlines is particularly problematic
    for resource agencies because, in many instances, FERC's eventual
    response triggers another set of deadlines to which agencies must
    respond. In these instances, because resource agencies are unable to
    predict FERC's actions, they are at a disadvantage in attempting to
    anticipate the timing of actions they may need to take in the future.
    The Department is of the view that the establishment of both deadlines
    and clearer process schedules for FERC would help streamline the
    licensing processes by establishing expected completion dates for
    various steps in the process, as well as help the resource agencies
    allocate resources. This proposal is entirely consistent with the
    National Energy Policy which recommended that FERC should be encouraged
    to adopt appropriate deadlines for its own actions.
        Basin-wide Assessments: FERC has a general policy encouraging the
    use of basin-wide assessments for the purpose of relicensing multiple
    projects in the same river basin. This policy is not applied in most
    cases, however. Instead, FERC typically treats each individual project
    licensing in a serial fashion according to the order in which
    individual project licenses expire. The resource agencies believe that
    there is opportunity for both efficiency and resource protection gains
    in the licensing process from basin-wide permitting. Studies can be
    consolidated and conditions, if needed, may be amenable to a more
    distributed approach. The resource agencies view is that Congress
    should require a basin-wide approach unless FERC can demonstrate that
    it is clearly not in the public interest to employ such an approach as
    compared to processing each license in the river basin individually.
    This might reasonably be limited to basins where the project licenses
    expire within 7 years of one another, with allowance for extension of
    the earlier licenses to the termination date of the later licenses. Our
    review of the data indicates that this would cover all of the licensed
    facilities in most river basins.
        Indian Trust Responsibility: Finally, executive branch agencies
    separately address the manner in which their decisions affect Federal
    trust and treaty responsibilities to Indians. Normally, this is done in
    NEPA analyses and records of decision. It is our view that this
    practice should apply to FERC decisions, and that Congress should
    require FERC to include in its FPA process specific and separate
    consideration of project effects on trust property, and its trust
    responsibility.
        Mr. Chairman, this concludes my prepared remarks. Again, we are
    available to work with the Committee on legislation to improve the
    licensing process. I will be happy to answer any questions you or other
    Committee members may have.

        The Chairman. Mr. Robinson, why don't you go right ahead?

       STATEMENT OF J. MARK ROBINSON, DIRECTOR, OFFICE OF ENERGY
             PROJECTS, FEDERAL ENERGY REGULATORY COMMISSION

        Mr. Robinson. Thank you, Mr. Chairman, Senators. My name is
    Mark Robinson, and I am Director of the Office of Energy
    Projects at the commission. I have provided written testimony,
    so I will be very brief this morning. I will touch on S. 597,
    S. 388 and S. 571.
        First of all, you have to understand that the licensing
    process at the Commission is a result of the laws that we work
    under the regulations and the policies that the Commission
    sets. The resulting licensing process is one of distributed
    decision making. There are fully five different entities that
    can set conditions that are not subject to review by the
    Commission that must be placed in those licenses.
        As a result of that, it puts the Commission staff in the
    role of trying to facilitate agreements, negotiate
    understandings that can be logically incorporated into a
    license and make sense, a license that can be issued and we can
    conclude that it is in the public interest. We do a good job of
    that. We have been doing a good job of that, but it is not
    easy. It takes time, and it costs money. No one would say that
    negotiating those types of agreements across the types of
    issues that we have to address in licensing is a quick or cheap
    process.
        As a result, in looking at the legislation that is being
    considered by yourselves, I look for two elements to see
    whether or not it would address the primary criticism of
    licensing process, basically that it takes too long and it
    costs too much. Those two elements that I am looking for go to
    are there time frames placed upon the agencies involved in the
    process for concluding their actions and giving their
    recommendations, their conditions, to the Commission.
        The second element is, are those conditions that everyone
    has the opportunity to provide to the Commission all held to
    the same standard? Are they driven by the same considerations?
    In other words, are they broadly considered? Are they public
    interest determinations across those conditions, or are they
    driven by just a single purpose?
        If the legislation goes to those points, I think that will
    go a long way to addressing the criticism that we receive of
    taking too long and costing too much. Turning directly to the
    three pieces of legislation that we have here, if I look at S.
    597, the Comprehensive and Balanced Energy Policy Act, it
    provides for a new process, another process.
        It looks at how we can get alternative conditions in place,
    something that goes on right now through the normal process, I
    should say, but this would formalize it and give us some
    additional process that we would have to go through.
        It does not set time constraints on any of the agencies.
    And it does not require that those conditions be viewed in the
    same way that we have to at the commission in the broad public
    interest aspect. So it would not, I think, address the
    criticism. It takes too long and costs too much.
        If I look at S. 71 and S. 388, it does in fact put
    constraints upon all the agencies involved to provide their
    information on a time frame. And also, it requires those
    agencies to take a broad look at those conditions in
    determining whether or not they are, in fact, appropriate, that
    it does meet that criteria that I spoke to earlier and would
    address it takes too long and costs too much.
        In closing, I would like to say that all three pieces of
    legislation go well beyond what I have discussed here. It is in
    my testimony. But I would like to repeat something that our
    Chairman said recently. We have as an objective to issue
    licenses that fully protect the environment. We try to maximize
    the production of power that we can get from those projects.
    And certainly in today's environment, that is understandable.
    And we try to do it at minimum cost.
        We will continue to do that regardless of what regulatory
    model that we act under, be it the distributed decision-making
    process that we have now or some other one. But it is extremely
    hard. And we are, I believe, doing our best to try to do it
    efficiently and quickly.
        Thank you very much.
        The Chairman. Thank you very much.
        [The prepared statements of Mr. Robinson and Mr. Hebert
    follow:]
      Prepared Statement of J. Mark Robinson, Director, Office of Energy
                 Projects, Federal Energy Regulatory Commission
        Mr. Chairman and Members of the Committee:
        My name is Mark Robinson, and I am the Director of the Office of
    Energy Projects at the Federal Energy Regulatory Commission. I
    appreciate the opportunity to appear before you to discuss proposed
    legislation relating to the Commission's hydropower licensing program.
    As a member of the Commission's staff, the views I express in this
    testimony are my own, and not those of the Commission or of any
    individual Commissioner.
        My testimony today will provide a brief overview of the hydropower
    licensing program. I will then focus on three proposed pieces of
    legislation: S. 597, the Comprehensive and Balanced Energy Policy Act
    of 2001; S. 388, the National Energy Security Act of 2001; and S. 71,
    the Hydroelectric Licensing Process Improvement Act of 2001. Because S.
    71 is incorporated in its entirety in S. 388, I will address the
    subject matter of S. 71 during my discussion of S. 388.
                     1. the commission's licensing program
        The Commission currently regulates over 1,600 hydropower projects
    at over 2,000 dams pursuant to Part I of the Federal Power Act (FPA).
    Non-federal hydropower projects are required to obtain Commission
    authorization if they are on lands or waters subject to Congress'
    authority. Those projects represent more than half of the Nation's
    approximately 100 gigawatts of hydroelectric capacity and over 5
    percent of all electric power generated in the United States.
    Hydropower is an essential part of the Nation's energy mix and offers
    the benefits of an emission-free, renewable energy source.
        The Commission's hydropower work generally falls into three
    categories of activities. First, the Commission licenses and relicenses
    projects. Relicensing involves projects that originally were licensed
    30 to 50 years ago. The Commission's second role is to manage
    hydropower projects during their license term. This post-licensing
    workload has grown in significance as new licenses are issued and as
    environmental standards become more demanding. Finally, the Commission
    oversees the safety of licensed hydropower dams. This program is widely
    recognized for its leadership in dam safety.
        The Commission is in the second year of a 10-year period (CY2000 to
    CY2010) during which 218 applications for hydropower relicenses are due
    to be filed. The Commission has already received 84 of these relicense
    applications. This group of projects has a combined capacity of
    approximately 22,000 megawatts (MW), or 20 percent of the Nation's
    installed hydroelectric capacity. Approximately forty percent of these
    218 projects will have filed their relicense applications by the
    beginning of 2002.
        Over the last three decades, the enactment of numerous
    environmental, land use, and other laws, and new interpretations of
    certain provisions of the FPA, have significantly affected the
    Commission's ability to control the timing of licensing and the
    conditions of a license. Under the standards of the FPA, projects can
    be authorized if, in the Commission's judgment, they are ``best adapted
    to a comprehensive plan'' for improving or developing a waterway for
    beneficial public purposes, including power generation, irrigation,
    flood control, navigation, fish and wildlife, municipal water supply,
    and recreation. The Electric Consumers Protection Act of 1986 (ECPA)
    amended the FPA to require the Commission to give ``equal
    consideration'' to developmental and non-developmental values.
        While the Commission's responsibility under the FPA is to strike an
    appropriate balance among the many competing developmental and
    environmental interests, various statutory requirements give other
    agencies a powerful role in the licensing process. Among others, those
    requirements include:

       Section 4(e) of the FPA, which authorizes federal resource
            agencies such as the Departments of Agriculture and the
            Interior to impose mandatory conditions on projects located on
            Federal reservations they supervise.
       Section 18 of the FPA, which authorizes the Departments of
            Commerce and the Interior to impose mandatory fishway
            prescriptions.
       Section 10(j) of the FPA, which in essence establishes a
            presumption for inclusion of Federal and State fish and
            wildlife agencies' recommendations to protect fish and
            wildlife.
       Section 401 of the Clean Water Act, which authorizes States
            to impose mandatory conditions as part of the State water
            quality certification process.
       The Coastal Zone Management Act, which requires that
            projects affecting coastal resources be consistent with State
            management programs.
       The Endangered Species Act, which directs the Departments of
            the Interior and Commerce to propose measures to protect
            threatened and endangered species.
       The National Historic Preservation Act, which requires
            Commission consultation with Federal and State authorities to
            protect historic sites.

        There have been three important court decisions concerning the
    roles of the Commission and the resource agencies under these statutes.

       In PUD No. 1 of Jefferson County v. Washington Department of
            Ecology, 511 U.S. 700 (1994) (Jefferson County), the Supreme
            Court held that a State acting under the CWA could regulate not
            only water quality (such as the physical and chemical
            composition of the water), but water quantity (that is, the
            amount of water released by a project), as well as State-
            designated water uses (fishing, boating, etc.). It is important
            to note that the Court specifically acknowledged that its
            decision did not address the interaction of the CWA and the
            FPA, since no license had been issued for the project in
            question. Its decision therefore did not discuss which
            regulatory scheme would prevail in the event of a direct and
            critical conflict.
       In American Rivers [I] v. FERC, 129 F.3d 99 (2nd Cir. 1997),
            the Court held that the Commission lacked authority to
            determine whether conditions submitted by State agencies
            pursuant to Section 401 of the Clean Water Act were beyond the
            scope of that section. The court held that challenges to such
            conditions were to be resolved instead by the courts.
       Finally, in American Rivers [II] v. FERC, 187 F.3d 1007 (9th
            Cir. 1999), the Court ruled that the Commission lacked
            authority in individual cases to determine whether
            prescriptions submitted under color of Section 18 of the FPA
            were in fact fishways. As in the Second Circuit case, the Court
            held that challenges to a fishway prescription were to be
            resolved by the courts, not the Commission. (On December 22,
            2000, the Departments of the Interior and Commerce issued a
            joint Notice of Proposed Interagency Policy on the Prescription
            of Fishways. The Commission staff filed comments noting that
            the unilaterally-developed policy would define the term
            ``fishway'' in an extremely broad manner that in staff's view
            is inconsistent with the definition of that term enacted by
            Congress in the Energy Policy Act of 1992).

        As a result of these judicial rulings, if the Commission were to
    conclude that one or more mandatory conditions would render a project
    inconsistent with the public interest, its only recourse would be to
    deny the license application. Not only is this a blunt instrument, but
    in most relicense proceedings denial is not a viable alternative.
                     2. the commission's licensing process
        The Commission currently uses two different processes in licensing:
    the ``traditional'' process and the ``alternative'' process. Under the
    alternative process, pre-filing consultation and environmental review
    can be integrated and proceed concurrently, in a collaborative manner,
    thereby dramatically shortening the processing time for an application.
        Earlier this year, Commission staff submitted a report of the
    hydropower program to Congress, as required by Section 603 of the
    Energy Act of 2000 (the Section 603 Report). In the report, the staff
    found that using the traditional process takes approximately 23 months
    longer than the alternative licensing process.
        Further, for the traditional process, the average cost of
    application preparation is $109/kW, and the cost for protection,
    mitigation, and enhancement measures is $264/kW. In contrast, for the
    alternative licensing process, the average costs for application
    preparation and protection, mitigation and enhancement measures are
    $39/kW and $58/kW, respectively--substantially lower than for the
    traditional process.
        The Commission has worked to improve the licensing process by
    making its regulations more clear and specific, enhancing opportunities
    for stakeholder participation, and providing flexibility to license
    applicants and others to design collaborative efforts that meet the
    needs of all participants. In addition, Commission staff routinely
    holds ``outreach'' meetings throughout the country to inform all
    stakeholders about the licensing process, and has taken an active role
    in facilitating settlements and introducing alternative dispute
    resolution procedures. The staff has also participated in Interagency
    training on hydropower licensing, and in the which shares ``lessons
    learned'' in the hydropower licensing process.
                          3. the proposed legislation
    A. S. 597
        S. 597 contains three provisions regarding the relicensing of
    hydroelectric projects, which I will discuss in turn.
        i. Section 701 would amend FPA Section 4(e) to provide that, where
    a licensee proposes an alternative to a mandatory condition proposed by
    the Secretary with supervision over a reservation on which a hydropower
    project is located, the Secretary shall accept the alternative
    condition, if the Secretary determines that the alternative would
    provide equal or greater protection than the original condition, is
    based on sound science, and will either cost less than the original
    condition or will result in a smaller loss of generating capacity than
    would the original condition.
        I support the idea of greater interaction between the resource
    agencies and licensees in the development of environmental measures,
    which Section 701 could encourage. However, given that this section
    leaves to the resource agencies the discretion as to whether to accept
    an alternative condition proposed by a licensee, I am uncertain that
    this measure would have much impact. The resource agencies already
    possess the ability to change their mandatory conditions if the
    applicant convinces them that an alternative is preferable.
        In addition, this proposal appears too limited to the extent that
    it only requires consideration of measures from applicants that provide
    ``equal or greater protection'' than the condition deemed necessary by
    the resource agencies. This would mean that the agencies would not have
    to consider, for example, an alternative that cut costs by 90 percent
    or that sharply increased capacity, but had 99 percent of the
    environmental protection. Also, the proposal does not provide for
    consideration of a measure's effect on other project purposes such as
    flood control, irrigation, and recreation.
        Finally, while as a general matter I support proposals to increase
    communications among interested parties to a licensing proceeding, I am
    concerned that, individually and especially in the aggregate, such
    processes may add burdensome, time-consuming steps to the licensing
    process, increasing its costliness and further delaying Commission
    action.
        ii. Section 702 would amend the FPA to provide that the Commission
    pass on directly to federal resource agencies that portion of the
    annual charges collected by the Commission that is attributable to the
    costs incurred by those agencies in administering Part I of the FPA.
        Commission staff included in the Section 603 report a
    recommendation similar to Section 702. Chairman Hebert has supported
    that recommendation, and I do so as well. Ensuring that Federal
    agencies recover appropriated funds spent for the licensing process
    would support the federal agencies' participation in that process.
        However, I am concerned that, as drafted, the bill would allow the
    Federal resource agencies to use annual charge funds not only to
    administer Part I of the FPA, but also for environmental enhancements,
    including measures that have no nexus to the project. This greatly
    expands the current scope of the annual charges provision, which I
    believe is intended to cover administrative costs, not to pay for
    environmental measures.
        iii. Section 703 provides that, within six months of the date of
    enactment of the legislation, the Commission shall submit to Congress a
    study, prepared in consultation with the Secretaries of Commerce, the
    Interior, and Agriculture, analyzing the length of time for issuing new
    licenses, the additional cost to licensees attributable to new license
    conditions, the change in generating capacity attributable to new
    license conditions; the environmental benefits achieved by new license
    conditions; and litigation arising from relicensing proceedings.
        Commission staff is always prepared to submit to Congress whatever
    information Congress deems necessary. I note, however, that the first
    three items are discussed in the recent Section 603 report. With regard
    to the environmental benefits achieved by new license conditions,
    Commission staff has begun reviewing methods for determining the
    effectiveness of license conditions. There does not appear to be a
    general agreement as to how to quantify environmental benefits (and,
    indeed, the value of particular benefits may vary from project to
    project), it would be difficult, if not impossible, to develop useful
    figures regarding the benefits of individual license conditions.
    Litigation arising from relicensing proceedings (which occurs in only a
    minority of cases) tends to be based on the facts of each case, and may
    not lead to general conclusions. Thus, I am uncertain that the proposed
    additional study will yield useful results.
    B. S. 388 (including S. 71)
        i. Section 724 of S. 388 would amend the FPA with the respect to
    mandatory license conditions submitted by the Secretaries of the
    Interior and Commerce under Sections 4(e) and 18 of that Act, and by
    Federal agencies supervising lands on which project works are located.
    The bill would require them to take into consideration various factors,
    including the impacts of proposed conditions on economic and power
    values, electric generation capacity and system reliability, air
    quality, drinking water, flood control, irrigation, navigation, or
    recreation water supply, compatibility with other license conditions,
    and means to ensure that conditions address only direct project
    environmental impacts at the lowest project cost. The Departments would
    be required to provide written documentation for their conditions,
    submit them to scientific review, and provide administrative review of
    proposed conditions.
        Section 724 would also provide for the Commission to establish a
    deadline for the submittal of mandatory conditions in each case, to be
    no later than one year after the Commission issues notice that a
    license application is ready for environmental review. If an agency
    fails to submit a final condition by the deadline, the agency loses the
    authority to recommend or establish license conditions. The Commission
    must conduct an economic analysis of conditions proposed by consulting
    agencies, and, upon request of license applicants, must make a written
    determination whether such conditions are in the public interest, were
    subjected to scientific review, relate to direct project impacts, are
    reasonable and supported by substantial evidence, and are consistent
    with the FPA and other license conditions.
        I support the purpose of the bill, which is to promote sensible and
    timely decisions by all agencies involved in licensing matters.
    Reasoned decision-making with respect to mandatory conditions must be
    the responsibility of the resource agencies, given the Commission's
    very limited discretion with respect to such conditions. As Congress
    considers any legislation, however, it should be careful to ensure that
    any procedures that could add time or expense to the process are
    justified by improved outcomes.
        Several portions of Section 724 of S. 388 are consistent with the
    recommendations in the Section 603 Report. For instance, having the
    resource agencies consider economic as well as environmental impacts
    would lead to better-informed determinations on what mandatory
    conditions are in the public interest. The Commission is required to
    take into account a range of public interest factors for matters within
    its discretion. The requirement for resource agencies to document their
    decision making is essential for due process. See Bangor Hydroelectric
    Co. v. FERC, 78 F.3d 659 (D.C. Cir. 1996). Establishing reasonable
    deadlines for submission of conditions (as the Commission's regulations
    now provide) could help make the licensing process more timely. These
    sensible requirements should make licensing more timely and efficient,
    while supporting well-reasoned licensing decisions.
        As Commission staff recommended in the Section 603 report, I
    believe that the best way to rationalize the hydropower licensing
    process would be to retain the authority of Federal resource agencies
    to impose mandatory license conditions, but to make that authority
    subject to a statutory reservation of Commission authority to reject or
    modify the conditions based on inconsistency with the Commission's
    overall public interest determination.
        In addition, Commission staff recommended that Congress provide
    that the Commission license be the only federal authorization required
    to operate the project, e.g., special use authorizations for projects
    on Forest Service lands and similar authorizations would be eliminated.
    A single administrative process would be established by the Commission
    to address all Federal agency issues in a licensing case, with
    schedules and deadlines established by the Commission, and with one
    administrative record compiled by the Commission in consultation with
    the other Federal agencies. The Commission would prepare a single NEPA
    document. The Federal agencies would not be required to adopt the
    Commission's conclusions, but would have to provide for the record
    their own analysis and conclusions based on the evidentiary record. The
    agencies' analyses and conclusions would be included in the record of
    the Commission's order acting on the application, and judicial review
    would be obtained by seeking rehearing of the Commission's order.
        These measures, if enacted, could shorten the license process, give
    greater certainty to licensees and other participants, and ensure that
    the FPA's public interest standards are used in developing all parts of
    a license.
        Staff recommended that, should Congress not allow the Commission to
    determine whether mandatory conditions imposed by other Federal
    agencies are in the public interest, Congress could nonetheless improve
    the mandatory conditioning process by requiring resource agencies to
    consider the full panoply of public interest values, support their
    conditions on the record, and provide a clear administrative appeal
    process. The Section 603 Report supports this by noting that the costs
    for protection, mitigation, and enhancement measures for licenses
    containing Section 4(e) and 18 mandatory conditions ($590/kW) were 2.7
    times the costs for licenses that did not contain those conditions
    ($218/kW). The Commission staff does not routinely highlight
    disagreements with mandatory conditions. However, the report concluded
    that, in the 12 percent of cases where staff did so, many of the
    resource agencies' conditions were substantially more expensive than
    conditions that staff thought adequate to protect environmental
    resources. Requiring agencies to better document and support mandatory
    conditions could help ameliorate this problem.
        ii. Section 725 of S. 388 provides that the Commission shall be the
    lead agency for environmental review under the NEPA, and that other
    Federal agencies will not perform additional environmental review.
        As noted above, Commission staff has recommended that the
    Commission prepare the sole NEPA document in licensing proceedings. At
    the same time, I do not want to eliminate the ability of individual
    agencies to perform the environmental review that they need to support
    their portion of the licensing process in a timely fashion.
        iii. Section 726 of S. 388 would require the Commission to prepare
    and submit to Congress a study of the feasibility of establishing a
    separate licensing procedure for small hydroelectric projects. As a
    general matter, Commission staff does not support differing regulation
    based on the size of hydroelectric projects. A project with a small
    capacity can have a significant impact both at the project site and
    beyond its immediate environs. Pursuant to the mandates of the Federal
    Power Act, the Commission evaluates that impact, and, in rendering a
    licensing decision, gives equal consideration to development interests
    and environmental resources in determining whether, and with what
    requirements, to authorize hydropower development. The Commission's
    current licensing ``exemption'' program for projects 5-MW or less,
    pursuant to Sections 405 and 408 of the Public Utility Regulatory
    Policies Act of 1978, has demonstrated the difficulty of establishing
    diminished requirements for this group of projects. Of course, we are
    prepared to study this matter and report back to Congress.
                                 4. conclusion
        Commission staff is well aware of the importance of hydropower, and
    of the significant role the Commission plays in licensing and
    overseeing crucial hydropower projects. We also recognize that the
    hydropower licensing process can be long and costly. The Commission and
    its staff will do everything we can to improve that process. At the
    same time, we are prepared to work with Congress and other agencies to
    craft legislative solutions. Together, we can develop the efficient,
    comprehensive licensing process that our Nation's energy needs demand.
        Thank you. I will be pleased to answer any questions you may have.
                                     ______

      Prepared Statement of Curt L. Hebert, Jr., Chairman, Federal Energy
                             Regulatory Commission
        Thank you for the opportunity to provide a statement for the record
    on recent bills designed to remove barriers to distributed generation,
    renewable energy, and other advanced technologies in electricity
    generation and transmission. I appreciate this opportunity to share my
    views on this important topic.
        Specifically, my testimony provides comments on: sections 110 and
    112 of S. 388 and section 301 of S. 597 dealing with federal agency
    reviews and reports; section 603 of S. 597 and the entirety of S. 933
    concerning interconnection standards; section 604 of S. 597 regarding
    net metering for renewable energy and fuel cells; and section 605 of S.
    597 concerning transmission service to intermittent generators.
                     i. federal agency reviews and reports
    A. Annual Reports on Availability and Capacity of Generation
        I support efforts to monitor more effectively the adequacy of our
    nation's electricity generation resources. Section 110(a) of S. 388
    would require the Secretary of Energy, in consultation with the
    Commission and other entities, to provide an annual report to the
    President and Congress, on the ``availability and capacity of domestic
    sources of energy generation to maintain the electricity grid in the
    United States.'' The section goes on to state that the report should
    ``specifically'' evaluate ``grid stability.''
        Evaluation of the availability and capacity of generation entails
    an analysis of whether local utilities have access to enough
    electricity generating facilities; whether there is adequate high
    voltage transmission facilities to move electric energy from those
    generating facilities economically over long distances; and whether
    there are sufficient lower voltage distribution lines to deliver the
    power to customers in a local area. Evaluation of grid stability is
    different and entails an analysis of whether all these facilities are
    operating within safe limits and in a coordinated manner. Section 110
    appears to focus on monitoring availability and capacity of generation;
    therefore, the references to ``grid stability'' may be inadvertent.
    B. Regulatory Reviews
        Section 112 of S. 388 and section 301 of S. 597 would both require
    each federal agency to review its regulations every five years for
    potential barriers to market entry of emerging energy technologies.
    While federal regulation should not thwart the development and use of
    advanced energy technologies, the same objective may be achievable in a
    less burdensome way. First, the regulations of many agencies have
    little or no effect on entry of emerging energy technologies, and these
    agencies could be exempted from this review requirement with no adverse
    effect on market entry. Second, if the first review is conducted
    properly and does, in fact, result in the removal of any unnecessary
    barriers to entry, there may be no need to incur the cost of additional
    reviews every five years.
        As for my agency, I can assure the Committee that the Commission is
    continually reassessing its regulations and policies to encourage the
    development of emerging energy technologies. More generally, the
    Commission is continually reassessing its regulations and policies to
    promote market entry and the removal of regulatory barriers to enhanced
    competition in the wholesale supply and interstate delivery of energy
    products and services. For example, on March 14, 2001 and May 16, 2001,
    the Commission issued orders removing regulatory obstacles and
    providing incentives to increased energy supply and reduced demand in
    California and the rest of the West.
                         ii. interconnection standards
    A. Interconnection With Transmission Facilities
        Section 4(f) of S. 933 would amend the procedures for obtaining
    interconnection with transmission facilities contained in section 210
    of the Federal Power Act (FPA). S. 933 would add a new streamlined
    process for a ``generating facility,'' defined as any ``facility that
    generates electric energy,'' to obtain interconnection with a
    ``transmitting utility,'' defined as any entity that ``owns, controls,
    or operates an electric power transmission facility that is used for
    the sale of electric energy.'' S. 933 calls for the Commission to
    promulgate a rule establishing technical standards for interconnection.
    After promulgation of that rule, a generating facility would be
    entitled to interconnection so long as it complied with the rule and
    paid the just and reasonable cost of the interconnection, which could
    in some circumstances be determined by a nonfederal regulatory
    authority.
        Reviewing applications for the interconnection of generators to
    transmission facilities has become a growing workload for the
    Commission, and I am interested in considering ways of making the
    review process more efficient. The development and implementation of
    broad regional transmission organizations will, in turn, promote the
    development of standardized and nondiscriminatory interconnection
    procedures. Moreover, the Commission recently announced that it intends
    to evaluate the importance of developing standardized interconnection
    procedures.
        S. 933 requires the Commission to promulgate a rule establishing
    ``technical'' standards for interconnection under the new streamlined
    process but does not specify what is meant by ``technical.'' While one
    interpretation is that the term refers to safety, reliability, and
    power quality matters (as in S. 597), I do not read the S. 933
    requirement to limit the scope of the standards that may be included in
    the rule (other standards might address priorities for obtaining
    interconnections, requirements for appropriate studies, etc.). If the
    bill is intended to define the term narrowly, however, this should be
    clarified. Further, I do not interpret this provision of the bill as
    affecting any Commission authorities to address interconnection matters
    under other FPA provisions, and recommend that the bill be so
    clarified.
        In addition to creating the new process for obtaining
    interconnection with a transmission facility discussed above, S. 933
    would also make a number of changes to the existing process for
    obtaining such interconnection. Most significantly, S. 933 would
    clarify the Commission's authority to decide interconnection matters
    based on a paper hearing. I support this proposal.
        S. 933 would also amend the criteria for evaluating an application.
    Under the existing language of section 210 of the FPA, the Commission
    may grant an application if it is in the public interest and it would
    either encourage overall conservation, optimize efficiency, or improve
    reliability. S. 933 would allow the Commission to grant an application
    if it were in the public interest and promoted competition. I support
    this change. The use of more general language allows the Commission to
    continue to consider conservation, efficiency and reliability, while
    focusing the Commission on competitive goals that will truly benefit
    consumers.
        However, I am concerned that S. 933 appears to remove some of the
    Commission's current authority under sections 210 and 212 of the FPA to
    establish rates for transmission interconnections for nonpublic
    utilities. S. 933 would allow nonfederal regulatory authorities to
    determine costs (is, establish rates) for interconnections to nonpublic
    utility transmission facilities. This removal of the Commission's
    authority could result in disparate treatment of new generating
    facilities, depending upon where on the transmission system they seek
    to interconnect and the nonfederal authority that has jurisdiction over
    the particular transmission facilities involved. In short, rather than
    ensure fair, nondiscriminatory pricing rules for all interconnections
    on the interstate transmission grid, this legislative change may result
    in some facilities being treated in an unduly preferential or
    discriminatory manner. (Also, the title used in S. 933, ``Effect of
    FERC Lite,'' is ambiguous.)
        Finally, S. 933 directs that the owner of the generating facility
    ``pays the costs of the interconnection.'' This could be interpreted as
    requiring the Commission to assign all costs of an interconnection
    directly to the owner of the generating facility. However, another
    feasible approach would be to allocate these costs among all customers
    benefitting from the addition of generation facilities, and this
    approach may help expedite generation additions. I believe the
    Commission should retain the flexibility to adapt its rate policy on
    this issue as appropriate.
    B. Interconnection With Local Distribution Facilities
        Section 603 of S. 597 and section 4(b) of S. 933 would both amend
    section 210 of the FPA to provide procedures for interconnection with
    local distribution facilities. S. 597 addresses only interconnection of
    ``distributed generation facilities,'' which are defined as electric
    power generation facilities ``designed to serve retail customers at or
    near the point of consumption.'' S. 933 addresses interconnection of
    all ``generating facilities,'' which, as mentioned above, are defined
    as any ``facility that generates electric energy.'' As in section 4(f)
    of S. 933 regarding interconnection to transmission facilities, these
    sections concerning interconnection to local distribution facilities
    call for the Commission to promulgate a rule establishing standards for
    such interconnection. After promulgation of that rule, a generating
    facility, or under S. 597, a distributed generation facility, would be
    entitled to interconnection so long as it complied with the rule and
    paid the just and reasonable cost of the interconnection.
        As an initial matter, I must point out that S. 933 defines the term
    ``local distribution utility'' as an entity that owns, controls, or
    operates an electric power ``distribution facility'' instead of ``local
    distribution facility.'' This distinction is important given the
    Commission's jurisdictional authorization under section 201 of the FPA,
    which distinguishes between ``transmission'' and ``local distribution''
    facilities. I recommend that in order to avoid confusion the definition
    of ``local distribution utility'' use the term ``local distribution
    facility'' and that conforming changes be made elsewhere in the
    legislation.
        These provisions also appear to depart from the previous allocation
    of jurisdiction between the federal and state governments. Since the
    enactment of the FPA, regulation of transmission in interstate commerce
    by public utilities has been the exclusive responsibility of the
    Commission, while regulation of local distribution has generally been
    left to state and local authorities. Similarly, wholesale sales of
    electric energy in interstate commerce by public utilities have been
    subject to the sole jurisdiction of the Commission, whereas state and
    local authorities have had exclusive jurisdiction over retail sales.
    The issue of the appropriate federal role in regulating interconnection
    with local distribution arises in both bills, but is particularly
    significant in the case of S. 597, which applies only to generators who
    intend to serve retail, rather than wholesale, customers.
        Moreover, S. 597 specifically calls for the Commission's local
    distribution interconnection rule to establish requirements on
    ``safety, reliability, and power quality.'' However, the Commission has
    no current expertise in these matters. Congress should consider whether
    the responsibility could be better met by another agency, such as the
    Department of Energy.
        Finally, S. 597 fails to identify which regulatory authority would
    determine whether costs were just and reasonable. If legislation on
    local distribution interconnection were adopted, it should include
    clarification, like that in S. 933, that the justness and
    reasonableness of costs would be determined by an appropriate
    regulatory authority.
             iii. net metering for renewable energy and fuel cells
        Section 604 of S. 597 would amend title VI of the Public Utility
    Regulatory Policies Act of 1978 to require retail electric suppliers to
    provide net metering service to residential and commercial customers
    that have small renewable-energy generators on site. Section 604 calls
    upon the Commission, after consultation with state regulatory
    authorities and nonregulated local distribution systems, to develop
    control and testing requirements for such metering systems. As
    discussed above, state and local authorities, rather than the
    Commission, have traditionally regulated local distribution, including
    retail metering. The Commission has no current experience or expertise
    on the mechanics of net metering. Congress should consider whether the
    responsibility could be better met by another agency, such as the
    Department of Energy.
        In addition to requiring the Commission to develop standards for
    net metering, S. 597 would also require that net metering systems
    comply with ``all applicable safety, performance, reliability, and
    interconnection standards established by the National Electrical Code,
    the Institute of Electrical and Electronics Engineers, and Underwriters
    Laboratories.'' These different sets of standards may or may not be
    fully compatible.
              iv. transmission service to intermittent generators
        Section 605 of S. 597 would amend the FPA to require the Commission
    to ensure that transmitting utilities do not penalize wind- or solar-
    powered generators ``for characteristics that are (1) inherent to
    intermittent energy resources; and (2) are beyond the control of such
    generators.'' Section 605 goes on to specify that prevention of such
    penalization would necessitate the Commission, at a minimum, to ensure
    that these intermittent generators: (1) are not penalized for
    scheduling deviations; (2) are assessed embedded costs only on the
    basis of kilowatt-hours generated, rather than capacity; and (3) are
    offered ten-year contracts for nonfirm transmission service.
        The Commission would be allowed to exempt a transmitting utility
    from the ban on penalizing scheduling deviations if that utility could
    demonstrate that scheduling deviations by intermittent generator
    customers were likely to have a substantial adverse impact on
    reliability. However, there would be a rebuttable presumption of no
    adverse impact where intermittent generators collectively constituted
    20 percent or less of the total generation interconnected with the
    transmitting utility's system.
        I agree with the concept that wind- and solar-powered generators
    should be able to compete on a level playing field with other types of
    generators. However, the issue of how best to address these difficult
    issues in today's new electricity markets is still evolving. As we move
    forward in developing any market rules that accommodate all forms of
    generation, including intermittent energy sources, we need flexibility
    to ensure that those rules work in a fair and nondiscriminatory
    fashion. In my opinion, legislation that would prescribe ratemaking in
    the degree of detail provided in section 605 may not be appropriate.
                                v. other issues
        S. 597 and S. 933 call for the Commission to promulgate a number of
    rules. Section 603(f) of S. 597 and sections 4(b) and 4(c) of S. 933
    would require that when promulgating these rules, the Commission would
    establish an advisory committee. The Commission is already subject to
    the notice and comment requirements of the Administrative Procedures
    Act when it promulgates rules. These requirements should provide
    adequate opportunity for involvement of interested persons and
    qualified experts, and the additional time and expense of conducting a
    parallel process under the Federal Advisory Committee Act may not be
    warranted.
                                 vi. conclusion
        I support the Senate Energy and Natural Resources Committee's
    efforts to address potential barriers to the entry of alternative
    technologies into the electricity markets. As discussed above, certain
    revisions may be appropriate to the specific language of S. 388, S.
    597, and S. 933. However, the Commission is committed to working with
    you to address those concerns and to offer any other assistance that
    you may need.

        The Chairman. Let me just introduce the other three
    witnesses we have on this subject. Ms. Elizabeth Birnbaum is
    the director of government affairs with American Rivers. Thank
    you for being here. Mr. Gerry Gray is the vice president with
    the Forest Policy Center with American Forests here in
    Washington. Thank you for being here. And Ms. Julie Keil is the
    director of hydro-licensing and Water Rights with Portland
    General Electric Company. Thank you for being here.
        Why don't you each go ahead and summarize your testimony,
    if you would, please.
        Ms. Birnbaum.

       STATEMENT OF S. ELIZABETH BIRNBAUM, DIRECTOR, GOVERNMENT
                        AFFAIRS, AMERICAN RIVERS

        Ms. Birnbaum. Good afternoon, Mr. Chairman and members of
    the committee. My name is Liz Birnbaum. I am the director of
    government affairs in American Rivers, a national river
    conservation organization with more than 30,000 members
    nationwide.
        We also chair the Hydropower Reform Coalition, a consortium
    of more than 80 conservation and recreation organizations from
    around the country with a combined membership of more than
    800,000. We appreciate the opportunity to testify here today.
        Our organizations strongly oppose any efforts to diminish
    environmental protections in hydropower licensing, either
    directly or through misguided process reforms. While we have
    participated in and encouraged administrative efforts to make
    the licensing process more efficient, we strongly disagree with
    the proposition that the faults in the process lie with State
    and Federal natural resource agencies.
        The two remaining in efficiencies are FERC's unwillingness
    to develop a single cooperative environmental review process
    involving all State and Federal agencies and the licensees'
    incentives to delay relicensing and withhold necessary
    information regarding environmental impacts of their projects.
    We appreciate the chairman's efforts to find ways to streamline
    the licensing process without causing additional environmental
    harm, but we would like to see further improvements to address
    these remaining problems.
        I would like to talk about three basic themes today. One,
    protect the public trust resources threatened by hydropower
    operations; two, improve the process without causing harm; and
    three, oppose rolling back environmental protections in the
    current licensing structure.
        First, I think that all the participants in this process
    will acknowledge that hydropower relicensing is a natural
    resource issue, a rivers issue, not simply an energy issue. The
    improvements made through relicensing at hydropower dams will
    have huge implications for hundreds of species, thousands of
    river miles, and millions of dollars in recreational
    opportunities for decades to come.
        In contrast, these decisions have a relatively small impact
    on energy generation, electric rates or industry viability. By
    requiring dam owners to build passage for fish, protect
    critical riparian habitat, adjust river flows to conform to a
    more normal pattern, and provide recreational access and
    opportunity, we can protect and restore valuable fisheries,
    native species diversity, recreational amenities, and natural
    ecosystem functions. At the same time, we can enhance economic
    opportunities, such as recreation, tourism, and ecological
    services.
        Because original licenses were issued before the enactment
    of modern environmental statutes and prior to our understanding
    of the impacts of dams on river ecosystems, virtually none of
    these dams meets modern environmental standards before
    relicensing. If awarded a license, a utility can monopolize a
    river for half a century with little oversight. We must take
    this once in a lifetime chance to set conditions that require
    hydro operators to modernize the way they operate their dams on
    our rivers.
        We are encouraged by the chairman's bill. And subsequent
    negotiations by his staff have begun to take a more rational
    approach to hydropower legislation. We will be happy to
    continue working with staff to meet the goals and reducing the
    time and cost of obtaining a license while improving
    environmental quality.
        The chairman's provision to allow alternative licensing
    conditions is a new benefit for the industry that we find
    reasonable, so long as it does not delay the licensing process
    and is available to all parties to the proceeding. We support
    the chairman's proposals to directly reimburse Federal resource
    agencies for licensing costs, to improve the collection of
    electric charges, to require development of cooperative process
    among FERC and the Federal resource agencies, and to address
    the key problem with the current relicensing process,
    inadequate information.
        Determining the necessary studies should be the province of
    the responsible resource agencies and not subject to the
    interpretations and biases of FERC. We would strongly oppose
    any provision that would require complex formal hearings.
        Such a requirement would not streamline the licensing
    process; it would only make it longer and more costly and would
    leave the public at a distinct disadvantage against the well-
    heeled resources of an electric generating corporation.
        While the chairman's legislative proposals will not further
    harm environmental quality, they are not likely to improve it
    significantly either. Therefore, we would urge some additional
    provisions that would improve the licensing process for
    environmental purposes: Grant shorter license terms or more
    flexible conditions within license terms; limit and condition
    the issuance of annual licenses; institute a royalty fee for
    the private use of public rivers; and reauthorize the office of
    public participation in the statute.
        The one thing that must be avoided in hydro-licensing
    legislation is the roll-back of existing environmental
    protections. In developing a balance of authorities in the
    Federal Power Act, Congress determined that some basic
    environmental protections must be afforded at every dam and
    should not be balanced away to promote cheap hydropower. Expert
    Federal and State resource managers established conditions
    based on substantial evidence to protect public trust
    resources. These basic protections form a floor above which
    FERC can balance license conditions in the public interest.
        Shifting these responsibilities to FERC would be
    inefficient and would change the standards for licensing. State
    and Federal agencies have considerable expertise in the
    relicensing arena. They work in the field on a specific river,
    as opposed to the FERC staff, who spend most of their time in
    Washington. There is little reason to believe that
    consolidation with FERC would either make the process faster or
    improve the outcomes.
        The good news is that relicensing provides significant
    protection to rivers with a low cost to power production.
    According to FERC's recent report, relicensing has reduced the
    average per project generation only 1.6 percent. Such losses in
    relicensing over the next 10 years would result in a .04
    percent reduction in the Nation's overall electricity
    generation.
        In any case, the amount of lost generation is significantly
    less than the 5 percent average fluctuation of energy demand
    caused by factors such as weather, fuel prices, and advances in
    technology.
        The losses in generation are comparable to those caused by
    installing a scrubber on a coal-fired plant. Being a good
    environmental steward is a legitimate cost of doing business.
    Unlike other industries, such as offshore oil development,
    mining or timber, hydropower licensees pay nothing for the use
    of public resources, our rivers. After 30 to 50 years, the
    initial capital investment in these projects is fully
    amortized. Asking that these dams make some small investment in
    environmental quality after decades of profitable operation is
    a reasonable and minor request. Paying for these changes
    continues to leave hydropower as the cheapest source of energy
    nationwide.
        In the scramble to find a magic bullet for the energy
    crises, we should be careful not to over rely on our nation's
    already troubled rivers. Through careful and deliberative
    evaluation involving the expertise of a range of agencies, we
    can bring hydropower dams up to modern environmental standards
    without compromising power generation.
        Thank you for the opportunity to speak.
        The Chairman. Thank you very much.
        [The prepared statement of Ms. Birnbaum follows:]
            Prepared Statement of S. Elizabeth Birnbaum, Director,
                      Government Affairs, American Rivers
                                  introduction
        American Rivers, a national river conservation organization with
    more than 30,000 members nationwide, strongly opposes any efforts to
    diminish environmental protections in hydropower licensing either
    directly or through misguided process reforms. We do support efforts to
    make the hydropower licensing process work better for all stakeholders
    and eliminate historic inequities in this complex regulatory process.
    These comments are also joined by the Hydropower Reform Coalition. The
    Hydropower Reform Coalition is a consortium of more than 80
    conservation and recreation organizations from around the country (see
    attachment). The Coalition was formed in 1992 with the purpose of
    improving river health and recreational opportunities through the
    licensing, relicensing, and regulatory enforcement of hydropower dams
    under the jurisdiction of the Federal Energy Regulatory Commission
    (FERC). Coalition members are national, regional and local conservation
    organizations, and together have a combined membership totaling more
    than 800,000.
        I would like to talk about three basic themes today, geared
    primarily toward the hydropower title of the Chairman's Energy Bill and
    subsequent discussions about revisions to that title, FERC's recently
    released report to Congress pursuant to Section 603 of the Energy Act
    of 2000, and the Administration's energy plan released in May:
        1. Protect our public trust resources--Hydropower harms rivers, but
    a strong process for relicensing can result in significant improvements
    to environmental quality;
        2. Improve the process without causing harm--The Commission should
    work cooperatively with federal and state agencies to improve licensing
    through administrative changes that seek a unified process, acknowledge
    diverse, multiple authorities and improve environmental quality. If
    FERC is unwilling to undertake this cooperative effort, Congress should
    require FERC to do so.
        3. Oppose environmental roll-backs--The current balance of
    authorities in hydropower relicensing is appropriate and effective;
    some proposed changes to that balance would threaten environmental
    quality.
                        hydropower affects public rivers
        Hydropower relicensing is a natural resource issue--a rivers
    issue--not simply an energy issue. The improvements and changes made
    through relicensing at hydropower dams will have huge implications for
    hundreds of species, thousands of river miles, and millions of dollars
    in recreational opportunities for decades to come. In contrast, these
    decisions have a relatively small impact on energy generation, electric
    rates, or industry viability.
        American Rivers and members of the Hydropower Reform Coalition are
    not anti-hydropower. We simply wish to ensure that these dams are
    operated to protect and restore river resources using best available
    technologies and best management practices. While decommissioning is a
    popular topic these days, we believe that dam removal will be the
    exception and not the rule.
        As early as 1908, President Teddy Roosevelt understood the need to
    safeguard our nation's rivers and helped to devise a system of periodic
    review to protect these national treasures.

              ``The public must retain control of the great waterways. It
            is essential that any permit to obstruct them for reasons and
            on conditions that seem good at the moment should be subject to
            revision when changed conditions demand.''

        More than 75 years later, the 9th Circuit Court of Appeals in
    Yakima Indian Nation v. FERC found that:

              ``Relicensing is more akin to an irreversible and
            irretrievable commitment of a public resource than a mere
            continuation of the status quo. Simply because the same
            resource had been committed in the past does not make
            relicensing a phase in a continuous activity. Relicensing
            involves a new commitment of the resource . . .''

        The impacts of hydropower dams on public trust resources are well
    known and well documented. The President's own plan acknowledges and
    catalogues the impacts of hydropower dams on natural resources.

              ``Hydropower, although a clean energy source, does present
            environmental challenges. Unless properly designed and
            operated, hydropower dams can injure or kill fish, such as
            salmon, by blocking their passage to upstream spawning pools.
            Innovations in fish ladders, screens, and hatcheries are
            helping to mitigate these adverse impacts. Ongoing dam
            relicensing efforts are resulting in community involvement and
            the industry's application of the latest technologies to ensure
            the maintenance of downstream flows and the upstream passage of
            fish. These efforts also have been successful in identifying
            and removing older, nonfunctioning dams and other impediments
            to fish movements.'' (President's Plan, 3-8)

        Because original licenses were issued before the enactment of
    modern environmental statutes and prior to our understanding of the
    impacts of dams on river ecosystems, virtually none of these dams meets
    modern environmental standards before relicensing. By requiring dam
    owners to build passage for fish, protect critical riparian habitat,
    adjust river flows to conform to a more natural pattern, and provide
    recreational access and opportunity, we can protect and restore
    valuable fisheries, native species diversity, recreational amenities,
    and natural ecosystem functions. At the same time we can enhance
    economic opportunities such as recreation, tourism, and ecological
    services.
        The widespread recognition of the environmental impacts of
    hydropower projects affirms the need for a careful review process that
    addresses some of the sins of the past. If awarded a license, a utility
    can monopolize a river for half a century with little oversight and no
    motivation to make environmental improvements. It's imperative to take
    this once-in-a-lifetime chance to set conditions that require hydro
    operators to modernize the way they operate their dams on our rivers.
                    relicensing--an important balancing act
        Because rivers are public resources with many competing interests
    and significant environmental issues, the licensing process for
    hydropower dams involves multiple stakeholders. Unlike most electricity
    generating technologies, hydropower does not have ``end of pipe''
    standards to ensure that the dam's operations do not unduly damage the
    environment. This is because every dam and every river is different,
    and generic standards cannot be applied to each project. The Federal
    Power Act (FPA), although commonly considered an energy statute, also
    occupies an important role in environmental protection. The statute was
    amended in 1986 to require FERC to give ``equal consideration'' to
    power (electricity generation) and non-power (fish and wildlife
    protection, recreation, etc.) benefits of the river. The economics of
    the hydropower facility should be taken into account by FERC in this
    balancing process.
        In developing this balance, Congress determined--and rightly so--
    that some basic environmental protections must be afforded at every
    dam, and should not be balanced away to promote cheap hydropower. Under
    these statutory requirements, expert federal and state resource
    managers establish conditions based on substantial evidence to protect
    public trust resources. Just as there are mandatory ceilings on
    emissions from fossil-fuel plants, these basic resource protections
    form a floor above which FERC can balance license conditions in the
    public interest.
        Sometimes referred to as mandatory conditions, these requirements
    assure that:
        (1) Fish can be passed upstream and downstream of a dam (FPA
    Section 18);
        (2) If the private dam is located on federally owned land, other
    purposes of the federal land are protected (FPA Section 4(e)); and
        (3) The dam complies with state-developed water quality standards
    (CWA Section 401).
        Both fish passage and federal lands protection have been part of
    the relicensing process since enactment of the Federal Power Act in
    1920.
        The current structure of the Act, which sets fishways apart as a
    special consideration, is in keeping with the law and practice that
    came to us from Europe at the time of settlement. Requiring millers--
    dam owners--to provide fishways at their own expense dates back many
    hundreds of years, based on the recognition that fish are equally
    important to commerce.
        The provision under Section 4(e) of the Federal Power Act that
    grants authority to land management agencies to ensure that projects on
    their lands meet current management goals and objectives is simple and
    based on common sense. Projects that are located on federal or tribal
    lands are already getting the benefit of cheap rent. In order to
    adequately manage the lands entrusted to them, federal land management
    agencies must have a say over how these projects are operated.
        The protection of water quality is a responsibility that has been
    delegated to the states under the Clean Water Act (CWA). Section 401 of
    the act ensures that private hydro projects will not interfere with
    state standards, by requiring that each federally licensed project
    receive a certification from the state where it is located,
    demonstrating that the project is consistent with the standards,
    including the designated uses for each water body. The Supreme Court
    has confirmed that standards may be numeric or narrative and include
    chemical, physical, and biological parameters.
        Any effort to shift these responsibilities to FERC would be
    inefficient and would fundamentally change the standards upon which we
    base these decisions. State and federal agencies have already developed
    significant expertise in the relicensing arena and work in the field on
    a specific river--as opposed to FERC staff who spend most of their time
    in Washington. In addition, FERC's mandate for ``equal consideration''
    might mean that these basic environmental protections would be assured
    only if they did not affect a utility's bottom line. Considering recent
    GAO findings, there is no evidence that consolidation with FERC would
    improve the process in any event.
                   facts don't support the claims of a crisis
        If we are worried about hydropower's impact on the environment,
    then where do we turn for energy? The good news is that changes to dam
    operations derived from relicensing can provide significant protection
    to rivers with almost no cost to power production. According to FERC's
    own report, relicensing has resulted in an average per-project
    reduction in generation of only 1.6% and an increase in capacity of 4%.
    Based on this track record, we can reasonably expect similar results
    from projects due to be relicensed over the next ten years (these
    represent 2.5% of the annual generation of the US). Such losses in
    relicensing would result in a 0.04% reduction in the nation's overall
    annual generation. In any case, the amount of ``lost'' generation is
    significantly less than the 5% average fluctuation of energy demand
    caused by factors such as weather, fuel prices, and advances in
    technology.\1\ We should not forget that these losses in generation are
    derived from comparing a baseline of operation that had NO
    environmental conditions to one with modern environmental standards--
    the losses in generation are comparable with those caused by installing
    a scrubber on the smokestack of a coal-fired plant. We need not trade
    healthy rivers for power production. We can have both.
    ---------------------------------------------------------------------------
        \1\ The mean net generation of electric utilities and non-utility
    power producers for 1990 to 1996 is 3,203,998 million kilowatt-hours,
    with a standard deviation of +/-159084.6 million kwh or
    +/-4.96%.
    ---------------------------------------------------------------------------
        Being a good environmental steward is a legitimate cost of doing
    business. Should the federal government guarantee profitability for
    hydropower utilities? If a project is already unprofitable because of
    market forces or because it is run poorly, should it be exempted from
    any environmental conditions? The answer to these questions is clearly
    no. According to the courts, ``There can be no guarantee of
    profitability of water power projects under the Federal Power Act;
    profitability is at risk from a number of variable factors, and values
    other than profitability require appropriate consideration.'' \2\
    ---------------------------------------------------------------------------
        \2\ Wisconsin Public Service Corp. v. FERC, 32 F.3d 1165, 1168 (7th
    Cir. 1994).
    ---------------------------------------------------------------------------
        Unlike other industries such as offshore oil development, mining,
    or timber, hydropower licensees pay nothing for the use of public
    resources--our rivers--and are not required to post any kind of bond to
    ensure that at the end of the projects useful life there is money to
    properly dispose of it. After 30 to 50 years, the initial capital
    investments in these projects are fully amortized. The only costs left
    to the licensee are basic operations and maintenance (the lowest of any
    electricity source) and environmental protection measures. Asking that
    these dams make some small investment in environmental quality after
    decades of profitable operation is a reasonable and minor request.
    Paying for these changes continues to leave hydropower as the cheapest
    source of electricity nationwide.
        It is simply a false threat to suggest that dams are being
    surrendered or abandoned due to the cost of environmental regulation.
    Since 1996, only three operating licenses have been surrendered--each
    because the facilities fell into disrepair or were damaged by flooding.
    According to FERC, since1993 ``no licensee has refused to accept or
    surrender their license citing project economics.'' \3\
    ---------------------------------------------------------------------------
        \3\ Written supplemental testimony of Doug Smith, FERC General
    Counsel, before the Senate Energy and Natural Resources Committee, 10/
    27/99.
    ---------------------------------------------------------------------------
        The Administration's own energy plan confirms that the principal
    factors limiting hydropower development have nothing to do with
    environmental regulation. The President's report explains that,
    ``Hydropower generation has remained relatively flat for years. The
    most significant constraint on expansion of U.S. hydropower generation
    is physical; most of the best locations for hydropower generation have
    already been developed. Also, the amount of hydropower generation
    depends upon the quantity of available water. A drought can have a
    devastating effect on a region that depends on hydropower. In fact,
    this year's water availability has been a contributing factor in
    California's electricity supply shortages.'' (President's Plan, 5-18)
        In the scramble to find a magic bullet for the energy crisis, we
    should be careful not to over-rely on our nation's already troubled
    rivers. Through careful and deliberate evaluation involving expertise
    of a range of agencies, we can bring hydropower dams up to modern
    environmental standards without compromising power generation.
                        solutions in search of problems
        Over the past several years, a number of legislative proposals have
    been put forward by members of the electric utility industry and most
    recently by FERC. We have consistently opposed those efforts. The
    common element of those reform bills has been to blame the resource
    agencies for costs and delays and to consolidate greater authority with
    FERC. We believe that these reforms address the wrong problem and
    therefore offer a poor solution to inefficiencies with hydropower
    regulation. Until recently, these proposals have been based on little
    more than anecdotal evidence and industry assertion. While, the
    publication of FERC's 603 Report offers new data and presents the first
    comprehensive look at the relicensing process in several years, it has
    been soundly criticized by the Government Accounting Office (GAO),
    federal and state agencies, and the environmental community, and offers
    no rigorous evidence or statistical verification for the claim that
    resource agency participation in the process creates major costs and
    delays.
                         critique of ferc's 603 report
        In November 2000, Congress required FERC within six months ``to
    undertake a comprehensive review of policies, procedures, and
    regulations for the licensing of hydroelectric projects to determine
    how to reduce the cost and time of obtaining a license.'' Congress
    specified action by the Commission, but the report filed in May 2001
    was explicitly a product of Commission staff (Report pg. 5). While it
    is entirely appropriate for staff to assist the Commission in the
    development of this report, we are troubled by the fact that the
    persons with decision-making authority--the Commissioners--have no
    ownership of this document.
        Congress also required the Commission to consult with other
    appropriate agencies, yet no draft was provided to those agencies for
    comment despite repeated pleas for cooperation. Although FERC includes
    agency comments in its appendix (as well as those from members of the
    public), it does not address these recommendations with any
    thoroughness, fails to include their recommendations or alternatives,
    and fails to provide any explanation of the consultation process.
        We are also troubled by an April report by the Government
    Accounting Office (GAO), which strongly criticized the Commission for
    failing to keep adequate records of its regulatory activities.\4\
    According to GAO's report, until FERC does a better job collecting data
    on the cost and timing of its process, ``FERC will not be able to reach
    informed decisions on the need for further administrative reforms or
    legislative changes to the licensing process.'' (pg. 17) This opinion
    was restated during a hearing of the House Energy and Commerce
    Committee along with a more specific GAO critique of the 603 Report.
    ---------------------------------------------------------------------------
        \4\ Licensing Hydropower Projects: Better Time and Cost Data Needed
    to Reach Informed Decisions About Process Reforms, U.S. General
    Accounting Office GAO-01-499, May 2001.
    ---------------------------------------------------------------------------
        In light of the GAO's indictment of FERC's data and record keeping,
    let me highlight several conclusions in FERC's report about timing and
    cost, some of which appear reasonable, others suspect.
    Timing Data
        The report suggests that Section 4(e) and 18 requirements by the
    federal resource agencies are not a major cause for relicensing delays
    (Report pg. 38). This is supported by an independent analysis by the
    Department of the Interior, which draws the same conclusion. The report
    does identify state agencies as being associated with significant
    delays, but it fails to show whether these delays are within the sphere
    of influence of those agencies or whether they are a victim of industry
    procrastination and delay. Other evidence would suggest the latter.
        We do know that license applicants have caused significant delay of
    the relicensing process by failing to provide complete license
    applications. Of the 157 relicensing applications filed by industry in
    1993, only nine provided sufficient scientific information about
    project impacts, forcing FERC to issue hundreds of additional
    information requests in the other 148 cases.\5\ The need to conduct
    further studies to complete their applications was a significant reason
    that there were major delays in these relicensings.
    ---------------------------------------------------------------------------
        \5\ Barnes, FERC's ``Class of '93'': A Status Report, Hydro Review
    (Oct., 1995).
    ---------------------------------------------------------------------------
        FERC's median time to respond to requests for administrative appeal
    or rehearing is 13.6 months, with a minimum of 6 months and a maximum
    of 62 months--more than 5 years. Other types of petitions also go
    unaddressed by the Commission for months or years. For instance, in one
    case environmental groups filed a petition to the Commission to
    initiate consultation under Section 7 of the Endangered Species Act
    four years ago and have yet to receive any response. In these
    situations, parties are prohibited from seeking judicial review until
    FERC acts, but cannot force FERC to act. In the meantime the
    environment continues to be harmed and legislative interpretations go
    unanswered.
    Cost Data
        FERC's section on costs is even more problematic. The report
    considers costs of the relicensing process to be limited to only those
    of the licensee and the agencies. They do not consider the cost to the
    public whether due to direct participation, or through the attendant
    impacts to the environment. They also offer no measure of what costs
    should be measured--no standard of analysis.
        Cost is closely linked to time. Due to the lengthy term of original
    hydropower licenses, those issued before the era of environmental
    consciousness have been largely insulated from the responsibility of
    paying for the environmental cost that they impose on society. No other
    major source of power--coal, nuclear, gas, or oil--has been so
    privileged. All these others have confronted their environmental
    obligations, and begun to internalize the costs. For hydropower,
    Congress has designated the issuance of a new hydropower license as the
    time when the maldistribution of costs and responsibilities is to be
    corrected.
        Delays in the process often save the project owners money in the
    short-run by maintaining status quo terms and conditions that allow the
    postponement of expenditures for mitigation. These savings come at an
    enormous expense to the environment, the public, and the tribes because
    of delayed mitigation, and provide a perverse incentive on the part of
    licensees to drag their feet and stonewall. Thus, it is often in the
    interest of the public and the environment to minimize licensing time--
    but finding ways to make the process more efficient should not override
    the need to protect other public interests in public resources.
        FERC's main evidence in support of its recommendation for ``one-
    stop shopping''--eliminating mandatory conditioning by other federal
    agencies--is the fact that projects with mandatory conditions incur
    higher mitigation costs per kilowatt of capacity. However, consistent
    with the criticisms outlined in the GAO report, this turns out to be a
    very superficial analysis. Do the two groups of projects analyzed
    (those with mandatories and those without) display any other
    differences? Are projects without mandatories smaller? Less
    controversial? Have they done less damage to the environment? In order
    to make any sense out of these numbers, one would have to organize the
    projects so that the only significant difference between the two groups
    is that one group had mandatory conditions and one did not. In any
    case, one must question whether FERC is suggesting that it would
    dramatically reduce those costs if it were the agency in charge? How
    would such efficiencies be found? Would that mean a reduction in
    environmental protection? FERC offers no specifics as to how the
    Commission would reduce costs to licensees but still maintain the same
    level of environmental protection.
    Clean Water Act
        In its 603 report recommendation on Clean Water Act Section 401,
    FERC demonstrates a complete misunderstanding of the Clean Water Act
    and a total disregard for state delegated authority. Water quality is
    inextricably linked to water quantity. The Clean Water Act requires the
    protection of physical, chemical and biological components of a water
    body. Protection of ``designated uses'' is a fundamental component of
    the Clean Water Act. Designated uses ensure that waters will be
    ``fishable, swimmable, and boatable''--uses that require that water be
    present in the waterway. Yet the Commission advocates limiting the
    definition of ``clean water'' to apply to only a few simple parameters,
    excluding water quantity and designated uses.
    One Stop Shopping--A Common Theme But a Bad Idea
        At no time in its history has the Commission had sole decision-
    making authority in hydropower licensing. The Federal Power Act has
    always been clear. The courts have consistently confirmed this
    plurality of decision-making over the past 10 years. The problem is not
    the multiple actors but FERC's unwillingness to cooperate and cede
    authority.
                         committee drafting principles
        American Rivers and the Hydropower Reform Coalition have been
    highly critical of hydropower legislation coming out of this committee
    over the past several years; however, we believe that the Chairman's
    bill and subsequent negotiations by his staff have begun to take a more
    rational approach. We will continue to work with his staff to ensure
    than any legislation developed by the Committee will meet the goals of
    reducing the time and cost of obtaining a license while improving
    environmental quality.
        While we continue to believe that the Chairman's legislative
    proposals will not further harm environmental quality, they are not
    likely to improve it significantly either. There is a great deal for
    industry to cheer about in this package. The requirement that resource
    agencies accept cheaper alternative mandatory conditions provided that
    they meet or exceed the resource management goals is generous and
    unprecedented. There is also a great deal in this package that should
    benefit everyone and lead to real streamlining. Proposals to require
    issuance of draft and final decisions from both FERC and the agencies
    are welcomed and should make things run more smoothly. There are fewer
    meaningful benefits to the environment but we look forward to working
    with staff on a number of the proposals below that we believe will make
    significant improvements.
    Alternative Conditions
        A provision that requires consideration of alternative mandatory
    conditions for addressing costs does not benefit environmental
    interests but it does not directly hurt them either. Unless a
    permissive administration with a bias toward energy development were
    willing to forgo critical environmental, recreational, and cultural
    resources, the standards currently under discussion for accepting
    alternative conditions would guard adequately against diminishing
    environmental protections. Such a provision does have the potential to
    create additional delays in the licensing process, and to that extent
    could harm environmental interests by deferring implementation of all
    environmental measures. We would urge that the provision be expressly
    coordinated with the agencies' existing processes for proposing and
    finalizing mandatory conditions and with draft and final NEPA analysis
    of the licensing decision in order to minimize delay.
        In addition, any provision that provides an opportunity to offer
    alternative conditions must contain provisions for participation of all
    stakeholders and not be limited to the licensee. Public participation
    has become a fundamental tenet of the hydropower licensing process and
    is consistent with every other procedure in the Federal Power Act. This
    section should also include a reciprocal provision that allows not only
    proposals for conditions that are equally protective but cost less but
    also proposals that are more protective but cost the same. This would
    not present a significantly greater burden on the resource agencies and
    would still be limited to consideration of alternative conditions,
    subject to the same requirements of substantial evidence, and leave
    significant discretion to the Secretary.
        We do not support inclusion of a new and undefined standard of
    ``sound science.'' The current standard of ``substantial evidence,''
    which is the one that must be met by FERC and is defined under the
    Administrative Procedures Act, is common and well-understood. ``Sound
    science'' would simply open up a whole new round of litigation. We are
    also unclear about the definition of electric ``reliability'' and
    believe that the term should be understood and defined before using it
    in statute. We would object to any definition that led to new peaking
    operations of a hydropower facility.
    Disposition of Licensing Charges
        Lack of resources and funding is the biggest contributor to
    resource agency difficulties with in the relicensing process. The
    Chairman's proposals to directly reimburse federal resource agencies is
    a critical first step in remedying this problem. The 1992 Energy Policy
    Act directed FERC to charge licensees a fee to cover the costs of
    agency participation in the relicensing process. However, this program
    has not gone forward as Congress originally intended. While those fees
    are being charged, the moneys are not making their way back to those
    agencies. This simple change will remedy the problem.
        The same amendment in 1992 also directed the reimbursement of state
    fish and wildlife agencies. FERC has taken no steps to collect or
    distribute those funds. We believe that this is a necessary
    improvement. We would also support including state water quality
    agencies in the Commission's cost recovery program.
        Industry has requested clarification of which agency costs are
    eligible for reimbursement. We support their position that those
    charges should not include FERC appeals or litigation costs and should
    instead be limited to participation in the relicensing process.
        The other major component to the amendments to collection of
    electric charges is returning the fees collected for the use of public
    lands back to the respected land managing agency for protection and
    restoration of headwaters. We strongly support this idea but offer two
    significant amendments to improve upon what the Chairman has already
    accomplished.
        The first addresses the need to charge a fair market price for the
    use of public lands. Currently industry pays only a token fee for the
    use of federal lands an average of $30 per acre. This does not
    accurately reflect the value of these mostly riparian lands, nor does
    it reflect the financial benefits derived from using these public
    resources. This fee is based upon twice the linear right-of-way fee
    charged for pipelines and power lines. We recommend the following
    amendment to address this problem:

              Section 10(e) of such Act is amended by inserting after ``for
            recompensing it for the use, occupancy, and enjoyment of its
            lands or other property'' the following: ``, based on the fair
            market value of such lands or other property, as determined by
            the Secretary of the Department administering such lands or
            other property.

        The funds dedicated to this restoration fund are limited to those
    currently earmarked for the Treasury, or 12.5% of the total collected.
    Currently 50% of the funds collected for the use of federal lands are
    dedicated to the Reclamation Fund, which benefits water development
    projects in the West. We believe that it is inappropriate for those
    moneys to be used for projects unrelated to licensed hydropower
    projects. Because hydropower projects on federal lands are located
    throughout the country and not simply in the West, we also believe that
    payments to the Reclamation Fund are inappropriate. For these reasons,
    we offer the following amendment in lieu of diverting payments to the
    Treasury:

              Section 17(a) is amended by replacing, ``the reclamation fund
            created by the Act of Congress known as the Reclamation Act,
            approved June 17, 1902'' with, ``a revolving fund to be
            administered by the Secretary of the department upon whose
            lands the project resides''.

        The rest of the provision about where the money should go and how
    it should be used requires no further amendments.
    Resource Studies
        We strongly support language to address an important problem with
    the current relicensing process--inadequate studies and information. He
    who controls the information controls the process, and without being
    able to require an applicant to provide certain types of information
    and studies, agencies are at a distinct disadvantage when developing
    conditions that meet their statutory mandates. To date, FERC has show
    an unwillingness to require studies by the license applicant other than
    those needed for FERC's own purposes. This leaves the resource agencies
    without the information necessary to meet their obligations.
        Inadequate information is a leading cause of delays in hydropower
    licensing proceedings. As mentioned above, of the 157 relicensing
    applications filed by industry in 1993, only nine provided sufficient
    scientific information about project impacts.\6\ The resulting delays
    have significantly harmed environmental quality by issuing annual
    licenses and delaying implementation of modern environmental
    conditions.
    ---------------------------------------------------------------------------
        \6\ Barnes, FERC's ``Class of '93'': A Status Report, Hydro Review
    (Oct., 1995).
    ---------------------------------------------------------------------------
        In our view, studies and information requested by a federal agency
    with authority under FPA Sections 4(e) and 18 or a state agency with
    authority under the Clean Water Act or the Coastal Zone Management Act
    should be the province of those agencies and not subject to the
    interpretations and biases of FERC. The current ambiguity over who
    determines what studies are ``reasonable and necessary'' simply creates
    a struggle about who has final say over study requests. We oppose any
    provision that leaves this determination with FERC.
    Joint Agency Procedures
        Cooperation among FERC and state and federal resource agencies will
    greatly improve the efficiency of the relicensing process. Under a
    charter signed in October 1998, the four principle federal agencies
    involved in relicensing--FERC, Interior, Agriculture, and Commerce--
    formed an Interagency Task Force to Improve Hydroelectric Licensing
    Processes (ITF). This committee was established to coordinate federal
    and state mandates. In July of 1999, the ITF established a Federal
    Advisory Committee to provide a forum for non-federal entities
    consisting of industry, states, tribes and environmental groups, to
    review and provide feedback on the activities of the ITF.
        This forum concluded its work at the end of 2000, publishing six
    guidance documents covering a broad range of issues that confront
    hydropower regulation. The process also resulted in several rulemakings
    and formal policy changes within each of these agencies. We believe
    that these reforms represent significant steps forward in improving the
    relicensing process, but they have not been given much time to work.
    Additional reforms, particularly by FERC, are still desirable. American
    Rivers supports a licensing process that is structured around NEPA with
    draft and final decisional documents, complete information for all
    participants, flexible but reliable timeframes, and transparency of
    analysis.
        Unfortunately, as an independent agency, FERC cannot be compelled
    by the administration to make administrative or regulatory changes.
    This fact was recently confirmed by the President's energy plan. ``The
    NEPD Group recommends that the President encourage the Federal Energy
    Regulatory Commission (FERC) and direct federal resource agencies to
    make the licensing process more clear and efficient, while preserving
    environmental goals.'' (President's Plan emphasis added, 5-18 and 5-
    22). While the President can ``direct'' federal resource agencies to
    act, just as his predecessor did through the efforts of the ITF, he can
    only ``encourage'' FERC. Congressional action is necessary. To date,
    FERC has been unwilling to undertake major changes to its licensing
    process other than those that reduce its own costs and time such as the
    ALP. If FERC were required to issue a staff draft license decision
    document along with its draft NEPA document, parties would have a
    meaningful and substantive document upon which to comment and the
    Commission would be able to better share its NEPA document with other
    agencies instead, of treating it as a draft decision.
        We oppose any provision that would requires complex, formal
    hearings. Such a requirement would not streamline the licensing
    process--it would only make it longer and more costly. The public does
    not have the resources to participate in such formal adjudicatory
    proceedings, leaving the public at a distinct disadvantage against the
    well-healed resources of an electric generating corporation.
                   additional legislative changes to consider
        American Rivers continues to believe that legislation is
    unnecessary to improve the licensing process for hydropower dams;
    however, if the Senate insists on moving forward with a legislative
    package, we believe that it should include provisions that will improve
    the environmental status quo. We offer the following additional
    elements that should be included:

       Grant shorter license terms or more flexible conditions

        Some members of the Coalition believe that the Commission and
    Congress should consider reducing the maximum term for license renewal
    from 50 to 15 years in an effort to improve the licensing process.
    There are several reasons to suggest this dramatic change. First,
    energy policy has changed since the Federal Power Act (FPA) was first
    enacted in 1920. The nation is no longer developing new hydropower on
    the same scale or investing significant financial resources in capital-
    intensive development. In fact, we now find ourselves in an
    increasingly competitive marketplace with short investment horizons and
    rapid exchange of assets. Fifty-year license terms are not consistent
    with these changes.
        Second, our knowledge of complex ecosystems and engineering is
    expanding and evolving at a phenomenal pace, enabling us to make more
    informed and effective decisions about resource management and energy
    production, but also requiring that management change when new
    information is developed. Licenses that lock in management decisions
    for 50 years preclude agencies from applying this ever-growing
    knowledge and understanding as it emerges. In contrast, shorter license
    terms allow modification of management decisions on a more regular
    basis to accommodate new information.
        Finally, the varied interests competing for use of our nation's
    rivers continue to increase. Hydropower is compatible with some of the
    interests, incompatible with others. Licenses of 15 years would provide
    FERC an opportunity to revisit on a more regular basis the uses to
    which our rivers are put in light of changing values.
        These factors have led some to conclude that shorter license terms
    would certainly lead to improvements in the licensing process. With a
    reduced term, stakeholders would not treat licensing as a ``once in a
    lifetime'' opportunity, but instead would view it as an ongoing
    process. This would be far more conducive to adaptive management,
    allowing greater flexibility in license conditions with regular
    monitoring and more frequent opportunity for technical advances.
    Therefore, we offer the following amendment:

              Section 6 and section 10(i) of The Federal Power Act are each
            amended by striking ``fifty years'' and inserting ``thirty
            years for original licenses and not more than 15 years for new
            licenses'';
              Subsections (d) and (e)(1) of such Act are each amended by
            striking ``twenty'' and inserting ``5''.
              Section 15(e) of such Act is amended by striking ``not less
            than 30 years, nor more than 50 years'', and inserting, ``not
            more than 30 years for original licenses and not more than 15
            years for new licenses''.

        While the reduction of the license term is arguably a dramatic
    proposal, we still believe that a more regular review of license
    conditions than the current 30 to 50 years would diminish the stakes of
    each subsequent review and would be more consistent with other
    regulatory proceedings such as those for municipal solid waste
    facilities or thermal power plants.
        Toward that end, we recommend that FERC be directed to institute an
    adaptive management program that would specifically allow states to
    ensure compliance with changing water quality standards on a regular
    basis or to allow federal agencies to revisit endangered species
    protection measures on a more regular basis. While at first blush this
    would seem to require additional work, we believe that once the initial
    relicense is issued following 30 to 50 years of unfettered operation,
    subsequent proceedings would be less cumbersome, involving mere
    refinements. We offer the following amendment as an example of this
    concept.
        Section 15(e) of such Act is amended by adding after the last
    period, ``all licenses issued shall be reviewed every five years by the
    Commission with the cooperation of relevant state and federal agencies
    who are authorized to recommend or prescribe license conditions, and
    pursuant to such review, the Commission and state and federal agencies
    shall reopen the license as necessary to adequately and equitably
    protect, water quality standards, new endangered or threatened species
    listings, and address other circumstances unforeseen in the original
    license.''

       Limit and condition the issuance of annual licenses

        As noted earlier, annual licenses provide an incentive for
    licensees to delay the licensing process by allowing continued
    operations without regard to current environmental standards. To
    minimize this incentive, FERC should require interim terms and
    conditions to be incorporated into annual licenses, limit the duration
    and number of annual licenses, and raise the standards for obtaining an
    annual license. Without a backstop to the process, licensees may allow
    things to drag on and avoid doing studies in order to receive annual
    licenses on old terms and conditions. Short of a Commission policy or
    rule to this effect, Congress should compel the Commission to take
    steps in this direction. We offer the following amendment as an example
    of this concept.
        Paragraph (1) of section 15(a)(1) of The Federal Power Act is
    amended by replacing, ``of the existing license,'' with, ``required to
    meet state water quality standards'' and inserting at the end of the
    subsection, ``Notwithstanding other sections under this Act, the term
    of any new license issued under this subsection shall be reduced by one
    year for each annual license issued by the Commission.''.

       Institute a royalty fee for the private use of public rivers

        Hydropower continues to be one of the least costly forms of
    electricity on the market, largely because hydropower generators do not
    pay any costs for fuel. However, rivers belong to the public and the
    public should therefore be compensated by dam owners for the ability to
    profit from this resource. In the natural resources arena the concept
    of a royalty payment is consistent with oil and gas leasing, mineral
    leasing, and timber harvesting. These industries pay a royalty while
    still mitigating for their impacts to the natural environment.
    Hydropower should do the same. A small royalty payment of 3 mils per
    kilowatt hour would have little effect on power prices and would
    provide a return to taxpayers for the use of a public resource. A
    portion of those fees could be returned to the state where the project
    resides for river restoration, parks development, and other public
    benefits. We offer the following language as a proposed amendment:
        Section 10(e) of The Federal Power Act is amended by adding the
    following at the end thereof:
        ``In addition to the annual charges under the preceding provisions
    of this subsection, the Commission shall require the licensee of each
    project under this part to pay to the United States for deposit into
    the General Fund of the Treasury a royalty in the amount of 3 mills per
    kilowatt hour of electricity generated by the project. Such royalty
    shall be paid at such times and in such manner as the Commission shall
    prescribe. Fifty percent of the amount of such royalties received with
    respect to licensed projects in each State in each fiscal year are
    authorized to be appropriated to the State for purposes of fish and
    wildlife enhancement projects in such State.''

       Reauthorize the Office of Public Participation

        The licensing process significantly taxes the resources of the
    general public. These stakeholders represent a wide array of interests,
    have differing levels of understanding of the process, and sometimes
    lack the technical expertise to meaningfully participate in all aspects
    of the licensing process. In collaborative proceedings, when non-
    governmental organizations are often expected to set forth coordinated
    positions, managing such a diverse group of interests and making
    difficult decisions can be quite challenging and often leads to delay.
        Congress should reauthorize funding for FERC to provide the public
    with compensation for ``. . . reasonable attorney's fees, expert
    witness fees, and other costs of intervening or participating in any
    proceeding before the Commission . . .'' consistent with 16 U.S.C.
    Sec. 825q. We offer the following amendment to Section 319(b) of the
    Federal Power Act:
        Paragraph (2) is amended to read as follows:

              ``(2) The Commission shall reimburse any person granted
            intervener status in any proceeding under Part I of this Act
            for reasonable attorney's fees, expert witness fees, and other
            costs incurred by such person to intervene and participate in
            such proceeding.''

        Paragraph (4) is amended to read as follows:

              ``(4) There are authorized to be appropriated to the
            Commission to carry out this section such sums as may be
            necessary. If, during any fiscal year, the Commission
            determines that the reimbursement for costs referred to in
            paragraph (2) cannot be provided because of insufficient
            appropriations, the Commission shall establish a reasonable
            schedule of fees that license applicants shall pay to the
            persons referred to in paragraph (2) to reimburse such persons
            for such costs.''
                                   conclusion
        Our nation's rivers and fisheries are facing a crisis of slow but
    steady extinction. Resource agencies with expertise in these areas are
    in the best position to address this threat. We can find better ways to
    generate hydropower and new sources of energy but we cannot bring back
    species once they have gone extinct. Reforms of the hydropower
    licensing process must focus on improved relations among the agencies
    and appropriate incentives for licensees rather than on reduced
    protections for our river resources. We applaud the Chairman for his
    efforts in this direction and encourage the Committee to follow his
    lead.

        The Chairman. Mr. Gray.

        STATEMENT OF GERALD J. GRAY, VICE PRESIDENT FOR POLICY,
                            AMERICAN FORESTS

        Mr. Gray. Thank you, Mr. Chairman, members of the
    committee. I am Gerry Gray, vice president for policy at
    American Forests. American Forests is the oldest national
    citizens' conservation group in the country. Our mission is to
    help people improve the environment with trees and forests. And
    we do this through programs that provide information, tools and
    resources to both urban and rural community groups across the
    country.
        The need for greater public and private investments in the
    protection, restoration and maintenance of watersheds is a very
    important concern to both us and many of our partners across
    the country. I am delighted to be here today to present some of
    our views on a specific section of S. 597, the Comprehensive
    and Balanced Energy Policy Act. That section deals with
    providing a portion of hydroelectric charges back to the
    reservation where these projects are for watershed protection
    activities.
        I have several points I would like to make. First, there is
    a great need for investment in watersheds. These are the
    natural assets, the capital, that provides the water resource,
    the ecological service to society. These assets are being
    degraded. There has been a lack of investment in them. And we
    need to find mechanisms to reinvest in these watersheds.
        There is also a need to reinvest in the rural communities,
    the human and social capital that will provide the ability for
    these communities to help sustain these watersheds. We called
    this a community-based approach. And it integrates the needs of
    the communities with the help of the watersheds. And we think
    it is the best way to approach some of these concerns.
        Section 702 contains critical elements of the community-
    based approach, which I will discuss later. But we do believe
    it needs to increase the amount of funding to really address
    the needs of these watersheds. To highlight the need for
    investment in watersheds, I would like to discuss the Sierra
    Nevada ecosystem project for a second. This 1996 study was one
    of the first in the Nation to look at large-scale ecosystems.
        And it found that the Sierra Nevada system produces about
    $2.2 billion worth of commodities and services from natural
    resource production activities, primarily related to water,
    timber, recreation, tourism, grazing, and other agricultural
    activities.
        About 60 percent of that value was from water, about $1.5
    billion a year. The study further found that of all of those
    activities, only water did not provide resources to Federal and
    local governments to reinvest in the maintenance of those
    watersheds. The SNEP report referred to the lack of funding for
    watershed maintenance as an under-investment problem. And it
    concluded that a massive and directed investment of time and
    money is needed to sustain and enhance the Sierra Nevada
    ecosystem and communities. It also concluded that there needs
    to be additional mechanisms to promote investment to maintain
    these important Federal lands watersheds.
        On a smaller scale in the northern part of the Sierra, the
    Feather River watershed, about 3.2 million acres and its 71-
    percent federally managed as national forest-national parks,
    had some similar analysis. And it found that there, too, water
    was the most significant economic resource from the watershed.
    And yet the watershed continued to be degraded, and there was
    no reinvestment in maintaining watershed health.
        Further research showed that with investments in improving
    watershed health, they could both increase water storage and
    improve water supply from the watershed. A group called the
    Feather River Coordinated Resource Management Group, a
    consortium of 21 local, regional, and national entities has
    developed a number of initiatives over the past 15 years to
    look at ways to improve watershed health and productivity.
        Recently it put together a list of short- and long-term
    activities that are necessary to maintain watershed health in
    the Feather River. And these activities mirror pretty much
    those outlined in section 702 of the bill. And we would call
    this a community-based approach once again, because it attempts
    to strengthen the ties between ecosystem health or watershed
    health and community well-being.
        These elements include activities to analyze and assess
    watershed conditions and trends, to highlight on-the-ground
    priorities dealing with endangered or threatened resources,
    roads issues, soil erosion and other things. It includes a very
    innovative multi-party monitoring process to ensure
    accountability and learning through these efforts, and to build
    trust among the diverse interests at the local level. And it
    includes a skill training or job training component to help
    build local capacity to undertake these types of watershed
    improvement activities.
        Finally, I would like to mention that we are very much in
    support of this innovative mechanism to redirect these funds
    from hydroelectric charges to watershed maintenance activity
    directly in these watersheds. Our estimate, however, is that it
    will provide less than about $1 million a year to all the
    national forest lands across the country, just insufficient to
    really accomplish a great deal.
        Therefore, we call this a very positive first step, but we
    believe that we need to look for additional mechanisms to
    increase both public and private investment in watershed
    protection.
        We would urge Congress and the Federal Government to
    examine the economic value of these ecological services being
    provided in these watersheds on Federal lands to identify the
    beneficiaries of those values, both within and beyond the
    boundaries of the watersheds, and to look for new mechanisms
    through which the beneficiaries of these activities can invest
    their fair share in watershed restoration and maintenance.
        Thank you very much, Mr. Chairman.
        The Chairman. Thank you very much.
        [The prepared statement of Mr. Gray follows:]
       Prepared Statement of Gerald J. Gray, Vice President for Policy,
                                American Forests
        Mr. Chairman and Members of the Committee:
        I am Gerry Gray, Vice President for Policy at American Forests, the
    oldest national citizens' conservation organization in the U.S. The
    mission of American Forests is to help people improve the environment
    with trees and forests. We do this through programs that provide
    information, tools, and resources to urban and rural communities to
    protect, restore, and maintain healthy ecosystems. Over the past five
    years, we have worked with many partners in forest-based communities to
    advance understanding of community-based approaches to ecosystem
    management. The need for greater public and private investment in the
    protection, restoration, and maintenance of watersheds has been an
    important concern of our partners across the country, in various
    landscapes and ownership contexts. I am delighted to be here today to
    present our views on Section 702 of the Comprehensive and Balanced
    Energy Policy Act.
        My comments are based in part on American Forests' national policy
    agenda for ecosystem restoration and maintenance. One of our major
    policy goals is ``to increase public and private investment in
    ecosystem restoration and in building the capacity of communities to
    maintain healthy ecosystems.'' My comments are also based on a paper
    that I recently co-authored with Leah Wills of Forest Community
    Research and Plumas Corporation in northern California. The paper,
    entitled Exploring Reinvestment from a Community-based Watershed
    Perspective,\1\ presents the view that watersheds, or ecosystems, are
    capital assets that are being degraded and need investment so they can
    continue to provide ecological services critical to the environmental,
    social, and economic well-being of communities.
    ---------------------------------------------------------------------------
        \1\ In Gray, G., Enzer, M., and Kusel, J. 2001. Understanding
    Community-Based Forest Ecosystem Management. Haworth Press, Binghamton,
    NY.
    ---------------------------------------------------------------------------
        Key points I would like to make today are:

       There is a great need for investment in the protection,
            restoration, and maintenance of watersheds. Water resources
            provide tremendous economic values, and there has been a lack
            of investment in maintaining the capacity of watersheds--the
            natural capital--to continue providing these natural resources
            and economic benefits.
       There is also a need to invest in communities--especially
            their human and social capital-to protect, restore, and
            maintain healthy watersheds.
       We believe that a community-based approach--an approach that
            integrates the needs of the watersheds, or ecosystems, and
            communities--is the best approach to maintaining watershed
            health.
       Section 702 contains critical elements of a community-based
            approach. It directs a continued annual flow of financial
            resources toward a range of essential activities that will help
            build capacity in rural communities and provide for analysis,
            planning, implementation, and monitoring of projects that will
            improve watershed health.

        We would like to thank the Chairman for including this provision in
    the Comprehensive and Balanced Energy Policy Act of 2001. This
    provision demonstrates federal leadership in recognizing the need for
    increased watershed investment, identifies an innovative source for
    funding, and promotes a community-based approach for planning and
    implementing the resource management activities.
                       the need for watershed investment
        Water-supply issues are becoming critical in many areas of the arid
    West, while in the East and South, water-quality concerns are driving
    new ecosystem management approaches. California's extremely high water
    values provide a dramatic example of the need for investment to
    maintain the capacity of ecosystems to provide these resources. This
    example is highly relevant to discussion of Section 702 because
    significant portions of California's key watersheds, particularly the
    headwaters of major waterways, are located on federal lands, such as
    national forests and national parks. The example is not unique to
    California, however. The U.S. Forest Service has increasingly been
    recognizing the importance of national forests as the source of water
    supplies, particularly drinking water, for many of our nation's major
    metropolitan areas. The agency's growing emphasis on water is
    illustrated by its recent large-scale watershed initiative, which
    focuses on learning how to protect and manage twelve pilot watersheds
    through collaborative efforts with other federal, state, and local
    entities.
        The California water example makes a strong economic case for
    maintaining the environmental health of watersheds upstream of large
    water and hydropower supply dams. The largely federally managed
    watersheds of California are critical for catching, storing, and
    channeling low-sediment flows of otherwise dispersed precipitation into
    elaborate and expensive water supply and hydropower production
    facilities. Combining the natural (watershed) and manufactured
    (engineered) infrastructure enables water and hydropower purveyors to
    produce billions of dollars of wealth through water and power sales.
    Affordable water and hydropower, in turn, support a vast array of other
    economic endeavors in California, most notably a multi-billion dollar
    agricultural economy.
        Although national policy has long recognized the value of federal
    lands as producers of high-quality water, neither national nor state
    policy has developed a way to foster investment in maintaining these
    water-supply watersheds. The 1897 Organic Act that clarified the role
    of the national forests focused on two primary purposes: ``securing
    favorable conditions of water flows, and to furnish a continuous supply
    of timber'' for the nation. Since then, a variety of mechanisms has
    been developed to obtain revenues from timber, recreation, forage, and
    other resource production activities and reinvest them in restoration
    and maintenance of federal lands. Examples of these mechanisms include
    direct payments to local jurisdictions, off-budget trust funds, yield
    taxes, and user fees. However, a limited amount of funding from these
    mechanisms has been directed toward the maintenance of federal lands
    for water production (quality and quantity). Support for watershed
    maintenance has only been provided through direct federal
    appropriations, and this amount has been insufficient to protect
    watershed health.
        The congressionally authorized and funded Sierra Nevada Ecosystem
    Project (SNEP) developed estimates of the economic values of natural
    resource activities in the Sierra Nevada ecosystem. As one of the
    nation's first efforts to estimate economic values for a large-scale
    ecosystem (20 million acres), the 1996 SNEP study broke new ground. The
    study examined and compared the value of natural resource production
    activities related to water, timber, recreation and tourism, and
    grazing and other agriculture. It found that the Sierra Nevada
    ecosystem produces approximately $2.2 billion worth of commodities and
    services annually and that water accounts for $1.5 billion--more than
    60 percent of the value. Most of the water values accrued to users of
    hydroelectricity and municipal and agricultural water supplies,
    virtually all of who were located outside the boundaries of the Sierra
    Nevada ecosystem. Water production activities generated no funding to
    help to federal and local governments maintain watersheds or
    communities. The SNEP report referred to the lack of funding for
    watershed maintenance as an ``under-investment problem'' and concluded
    that ``a massive and directed investment of time and money'' is needed
    to sustain and enhance the Sierra Nevada ecosystem and communities
    (SNEP, p. 1057). The report also concluded that ``additional mechanisms
    to promote reinvestment are necessary to maintain and enhance the
    Sierra Nevada ecosystem so that it can continue to provide the socially
    desirable outputs.''
               a community-based approach to watershed management
        Over the past 15 years, the Feather River Coordinated Resource
    Management (FR-CRM) group, a consortium of 21 local, regional, and
    national entities, has developed a number of initiatives exploring
    collaborative approaches to watershed management in the Feather River
    watershed. Their initiatives seek to strengthen local capacity,
    identify watershed reinvestment mechanisms and priorities, and forge
    alliances with groups beyond the watershed's boundaries. They have
    explored multi-issue, multi-scale approaches to investing in watershed
    management through efforts with regional networks, such as the
    California Urban Forest Advisory Council, the California Brownfields
    Communities working group, and the Regional Council of Rural Counties,
    and national networks. They have also worked with the Communities
    Committee of the Seventh American Forest Congress, a national network
    of organizations focused on the interdependence of forests and
    communities.
        The 3.2 million-acre Feather River watershed is the northernmost
    drainage in the Sierra Nevada; 71 percent is federally managed as
    national forests and national park land. The watershed delivers 4.6
    million acre-feet of unimpaired flow to the famous 1,330.1 MW
    ``Stairway of Power,'' currently owned by Pacific Gas and Electric
    Company (PGandE) and the California Department of Water Resources.
    PGandE serves 600,000 customers using the Feather River hydrosystem as
    part of its electrical supply grid. The Feather River watershed
    historically supported a premier timber management and woods products
    industry, and ``Feather River Country'' is increasingly attractive for
    recreational developments. Recent research shows that investments in
    improving watershed health could increase the water storage in and
    supply from the watershed. Dr. Jeff Romm, an economist at the
    University of California at Berkeley, found that ``in certain
    conditions, riparian and meadow restoration actually can enhance water
    storage more efficiently than dam augmentation.'' And, Dr. Linda Bond,
    a consulting hydroecologist in Sacramento, and Dr. Rick Kattelmann, a
    hydrologist at the Forest Service's Pacific Southwest research station,
    estimated that investing in watershed health improvements could provide
    at least an additional 250,000 acre-feet or, 7 percent more useable
    water annually, to downstream water users. These watershed-specific
    analyses mirror SNEP's earlier Sierra-wide findings and document water
    as the most economically important output from the Feather River
    watershed, yet the environmental health of the watershed continues to
    degrade.
        In 1995, the FR-CRM began an initiative to identify the most
    effective short- and long-term reinvestment activities for maintaining
    the health of the Feather River watershed. Based on the group's years
    of experience, it concluded that a wide range of watershed management
    activities need to be funded under an effective reinvestment program.
    These activities include: watershed rehabilitation projects, planning,
    economic incentives, critical habitat protection and enhancement,
    stewardship education, project effectiveness monitoring and watershed
    trend monitoring, resource condition assessments, job training and
    development, and testing and evaluation of best management practices,
    with some money set aside for unallocated expenses, such as
    contingencies or emergencies. The breadth of the activities recognizes
    that reinvestment efforts must integrate environmental and economic
    concerns by developing comprehensive assessment information at the
    outset of projects and comprehensive monitoring information at the
    conclusion.
        Beyond identifying its local reinvestment priorities, the FR-CRM
    has also developed white papers for community forestry and watershed
    groups as a means of moving reinvestment strategies forward on a
    broader, regional basis. Its most in-depth work was sponsored by the
    Collaborative Learning Circle, a regional consortium of community
    forestry and watershed groups in the Pacific Northwest. The list of
    watershed management activities developed through this initiative is
    very consistent with the activities identified in Section 702 for the
    protection of water resources.
                            comments on section 702
        Given the need I have described for investment in watershed
    protection, restoration, and maintenance, we are pleased with
    provisions in Section 702 that direct federal funds from the proceeds
    of hydropower charges directly to watershed protection activities on
    federal lands. Our understanding is that the amount of funding
    available from these proceeds will not be very large, however. Based on
    annual proceeds of hydropower fees on the national forests in FY 2000,
    we anticipate that the 12\1/2\ percent that would be directed toward
    watershed protection will amount to less than $1 million per year under
    the current fee structure for hydropower facilities. This amount of
    funding, although helpful, will not accomplish a great deal in
    addressing the needs of watersheds throughout the nation. Therefore, we
    support the provision as a positive step, but we believe Congress and
    the federal government should do more to generate revenues for
    investment in watershed protection, restoration, and maintenance. We
    believe that greater investment is needed, to ensure that watersheds
    are not degraded, and that those who derive economic benefit from a
    watershed, or ecosystem, should pay their fair share of the maintenance
    costs. With respect to water resource issues, we believe it is critical
    for the federal government to examine the economic value of the
    ecological services being provided by federal-land watersheds, to
    identify the beneficiaries of those values, both within and beyond the
    watershed boundaries, and to identify mechanisms through which those
    beneficiaries can invest their fair share into watershed restoration
    and maintenance activities.
        The watershed protection activities in Section 702 comprise
    important elements of community-based approaches, which seek to
    strengthen ties between ecosystem health and community well-being.
    These elements include assessment activities to understand watershed
    conditions and trends; on-the-ground activities to address high-
    priority resource needs; multiparty monitoring of water protection
    activities to ensure accountability and learning, as well as build
    trust among diverse interests involved in the process; and job training
    to help develop a skilled workforce and job opportunities in rural
    communities. The provisions that allow the appropriate federal agency
    to make grants or enter into cooperative agreements or contracts with
    non-profits, small businesses, or other cooperative entities within or
    near watersheds are also important to meet the goal of building
    community capacity.
        Finally, I would like to suggest two specific changes to the list
    of watershed protection activities:

       For item (F), add ``riparian and upland forests'' to the
            list of land areas on which activities for erosion control and
            restoring hydrologic function might be done. The condition of
            these forest areas can greatly impact the health and function
            of a watershed.
       For item (E), add ``on public and private lands'' to the
            language. It is important for watershed assessments to include
            all lands within a watershed to fully understand investment
            needs and priorities.

        Thank you for the opportunity to testify on this legislation. I
    would be happy to respond to any questions.

        The Chairman. Ms. Keil, why don't you go ahead?

    STATEMENT OF JULIE KEIL, DIRECTOR OF HYDRO-LICENSING AND WATER
               RIGHTS, PORTLAND GENERAL ELECTRIC COMPANY

        Ms. Keil. Chairman Bingaman and other members of the
    committee, thank you for the opportunity to testify today. I am
    the director of hydro-licensing and water rights for Portland
    General Electric Company, a modestly sized investor owned
    utility based in Portland, Oregon. We own five FERC license
    projects. These form the cornerstone of our resource portfolio
    that allows us to provide efficient and economical services to
    our customers.
        Senator Smith was kind enough to mention before our
    aggressive conservation efforts. The portfolio includes that
    along with large investments in wind and the other resources
    that you heard about this morning.
        I have appeared before Congress twice before on this topic.
    I have a sincere hope that the next time I do it I will be here
    to discuss with you all the benefits that we see from the
    changes that you have enacted this session. The time has become
    only more urgent for us to enact these changes. Over the next
    15 years, one-half of the non-Federal hydro capacity, nearly
    29,000 megawatts of energy, must undergo the relicensing
    process. PGE alone, despite our modest size, we are relicensing
    nearly 600 megawatts all before the year 2006.
        Unlike the previous Congresses that I spoke before, the
    current discussion is based on a deep and, I think, well-
    informed record before you, based on my testimony and the
    testimony of others. It is consensus driven and, most
    importantly, bipartisan in nature. We are hopeful that this
    spirit of bipartisanship will produce a balanced bill this
    year.
        I want to especially thank Chairman Bingaman and Senator
    Craig, along with my home State Senators, Wyden and Smith, for
    their commitment and efforts to try and reach consensus. But I
    must emphasize that absent legislative reform of the FERC
    relicensing process, hydro's role in the Nation's energy supply
    is in jeopardy.
        As you have heard today, hydropower is our largest and most
    commercially viable renewable resource. And I want to emphasize
    again that it would be a shame to increase other renewables to
    the detriment of hydro. You need to rely on that base that was
    talked about earlier.
        More than any other form of power produce, it also provides
    a myriad of other benefits, including recreation, flood
    control, and irrigation. It is also emissions free, which, in
    the time of ongoing concern over greenhouse gases, cannot be
    overlooked.
        All across the West, utilities are struggling to keep the
    lights on and to provide the reliable power that is the engine
    of economic growth. The margin for error these days is
    perilously thin. In these circumstances, hydro's unique
    reliability attributes have taken on increased importance.
    Unlike most thermal power projects, hydropower projects can be
    turned on and off almost instantaneously. This is a critical
    component of a system that must exactly match generation to
    load every minute of the day and every day of the week.
        While we are committed to other renewables and to
    conservation, none of those sources provide the flexibility and
    system support that hydropower projects provide for us in the
    West. Despite these benefits, America is in danger of losing
    significant hydropower capacity and operational flexibility at
    a time when it is most needed. Characterized by excessive costs
    and delays, the Federal hydro-licensing system threatens to
    reduce generation capacity and operational flexibility in
    projects throughout the Nation.
        You might well ask, how did we get to this point? Simply
    put, the process fails to balance the environmental impacts of
    hydro projects with the crucial energy and non-energy values of
    the resource. It suffers, as Mr. Robinson mentioned, from
    dispersed decision-making authority and an inability to balance
    competing values. The net result is that no one has the
    authority to speak on behalf of the public interest in general,
    no one has the authority to make that final balance.
        In relicensing our largest hydro project, Pelton Round
    Butte, 11 agencies, each with a single mandate and mandatory
    conditioning authority over some or all of the project, have a
    role to play and have been involved. No one is responsible for
    making their various mandates consistent. No one has the
    authority to look at the broader picture and make sure that
    important energy benefits are considered in the exercise of
    those mandates. To call the process a three-ring circus does
    not do justice to the complexity that we face.
        To take the analogy one step further, in my role I juggle
    many interests. I am responsible for providing reasonably
    priced and reliable service to PGE's customers. I must also
    ensure that the company's investors get a fair return on their
    investment in the company. And I must negotiate terms and
    conditions, which is what I do on a daily basis, which reflect
    PGE's deeply held environmental stewardship ethic.
        Our goal in relicensing is to make the environmental
    footprint of the project as small as possible while still
    maintaining a viable project.
        My agency counterparts, on the other hand, often juggle
    only one ball, the protection of natural resources. This
    fundamental disparity is at the core of the hydro-licensing
    conundrum. You will find attached to my written testimony many
    other examples of how the process fails, and I would strongly
    encourage you to read that attachment.
        You will undoubtedly hear the argument that the problems
    with hydro-licensing can be resolved solely through
    administrative means. I have to disagree. And I do have
    firsthand experience in this arena. I have served 3 years as a
    member of the Federal Advisory Committee that advised the
    Interagency Task Force and on a parallel level have been deeply
    involved in the National Review Group founded by EPRI, which
    has explored many different for administrative reforms.
        The problem is they simply do not address the fundamental
    problem with the system. The system as it is now benefits no
    one. It certainly does not serve the interests of energy
    production and, I would strongly argue, ill serves the
    environment as well, as environmental protection delayed is
    protection denied.
        To craft a process that truly advances all interests,
    energy and environment, legislative solutions are necessary.
    For the hydro industry, our number one priority is to reinject
    balance into the licensing process, to make sure, if you will,
    that everyone has more than one ball to juggle, that everyone
    in the process must balance and consider competing and
    difficult interests.
        Our other priorities include scientific administrative
    review of mandatory conditions, deadlines for timely
    submission, coordination of the environmental review process
    under NEPA. The two legislative proposals you have before you,
    S. 71 and S. 597, both address these needs in a variety of
    ways. The question that we face now is, can these two
    approaches be merged in a way that will allow us to wisely make
    the most difficult of decisions: How do we provide for the
    energy needs of today while protecting and enhancing precious
    environmental resources for the future?
        The industry stands ready to work with the committee and
    with other interests, and we want to encourage you to continue
    the bipartisan efforts to date. Keeping the lights on in the
    Northwest and throughout the Nation is not a partisan issue.
    And it demands your prompt attention.
        Thank you.
        [The prepared statement of Ms. Keil follows:]
    Prepared Statement of Julie Keil, Director of Hydro-licensing and Water
                   Rights, Portland General Electric Company
        Chairman Bingaman, Ranking Member Murkowski, Members of the
    Committee, thank you very much for giving me the opportunity to appear
    before you today to discuss legislation that has been introduced in the
    Senate that would improve the Federal Energy Regulatory Commission's
    hydroelectric relicensing process.
        I appear before you today in two capacities. First and foremost, I
    am Director of Hydro Licensing and Water Rights for Portland General
    Electric Company. PGE is an investor owned utility based in Oregon,
    serving more than 700,000 customers in the Portland metropolitan area
    and the Willamette Valley. PGE owns 5 FERC-licensed hydroelectric
    projects. The capabilities of these projects form the cornerstone of
    our ability to provide efficient and economical service to our
    customers.
        I am also here representing the hydropower industry. As a former
    President of the National Hydropower Association, I have participated
    over the years in hundreds of discussions with industry colleagues and
    non-industry stakeholders as to the challenges and opportunities facing
    hydropower in the 21st century. I am a member of the Federal Advisory
    Committee (FACA) that worked with the Interagency Task Force towards
    administrative improvements to the hydro relicensing process;
    similarly, I am a member of the EPRI National Review Group that has
    also explored administrative relicensing process reform. In addition,
    Portland General is an active member of the Hydroelectric Licensing
    Reform Task Force, a coalition of public and investor-owned hydropower
    generators drawn from the memberships of the American Public Power
    Association, the Edison Electric Institute, and the National Hydropower
    Association. As such, my testimony today reflects the sentiments of a
    broad cross-section of the hydropower industry.
        PGE is also a member of WaterPower: The Clean Energy Coalition, a
    group of over 660 consumer, labor, environmental, farming and other
    organizations that recognize the need to improve the hydro relicensing
    process. At the local level, PGE has been a key participant in numerous
    state task forces aimed at improving the process of state participation
    in the relicensing of hydro projects.
        The issue of hydro relicensing improvement is not new to this
    committee. In oversight and legislative hearings held before this
    committee during the previous two Congresses, a detailed record has
    been compiled as to the complexity, costs, delays, and conflicting
    mandates inherent in the FERC relicensing process. The energy crisis
    that currently plagues California and the Pacific Northwest has only
    underscored the need for and importance of Congress acting as soon as
    possible to reform the relicensing process so as to preserve consumer
    access to clean, reliable, and cost-efficient hydropower.
        The urgency surrounding this issue has not dissipated with the
    passage of time. In fact, with each passing year the stakes increase
    considerably. Today, as we look at the next 15 years, one-half of all
    non-federal hydroelectric capacity--nearly 29,000 MW of power (enough
    to serve 29 million homes)--must undergo the FERC relicensing process.
    This includes 240 projects in 38 states, much of it in Western states
    where power supply is a major concern. Portland General alone is in the
    process of relicensing nearly 600 megawatts, all before 2006. We are
    not unusual in this respect.
        What has changed, however, is the bipartisanship that now
    characterizes efforts to improve the relicensing process. All of us
    within the hydropower industry are encouraged by this shift towards a
    bipartisan consensus on hydro relicensing. The fact that both
    Republican and Democratic-sponsored Senate energy policy packages
    introduced earlier this year contain sections on hydro relicensing
    improvement is a testament to the important consumer benefits to be
    gained from relicensing reform. We are hopeful that this spirit of
    bipartisanship will produce a balanced, comprehensive, substantive bill
    this year. I want to especially thank Chairman Bingaman and Senator
    Craig, and my home-state Senators Wyden and Smith, for their commitment
    to this issue and good-faith efforts to date at trying to reach
    consensus. The fact is, hydropower has played--and must continue to
    play--a key role in our nation's energy policy; and absent legislative
    reform of the FERC relicensing process, that role is in jeopardy.
        Hydropower accounts for about ten percent of the nation's
    electricity and over 80 percent of its renewable energy. The benefits
    of hydropower, and its continued importance to our nation's
    environmental and energy policy objectives are well documented.
    Hydropower is not only our largest, renewable energy resource; it is
    low cost and efficient; it is a purely domestic resource; and it
    provides Americans with abundant recreational opportunities, as well as
    many flood control and irrigation benefits. It is also an emissions-
    free resource, which in a time of ongoing concern over greenhouse gases
    cannot be overlooked. In 1999, hydro displaced the emissions of 77
    million metric tons of carbon; that is the equivalent of removing 62.2
    million passenger cars, nearly 50% of the current fleet, from our
    nation's roadways. In addition, emissions-free hydropower generation
    helps us avoid significant amounts of Nitrogen Oxide (NOX)
    and Sulfur Dioxide (SOX), which are major contributors to
    decreased air quality.
        As California and the West continue to grapple with an energy
    supply insufficient to meet growing consumer and industrial demand, it
    is another of hydropower's attributes that has taken on increased
    importance: its reliability. The management of the nation's electric
    grid depends upon fast, flexible generation sources like hydropower to
    meet peak power demands and to restore service after a blackout.
    Hydropower's ability to go from zero power to maximum output quickly
    and predictably makes it exceptionally good at meeting changing loads
    and providing ancillary electrical services.
        Despite these multiple benefits, our supply of hydropower is waning
    and America is in danger of losing significant hydropower capacity and
    operational flexibility at a time when it is most needed. As we face
    rising energy prices, increased levels of pollution, energy shortages
    and reliability concerns, we must consider ways to counter these
    trends. In short, now is the time for policymakers at the federal level
    to fix the hydro relicensing process, for it is this process that poses
    the greatest threat to the future viability of this important resource.
        As documented in recent Congressional hearings and most recently by
    FERC in its Section 603 Report, the relicensing process suffers from
    dispersed decision-making authority and an inability to balance
    competing values. The bottom line is that costs, delays, and
    conflicting mandates inherent in the process threaten to reduce
    generation capacity and operational flexibility throughout the nation.
    As we lose megawatts and operational flexibility, we must rely on less
    efficient generation sources that both cost more and produce greenhouse
    gas and other emissions.
        How did we get to this point? Why such a dysfunctional process?
    While there is no shortage of explanations, most of it can be boiled
    down to one unfortunate reality: the relicensing process fails to
    properly balance the environmental impact of hydro projects with the
    crucial energy and non-energy values of the resource.
        Since 1986, FERC has been required, under the Federal Power Act, to
    give ``equal consideration'' to a variety of factors when issuing hydro
    project licenses and relicenses. This balancing authority requires FERC
    not only to consider the power, economic, and development benefits of a
    particular hydro project, but also to consider energy conservation and
    the protection, mitigation of damage to, and enhancement of fish and
    wildlife. In other words, under Federal law, FERC has the
    responsibility and authority to strike a balance between power and
    environmental values. If this were the provision of the Federal Power
    Act that governed in this situation, relicensing might have a chance to
    succeed. The courts, however, have interpreted the Federal Power Act so
    as to prevent any balancing from taking place. The courts, in effect,
    have given Federal resource agencies unilateral authority to set
    ``mandatory'' conditions on FERC relicenses. FERC has no opportunity to
    question the basis of mandatory conditions set by the agencies, or to
    fit those conditions into the final license.
        This would not be a problem if federal resource agencies, when
    imposing a mandatory condition, considered the many factors that FERC
    is required to examine pursuant to the Federal Power Act. However, this
    is simply not done. While all of the agency personnel with whom I have
    worked over the years have been intelligent, well-intentioned people,
    their statutory mandates simply do not permit them to look beyond the
    narrow resource areas they are charged to protect. The net result is
    that no one is balancing. No one has the authority to look at the big
    picture of how hydro fits into our national energy policy. I go back to
    my earlier observation: in today's energy-short climate, where every
    megawatt counts, this is a situation that must be remedied, and
    remedied soon.
        A brief example from my experience may serve to illustrate. In
    relicensing PGE's Pelton Round Butte Project, 11 agencies each with a
    single focus and mandatory conditioning authority over all or part of
    the project have been involved. No one is responsible for making their
    various mandates and authorities consistent. As importantly, no one has
    the authority to look at the broader picture and make sure that
    important energy benefits are considered in the exercise of those
    mandates. To call the process a three ring circus does not do justice
    to the complexity we face.
        Attached to my written testimony is a compilation of recent
    relicensing experiences, reflecting the problems many of our hydropower
    colleagues have witnessed first hand with the current relicensing
    process.* For example, the National Marine Fisheries Service last year
    imposed a fish passage requirement on the Enloe Dam project license in
    Washington that was contrary to the wishes of a Congressionally
    authorized regional collaborative planning council. Look at
    PacifiCorp's North Umpqua project in Oregon where the relicensing
    process took over 10 years. Even though a settlement was recently
    reached in this proceeding, relicensing process improvements could have
    resulted in smoother settlement negotiations, at far less cost and
    resulted in investments being made in environmental improvements rather
    than in study upon study upon study.
    ---------------------------------------------------------------------------
        * The attachments have been retained in committee files.
    ---------------------------------------------------------------------------
        Some have suggested that the problems with the FERC relicensing
    process can be solved solely through administrative, rather than
    legislative means. I disagree. And I draw that conclusion having
    invested considerable time and energy in recent years in search of
    substantive administrative remedies. As I mentioned earlier, for the
    last three years I have been a member of the Federal Advisory Committee
    (FACA) that worked with the Interagency Task Force towards
    administrative improvements to the hydro relicensing process;
    similarly, I am a member of the EPRI National Review Group that has
    also explored administrative relicensing process reform. While the EPRI
    NRG and an ITF successor group continue to explore administrative
    reform, I have come to the following conclusion: properly developed and
    implemented administrative remedies can certainly help on a number of
    fronts and should be encouraged. But taken alone, administrative
    reforms can not fully address the fundamental and substantive problems
    with the process.
        These thoughts were echoed in a letter that was sent earlier this
    year to members of this Committee, signed by me and the other 5
    industry FACA representatives, expressing the following assessment of
    the ITF's work product. In that letter we said:

              While the [ITF] reports themselves are helpful, they do not
            resolve the fundamental conflict inherent in the existing
            system of government oversight of hydropower projects, nor will
            they assure maintenance of this reliable and low-cost source of
            electricity . . . The reforms necessary to achieve substantive
            improvements in the licensing of hydroelectric facilities can
            best be obtained through legislation addressing the Federal
            Power Act.

        Let me say once again: legislative fixes are necessary if we are to
    reform the hydroelectric relicensing process in a manner satisfactory
    to most stakeholders.
        So, what legislative fixes are needed? For the hydro industry, the
    number one priority is to re-inject balance into the relicensing
    process--a balance between environmental protection and the all-
    important energy and non-power benefits of hydro projects. Both of the
    legislative proposals that are before this Committee address this need,
    albeit in different ways and to varying degrees.
        S. 71, the ``Craig bill'', which also serves as Title VII of S.
    388, requires agencies to take into consideration project benefits,
    including economics and power values, system reliability, air quality
    and flood control, and requires the agencies to document consideration
    of these factors. It does not require agencies to subordinate their
    natural resource responsibilities to these factors, it simply requires
    them to take other factors into account. The hydro industry supports
    this concept and believes it would secure the requisite balance that is
    lacking in an environmentally compatible manner.
        Title VII of S. 597, the Bingaman bill, seeks balance through
    introducing the concept of an alternative mandatory condition. The bill
    requires agencies to adopt applicant-drafted alternatives that provide
    equal or greater environmental protection; are based on sound science;
    and will either cost less to implement than the original condition or
    result in less loss of generating capacity than the original condition.
    We support this concept with the following qualifications:
        i) it is important that the environmental standard not be too
    restrictive so as to disqualify what might otherwise be the most
    effective approach to achieving an environmental goal;
        ii) since a mandatory condition does not generally impact capacity
    at a project, the criteria for an alternative should be ``less loss of
    electric generation, capacity or operational flexibility;''
        iii) if an alternative must be based on sound science, then a
    Secretary's rejection of an alternative should also be based on sound
    science; and
        iv) in the case of a disputed issue of material fact, there is a
    need for a hearing on the record.
        With these changes, the ``alternative condition'' language of the
    Bingaman bill could be an effective and useful tool to encourage
    innovative approaches to regulations without sacrificing important
    environmental outcomes.
        On a related note, some have suggested that any party should be
    allowed to propose an alternative mandatory condition. We disagree.
    Allowing any party to do so would not only clog the system with dozens
    upon dozens of alternatives, but it also ignores the fact that other
    parties will already have had ample opportunities to propose license
    conditions in the proceeding. At the end of the day, it is the
    applicant who must decide whether to accept a license with the
    condition or to reject it; accordingly, it is the applicant and the
    applicant alone who should have the opportunity to put forth a least-
    cost alternative.
        Other industry legislative priorities include:
    Scientific Review of Mandatory Conditions
        Industry believes that mandatory conditions should be grounded in
    the best available scientific evidence. As such, federal resource
    agencies should be required to subject each condition both to
    appropriately substantiated scientific review based on best available
    and current empirical data or field-tested data and to peer and public
    review. The Craig bill gets us there, requiring a scientific basis for
    all conditions and peer review. As for the Bingaman bill, our above-
    mentioned qualifications to the alternative condition section would
    insert a requisite grounding in ``sound science.''
    An Objective Administrative Review Process for Mandatory Conditions
        Usually, under the current relicensing regime, federal resource
    agency field biologists are the ones who draft mandatory conditions,
    without any opportunity given for an objective administrative review.
    In order to shed greater light on the formulation of mandatory
    conditions, federal resource agencies should be required to:

       provide notice of draft conditions;
       provide an opportunity for a hearing on the record;
       consider all comments received; and
       include comments in the documentation submitted to the
            Commission as evidence.

        The Craig bill provides for administrative review of contested
    conditions before the issuance of a final order. This review could both
    improve and shorten the relicensing process by eliminating the
    likelihood for post-license litigation. While such administrative
    review is absent from the Bingaman bill as introduced, we are pleased
    that Chairman Bingaman and his staff have indicated a willingness to
    revisit such concepts in a revised bill.
    Establishment of Deadlines for the Timely Submission of Mandatory
            Conditions
        We must get away from excessively lengthy relicensing proceedings--
    some taking more than 26 years. Under current FERC regulations,
    resource agencies are already required to meet deadlines for submission
    of conditions; rarely, however, do agencies adhere to these deadlines.
    To be effective, these deadlines must be codified through amendment to
    the Federal Power Act. The Craig bill sets firm deadlines for the
    submission of draft and final mandatory conditions, which is a concept
    we support. While the Bingaman bill does not set such deadlines, we
    support the notion of FERC issuing an estimated schedule for all
    subsequent actions by the applicant, FERC, resource agencies and other
    parties--a notion that Chairman Bingaman and his staff are currently
    considering.
    Coordination of the Environmental Review Process Under NEPA Into One
            Document
        Finally, there is a palpable need for greater coordination among
    agencies with jurisdiction over the hydro relicensing process. This is
    especially the case in the area of environmental review. In order to
    avoid duplication of efforts, we would recommend legislative efforts,
    such as those contained in the Craig bill, to confirm FERC's
    responsibilities as lead agency for environmental reviews of hydro
    projects under NEPA, including a requirement that FERC set deadlines
    for submitting input on environmental review by Federal, state and
    local agencies. NEPA coordination is currently absent from the Bingaman
    bill, but is under consideration by Chairman Bingaman and his staff; we
    would encourage its inclusion in any final legislation.
        The question then for this Committee is, can elements be drawn from
    the Craig bill and the Bingaman bill in a way that would substantively
    address the problems with the current process in a manner fully
    compatible with environmental law? In answering this question, the
    hydropower industry encourages Chairman Bingaman and Senator Craig, and
    all the members of this Committee, to sit down and forge consensus
    legislation. The hydropower industry stands ready and willing to assist
    in this effort as needed. What is most important, is that the
    extraordinary work done by Senators Bingaman and Craig to date not fall
    prey to partisanship. The energy supply problems in my region, and
    throughout the nation, are not partisan issues and demand prompt
    attention. Accordingly, I urge the Committee to continue its good faith
    efforts and pass consensus language on hydro relicensing reform this
    summer.
        In conclusion, I would like to offer the following thoughts on the
    relationship between energy priorities and natural resources. The river
    and fisheries resources administered by hydro project operators are
    very important ones, and essential and long-lasting commitments are
    being made in relicensing processes. Portland General and the
    hydropower industry as a whole take seriously their role as stewards of
    the rivers we are privileged to use. Licensees go to great lengths to
    involve stakeholders and members of the public in licensing and
    relicensing processes. These consultations take years and, without
    question, natural resource issues constitute the bulk of those
    discussions. Ultimately, the majority of direct and indirect
    expenditures made by licensees are spent on environmental protection,
    mitigation and enhancement measures.
        Some rhetorically argue that the hydropower industry wants to
    ``roll back'' environmental regulations in this process. That is
    absurd. With hydropower process improvements, resource enhancement and
    protection will continue. But they must continue in a process that also
    recognizes and protects the value of the product that is the subject of
    the relicensing in the first place. We can and must achieve balance in
    this arena. We strongly believe that healthy rivers and hydropower can
    coexist and we continue to work toward that end.
        Time is short. As we look to self-sustaining energy strategies, now
    is the time for policymakers to better incorporate hydropower into the
    nation's energy mix. We urge you to pass hydro relicensing improvement
    legislation this Session. It is a goal that can benefit hydro
    producers, the environment and consumers, and one that all Americans
    should support.
        Thank you.

        The Chairman. Thank you very much.
        Thank you all for your testimony. Let me just ask one
    question here and then defer to Senator Craig. Mr. Robinson,
    you indicated in your testimony that under the court rulings
    that have come down, that if the Commission were to conclude
    that one or more of the mandatory conditions that have been
    imposed would render a project inconsistent with the public
    interest, then the commission's only course would be to deny
    the license application. Am I correctly understanding what you
    said?
        Mr. Robinson. yes.
        The Chairman. Has there been any circumstance where that
    has occurred, where an agency has imposed a mandatory condition
    which you felt was so out of line that you went ahead and
    denied a license application?
        Mr. Robinson. I think the very scenario that you bring up
    is one that goes to some of our longest running relicensing
    actions. It is really not a viable option to deny a license at
    relicensing. We are not sure where the project would go. So
    what we have to do is to continue to try to facilitate a set of
    conditions that will allow for a sustainable project and one
    that does meet that public interest standard. And sometimes
    that takes a number of years.
        The Chairman. So instead of denying the license, you wind
    up just prolonging the pre-licensing process.
        Mr. Robinson. Well, we continue to work with all the
    parties that are providing conditions to try to get a license
    that meets that public interest standard. And that does at
    times--from project to project can take some time. I would note
    that we are the only agency that is required to balance all
    those conditions and meet that standard when we issue that
    license. And sometimes that is a difficult standard to meet,
    when you are receiving mandatory conditions that do not have
    that same standard of review.
        The Chairman. Okay.
        Senator Craig.
        Senator Craig. Thank you, Mr. Chairman. And to all of you,
    thank you for your valuable testimony. Obviously the issue of
    licensing hydro projects is of great concern to all of us and
    to all of you who are here. We appreciate your testimony.
        First of all, Mark, I want to thank you and one of your
    colleagues, John Katz, Office of General Counsel.
        Mr. Chairman, recently we had a very difficult situation in
    Idaho, and these gentlemen facilitated in a settlement process
    between a investor-owned utility and a Federal agency that was
    most helpful. And that was greatly appreciated by Idaho. And
    Idaho consumers and rate payers, I suspect, were collectively
    the beneficiary of that.
        Mark, there have been many studies recently that address
    loss of generation. Some say it is 4 percent, some say it is 8
    percent. Mr. Bettenberg referenced that as it relates to the
    consequence of FERC's current process. Are there other effects
    in the relicensing process that is aside from the loss of
    generation that have not received the appropriate attention?
        Mr. Robinson. I think the answer is yes. In fact, I know
    the answer is yes. The easiest thing to determine, when you
    look at a relicense, is the effect on generation, the effect on
    capacity. Those are numbers that you can pick out pretty
    quickly.
        What you cannot do as easily, and in fact no one has really
    attempted to do this, is what the effect of relicensing and
    changed conditions on how the project operates, what that does,
    the ability of that project to factor into the reliability of
    the system, to provide for peak load requirements, and to just
    be a flexible component of the electric generating system that
    that project exists within.
        That is, for a hydropower project in particular, is so
    interrelated to changing hydrological conditions that it is
    hard to separate it out. But there is no doubt that, when you
    take a project that has been operating with great flexibility
    within an electric system and you put a condition on it that
    says you will now operate what is called run of river, in other
    words, no longer adjust the reservoir elevation to satisfy
    power demands, that you have reduced its ability to be a factor
    in system reliability and peak load demand. That has not really
    been studied.
        Senator Craig. I think we can all focus on numbers or
    percentage of loss of generating capability. And that is
    probably whey we have gone that route instead of the ability to
    operate some flexibility.
        Mr. Robinson. That is correct.
        Senator Craig. Mr. Bettenberg, your colleague sitting next
    to you today filed some lengthy written testimony with the
    committee. Have you had a chance to review that testimony?
        Mr. Bettenberg. I read it over quickly last night. Yes,
    sir.
        Senator Craig. Have you had a chance to read Mr.
    Bettenberg's, Mark?
        Mr. Robinson. Yes, sir.
        Senator Craig. Is there anything in Mr. Bettenberg's
    testimony that you would like to address or that you believe
    needs to be clarified in order for this committee to be more
    fully and completely informed on the issue? And I am talking
    generally about agency responsibility. That is a question of
    you, Mark.
        Mr. Robinson. Okay. There were a couple points, and I will
    try to be brief on them. And I heard them repeated at----
        Senator Craig. The reason I am following this line of
    questioning, Mr. Chairman, because I am using all of the other
    testimony as a template to question Mark based on how FERC sees
    these kinds of relationships.
        Mr. Robinson. Okay. One of the statements that was made is
    that there is no difference in the time required to relicense
    between a project that contains mandatory conditions and those
    that do not. If you look grossly at the statistics, in fact,
    that is correct. However, given the number of projects we
    relicense and the number of different things that can cause
    delay, one delay masks another.
        In the grand scheme of things, the issuance of a section
    401 certificate under the Clean Water Act really drives the
    train in about 40 percent of our projects. I mean, that is the
    cause of the largest delay. But inside of that, inside of that
    delay, clearly the receipt of 4(e) conditions, which runs about
    17 months on the average, when the commission has asked for
    those within about 2 months, leaving you about a 15-month delay
    on average when we receive 4(e) conditions, it is a delay. And
    a delay is a delay is a delay. And we cannot do anything about
    that.
        So to say that there is no difference between the two
    really does not look at it in fine enough detail. And what we
    found, what we did, is that you have about a 15-month period in
    there, on average, where we do not receive 4(e) conditions,
    just as an example. That is one instance.
        The second thing I would like to bring up is the commitment
    in the testimony, and again as expressed here, that conditions
    will be provided within 60 days after we establish a notice
    that says we are ready for your condition, which is consistent
    with our regulations and what we would like to see those
    conditions come in.
        And then a second commitment, that they will come in with
    their modifications to those conditions 60 days after the draft
    NEPA document, and then a commitment to come in after the final
    EIS with their ultimate conditions. Well, that is three bites
    at the apple. We would like to have those conditions 60 days
    after we establish that we are ready for those conditions.
        Senator Craig. Let me go to a similar line of questioning
    with the testimony that was given by Ms. Birnbaum. Did I do
    that right, Liz? Thank you.
        Have you had the opportunity, Mark, to review Ms.
    Birnbaum's testimony, either her testimony filed here today or
    she recently gave some, I think it was June 27, before the
    House? And I was fascinated by many parts of her testimony, but
    particular with her discussion of the Federal Resource Agency's
    mandatory conditions and how they are used by Federal agencies
    to, in her words, ``form a floor above which FERC can balance
    license conditions.''
        Do you have any thoughts in relation to that concept? I
    thought that was an interesting statement as it related to the
    overall process.
        Mr. Robinson. Yes, sir, I do. It projects a visual in my
    mind. If you look at it as you set the floor from which you
    balance, it projects one type of image. The actual image is
    this: If you have a--if you can think of it as a scale, like
    a--I am a biologist. So I will say a triple beam balance type
    of a scale, which is a long stick with a point in middle where,
    you know, you balance things.
        What really happens is, you come in one side of that
    balance, and you set those conditions. Well, that will move
    that up and down on one side. Once those are set, it is pointed
    to, and it also sets the other side of the balance. Those non-
    developmental--I am sorry, those developmental types of issues,
    like power production, irrigation, safety, those things someone
    mentioned from the table earlier.
        So it does not exactly set the floor; it actually sets the
    point that you are going to have on the power production sides
    by setting the point that you are going to have for the
    environmental protection.
        I hope that was somewhat clear.
        Senator Craig. Well, I think I understand it. Because that
    was my frustration, agencies coming in with mandatory
    requirements, I understand that. But it does change the
    circumstance----
        Mr. Robinson. It certainly does.
        Senator Craig [continuing]. Under which an ultimate license
    can be formed and ultimately a project operated.
        I will return to you. I have more questions.
        Mr. Robinson. Go right ahead.
        Senator Craig. All right. Let me give you an opportunity,
    Mark, to respond to what I considered to be a very charge that
    Ms. Birnbaum made.
        And certainly, Ms. Birnbaum, you, too, can respond.
        And this came from her June 27 testimony in the House. She
    asserts that, again in her words, ``FERC over relies on what is
    characterized as the public interest.'' And you certainly have
    mentioned that today, Mark. ``But is little more than best
    professional judgment clouded by institutional biased.''
        I believe that was your quote, Ms. Birnbaum.
        She continues in her testimony to assert that the
    Commission's decisions are often made in a black box and are
    arbitrary and capricious. I guess I would have to say, do you
    know what she is talking about here? Has American Rivers ever
    formally raised this with the Commission and given particulars
    so that it could respond to those kinds of allegations?
        Mr. Robinson. I did notice that in her statement. It did
    not escape me, I tell you. I am quite surprised at that.
        Senator Craig. Well, they are not fighting words, but they
    certainly are illustrative of a process or a condition.
        Mr. Robinson. I am surprised at those statements. We have
    worked with American Rivers and others for a number of years to
    develop the process that we have now. And I cannot believe that
    anybody at this table would say that the FERC licensing process
    is anything other than one of the most public-intensive,
    public-involvement, above-the-table, transparent regulatory
    systems in place here in D.C. today.
        We have--and as a result of that, you get an enormous
    amount of process, and you get more time, more cost, which of
    course now generates the criticism that we have. But that is
    the truth of it.
        And I would like to just go one step farther, if I could,
    because another criticism we hear from American Rivers, and
    hopefully I can address it and maybe will never hear it again,
    but we might, is that the expertise only exists with the
    agencies. There are two aspects of the expertise that come into
    play in licensing a hydropower project on the environmental
    side. And it is more than the environment, but just on the
    environmental side.
        One set of expertise rests with the agencies. There is no
    doubt about it, and we rely on it. And we would propose nothing
    that would diminish that input to the process. That is what
    goes on with those resources locally. They know where the fish
    are. They know where the elk range. And we have to have that
    information to make good judgments and good decisions about
    these projects.
        The other set of information is what does a hydropower
    project do to those kinds of resources? We have without doubt
    the greatest concentration of environmental expertise. There
    are 80 more people just like myself with advanced degrees in
    environmental sciences that exist back at the Commission, who 5
    days a week and at least 8 hours a day work on hydropower
    licensing from an environmental perspective. They are
    professionals. We have that expertise, and we know what
    hydropower projects do to those resources.
        If you combine those two, we have the best possible chance
    of issuing a license that meets the public interest standards.
    Neither one can stand alone. And hopefully American Rivers will
    appreciate that and make note of that from this point forward.
        Senator Craig. Liz, in fairness to you, certainly you are
    entitled to respond.
        Ms. Birnbaum. Thank you. I wanted to comment on the
    elements of my earlier testimony that you commented on. The
    institutional bias referred to, as is pretty clear, based on
    the fact that FERC simply does not deny hydropower licenses.
    They are a licensing agency. And they are supposed to be
    deciding whether or not a hydropower project should be placed
    where it is proposed. In fact, they do not deny licenses. They
    are much more of a hydropower promotion agency.
        Now under those conditions, Congress has put a number of
    constraints and in 1986 determined that there needed to be more
    of a requirement that FERC balance non-power interests, as well
    as power interests, because it recognized that FERC's general
    approach is to grant licenses.
        On the black box perspective, although FERC's public docket
    is very often, what happens at FERC is very much behind closed
    doors. FERC does not, for example, publish a draft decision,
    even a staff draft, before they come out with the final
    decision on a license. And then as virtually everybody who has
    had to deal with the FERC rehearing process knows, once a
    petition for a rehearing is filed, nobody knows how, when, or
    why a decision will be made. The statute requires that it be
    done within 30 days.
        Typically FERC issues a decision accepting the request for
    a rehearing solely for the purpose of further consideration.
    And then a final decision does not come out for 6 months to
    several years.
        All of that is a black box. Nobody knows what is going on
    inside of it.
        Senator Craig. Well, I understand the process, and I
    appreciate some of the reasons and some of them economic as to
    why those decisions are made in that light. You have made the
    absolute statement that FERC has never denied a license. Do you
    want to repeat that?
        Ms. Birnbaum. I actually do not know whether FERC has ever
    denied a license for sure, but I know that they do not in
    general. The Corps of Engineers----
        Senator Craig. I know of a few, and I will bet Mark could
    come up with others.
        Ms. Birnbaum. You know, the Corps of Engineers grants
    thousands of wetlands permits and occasionally denies one. FERC
    has been known to go back and tell people that they needed to
    file a different application for a different license. But in
    general, FERC is strongly biased towards granting license
    applications.
        Senator Craig. Again, Mark, for years now, many opponents
    of hydro have asserted that FERC's licenses once issued are
    immutable for periods of 30 to 50 years. First of all, is that
    true? And what can the Commission do when environmental
    resources are threatened as a consequence of changed
    circumstances at the projects?
        Mr. Robinson. Since about 1975, licenses issued by the
    Commission have included what have commonly become known as
    reopener provisions.
        These are provisions that allow the commission, if there
    are changed circumstances or unanticipated consequences of
    licensing that appear during the course of the 30- to 50-year
    license to go back in and, on its own merits or at the request
    of the Department of the Interior or Commerce, I believe, make
    adjustments to that license for the protection of fish and
    wildlife, for the addition of recreational resources, and for a
    number of other environmental types of conditions.
        That really, around, I will say, 1991 or so, was
    highlighted through what is known as the Platte River decision,
    where we were asked to go in and make rough and ready changes
    to a project, by the courts, to facilitate whooping crane
    habitat.
        Since that time, we have had about 50 other reopener
    actions at the Commission, where we have gone back in during
    the course of the license and modified those projects. We have
    about 15 of those 50 pending right now. All but 3 or 4 of those
    others that we have already treated were typically handled by
    again negotiation with the licensee and the agencies that were
    involved in coming up with a solution where the licensee would
    come in and amend their project to take care of whatever
    problem was there.
        So we have a completed a large number of these. But it is a
    provision that we include in all licenses now to ensure, if we
    have changed circumstances or unintended consequences, we can
    go back and make adjustments to those projects, recognizing
    that we do that with great--I mean, there has to be the ability
    to rely on those licenses by the people who are developing
    these projects and investing their money.
        But we also know that we have balance that with making sure
    that we know when a new species is listed, endangered species
    is listed, that we can go in and make some adjustments to that
    project to satisfy the endangered species concern.
        Senator Craig. You say it is a provision within the license
    now. Is it a relatively new provision? How long have you been
    doing this?
        Mr. Robinson. I think it has been about since 1975 that
    almost all of them include it. Right now it is very few
    licenses that remain that do not include that provision.
        Senator Craig. But historically speaking, and I know that
    Ms. Birnbaum referred to that, I think what she said was
    historically accurate in a sense, but I had understood there
    was flexibility now, based on certain circumstances.
        Mr. Robinson. We have been making use of the reopener
    provision with much greater frequency since about 1991, about
    ten years.
        Ms. Birnbaum. May I comment on that?
        Senator Craig. Yes, please.
        Ms. Birnbaum. Although FERC has indeed used the reopener
    provision where licensees have been willing to come in and
    amend their licenses, some of the good actors who recognize
    that they need to deal with new endangered species listings,
    there are also some notable cases in which they have declined
    to reopen licenses where they have reopener clauses, when new
    species have been listed, and even where there have been die-
    offs of endangered stocks of fish. And they have declined to
    reopen those licenses.
        Senator Craig. Okay. Mr. Chairman, I have other questions,
    but you have been very generous with time. And it is late, and
    this panel has been held longer than I think they probably
    thought they would be here. I will submit some questions in
    writing. And thank you very much.
        The Chairman. Thank you, all, very much. I think it has
    been very useful testimony. And we will conclude the hearing.
        [Whereupon, at 12:25 p.m., the hearing was recessed, to be
    reconvened on July 24, 2001.]

                             NATIONAL ENERGY ISSUES

                                  ----------

                             TUESDAY, JULY 24, 2001

                                           U.S. Senate,
                     Committee on Energy and Natural Resources,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 9:42 a.m. in room
    SD-106, Dirksen Senate Office Building, Hon. Jeff Bingaman,
    chairman, presiding.

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

        The Chairman. The committee will come to order. This is one
    of several hearings we have had both this year and in the last
    Congress on the science of climate change, but in the past we
    focused on the science of climate change, the cost of
    implementing the Kyoto Protocol, and appropriate research and
    development agenda to ensure technologies are developed to
    reduce and eventually eliminate greenhouse gases from energy
    sources. The committee has not held a hearing specifically on
    measures undertaken by the private sector to actually reduce
    emissions. I think this focus on a pragmatic and proactive plan
    to reduce greenhouse gas emissions is certainly timely today.
        We are all aware that the administration has removed the
    United States from substantive participation in the
    international negotiations that have been occurring in Bonn.
    Agreement was reached on rules for the Kyoto Protocol yesterday
    that include, as far as I can tell from press reports, all of
    the flexibility mechanisms that the U.S. Government and U.S.
    industry has long argued were critical to a cost-effective
    strategy.
        The meeting of the parties in Bonn will continue through
    the end of the week as the details of the implementation are
    being worked out. Unfortunately, those details will be worked
    out without our involvement.
        The two major criticisms of the protocol, first that the
    market mechanisms essential to avoiding economic harm were not
    clearly defined, and second that developing countries were not
    required to take on defined commitments, those two criticisms
    should in my view not have resulted in the administration
    walking away without a serious effort to remedy those defects.
    It appears to me from the press reports I have seen that the
    first criticism that market mechanisms essential to avoiding
    economic harm were not clearly defined, that criticism is well
    on its way to being addressed.
        The second criticism, that developing countries were not
    required to make defined commitments I think also is in flux.
    According to testimony that the committee received last month,
    China has reduced its greenhouse gas emissions, or taken
    actions to reduce greenhouse gas emissions from the levels they
    otherwise would have achieved by as much as a third during the
    past 20 years.
        That same testimony indicated that our own greenhouse gas
    emissions since the signing of the Rio treaty have increased
    substantially.
        While the Congress has debated the subject, many members of
    the business community have been taking actions to reduce
    greenhouse gas emissions. They are now seeking to build on this
    experience through development of a clear legal framework for
    domestic emission reductions.
        Establishing risk parameters will enable the private sector
    to make informed investment decisions and minimize cost. There
    is no simple, universal answer for meeting the challenges of
    climate change. The study that the Department of Energy came up
    with, the Scenarios for a Clean Energy Future, written by five
    of our national laboratories, makes the case that a vigorous
    program of energy technology research, development,
    demonstration, and deployment, coupled with an array of public
    policies and programs to overcome market failures and
    organizational barriers, can be an effective public response to
    the Nation's energy-related challenges.
        Such policies could significantly reduce inefficiencies,
    reduce oil dependance, reduce air pollution and greenhouse
    emissions at essentially no net cost to the U.S. economy. That
    is the conclusion of this report that I referred to. I urge my
    colleagues on the committee to review the report if they have
    not done so. We need to develop a set of public policies that
    will set up the necessary infrastructure to leverage our
    resources to accomplish that goal.
        I am obviously interested in hearing what the panelists'
    views are on how policy changes, coupled with the
    implementation of efficient new technologies and practices, can
    move us forward in our effort to reduce greenhouse gas
    emissions. Let me call on Senator Murkowski for any comments he
    has, and then we will go to the witnesses.
        [A prepared statement from Senator Hagel follows:]
       Prepared Statement of Hon. Chuck Hagel, U.S. Senator From Nebraska
        Mr. Chairman, I want to thank you for holding this important
    hearing today on climate change.
        The timing is very appropriate, coming on the heels of the Bonn
    negotiations on the Kyoto Protocol. I believe the outcome of those
    negotiations clearly indicates that the U.S. should take action
    domestically to address the challenge of climate change, because the
    path the international community is taking is veering further and
    further from the interests of the United States.
        The agreement reached in Bonn underscores President Bush's position
    that the Kyoto Protocol is not in America's national interest. It
    severely restricts the use of market mechanisms by reducing the use of
    emissions trading, placing severe discounts on the use of carbon
    sequestration efforts and including other measures that reduce a
    nation's flexibility. The participation of developing nations wasn't
    even discussed. The Bonn agreement moves the Kyoto Protocol further
    from the provisions established by a 95-0 Senate vote on the Byrd-Hagel
    resolution, and further away from any treaty that could ever be
    ratified by the U.S. Senate.
        The United States is committed to addressing the issue of climate
    change. But we will not subjugate the economy of the United States,
    which would have global implications, to an international agreement
    that would have little to no impact on reducing global greenhouse gas
    emissions. By completely leaving out any commitments from the
    developing countries, the Kyoto Protocol is no solution for a global
    challenge.
        The United States will also work to take domestic actions to
    enhance our knowledge of climate change, to develop technologies
    necessary to address this challenge and to reduce greenhouse gas
    emissions. I am working with my colleagues on this committee, Senators
    Murkowski and Craig, to develop legislation which would do this.
        I look forward to hearing from today's witnesses on various
    approaches that can help us reduce our greenhouse gas emissions. We
    need to look at a wide variety of voluntary measures that can be
    undertaken now, and the technology we can develop in the future that
    will allow the United States to take significant steps to reduce our
    greenhouse gas emissions without wreaking havoc on our economy.
        We also must continue our efforts to increase scientific
    investigation into climate change in order to close the gaps that exist
    in our knowledge of this extraordinarily complex issue. The actions we
    take should be grounded on a sound scientific base.
        I would like to note the presence of a fellow Nebraskan this
    morning, John Campbell of Ag Processing Inc. I have worked with John on
    numerous issues, particularly renewable fuels, and I believe he will
    have some interesting things to say about how ethanol and biodiesel can
    help us reduce greenhouse gas emissions.
        Again, thank you Mr. Chairman for holding this timely hearing. I
    look forward to the testimony from our witnesses.

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

        Senator Murkowski. Thank you, Mr. Chairman. Good morning.
    It is a pleasure to begin another week with hearings on various
    aspects of our energy legislation. With regard to Kyoto, I
    think we have gone from bad to worse, relatively speaking. On
    the other hand, the timing of the hearing is appropriate, given
    the decisions that were made in Bonn.
        As we look at finalizing the operational rules for the
    Kyoto Protocol, it is my opinion that the partial agreement
    reached by negotiators this past weekend has made a flawed
    treaty, if you will, even worse.
        Now, we do not have all the details relative to the
    administration's views on this, but I expect we will shortly.
    The negotiators basically placed more restrictive rules on
    market mechanisms like emission trading, which basically
    increases the cost to the economy. It is beyond me that they
    would exclude nuclear power as part of the solution. Evidently,
    the environmental ministers of many of the European countries
    are so fearful that somehow--we have some feedback in the room,
    Mr. Chairman.
        The Chairman. I do not think it is feedback. I think
    somebody is watching the soap operas towards the back of the
    room.
        Senator Murkowski. Either that, or they are listening to
    the news, which may be better news than we are making.
        The Chairman. You have got someone fixing it? Okay. We will
    proceed.
        Senator Murkowski. Well, we will proceed anyway. I wonder
    who has got jurisdiction over the Energy Committee? Clearly
    somebody does.
        In any event, it is beyond me that those that are looking
    for relief on global warming would exclude nuclear energy, and
    evidently some of the developing nations are fearful--and
    perhaps our witnesses can give us a little explanation on
    this--that somehow the developed nations would dump the nuke
    waste into the environments of the developing nations, but if
    you are looking for relief on global warming, why, nuclear
    clearly has a role, and I think that in itself, exclusion of
    nuclear power, I am told that the French have decided to remain
    neutral on it, and they are some 80, 85 percent dependent on
    nuclear energy.
        They limited use of carbon sequestration to reduce net
    emissions to the atmosphere. We all know we could assimilate an
    awful lot more carbon by encouraging second growth forestry.
    Old growth does not assimilate carbon sequestration at the same
    rate that second growth timber does. They cut a series of
    political deals. I think that sets a bad precedent for future
    efforts to limit emissions.
        It is kind of interesting, we note China's reduction. China
    made the reduction outside the global warming climate change
    debate. One of the things that we were quite critical of was
    the Three Gorges Dam, the development of that, and that in
    itself will make a significant case to reduce emissions. I
    think that dam alone was supposed to replace about 36 500-
    megawatt coal-fired plants, to give you some idea, as we
    criticize China's efforts to reduce emissions, of the trade-off
    here.
        The result of the discussion in Bonn I think probably takes
    us further away from the Byrd-Hagel resolution, which--I do not
    know if Hagel is with us this morning. I think it passed 95 to
    zero.
        Global participation by all nations was not even on the
    agenda for discussion, and decisions on rules made the Kyoto
    Protocol more expensive and less effective. These recent
    actions on the international level I think only confirm the
    President's wisdom to reject the flawed Kyoto Protocol and seek
    an alternative way forward to reduce emissions of greenhouse
    gases while providing the energy that we are going to need.
        Kyoto is not the only game in town, as many in the
    international community would have you believe. Today's
    witnesses are voluntarily reducing their emissions without the
    Kyoto Protocol in force, and they are developing promising new
    options, including carbon sequestration to reduce emissions to
    the atmosphere. There are several policy actions we can take to
    foster more of these voluntary activities and make sure that
    they yield quantifiable reductions, and I hope the witnesses
    will provide us with their views.
        For example, I believe we can improve the Department of
    Energy program for reporting voluntary greenhouse gas emission
    reductions by turning it into a robust registry that allows
    companies to register baselines and actions taken to reduce
    emissions. This registry can be used as a scorecard for our
    efforts to reduce emissions in a cost-effective manner.
        We should also invest in more energy research and
    development to develop the energy technologies of tomorrow,
    that is, energy without emissions, and to develop a range of
    tools, including carbon sequestration, that we can use to
    manage our risks. A lot of that is planting more trees. I
    proposed this last year, and Senators Byrd and Stevens have
    included this proposal in their legislation.
        I think we should focus on the potential to avoid emissions
    in developing countries through energy transfer technologies.
    As I said earlier, we have the technology. We can assist those
    countries.
        This is clearly the right way forward, not the flawed Kyoto
    Protocol made worse by decisions made in Bonn. Several of us
    are working on legislation to help manage the risk of climate
    change and provide an alternative for Kyoto, and I certainly
    encourage those Senators who are sincerely concerned about this
    effort to join us.
        Thank you.
        The Chairman. Thank you very much.
        Our first panel is Hon. Francis Blake, who is the Deputy
    Secretary of Energy here in Washington. He is a frequent
    visitor to our committee, which we are very pleased about, and
    Mr. Christopher Risbrudt--is that the correct pronunciation?--
    who is the Acting Associate Deputy Chief for Programs and
    Legislation with the U.S. Forest Service. I thank you both for
    being here. Mr. Blake, why don't you go right ahead.

             STATEMENT OF FRANCIS BLAKE, DEPUTY SECRETARY
                               OF ENERGY

        Mr. Blake. Thank you, Mr. Chairman and members of the
    committee, and thank you for inviting me here this morning. I
    would like to submit my testimony for the record and just
    briefly summarize it, if that is all right.
        The Chairman. That would be fine, and your full statement,
    both of your statements will be included in the record.
        Mr. Blake. The issue you are considering today is of
    tremendous importance. At our current rate and pattern of
    energy consumption, DOE estimates that U.S. carbon dioxide
    emissions will increase at an annual average growth rate of
    about 1.4 percent through 2020. We are going to need a
    concerted effort to reverse this trend, and technology is going
    to have to play a central role.
        For that reason, President Bush created the National
    Climate Change Technology Initiative. He has directed the
    Secretary of Commerce to evaluate the current state of climate
    technology research and make recommendations for improvement.
    He has tasked the Department of Energy, in coordination with
    other agencies:
        First, to strengthen the basic research at our national
    labs, looking to the development of advanced mitigation
    technologies;
        Second, to enhance public-private partnerships and expedite
    innovative and effective reduction technologies;
        Third, to make recommendations for funding of demonstration
    projects; and
        Fourth, to develop improved methods for measuring and
    monitoring greenhouse gas emissions.
        We are already well underway in that effort. Recently, we
    announced a grant to the Nature Conservancy, studying land use
    practices for studying carbon more effectively. We have made a
    couple of awards to consortiums of companies that are looking
    to develop new technologies for capturing and sequestering
    CO2 from oilfields and from fossil fuel combustion
    plants.
        Across the Department, we have multiple programs aimed at
    reducing the energy intensity of our economy, that is, the Btu
    consumed per dollar of GDP, and reducing the carbon intensity,
    that is, the amount of carbon per unit of energy.
        We have major research and development programs focused on
    efficiency improvements and in reducing CO2
    emissions through greater use of lower carbon fuels and, of
    course, through renewables. Geothermal, wind, nuclear, solar,
    these are all technologies that promise tremendous
    opportunities for reducing our greenhouse gas emissions, and I
    know from our discussion last week and the support of this
    committee on further research and development efforts, that we
    share a number of perspectives on how we can move forward and
    address this important issue.
        I look forward to answering any questions and working with
    this committee on the legislation that you have before you.
    Thank you very much.
        [The prepared statement of Mr. Blake follows:]
        Prepared Statement of Francis Blake, Deputy Secretary of Energy
        Mr. Chairman and members of the committee, I welcome the
    opportunity to testify on S. 597, the Comprehensive and Balanced Energy
    Policy Act of 2001; S. 388, the National Energy Security Act of 2001;
    and S. 820, the Forest Resources for the Environment and the Economy
    Act.
        In June 2001, the President announced his commitment to develop an
    effective and science-based approach to addressing global climate
    change. A cornerstone of that commitment is the deployment of existing
    technologies and the development of new technologies that can increase
    energy supply, promote energy efficiency, and reduce greenhouse gas
    emissions.
        The Energy Information Administration is projecting that U.S.
    carbon dioxide emissions from energy consumption will reach 1,800
    million metric tons of carbon equivalent in 2010, and continue to rise
    to 2,000 million metric tons of carbon equivalent by 2020, an average
    annual growth rate of 1.4 percent. We will need a concerted effort to
    reverse this trend.
        While many different policy approaches to greenhouse gas reductions
    may be considered, none can be successful without a continuing supply
    of new, more economically and environmentally sound technology. Prudent
    technology research and development reduces the costs of new
    technologies, and expands economic opportunities while lowering
    emissions. Accompanying public policy can provide incentives for
    technology investment, diffusion and deployment.
        Public support for reducing greenhouse gas emissions depends on
    combining economic growth with environmental protection. Both can occur
    if new, lower-emitting, cost-effective technologies are profitable and
    economically efficient. Forcing costly and less productive technologies
    into the economy reduces economic growth and inevitably drains public
    support for emissions limitations. No climate change strategy, no
    matter how flexible and efficient, can support robust economic growth
    unless lower cost and higher productivity technologies reducing
    greenhouse gas emissions are readily available.
        Because greenhouse gas emissions come from many sectors of the
    economy, a broad range of technologies will be needed. Such a portfolio
    of technologies could include energy efficient technologies, lower
    carbon-emitting technologies, carbon capture, storage and sequestration
    technologies, and new technological discoveries yet to be made.
        To assure that we can meet our technology needs to reduce
    greenhouse gas emissions, the President created the National Climate
    Change Technology Initiative and directed the Secretary of Energy, the
    Secretary of Commerce and the Administrator of the Environmental
    Protection Agency to: 1) evaluate the current state of U.S. climate
    change technology research and development and make recommendations for
    improvements; 2) provide guidance on strengthening basic research at
    universities and national laboratories, including the development of
    the advanced mitigation technologies that offer the greatest promise
    for low-cost reductions of greenhouse gas emissions; 3) develop
    opportunities to enhance private-public partnerships in applied
    research and development to expedite innovative and cost-effective
    approaches to reduce greenhouse gas emissions; 4) make recommendations
    for funding demonstration projects for cutting-edge technologies; and
    5) develop improved technologies for measuring and monitoring gross and
    net greenhouse gas emissions. The National Climate Change Technology
    Initiative also will enhance coordination across federal agencies and
    among the federal government, universities, and the private sector. We
    are now at work implementing the President's initiative and will be
    able to report back to the President later this year.
        We are making progress on other fronts as well. In mid-July, the
    President announced new agreements that involve DOE. The first is an
    agreement with the Nature Conservancy to study land use and forestry
    practices for storing carbon more effectively in Brazil and Belize. The
    second is with an international team of energy companies to develop a
    new set of technologies for reducing the cost of capturing and
    sequestering carbon dioxide from fossil fuel combustion plants. There
    are other Federal agencies, notably the Environmental Protection Agency
    and the Department of Agriculture, with programs that address climate
    change through technology research and development and deployment.
        The Administration is engaging on the international front as well.
    As we speak, the United States is participating constructively in
    international discussions on climate change at the continuation of the
    Sixth Conference of the Parties to the Framework Convention on Climate
    Change in Bonn, Germany.
        At the Department of Energy, we have multiple programs aimed at
    addressing climate change both indirectly through improvements in
    energy efficiency and R&D on renewable energy sources, and directly
    through R&D programs aimed at sequestering carbon. Our programs, many
    in partnership with industry, address: efficiency improvements in end
    use, distribution, transmission, and generation of electricity;
    increased use of energy-efficient electro-technologies; reducing
    CO2 emissions through increased efficiency of coal and gas-
    fired plants; promotion of greater use of lower carbon fuels such as
    natural gas, nuclear, or renewable energy; transportation actions,
    including greater use of natural-gas-powered and electric vehicles;
    recovery of methane from landfills and coal seams; and the use of fly-
    ash as a cement substitute.
        We've enjoyed numerous successes over the years and I'd like to
    highlight a few examples.
        DOE-sponsored technology advances in wind power has led to an
    eight-fold drop in cost, to about five cents per kilowatt-hour in areas
    with the best resources. In these locations, wind is competitive with
    many traditional generation technologies. Geothermal power plants, once
    restricted to the geysers area in northern California, are now
    operating throughout California and in Nevada, Utah, and Hawaii.
    Scientific advances have enabled successful geothermal power plant
    construction and operation in these four states. Installed geothermal
    power plant capacity now exceeds 2,800 megawatts. Over 400,000
    geothermal heat pump applications have a total thermal capacity of
    3,600 megawatts in the United States. Biomass power has grown to 350
    U.S. power plants providing 7000 megawatts of power. New technologies
    that boost the efficiency and cleanliness of biomass power are now
    being tested. Through technology advances achieved by DOE research and
    development, the performance of renewable technologies has increased
    while the costs have dropped dramatically. Combined with a more
    detailed knowledge of renewable energy, these advances have accelerated
    the market for renewable technologies.
        Starting from a few research and development firms supported by
    federal funding, the U.S. photovoltaics industry has developed into a
    thriving business with annual sales of $500 million. Thin-film
    photovoltaic cells are now doubling as rooftop shingles. DOE research
    on thin-film photovoltaic cells and a growing interest in integrating
    photovoltaic cells into buildings have resulted in this new building
    material that generates electricity-using sunlight. The energy
    generated from a building's rooftop shingles can provide power both to
    the building and to the utility's power grid. Several demonstration
    projects, including a solar rooftop system showcased at the Southface
    Energy and Environmental Resource Center in Atlanta, Georgia, have
    proven that these innovative shingles can provide clean electricity.
        Geothermal heat pumps are one of the most cost-effective heating
    and cooling systems available. A typical system can reduce energy
    consumption by 23 to 44 percent compared to traditional heating and
    cooling systems. While geothermal heat pumps are typically more
    expensive to install, their greater efficiency means the investment
    maybe recouped in three to ten years. Experience has shown that use of
    geothermal heat pumps can be beneficial to electric utilities and their
    customers.
        DOE's appliance standards program for clothes washers, furnaces,
    air conditioners, water heaters and fluorescent lamp ballasts helps
    reduce carbon emissions by reducing demand for electricity generated by
    fossil fuels.
        Nuclear energy will continue to play a significant role reducing
    greenhouse gas emissions. DOE's research program on fuel improvements
    for light-water nuclear reactors created a technology that currently
    enables 50 percent more energy to be extracted from each unit of
    nuclear fuel, with prospects for greater increases in the future. This
    technology, called ``extended burnup,'' is now being implemented
    worldwide in water-cooled reactors. Its widespread use also has several
    other independently valuable consequences, such as increasing the
    output of nuclear power systems, which do not produce greenhouse gases.
    Extended burnup reduces fuel cost for each operating reactor by several
    million dollars per year and permits utilities to extend the time
    interval between refueling outages from 12 months to 18 or 24 months.
    Also, by more fully using each unit of nuclear fuel, the amount of
    spent nuclear fuel that must be stored today is reduced by one-third.
        The President's National Energy Policy will build on these
    successes. The Policy addresses conservation, energy efficiency, and
    cleaner sources of energy. In particular, the President's clean coal
    initiative builds on the success of prior public-private partnerships
    in clean coal technology. From 1986 to 1993, government and industry
    sponsored 38 first-of-kind clean coal technology projects in 18 States.
    Before this program, only a few options existed for reducing pollutants
    released from coal, and almost all were expensive. DOE's Clean Coal
    Technology Program changed that. Today, because of the clean coal
    investment, 75 percent of U.S. coal-fired power plants now use, or are
    installing, low-cost, low-polluting burners to reduce smog-forming
    nitrogen oxides. Power plants can now turn coal into a gas and remove
    virtually all of its smog- and acid rain-forming impurities, creating a
    fuel that rivals natural gas in environmental cleanliness. Also like
    natural gas, coal gas can power ``combined cycle'' arrangements of gas
    and steam turbines that boost fuel efficiencies and reduce greenhouse
    gases.
        I would like now to turn my attention to the several energy policy
    bills that are the topic of the hearing today.
        In examining these three bills (S. 388, S. 597, and S. 820), it is
    clear that we share common goals though there are, of course,
    differences in the relative emphasis placed on different goals. I
    think, for instance, that we can all agree on the importance of energy
    research and development and the role of new technology in helping us
    to blunt the horns of our energy and environmental dilemma. There
    appears to be a consensus on the importance of public investment in
    energy efficiency. And there are several areas where the need for
    updating the regulatory regime under which energy is produced,
    transported, and sold is manifest.
        Consistent with the emphasis on R&D and technology in the energy
    bills under consideration, we are, as I mentioned earlier, working on
    the President's National Climate Change Technology Initiative, which
    will help us define a technology future that explicitly addresses
    climate change. In addition, DOE, in partnership with USAID and the
    Department of Commerce, has been working on the Clean Energy Technology
    Exports initiative, which originated in Senate report language
    accompanying the FY2001 Energy and Water Development Appropriation Bill
    and is a component of the President's National Energy Policy as well as
    being reflected in Section 111 of S. 597. The goal of the initiative is
    to facilitate private sector efforts to launch clean-energy
    technologies into international markets by improving the government's
    role in clean energy research, development, demonstration, and
    deployment.
        In closing, the Administration welcomes the committee's efforts to
    address our Nation's climate change challenge and its strong support of
    the Department's energy science, research and technology development
    programs. The legislation under consideration by the committee is
    ambitious and many of its provisions would have consequences that must
    be weighed carefully before enactment. In this regard, I request that
    the Department be given the opportunity to continue to work with the
    committee on those provisions in the bill that affect DOE's programs.
        Mr. Chairman, that ends my testimony and I would be happy to answer
    any questions the committee may have at this time.

        The Chairman. Thank you very much.
        Mr. Risbrudt, please go right ahead.

      STATEMENT OF CHRISTOPHER RISBRUDT, ACTING ASSOCIATE DEPUTY
    CHIEF FOR PROGRAMS AND LEGISLATION, FOREST SERVICE, DEPARTMENT
                             OF AGRICULTURE

        Mr. Risbrudt. Thank you.
        Mr. Chairman and members of the committee, thank you for
    the opportunity to appear before you today to discuss S. 820,
    the Forest Resources for the Environment and the Economy Act.
    My name is Chris Risbrudt, Acting Associate Deputy Chief for
    Programs and Legislation.
        The administration agrees with the goals of S. 820, to
    promote sustainable forestry in the United States and encourage
    carbon sequestration on Federal, State, and nonindustrial
    private lands, and would like to examine the bill in more
    detail and work with the committee on an acceptable bill.
        On June 11, the President announced a series of initial
    steps, including plans for advancing the science of climate
    change, advancing technologies to address climate change, and
    promoting cooperation in the Western Hemisphere and beyond. The
    Cabinet is continuing to work on this issue, and is considering
    approaches that will tap the power of markets, help realize the
    power of technology, and ensure the widest possible global
    participation. Secretary Veneman is actively engaged in this
    process.
        The concepts and ideas contained in S. 820 will receive
    serious consideration by the administration as we move forward
    in developing an overall approach to address the serious
    problem of climate change. Although there is much debate about
    how to address climate change and the specific impacts of
    climate change on the global environment, there is general
    agreement that atmospheric CO2 levels are
    increasing. Increasing forestland area, greater adoption of
    agroforestry by agriculture, and improving forest and rangeland
    management and productivity can help reduce the rate of
    CO2 accumulation.
        Trees are efficient at sequestering large amounts of
    CO2. Simply put, trees store carbon in their stems
    and branches, as well as below-ground in their root systems. In
    fact, about 50 percent of the dry weight of a tree is carbon.
    We believe that in forest ecosystems carbon accumulates over
    time on the forest floor and in the soil due to woody debris,
    leaves, and roots. Storing, or sequestering this carbon in
    forests removes it from the atmosphere while providing other
    environmental and economic benefits.
        Approximately half of the land in the contiguous United
    States is devoted to agriculture. Due to this extensive
    agricultural land base, incorporating tree planting into a
    small portion of these lands through windbreaks and riparian
    forest buffers could result in an enormous amount of carbon
    sequestration, as well as promoting conservation and economic
    diversification.
        The goals and objectives of S. 820 fit within the construct
    of existing forest programs, and would give the agency more
    tools to manage the national forests and grasslands, provide
    assistance to State and private landowners through the
    Cooperative Forestry Assistance Act, and continue cutting-edge
    research and development activities.
        Through research and development, the Forest Service would
    continue to develop the science and technology needed to
    understand, manage, enhance, monitor, and estimate forest
    carbon stocks, including the above-ground, below-ground, and
    forest product pools. The administration would like to review
    its program across the Agricultural Research Service,
    Cooperative State Research, Education and Extension Service,
    the Department of Energy, the Forest Service, and the National
    Science Foundation to evaluate what is now being done and the
    best means to gather this information in the least burdensome
    way.
        In closing, Mr. Chairman, the administration appreciates
    the effort and thoughts that have gone into developing S. 820.
    The ideas contained in this bill warrant serious consideration.
    However, the bill will affect direct spending. The
    administration recommends that the activities called for by
    this bill be funded through discretionary appropriations.
        The forest-based initiatives articulated in this bill would
    contribute to sustainable forestry and carbon storage on
    Federal, State, and private lands. The administration is
    developing a comprehensive plan for addressing climate change,
    and welcomes this input. We would ask that, as Congress
    develops its own ideas on methods to address this global
    problem, it also considers opportunities to encourage
    agroforestry and improve the management of agricultural soils
    to increase carbon sequestration.
        Thank you for the opportunity to comment today. I would be
    pleased to answer any questions that you or members of your
    committee may have.
        [The prepared statement of Mr. Risbrudt follows:]
      Prepared Statement of Christopher Risbrudt, Acting Associate Deputy
       Chief for Programs and Legislation, Forest Service, Department of
                                  Agriculture
        Mr. Chairman and members of the committee: Thank you for the
    opportunity to appear before you today to discuss S. 820, the Forest
    Resources for the Environment and the Economy Act. I am Chris Risbrudt,
    Acting Associate Deputy Chief for Programs and Legislation.
        The Administration agrees with the goals of S. 820 to promote
    sustainable forestry in the United States and encourage carbon
    sequestration on federal, state, and non-industrial private lands, and
    would like to examine the bill in more detail and work with the
    committee on an acceptable bill.
        On June 11, the President announced a series of initial steps,
    including plans for advancing the science of climate change, advancing
    technologies to address climate change, and promoting cooperation in
    the Western Hemisphere and beyond. The Cabinet is continuing to work on
    this issue and is considering approaches that will tap the power of
    markets, help realize the promise of technology, and ensure the widest-
    possible global participation. Secretary Veneman is actively engaged in
    this process.
        The concepts and ideas contained in S. 820 will receive serious
    consideration by the Administration as we move forward in developing an
    overall approach to address this serious problem.
        S. 820 would amend the Energy Policy Act of 1992 to authorize a
    role for the Secretary of Agriculture in the Climate Change program
    relating to carbon sequestration on forested lands. S. 820 would direct
    the Secretary of Agriculture to:

       Report to Congress on carbon storage and the potential to
            increase carbon storage on national forests through management
            actions, and the contribution of U.S. forestry to the global
            carbon budget;
       Establish a Carbon and Forestry Advisory Council to advise
            the Secretary on developing guidelines for accurate voluntary
            reporting of greenhouse gas sequestration from forest
            management actions; evaluating the potential effectiveness of
            the guidelines; and estimating the effect of the proposed
            implementation on carbon sequestration and storage;
       Review and advise the Secretary of the Department of Energy
            on existing voluntary reporting guidelines for greenhouse
            gases;
       Establish incentives for States, non-industrial forest land
            owners, and nonprofit entities for forest management activities
            and carbon sequestration through a revolving loan program; and
       Establish reporting requirements for State, non-industrial
            forest landowners, and nonprofit entities that participate in
            the revolving loan program for carbon sequestration.
                                   background
        Although there is much debate about how to address climate change
    and the specific impacts of climate change on the global environment,
    there is general agreement that the atmospheric CO2 levels
    are increasing. Increasing forestland area, greater adoption of agro-
    forestry by agriculture, and improving forest and rangeland management
    and productivity can help reduce the rate of CO2
    accumulation.
        Trees are efficient at sequestering large amounts of
    CO2. Simply put, trees store carbon in their stems and
    branches as well as below ground in their root systems. In fact, about
    50% of the dry weight of a tree is carbon. We believe that, in forest
    ecosystems, carbon accumulates over time on the forest floor and in the
    soil due to woody debris, leaves, and roots. Storing or sequestering
    this carbon in forests removes it from the atmosphere, while providing
    other environmental and economic benefits.
        Existing forests produce benefits because actively managed forests
    produce fiber at the same time that they are storing carbon. Active
    forest management results in a mixture of age-classes and younger,
    faster growing forests produce fiber and store carbon at a faster rate.
        Approximately half of the land in the contiguous U.S. is devoted to
    agriculture. Due to this extensive agricultural land base,
    incorporating tree planting into a small portion of these lands through
    windbreaks and riparian-forest buffers could result in an enormous
    amount of carbon sequestration as well as promoting conservation and
    economic diversification. Other federal programs, such as the
    Conservation Reserve Program or the Environmental Quality Incentives
    Program encourage the planting of trees and shrubs in agricultural
    settings.
        The goals and objectives of S. 820 fit within the construct of
    existing Forest Service programs and would enable the Agency to fully
    utilize its authority to manage the national forests and grasslands,
    provide assistance to State and private landowners through the
    Cooperative Forestry Assistance Act, and continue cutting edge research
    and development activities.
        Through R&D (Research and Development), the Forest Service would
    continue to develop the science and technology needed to understand,
    manage, enhance, monitor, and estimate forest carbon stocks, including
    the above-ground, below-ground, and forest product pools. The
    Administration would like to review its program across Agricultural
    Research Service (ARS), Cooperative, State, Research, Education &
    Extension Service (CSREES), Department of Energy (DOE), Forest Service,
    and the National Science Foundation (NSF) to evaluate what is now being
    done and the best means to gather this information in the least
    burdensome way.
        The new incentives and revolving loan program would fit neatly into
    existing Cooperative Forestry Programs. These programs provide
    technical and financial assistance to private landowners for
    reforestation and other forest management activities that result in
    enhanced forest productivity, improved environmental quality, and
    ultimately, increased carbon storage. The Rural Communities Assistance
    programs would also help rural places develop and sustain economic
    diversification and a market-based infrastructure.
        In particular, the proposed revolving loan program is essentially
    the same as the existing Smart Growth Partnership Program, a program
    that is part of the conservation spending category. That program
    provides funding to Intermediate Relending Program (IRP) entities at
    low interest rates so that these entities can establish revolving
    loans. The purpose of funding the IRP's is to help landowners manage
    and develop woodlots and forests to protect these lands from
    development.
        The recent release of the President's Climate Change Review Interim
    Report and the National Energy Policy complement these goals. We
    commend the sponsors of this bill for their recognition of the
    important role of our Nation's forests in carbon sequestration and
    recognizing that long-lived forest products, such as construction
    materials and furniture, are important carbon stocks that can be
    estimated and managed as part of active forest management programs that
    increase overall carbon storage. Estimates of carbon pools that do not
    include forest products currently in use and in landfills are
    inaccurate and misleading.
        The bill should be clarified to reconcile the potential conflict
    between carbon sequestration and ecosystem restoration. In many parts
    of the country, particularly the Interior West, the health of our
    national forests and public lands has deteriorated due to the excessive
    growth of small diameter thatch. The result is high carbon density, but
    low ecological health, not to mention high risks of catastrophic fire
    damage. The bill needs to consider how, in various circumstances,
    increasing carbon sequestration in a forest may run counter to other
    important goals.
                                  suggestions
        The Administration would recommend a technical change to the title
    of the bill by removing the reference to ``national forests derived
    from the public domain.'' Unless this change is made, the initiatives
    in the bill would not apply to national forests in the east and south
    that were established from acquired lands.
        We would also like to work with you to clearly define the intent of
    term ``watershed.''
        Because S. 820 amends the Energy Policy Act of 1992, which is
    administered by the Secretary of Energy, there are several places in
    the bill where it is not clear whether the authority or requirement
    referring to ``the Secretary'' refers to the Secretary of Energy or the
    Secretary of Agriculture.
        The Administration would recommend several clarifications in
    Section 4 of the bill, because the authority and administration of
    several paragraphs is confusing. Section 4 of the bill amends 42 U.S.C.
    13385 and requires the Secretary of Agriculture to undertake a review
    of the guidelines for the voluntary collecting and reporting of
    information on sources of greenhouse gases established by the Secretary
    of Energy, Administrator of the Energy Information Administration, and
    make recommendations for amendments and refinements of the guidelines.
    The Administration would recommend redrafting the requirement for the
    Secretary of Agriculture to complete public involvement on any
    recommended changes before recommending them to the Secretary of
    Energy. Instead, perhaps a collaborative approach to public involvement
    might be more useful.
        It is also unclear from the construction of Section 4 whether the
    Secretary of Agriculture or the Secretary of Energy is ultimately the
    keeper of carbon storage information generated by States and non-
    industrial forest landowners participating in the revolving fund
    program. The language of the bill needs to be clarified concerning the
    role of the Administrator of the Energy Information Administration,
    Department of Energy and the role of the Department of Agriculture in
    data collection and storage.
        Throughout Section 4 of the bill, which amends the Global Climate
    Change Title of the Energy Policy Act administered by the Secretary of
    Energy, the existing law refers to requirements and authorities of the
    Secretary of Energy. This becomes problematic in Section 5 of the bill
    where the question arises concerning the Forest Carbon Cooperative
    Agreements and Loan program, whether ``The Secretary'' mean the
    Secretary of Energy or ``The Secretary of Agriculture?''
        The interactions with the State Foresters and activities on non-
    industrial forest lands are similar to language in the Cooperative
    Forestry Assistance Act that is within the authority of the Secretary
    of Agriculture. The Administration would recommend that Section 5 of
    the bill be redrafted to amend the Cooperative Forestry Assistance Act
    of 1978 (16 U.S.C. 2101-2114, 16 U.S.C. 1606) to clarify the
    administration of the State and non-industrial private land carbon
    sequestration program to the Secretary of Agriculture through the Chief
    of the Forest Service. This would speed implementation of the incentive
    programs and movement of funds and direction through existing processes
    and authorities under the Cooperative Forestry Assistance Act.
        We commend your intent to be consistent with Executive Order 13112
    on Invasive Species by identifying eligible tree species. This approach
    provides important environmental safeguards while offering landowners
    opportunities for increased productivity, increased local income, and
    increased carbon sequestration that would not otherwise be realized.
    This also provides the landowner with opportunities to take advantage
    of science and technology advances in woody cropping systems that can
    provide bioenergy feedstocks, thereby offsetting the use of fossil
    fuels.
                                    summary
        In closing, Mr. Chairman, the Administration appreciates the effort
    and thoughts that have gone into developing S. 820. The ideas contained
    in this bill warrant serious consideration. However, the bill will
    affect direct spending; the Administration recommends that the
    activities called for by this bill be funded through discretionary
    appropriations. The forest-based initiatives articulated in this bill
    would contribute to sustainable forestry and carbon storage on federal,
    state, and private lands. The Administration is developing a
    comprehensive plan for addressing climate change and welcomes this
    input. We would ask that, as Congress develops its own ideas on methods
    to address this global problem, it also consider opportunities to
    encourage agro-forestry and improve the management of agricultural
    soils to increase carbon sequestration.
        Thank you for the opportunity to comment today. I would be pleased
    to answer any questions you or members of your committee may have.

        The Chairman. Thank you very much. Let me start by asking
    Secretary Blake, I have been concerned as I read the newspapers
    about the action in Bonn. I have been concerned about the same
    issue that Senator Murkowski discussed in his opening comments,
    and that is the apparent decision that nuclear energy would not
    be looked on, or a power producer of nuclear energy would not
    be looked on as part of what a country would be given credit
    for, or part of the framework that has now been agreed to in
    Bonn.
        I had thought that this meeting in Bonn would have been an
    excellent opportunity for us to lobby for the consideration of
    nuclear power as part of what is included there, and we missed
    that opportunity. Am I misreading the situation, or what is
    your view on that?
        Mr. Blake. Excuse me, I am not familiar with the background
    of the treaty negotiations myself, and I am just getting a note
    confirming that nuclear energy is out of the Clean Development
    Mechanism and Joint Implementation.
        I think your broader comment is whether that is an
    appropriate conclusion for the Protocol. I think we would share
    Senator Murkowski and your concerns on that approach.
        The Chairman. What was the judgment made--perhaps you are
    not the right person in the administration to ask, but what was
    the judgment that caused us to not want to be there lobbying
    for inclusion of nuclear power?
        Mr. Blake. I think we were there assisting throughout the
    discussions. We had a team there. Whether that team discussed
    the nuclear issue specifically I just do not know. I would not
    be the right person to ask on that.
        The Chairman. The Department of Energy was in no way
    involved in any of that?
        Mr. Blake. Yes, we were. Yes, we were. We had a number of
    representatives there. What I cannot tell you is whether that
    issue was specifically raised by any of our representatives
    there with some of the other delegates.
        The Chairman. If it was raised, since we had withdrawn from
    the negotiations we were really not at the table to make
    suggestions, were we? How were we participating?
        Mr. Blake. I think we were able to make suggestions, but as
    you say, we were not at the table as such.
        The Chairman. Well, as I say, it seems to me that is an
    unfortunate result which I do not know if it could have been
    avoided had we been at the table, but I certainly am concerned.
        Similarly, as I understand it, the framework that has now
    been described, or the agreement that has now been described
    there in Bonn, they are still working through the details for
    the rest of this week on that, and again we are not there
    participating in any of those negotiations. I am right about
    that?
        Mr. Blake. Again, we have people there who are there to
    help in the discussions, and certainly provide the U.S.'s
    views.
        The Chairman. We are observers, and there if someone asks
    us for our opinion, is that our essential position?
        Mr. Blake. Well, we have the Convention itself, and then
    there is the Protocol, and there are two sets of discussions,
    and I think on the Convention we are more directly engaged than
    on the Protocol. That is my understanding.
        The Chairman. But the Protocol is the one they are now
    working out the details of, is that correct?
        Mr. Blake. That is correct.
        The Chairman. So that is the part we are not engaged in.
        Mr. Blake. Well, I think we are engaged. We are there
    helping the other countries and certainly providing what is the
    U.S. position.
        The Chairman. Let me also ask, one of the concerns I had:
    the President, of course, has issued the energy plan for the
    country, and one of the concerns I had when I read it, there
    was much in there I agreed with, but there was also a lack of
    attention to the issue of climate change, as I saw it. It did
    not seem to be integrated into that plan.
        We in this committee are going to try to put together a
    comprehensive energy bill as the administration has urged, and
    I am anxious that we try, as best we can, to integrate policies
    that we can agree upon on climate change into that energy bill.
    It seems to me the best opportunity that we have in this year,
    and maybe in this Congress, to do that. Do you have a position,
    does the administration have a position on whether we should be
    trying to address these issues as part of a comprehensive
    energy bill?
        Mr. Blake. I think when you look at the administration's
    energy plan, probably 50 percent of the recommendations have a
    direct bearing on carbon dioxide emissions, whether it is
    energy efficiency renewables, increased research and
    development. So there is already attention through the plan on
    this question both of the energy intensity of our economy, as
    well as the carbon intensity of the fuels that we use.
        The Chairman. So the emphasis that is in your plan on
    research and development and on renewable sources of energy,
    you see that as essentially the climate change component.
        Mr. Blake. The President has also directed us, to review,
    on all of the efficiency and renewable portfolio. For example,
    what we are doing, what we need to be doing, and we are taking
    a top-to-bottom review of that, as well as directing us on the
    R&D efforts that more particularly focus on our carbon dioxide
    reduction program.
        The Chairman. This internal working group, the
    administration's got on climate policy or climate change, will
    it have anything in the way of a recommendation that this
    committee could consider as we put together comprehensive
    energy legislation, or what is your intention with regard to
    that?
        Mr. Blake. Well, there are a number of aspects to it, as I
    indicated. The Department of Commerce has been tasked with
    looking at the state of climate change research, and I think
    they will be coming up with some response to the President on
    that, if I understand the time frame correctly, in August.
        We are also working on the R&D technology side of that, the
    efforts underway. I think we are working on an as soon as
    possible report-out date, but I cannot give you a specific
    time.
        The Chairman. There are a couple of items I wanted to
    particularly just mention which I would appreciate you looking
    at that are not related to climate change, as such. One is the
    Strategic Petroleum Reserve. Last week, we sent this letter to
    Secretary Abraham urging that he initiate a full management
    review of the operating cost of the Strategic Petroleum
    Reserve. We are spending $160 million per year to maintain the
    reserve, and it seemed to us that was an excessive amount, so I
    would like--I hope you folks are working on getting us a
    response to that.
        Mr. Blake. Mr. Chairman, when we got your letter I met with
    Director of that office last week, and we have begun the full
    review.
        The Chairman. Okay. Thank you very much.
        One other item that we are just sending you a letter on
    today, these are the remaining oil overcharge refunds. The
    Department of Energy is still, as I understand it, sitting on
    about $250 million of refunds that are due to the public for
    oil overcharges that occurred about 20 years ago. I understand
    a significant portion of those refunds are owed to utilities.
    We are sending Secretary Abraham a letter today on the subject.
    I would appreciate you looking at that as well and seeing if
    you could give us a status report.
        Mr. Blake. I will do that, yes, sir.
        The Chairman. All right.
        I think I have probably used all of my time. The timers are
    not working here. I do not know if anyone has failed to turn
    them on, but I think I have probably used all my time.
        Senator Murkowski.
        Senator Murkowski. Thanks very much.
        I would like for the record to note the submission of
    positions by the American Petroleum Institute and NEI, the
    Nuclear Energy Institute, into the hearing today, and I would
    ask unanimous consent that the statements be entered into the
    record as submitted, and as if read.
        I think it is important to note that as far as the
    submission of the Nuclear Energy Institute, it covers a letter
    to the governments around the world indicating the important
    role nuclear power plays in meeting the challenge of reducing
    emissions, and further states the continued safe, effective use
    of nuclear electricity and of advanced nuclear power technology
    are an integral part of the international effort to manage
    risks from global warming. The letter is signed by 93 CEO's
    from around the world. These are leaders in the nuclear
    industry worldwide.
        You know, it is just incomprehensible to me why at this
    meeting in Bonn they would simply ignore the role of nuclear
    energy. That is why it is my feeling there is a tremendous
    inconsistency here with getting on with just how we are
    seriously going to reduce emissions and ignore the role of
    nuclear energy.
        There is also a letter submitted by the American Petroleum
    Institute which basically suggests that the petroleum industry,
    refining industry and so forth, have made substantial
    reductions in emissions as a consequence of greater awareness
    and concentration of capital into reducing emissions through
    technological breakthroughs, and I think that is an important
    contributor as we recognize our obligation here in America to
    try and do our share in reducing emissions.
        Another item that I wanted to bring up, Mr. Blake is, there
    is a bill around here--I do not know whether it is S. 556--I
    think Senator Lieberman and Senator Jeffords are sponsors, but
    I understand that the EIA has indicated in a recent study that
    multipollution legislation for the utility sector as proposed
    under this legislation would lead to about an $80-billion
    higher annual electric cost by the year 2010, nearly a 30-
    percent cost increase per kilowatt hour, and it would require
    massive early retirement of coal-fired generation as a
    consequence of eliminating that as one of the major sources.
        I think coal provides about 50 percent of our energy, and I
    would ask you if this is your analysis? Is this the reason why
    the administration opposes caps on CO2 emissions
    from powerplants?
        Mr. Blake. Certainly the EIA study, which did analyze the
    costs for a multi-pollutant approach, and particularly
    CO2, pointed out the economic impacts. As you
    indicated, they are about $80 billion higher electricity costs
    in 2010, and average retail prices up over 40 percent. In
    addition, and perhaps even more importantly in terms of the
    Protocol, I think the concern was the lack of participation of
    the developing countries. For example, from 1990 to 2010 the
    increased emissions from developing countries not included
    would more than double the reductions that the United States
    would have been making. So for all of this dislocation of the
    economy the net environmental benefit seemed very questionable.
        Senator Murkowski. Senator Bingaman brought up a point that
    I wanted to follow up on a little bit concerning SPRO, because
    you remember our experience under the last administration when
    we had the heating oil crisis in the Northeast Corridor about a
    year ago, a little bit more than that, we were concerned about
    relief, and we pulled 30 million barrels out of the Strategic
    Petroleum Reserve and then found that we did not have the
    refining capacity to refine that in an expeditious manner, and
    I think we got about 3 million barrels or so of refined product
    from that pull of 30 million barrels out of SPRO.
        I certainly agree, $160 million per year seems an awful lot
    of money to manage a program for reserves, but I would
    appreciate it if you would provide us with an analysis of just
    how fast we can move oil out of SPRO, reminding all of us that
    it is crude oil, it is not refined product, and if we need it
    in a hurry we still have to move it to a refinery, and if all
    we do is offset an equal amount of that that we import we have
    not accomplished much.
        Is there any change in that, based on your recollection,
    because my understanding is our refineries are running at very,
    very high capacity now, so if we had to pull out SPRO, would we
    have gained anything?
        Mr. Blake. Senator, you are correct, and we can do the
    analysis. As you indicate, the issue is not just the
    withdrawal, it is the refining, and whether the refining
    capacity is available, which was an issue the last time.
        Senator Murkowski. Let me ask one more question relative to
    the President's national energy plan. Does it not, in effect,
    identify and highlight the reduction of greenhouse gases from
    the concept of business as usual through some specifics that
    are in this legislation, like cleaner fossil fuels, clean coal
    technology, expanded nuclear energy and dependence, improved
    energy efficiencies, enhanced alternative fuels, so is it not
    really true that the President's energy plan does address
    climate change specifically?
        Mr. Blake. Yes, sir, in the sense that a number of the
    recommendations, as I indicated, were exactly to the point of
    cleaner burning fuels and lowering the energy intensity of the
    United States. That is exactly correct.
        Senator Murkowski. I think as we come off this question of,
    well, gee, the rest of the world went ahead and signed on and
    the United States did not, and therefore, why is it the United
    States taking a position contrary to the views of some that we
    ought to be a leader, and I think we are going to have to wait
    for the administration to come back with their analysis, but it
    seems to me that to go in seriously with a commitment to try
    and do something about emissions and then eliminate the one
    technology that provides substantial relief, and that is
    nuclear energy, shows in itself the weakness and the fallacies
    associated with those that were basically responsible for the
    agenda, and I am just very disappointed that they started in
    with the premise that they were going to eliminate nuclear
    energy, so I think the administration certainly did the right
    thing saying we are not going to be a party to it, we are going
    to provide the leadership and technology and make it available
    to the developing countries and the rest of the world as well.
        Thank you.
        The Chairman. Senator Feinstein.
        Senator Feinstein. Thanks very much, Mr. Chairman. Good
    morning, Mr. Blake. I wanted to make a couple of comments to
    you. I just came out of an election last year in California.
    California is the fifth largest economy on earth. I had very
    good business support.
        I talked about global warming. Global warming was one of my
    top priorities for reelection, and I won the reelection by over
    1\1/2\ million votes. Californians I believe want action. This
    Senator finds the U.S. absence from the Kyoto Protocol both
    deplorable and I think really arrogant.
        About a year-and-a-half ago, I spent the day at Scripps
    Institute, talked with all of their senior scientists. I came
    away believing without a doubt that climate change is a real
    phenomenon. You have expressed that in some of the figures you
    put forward in your written paper, but when it comes to really
    taking the actions that are necessary, I find us really
    backwards.
        I am staggered by the fact that we are 5 percent of the
    population and we consume 25 percent of the energy of the
    world, and recently some have pointed out that in my State in
    the next 100 years we are going to lose the entire Sierra
    Nevada snow pack, and that is the drinking water for 22 million
    people. It is the water for the largest agricultural-producing
    State in the Nation, and for I think the largest segment of
    high tech.
        Californians are not afraid of doing what we need to do
    with respect to retard global warming. The transportation
    sector is responsible for one-third of it. Senator Snowe and I
    have introduced legislation, as you know, to bring SUV and
    light truck standards up to that of sedans within 6 years after
    passage of the bill. That would save 10 percent on oil imports,
    about a million barrels of oil a day, and it would keep 240
    million tons of carbon dioxide from entering the atmosphere a
    year.
        Scientists have told me that it is the most effective
    single stroke that the United States can take to really do our
    share in reducing global warming. In view of what you say in
    your paper, particularly about the 1.4 percent annual growth
    rate of carbon emissions to the year 2020, I know the
    administration's position has been, let us wait to see the
    report of the National Academy of Sciences on bringing SUV's
    and light trucks up to that of sedans, but I feel very strongly
    supportive of the chairman's comments, and that whatever comes
    out of this committee has to really be forceful. We have to be
    leaders in this area. If we do not, and if we do not take the
    steps now, I do not think we are ever going to be able to catch
    up.
        My question to you is, have there been any discussions in
    the administration on Senator Snowe's and my bill on SUV light
    trucks beyond the wait-and-see attitude, and secondly, are you
    willing to take any steps to revisit the standards on air
    conditioners and energy efficiency standards for other devices?
        Mr. Blake. Senator, first on the issue of the NAS study and
    CAFE standards, the administration's position is and remains
    interested in removing the moratorium on DOT's development of
    new standards, awaiting the report on the NAS--although a draft
    was released to the press, the formal report has not been
    forwarded--and then to balance the recommendations of that
    report with the factors of safety and the environment and
    consumer interest. That remains the administration's position.
        On appliance standards, on air conditioners, increasing the
    appliance efficiency requirements for air conditioners, we took
    a very serious look at increasing where it is now 10 SEER, and
    it was proposed to go to 13, and we are suggesting 12, so it is
    still an increase.
        One of the basic reasons for staying at 12 versus 13 was
    the concern that actually 13 was going to be counterproductive,
    that it would discourage certain kinds of purchases of
    efficient equipment, and we would actually be better off from
    an efficiency perspective with the 12 standard.
        Senator Feinstein. I think I have just time for one more
    question.
        What other recommendations would you have, other than fuel
    efficiency, assuming we can come to some agreement on that, as
    to what Congress could do, kind of looking for bold strokes to
    really play a major role in what I think is the largest
    environmental problem we have?
        Mr. Blake. I believe that the research and development
    opportunities here are the single most interesting and most
    effective role both Congress and the administration can play.
        I would hope, in response to your earlier comments, when
    you see some of the things that we are looking at, carbon
    sequestration technologies that take--I mean, a lot of these
    are still on the drawing board. For example, to take
    CO2, put it in storage, have a biological agent
    react it to methane, and the methane is used again for power
    production. These are ideas on the drawing board that we are
    looking at funding. We think this dramatically changes the
    nature of this discussion. Instead of a forced march, where
    basically the compliance mechanism is shift from coal to
    natural gas, which has a lot of other implications, we look at
    a much broader suite of technological solutions.
        This committee had a hearing on the research and
    development issues last week. I think there is a lot of common
    ground on that, and some enormous progress that can be made
    there.
        The Chairman. Senator Burns.
        Senator Burns. Thank you very much, Mr. Chairman. I have a
    statement I just would put in the record at this time.
        [The prepared statement of Senator Burns follows:]
       Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
        I'd like to welcome the witnesses here today and thank the Chairman
    for holding this hearing. This is the third hearing we've held in this
    committee on global climate change, and finally we have reached the
    place where we are ready to begin talking about where to go from here.
        One of the big concerns in this debate has been carbon dioxide, how
    much should we produce, whether it should be regulated, and its role in
    climate change overall. I would ask that any time we look at
    legislation or a change in policy we do two things: first, make sure
    the response made is firmly rooted in science rather than emotion; and
    second, resist the urge to write a new rule and build a bigger role for
    government at every turn of this debate. Instead, I would suggest we
    maximize the role of the free market and provide the incentives for
    businesses and individuals to do whatever we'd like them to do.
        I have said it before and I'll say it again. We need solid science
    to make decisions about global climate change or any other issue of
    this type that affects us as a country. We have had an entire hearing
    on the basic science aspects of this research. In addition, I think it
    is important we understand the wider implications of any plan to reduce
    carbon dioxide. The plans I have seen would have huge effects on the
    United States economy, and that is something we need to understand
    before we rush into anything.
        One of the most interesting studies I have seen was a recent report
    by the Energy Information Administration which predicted the increase
    in energy prices if carbon dioxide were added to a multi-pollutant
    strategy which would be enforced by the EPA. The study found that
    energy prices would increase 2 cents per kilowatt because of
    restrictions which would hit the energy industry so hard. Two cents may
    not seem like a lot when you look at it one kilowatt at a time, but
    imagine the larger effects on manufacturing and even our clean
    industries which rely heavily on computer technology. You need
    electricity to run all that, and the more expensive it gets, the bigger
    drag you will have on this economy.
        The Senate recognized this in 1997 when it passed S. Res. 98 by a
    vote of 95-0. Every Senator voting that day agreed that the United
    States should enter into a global climate change treaty it should be
    done globally, and with the least cost possible to the United States
    economy. The Kyoto Protocol does neither of these, especially after
    last week when the negotiations were taken up and severe limits were
    put on emissions trading and carbon sequestration.
        Carbon sequestration is a very interesting concept. I have a lot of
    farmers and foresters alike in Montana who would like to know what this
    means for them. I don't know yet, and I don't know if anyone does. I am
    interested to hear the opinions of our witnesses today on what further
    research is needed to implement any system of carbon sinks here in the
    U.S.
        We have several pieces of legislation from this Congress, and a few
    from last Congress that I expect to see again, that I am interested in
    learning more about. As with any issue, there are some good ideas out
    there, and some that I fear would cripple our American prosperity with
    little hope of solving any real problem.

        Senator Burns. In the area of sequestration, Mr. Blake, I
    am wondering if the administration is taking a look at--you
    know, our farmers and ranchers are very much interested in that
    and want to play a role in that, our forests, and of course you
    have the U.S. Forest Service here today who wants to play a
    role in that. We can capture some of that carbon from the
    atmosphere. How can these be used as a part of the larger plan
    to reduce the total carbon in the atmosphere?
        Mr. Blake. Senator, my response, I defer to the gentleman
    to my left as well, but we are looking within the Department at
    technologies for biomass use in fuel-burning so that you get
    the advantage--if you did, for example, a 5-percent co-fire in
    a coal plant with biomass switch grass and the like, you get a
    5-percent reduction in CO2 emissions. You get the
    benefit of the carbon sink, and growing it, and then you have
    got a benefit in burning. I think it has a very interesting
    potential role to play in the overall carbon dioxide reduction
    program.
        Senator Burns. Give me your thoughts on coal bed methane.
        Mr. Blake. I think the same principle applies there. It is
    a new technology that would allow substantial reductions of
    CO2.
        Senator Burns. That is about all the questions I have. I
    was going to listen to their testimony and I had to step out
    for a second, but I did want to ask those couple of questions.
        You know, I am not real sure that agriculture cannot play a
    role in capturing--maybe if industry is going to get credits
    for taking so much carbon dioxide and using it, why would not
    agriculture be--it could be handled the same way, and looked at
    the same way. After all, we feel, in growing crops, there is a
    necessity to have a little of it. We cannot cut it all out
    because it grows things, but we ought to get some credit for
    that also.
        So thank you, Mr. Chairman.
        The Chairman. Thank you very much.
        Senator Wyden.
        Senator Wyden. Thank you, Mr. Chairman.
        First, Mr. Risbrudt, let me thank you for the generally
    supportive comments that you made of the legislation that
    Senator Craig and I authored, the Forest Resources for the
    Environment and the Economy Act, and I will have a couple of
    questions for you on that in just a minute.
        Mr. Blake, you look at what the world is saying today about
    the United States and this question of global climate change. I
    mean, today, people are reading headlines all over the globe,
    United States isolated, United States out in the cold, United
    States only looks on--I mean, I could just kind of go on, one
    after another, and like several of my colleagues I just think
    this country cannot afford to be a bystander in this issue, and
    my question to you is, how does the administration envisage
    finding common ground at this point with the close to 180 other
    nations?
        I mean, it is not clear to me how, out of all these various
    and sundry processes that we are following, the studies but not
    participating and the like, how do you all envisage getting to
    common ground so that we can do what Senator Craig and I did,
    and actually make some progress?
        Mr. Blake. Well, that is a very broad question that I am
    not sure I am fully competent to answer in terms of the larger
    geopolitical concerns.
        Senator Wyden. Well, give me a sense of how out of all of
    this bystanding, which is where we are today, we are actually
    going to do what Senator Craig and I did, which is come up with
    a practical proposal? I mean, I think it would be helpful if we
    even had some general sense of how the administration was going
    to get there from here.
        Mr. Blake. What we are doing now is doing the basic review
    of our technologies, and what roles our technologies can play
    in providing answers to carbon dioxide removals. I think these
    are going to be of dramatic interest to our allies, may well
    set out a path that convinces them the U.S. position is
    correct, and looks to what the developing countries can do,
    what opportunities there are there, what are our opportunities
    here. I say, things that are on the horizon that make a great
    deal of sense for the entire world to be working towards.
        Senator Wyden. I do not want to doubt your sincerity here,
    but I think the proposition that out of this research you are
    going to get something that convinces 180 countries that they
    are essentially wrong and we are right is a very dubious
    proposition.
        And again, I want to work with you all in a bipartisan way.
    We have shown in this committee again and again--Senator Craig,
    Senator Burns and I put in a significant energy bill
    yesterday--that we want to work in a bipartisan way, but you
    have got to give us some material to work with, and I will not
    belabor it at this point.
        Mr. Risbrudt, a question for you. I do appreciate your
    generally supportive comments this morning on the forest
    resources legislation. What is left in your mind for Senator
    Craig and I to do? I would rather not walk out of the room
    uncertain about what is left to do.
        I gather that you all would like to see some kind of
    appropriation which is invariably written for this kind of
    exercise, but are there other things that Senator Craig and I
    should be trying to do, but what in your mind is left in order
    to actually get this signed into law?
        Mr. Risbrudt. I think the general outlines of the bill are
    very good, Senator. We are really just asking for some fine-
    tuning of the portions of the bill that will make it work
    better for the administration.
        Senator Wyden. Which provisions are most in need of fine-
    tuning, in your mind?
        Mr. Risbrudt. Since it is amending the 1992 bill that is
    directed specifically at the Secretary of Agriculture, we think
    we need to review the bill to make sure it is clear which
    Secretary we are talking about in this bill. It needs to be
    clear to us whether it is the Energy Secretary or the
    Agriculture Secretary that is getting new authorities, for
    example, so it is clarifications, I believe.
        Senator Wyden. That seems very reasonable, and Mr.
    Chairman, I will not go any further. I think that is the kind
    of cooperation we need throughout this process, and that was
    the point of my question, Mr. Blake.
        Mr. Risbrudt leaves me, on a bipartisan bill, with a sense
    of what we need to do, and he thinks that it is substantively
    by and large a good bill. There needs to be some clarification
    in going back to the 1992 statute. That certainly makes a lot
    of sense to me.
        But what I leave with respect to the big picture, Mr.
    Blake, is the stark paradox between these headlines of all over
    the world have the United States basically sitting this issue
    out, and your discussion of how we are going to do some
    research into various technologies and then we are going to
    convince 180 people they are wrong and we are right, and I
    think we need to do better.
        Mr. Chairman, thank you.
        The Chairman. Thank you.
        Senator Craig.
        Senator Craig. Thank you very much, Mr. Chairman.
        Gentlemen, I am pleased you are here this morning, and Mr.
    Chairman, thank you for holding the hearing.
        From Buenos Aires to Kyoto, was it politics, or was it
    science? My guess is that Kyoto was formed a great deal under
    politics because the science could not come together and Kyoto
    was falling apart, and the Vice President had to run to Japan
    and tack it back together for all of the politics involved.
        It is important that that be said this morning in the
    context of this hearing, and the comments that are coming from
    some of my colleagues. Is it wrong or misguided to argue that
    something is wrong or misguided, and therefore say so? Is that
    a statement of leadership, or a statement of arrogance?
        I think what George W. Bush has proven is that his
    statement is a statement of leadership, not a statement of
    arrogance. Now, Mr. Chairman, I say that because I and others,
    including yourself and Senator Murkowski, have spent a great
    deal of time with this issue, more time on this issue than I
    have spent on a good many others in the last several years, so
    it is not by accident that two of the pieces of legislation,
    one just referred to by my colleague from Oregon, S. 820, is a
    part of my effort and Senator Wyden's effort, and S. 1776,
    which is a much more comprehensive effort, to try to bring the
    science together, create the modeling that we can agree to and
    not rely on foreign modeling to result in the kinds of
    conclusions that we can base public policy on.
        I went so far as to spend a week at The Hague, the last
    stop before the one that is now involved in Germany. I learned
    a lot about the politics of Europe, but not much about the
    science, because I will tell you, The Hague was a great deal
    more about politics and how do we scheme, as a group of
    Europeans and other nations of the world, to try to control the
    U.S. economy, and if we can squeeze it and stifle it in the
    name of something green, we win, they lose.
        Well, I was there to protect sequestration, and I spent
    long hours arguing with the U.S. delegation not to compromise
    or give away one of the very tools we have and can improve upon
    as a part of a total package, Mr. Chairman, when it relates to
    climate change.
        I know that everyone looks for the silver bullet on this
    issue. They fail to recognize that all of the bits and pieces
    put together that we have been working on collectively for the
    last long while, including the Clean Air Act and a good many
    others, and a lot of new technological applications, have
    resulted in a dramatic reduction in the rate of CO2
    emissions as it relates to a unit of production in this
    country. We are doing very well today, but that is not to
    suggest we cannot do a lot better.
        But to drive ourselves toward Kyoto was, in itself, a
    folly, and the Senate in S. Res. 98 in 1997, with an expression
    of 95 to zip, said so, and yet we still want to maul this issue
    to death for the politics of it because somehow we think it
    will gain us votes.
        I am very proud that President Bush called it for what he
    saw it to be, and is now recognizing the importance of creating
    new dynamics and new paradigms to lead this issue, and I must
    tell you that if the Prime Minister from Japan stays where he
    is, we win and the politics loses.
        Now, I will have to admit, Mr. Chairman, that in that
    process this President by his action has created a major
    international void that needs to be filled, and that is what is
    going on right now. The working group, the major effort to
    analyze all of the bits and pieces is an effort to put
    leadership into the science of this issue and not the politics
    of this issue, and I say bravo, Mr. President.
        Now, you and I and others have met with that working group.
    They are looking at all of the pieces of legislation we have
    collectively put together and I hope we can get there. We must
    get there. You and I and others know that we have a problem out
    there. The science is converging on the issue of warming, but
    it is not converging on why, because the modeling is faulty,
    and if we can come up with the right kind of models--and, Mr.
    Chairman, we have the tools.
        We have Mr. Blake's supercomputers that are sitting idle at
    this moment on this issue because we have not brought the
    science together to program them to do the modeling necessary
    to give us accurate figures instead of Canadian figures or
    German figures. We ought to do that. That is part of what S.
    1776 does. It brings the science together, and it allows us to
    begin to shape the issue.
        Now, a part of that issue, and why I defended so vigorously
    sequestration, and why I convinced people like Frank Loy and
    others who were involved in the last meeting in The Hague not
    to cut a bad deal when a good deal was possible, and thank
    goodness they did not cut a bad deal, was to take away or tie
    behind our back some of our tools.
        You are going to have others talking about sequestration
    this morning, but S. 820 works at that in a vigorous way, and I
    am glad, Chris, that you have talked about that this morning
    and looked at the dynamics of forest management. We need to
    look at agriculture and rangeland management not in a nonactive
    way, but very much an active way.
        Nonactive forest management last year put more carbon into
    the atmosphere out over Idaho and Montana than we have seen in
    decades. Last year, for all of you who are interested, we
    burned more public land acres in the United States than ever in
    the history of the United States, and that was water vapor and
    carbon going into the atmosphere, because when forests grow,
    they collect carbon. They are carbon.
        When they burn, they release it, and to understand that
    inactive management creates monstrous fuel-loading that results
    in ultimate carbon releases does not solve a problem. Active
    growing, multidiverse forests, intermediate stands, all kinds
    of uneven age stands creates the dynamics of an active forest
    that sequesters huge volumes, potentially 300-plus million
    metric tons. I think it is called a million metric tons of
    carbon equivalent is the figure we use, Mr. Chairman.
        Well, that is the issue here. Gentlemen, thank you. Or, at
    least that is the issue from my perspective. We have an
    opportunity to come together, but I do not see the United
    States standing this one out, Mr. Chairman. I see it creating
    an opportunity to lead us into true science and ultimate
    policy, instead of just the raw politics of economic control.
        Thank you.
        The Chairman. Thank you very much.
        Senator Landrieu.

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

        Senator Landrieu. Thank you, Mr. Chairman. First let me
    thank you for continuing to emphasize the importance of the
    issue of climate change in the context of our national energy
    policy. I think that is clearly the right approach, a
    comprehensive approach, and I really commend you for keeping it
    in the forefront of our discussion as we move forward to
    develop an energy policy that we can clean up our air and our
    water with and also grow with and expand and recognize the
    potential, or appreciate, experience the potential of this
    great economic expansion for our Nation and the possibilities
    for the world, so I thank you for that.
        I just want to make a few brief points and then just ask
    one question. One, I want to add my voice to those who have
    expressed disappointment in the sort of lack of focus on the
    nuclear issue, and how that worked out at the Bonn conference.
        I am hoping and thinking and believing that nuclear should
    be part of our energy policy and strategy, that we need greater
    capacity generated by nuclear, or through nuclear in this
    country and in the world, and so I want to add my voice to the
    disappointment and hope that we can continue to make progress.
        I know because we are not signers we are not at the table
    in the details of the negotiation, but I again want to commend
    Senator Domenici for his work on this area. I look forward to
    working with him on several bills that have been introduced,
    and believe that while there are challenges still with the
    waste issue, nuclear is a road that we should travel if we want
    to make significant headway in reducing the warming of the
    earth's atmosphere.
        No. 2, I am also happy to see the focus on natural gas, and
    the role that natural gas can play in helping us meet our
    challenges with our climate, and in particular want to submit
    and will to the record the front page article of the New York
    Times this week about the significance of moving forward with
    an energy policy, looking for new production sources for
    natural gas, and then the transmission part of that, to meet
    the goals that we are discussing this morning.
        A third brief point before I get to my question is, I want
    to acknowledge, since sometimes the energy companies get beat
    up pretty badly around here, I want to acknowledge that there
    has really been a sea change in the industry recently, and that
    every major oil company is part of a United Nations
    International Petroleum Industry Environmental Conservation
    Association.
        I think almost every major company is involved in this
    effort, and I want to particularly acknowledge Chevron and BP-
    Amoco and Texaco, just to name a few. I am somewhat
    disappointed that Exxon-Mobil continues to drag their feet a
    little bit, but other than that company, most of the other
    companies are really stepping forward with some very
    constructive solutions and ideas, and I do believe that the
    less political rhetoric we can bring to this subject and the
    more we can bring industry and the environmental community
    together to really meet our goals--and I wanted to acknowledge
    them for the record and thank them for their good work.
        Now, my question is to you, Mr. Risbrudt, whether you are
    familiar, if you could comment, maybe, on the additional work
    that we are doing on carbon sequestration, and how we could
    verify the actual increases in the carbon sequestered through
    this process. Do you agree that more research needs to be done,
    or what could you elaborate a little bit on that point, because
    I was party to a wonderful press conference that we had this
    last week with one of our major power companies, and in a grand
    area that was set aside in Louisiana.
        It was one of the first models, the Catahoula Wildlife
    Preserve, where this private-public partnership was modeled,
    and I was very supportive of the idea conceptually, I think it
    is quite good, but the real, I guess where the rubber hits the
    road is, can we be confident that we are actually meeting the
    goals of this public-private partnership, so do you agree that
    more research needs to be done on this particular point, or
    what are your views at this time?
        Mr. Risbrudt. I think more research would be appropriate.
        The Forest Service has a national inventory system called
    the Forest Inventory and Assessment System, where we sample the
    Nation's forests on a 5-kilometer grid, and we try and do that
    on a 10-year cycle, to measure the amount of vegetation that is
    there, and we are also using that to measure the changes in
    carbon sequestration.
        On a project-by-project basis, that is a little different
    issue. We probably do not want to be the verifiers of small
    projects relative to the national forest system, but we would
    be very supportive of the research in the methods and protocols
    for verifying that on those projects, yes.
        Senator Landrieu. Well, do you think someone needs to be in
    charge of monitoring the outcomes of these smaller projects?
    What would your suggestion be if you all are not in the
    position to monitor that?
        Mr. Risbrudt. I think maybe with partnerships with the
    States through our State and private branch. Each State has a
    State Forester that we provide technical and financial
    assistance to private landowners through the State Forester's
    organization, and so I would suggest in partnership of the
    States and possibly other organizations we could deal with that
    issue.
        Senator Landrieu. Okay. Thank you, Mr. Chairman.
        The Chairman. Thank you very much.
        Senator Domenici.

           STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR
                            FROM NEW MEXICO

        Senator Domenici. Mr. Chairman, thank you very much for the
    hearings. I personally was very late, and I apologize for that,
    but I gather that you have had more success today, that a
    number of Senators have come down to listen to this issue, and
    I am glad to be last and try to take only a few minutes.
        First, for those who were talking about implementing Kyoto,
    and why our President is saying he will not, I remind everyone
    that the U.S. Senate voted 95 to zero not--saying at that time,
    do not send us the treaty, because we will not ratify it. Now,
    that is 95 percent of the then-sitting U.S. Senate, which must
    mean it is bipartisan.
        It actually was led by a Democrat, partnering up with a new
    Senator from Nebraska when this resolution was adopted, do not
    bother to send it to us because we will be not ratify it.
        Now, Mr. Chairman, I went to see how many of the Senators
    are still in the Senate, and there are 78. Seventy-eight of the
    sitting Senators today were among the 95 who said Kyoto is not
    the right way to do it, and I guess inherently saying it is not
    good for America, there may be--there must be a better way.
        Now, I am not terribly impressed with the French leader
    constantly lecturing us. I wish a Senator could be along,
    anyone, and every time he tells our President what to do, maybe
    the Senator could say, don't you know 95 out of 100 Senators
    said this was not good for America? It is not George Bush. He
    took over way after the signing of this resolution of
    nonapproval.
        Secondly, it is most interesting, for being what it is
    supposed to be, the Kyoto agreement and all attendants to it
    did not mention nuclear power. It is as if there were two
    worlds. There is a world that wants to solve the problem their
    way, and their way does not include even mentioning nuclear
    power.
        I think for some it renders it susceptibly invalid,
    susceptibly impossible that the countries could follow it and
    not find out that there are much better ways than they have.
        My last, third observation at the top end of this is, while
    Kyoto only attempts to put restraints on the industrialized
    nations, clearly it is also a restraint on worldwide growth. It
    will put a restraint. That means that some of the very poor
    countries in this world that we say are free of Kyoto will have
    no energy source of any significance unless we move ahead with
    research to develop better, clean sources at reasonable prices
    for them, too.
        So I have on my own, to the extent that it is possible, I
    have lined up as many Senators as I can, and we are going to
    begin talking about America post Kyoto. We are going to start
    talking about growth and prosperity beyond Kyoto.
        We are going to start talking about growth and prosperity
    for the poor countries of the world post Kyoto, because the
    vision is, if you can move ahead with some of these clean
    technologies, included among them are hydrogen and nuclear, set
    up in a totally new generation, much less toxic, easy to manage
    the toxicity, along with extraordinary efforts at clean coal,
    and then fit those into the world market with a goal--with a
    goal--there will not be a Kyoto problem in X number of years.
    Somebody might want to keep a tab on CO2, but it
    will not be relevant, because the world as it grows will not be
    using energy that pollutes the atmosphere and causes global
    warming.
        So every time I come here, I do not help our chairman by
    asking questions. I did one day on part of this subject which I
    am very concerned about, that is the subject of waste
    management, which we are working on, too.
        But with that, I stand willing to work with this President,
    with Democrats, Republicans, to try to get before the American
    people an international plan that we would lead that could set
    a 10-year and a 20-year goal, and put the standards that are to
    be achieved right in the goals, and then say to American
    scientists pooled with those around the world, marry up the
    brethren that are in business and produce this kind of new,
    clean technology within X number of years.
        I think that is a marvelous thing to run up alongside a
    Kyoto agreement that has created so much animosity, some of it
    not right, but much of it right, and such accusations that if
    you are not for that, you are not for the environment in the
    world, those kinds of statements are just not true. Do you
    think all 95 Senators when they voted not to do this, not to
    enforce it, do you think they were all up there saying I want
    to vote for a bad environment for my children and
    grandchildren? Of course not. They knew fairly well that this
    was a very different approach, and that maybe it would hurt
    America rather than gain a lot, and maybe we could do a better
    job another way.
        Thank you, Senator Bingaman.
        [The prepared statement of Senator Domenici follows:]
           Prepared Statement of Hon. Pete V. Domenici, U.S. Senator
                                From New Mexico
        Mr. Chairman, your hearing today focuses on legislative proposals
    to mitigate greenhouse gas emissions. I appreciate your holding this
    series of energy-related hearings to develop future legislation. The
    nation will be well-served when we respond to the challenge of the
    President's National Energy Policy with new legislation, and this area
    should be part of that response.
        Today, I'd like to remind this committee that the Senate is already
    moving rapidly to reduce our greenhouse gas concerns through the strong
    Energy and Water Development Appropriations bill that we just finished
    last Thursday. In addition, I'd like to share with this committee a
    vision that I've developed for a national response to move beyond
    debates over details of the ill-conceived Kyoto Protocol towards
    actions to truly help the world achieve prosperity through clean
    energy.
        The Energy and Water bill passed the Senate last Thursday by a 97-2
    margin. It represents a major step in fulfilling the President's
    commitment to a balanced and diversified energy policy--particularly in
    the area of expanding the supply of clean energy from renewable sources
    and nuclear power.
        I've heard some argue that the President's Policy doesn't address
    the possible threat of global warming. Those who have read the Policy
    shouldn't make that statement. The Policy has strong support for clean
    energy sources.
        Renewable sources are encouraged in many ways, including tax
    credits for wind, biomass, solar, and the purchase of clean fuel
    vehicles. The Policy supports a major research program in clean-coal
    technologies, advocates increased funding for renewable energy R&D and
    recognizes nuclear energy for its very positive environmental benefits.
        It is in these last two areas, renewable energy and nuclear energy,
    that the Energy & Water bill takes a major step in implementing the
    President's national energy policy.
        The renewable energy programs are funded in this bill at $435
    million. That's $60 million and 16% above the current year level.
    There's no question that renewable sources can and should play a larger
    role in our energy supply, and this budget will accelerate progress
    towards that vision.
        Nuclear energy received significant increases as well in this bill.
    I strongly agree with the President's National Energy Policy in its
    recommendation supporting the expansion of nuclear energy in the United
    States. Nuclear plants offer emission-free power sources, help maintain
    diversity of fuel supply, enhance energy security, meet growing
    electricity demand, and protect consumers against volatility in the
    electricity and natural gas markets.
        The bill strongly supports a number of nuclear energy R&D programs,
    including one devoted to reducing the quantity and toxicity of spent
    nuclear fuel--called ``transmutation''. It's vital that we identify
    national strategies for that spent fuel, failure to do so will stand as
    a serious roadblock to nuclear energy's important contributions.
        As a final thought on energy security, Mr. Chairman, I want to
    share with you and my colleagues a vision, which is encompassed in that
    Appropriations bill and which I've shared with President Bush.
        I strongly believe that we need to reach beyond the debate over
    Kyoto with a blueprint that provides the tools to combat global
    warming.
        I'm convinced that we can have growth and prosperity in America
    without global warming.
        And I'm equally convinced that we can help provide those same
    benefits for the world.
        I propose that we provide worldwide leadership to eliminate the
    threat of global warming by a commitment to prosperity and growth
    through clean energy.
        And I further propose that we accomplish this goal through
    partnerships with our friends and allies, especially those in
    developing countries.
        I've specifically urged the President to lead this new initiative,
    to accelerate our own research and to build international partnerships
    for joint development of all the clean sources of energy--renewables,
    clean fossil fuels, nuclear energy, and hydrogen-based fuels. Then as
    we transition to improved technologies in the future, our partner
    nations will also be building up their energy infrastructure with the
    latest and cleanest technologies.
        With the new Energy and Water Appropriations bill and the
    President's Policy, our nation will develop energy supplies that
    provide us with clean, reliable, economic energy far into the future.
    But we should be looking beyond our own borders.
        We should be seizing every opportunity to help the developing
    nations around the world achieve much higher standards of living. They
    simply can't do that without reliable electricity supplies.
        Each nation will make their own choices for fuel sources,
    exploiting their own strengths. We have abundant natural gas--and it
    will make a huge contribution to a cleaner future for our country. But
    every nation needs diverse energy supplies, not a reliance on one
    source. Other nations may be well positioned to exploit their solar or
    wind resources--through this program nations can make the choices best
    matching their circumstances.
        The leadership shown by Senator Byrd on clean coal technologies
    matches this vision very well. Some other nations have immense coal
    resources, through this vision they can benefit from our investment in
    clean coal technologies.
        We can leave the poorest countries to their own resources to
    develop whatever energy they can, or we can offer substantial help to
    partner with these nations to help them develop sources that are not
    only reliable and reasonably priced, but also clean.
        It's strongly in our self interest to do this. After all, we all
    share the same air. And in addition, countries with strong economies
    are our best choice for trading partners.
        Mr. Chairman, I hope my vision for a world with abundant clean
    energy options is accepted by this committee. As we work toward the
    comprehensive energy legislation called for in the National Energy
    Policy, I hope that this vision can help to guide our discussions.

        The Chairman. Senator Johnson.

              STATEMENT OF HON. TIM JOHNSON, U.S. SENATOR
                           FROM SOUTH DAKOTA

        Senator Johnson. Thank you, Mr. Chairman. I would ask
    consent to simply submit a full statement for the record and
    only comment briefly that headlines all across the world this
    morning are screaming that the United States is isolated from
    the rest of the world by the decision the Bush administration
    has made relative to the Kyoto treaty.
        I do not believe that a Kyoto debate in this committee is
    particularly fruitful at this time. I would observe that as I
    recall the 95 to nothing vote in the U.S. Senate on the Byrd
    amendment that it had to do with whether poor countries also
    ought to be included in the Kyoto protocol, rather than up or
    down directly on the Kyoto treaty, but in any event, whether we
    participate or do not participate, the harsh reality exists
    that the United States, with 4 to 5 percent of the population,
    produces 25 percent or so of the greenhouse gases in the world,
    and so whether in one context or another, we have an enormous
    obligation to move forward, I think aggressively, with
    strategies designed to address that issue.
        The thrust of the hearings today, as I understand it, were
    intended to focus in particular on the views of the private
    sector with respect to pending legislation before the
    committee, including provisions for reduced greenhouse gas
    emissions, and for that reason, and with my particular interest
    that I have in biofuels, I would withhold from any further
    questions of this panel and thank them for their participation,
    but expedite movement onto the private sector panel, and I
    yield back.
        [The prepared statement of Senator Johnson follows:]
     Prepared Statement of Hon. Tim Johnson, U.S. Senator From South Dakota
        Mr. Chairman, this is a timely hearing as it coincides with the
    latest round of meetings and agreements on global climate changes in
    Bonn. Unfortunately, the United States did not choose to engage in
    substantive discussions in Bonn. This was a lost opportunity because
    the challenges facing the world on emissions and climate change are
    real and extremely important. Scientific studies are showing more
    connection between our energy uses and their impact on the environment
    and well-being of the globe. Any legislation we pass must maintain and
    improve the delicate balance between increasing our energy needs and
    improving our environment.
        I am particularly interested in the role that biofuels can play in
    helping to reduce emissions. As many of you know, Sen. Hagel and I have
    introduced legislation, S. 1006, the Renewable Fuels for Energy
    Security Act of 2001, that would require that a certain percentage of
    all transportation fuels include a renewable fuels component. Not only
    would this help to reduce our dependence on foreign oil but it would
    also reduce emissions and improve our air quality.
        Studies have shown that increase of biofuels would be beneficial to
    the environment. The Department of Energy released a report in 1999
    which stated that the use of ethanol as a transportation fuel reduces
    greenhouse gas emissions. The report stated that the energy effects per
    gallon of ethanol blended in gasoline could be significant--as much as
    a 95% reduction in petroleum use, with an approximate 25% reduction in
    greenhouse gas emissions and 45% reduction in fossil energy use.
    Renewable fuels currently constitute 0.7% of the total U.S. consumption
    of gasoline. The figures from the DOE report demonstrate increasing the
    renewable percentage to 5%, as would be required by the Hagel/Johnson
    bill, would greatly improve our air quality.
        Moreover, an important but often overlooked fuel is biodiesel.
    Diesel fuel is used to power big trucks and buses but emits high level
    of particulates and harmful gases. Biodiesel, however, can have improve
    this situation. Biodiesel production is small but has been growing
    steadily. Like ethanol, biodiesel improves our air quality and
    environment. Biodiesel is four times as efficient as diesel fuels in
    utilizing fossil energy. The overall emissions of carbon dioxide from
    biodiesel are 78% lower than regular diesel while particulate matter
    emissions from biodiesel are 32% lower than regular diesel.
        In addition, with the new EPA rules requiring dramatically lower
    amounts of sulfur in diesel fuel by 2007, the market prospects for
    biodiesel, an intrinsically low sulfur fuel, are very bright for
    helping to meet this requirement.
        Mr. Chairman, the increased use of biofuels is a small component of
    the overall effort to improve our environment and reduce emissions. But
    it is an important effort that must be pursued. It is a prime example
    of how we can maintain and improve the need to fuel our transportation
    sectors while improving our quality of life. Renewables fuels can help
    to fill our existing transportation needs while making the environment
    safer. Differences exist on how we can increase the use of renewable
    fuels in a way that is economically viable. But I am confident that we
    can do so in a way that benefits everyone. The fact that we can improve
    our quality of life while also strengthening our energy security shows
    means it is worth pursuing. The increased use of biofuels is the type
    of initiative that has been envisioned in Bonn and Kyoto and should be
    included in our long-term energy strategy.
        Thank you, Mr.Chairman and I look forward to the testimony.

        The Chairman. Thank you very much. Unless anyone has a
    burning issue, I think I will move to the second panel. Thank
    you both very much for your testimony.
        Let me introduce the second panel as they come forward,
    please. Mr. John Campbell, who is the vice president for
    industrial products and government relations with Ag
    Processing, Inc., in Omaha, Nebraska, Mr. Gardiner Hill, who is
    with BP, he is the CO2 program director, Mr. Jim
    Lyons, who is a professor at the Yale School of Forestry and
    Environmental Studies, Mr. Frank Cassidy, who is the president
    and chief operating officer of PSEG Power in Newark, New
    Jersey, and Mr. Gene Gebolys, who is the president of World
    Energy in Chelsea, Massachusetts.
        Why don't we just start and go right across, starting on
    the left-hand side and right across the panel here, and if each
    of you would take 5 or 6 minutes to summarize the statement,
    and we will include your full statement in the record, so thank
    you very much for being here.

            STATEMENT OF JOHN B. CAMPBELL, VICE PRESIDENT,
                     AG PROCESSING, INC., OMAHA, NE

        Mr. Campbell. Thank you, Mr. Chairman. Ag Processing is a
    regionally federated cooperative. We are owned by farmers in
    several Midwestern States. Our primary business in soybean
    processing, feed manufacturing, and the traditional value-added
    businesses out there. However, we in 1995 got into the biofuels
    business. We built a 30-million-gallon ethanol plant and
    expanded it to 50 million gallons, and then in 1996 jumped into
    the biodiesel business, which is a soybean-oil-derived additive
    oxygenate, essentially, for diesel fuel, and have been in that
    business since that time, so we are highly interested in
    whatever value we can bring to our farmer members through the
    efforts that we are making to reduce greenhouse gas emissions
    as part of our normal business activities.
        As you know, renewables are going to be a part of the
    national energy strategy. With respect to agriculture, though,
    I think renewables need to be considered in the context of not
    only the direct greenhouse gas emission reductions through
    displacement or replacement or enhancement of fossil fuels, but
    also in the context of viewing agricultural production as part
    of that system.
        We have talked a lot about sinks. The literature on sinks
    is very dramatic when it comes to agriculture. Farmers and
    ranchers effectively own the greenhouse. We talk about
    greenhouse gases. Well, that terrestrial ecosystem between what
    the public sector owns in forests and what the private sector
    owns in farmland and pastureland is essentially the foundation
    of the greenhouse. We have enormous potential to sequester
    greenhouse gases.
        Part of this potential is enhanced or discouraged by
    Federal farm policy. What we got in 1996 was called Freedom to
    Farm, and in Freedom to Farm, farmers gained new flexibility to
    use crop rotations, and what that has done is brought on
    several, many millions of acres of soybean land, and what
    soybean and corn rotations do is reduce nitrogen use, they
    increase soil organic matter, or have the potential to, there
    is all kinds of side environmental benefits from the use of
    these crop rotations.
        Agriculture is currently engaged in practices that are
    already reducing greenhouse gases. Biofuels is one of them. Our
    company alone, if you look at the ethanol and biodiesel that we
    produce, are probably saving on the order of 300 million pounds
    of CO2 equivalent per year.
        When you look at the soils that these fuels are grown on,
    the national estimate for carbon sequestration in agricultural
    croplands is 5 billion tons of CO2. I mean, these
    are enormous figures. Some scientists estimate that soil
    sequestration alone could meet the hypothetical Kyoto targets
    entirely for a 12- to 24-year period.
        Now, after that period you reach a point of saturation
    where you cannot really absorb any more carbon, and it becomes
    a--you reach equilibrium, but agricultural land has released
    about 50 percent of the soil organic carbon through traditional
    tillage. As we bring modern tillage and enhanced tillage
    mechanism and practices to farmland, we can gain back probably
    half or more of that soil organic matter.
        It is just like forests. The politics of soil and cropping
    sequestration has not fit with the agenda, so what we have
    essentially is we are in disagreement. There was more of a
    consensus about the reforestation benefits of sinks, but
    agricultural sinks are still out there in Never-Never Land as
    far as the negotiations and the protocols are concerned.
        The same is true with a lot of the other things we do in
    agriculture. Just modern farming technology alone has reduced
    the use of nitrogen fertilizer inputs, as an example. In Iowa
    alone, where we have most of our processing plants, the
    nitrogen fertilizer reductions in that State are the equivalent
    of planting 1 million acres of trees, and these have been
    voluntary efforts. They have happened because economics has
    pushed farmers to reduce inputs, become less energy-intensive,
    and increase soil organic matter as a part of natural farming
    technologies.
        I see the red light flashing. I will conclude by saying
    this committee has a mission, a critical mission in developing
    a national energy strategy. There is a bill pending before your
    committee Senators Johnson and Hagel have introduced to
    increase renewables. That bill alone would be worth about 16
    million metric tons of CO2 equivalent if it were
    implemented. If you combine that with measures in the farm bill
    or other places to enhance and encourage and incentivize
    sequestration activities, the compliance potential is enormous,
    and along with forestry measures, gives the United States
    options to voluntarily reduce greenhouse gas emissions in a
    very significant way.
        I thank you.
        [The prepared statement of Mr. Campbell follows:]
            Prepared Statement of John B. Campbell, Vice President,
                         Ag Processing Inc., Omaha, NE
        Thank you and good morning Mr. Chairman. On behalf of Ag Processing
    Inc. and Ag Environmental Products LLC, I appreciate the opportunity to
    testify and commend the committee for holding this hearing. I know your
    time is short and that you have many witnesses so I will highlight this
    testimony and ask that the complete text be entered for the record.
        Mr. Chairman, most people associate AGP with the regional
    cooperative that crushes more soybeans and refines more soybean oil
    than any other farmer-owned cooperative in the world. While that may be
    nice bragging rights, our farmer and local cooperative manager Board of
    Directors wanted to go farther and do more.
        Popular buzzwords in rural America today are ``value-added'' and
    ``farmer-owned''. Other than sounding nice, what do these phrases
    really mean? For our cooperative it means doing what we have always
    done but also striking out in new directions. In 1986 it meant building
    our first soybean oil refinery so that we could add value to soybean
    oil. Throughout the years it has meant expanding our overseas and
    domestic customer base. It has meant expanding plants and building new
    ones to keep up with the growing soybean and livestock industry. It has
    meant introducing the first and only component pricing program for
    soybeans.
        More specific to this hearing, our Board decided in 1995 to build a
    grain ethanol plant in Hastings, Nebraska. That particular plant
    started out as a 30 million-gallon plant and has been expanded to 50
    million gallons. A year later we jumped into the biodiesel market by
    building the first dedicated soydiesel plant in the Midwest at Sergeant
    Bluff, Iowa.
        The preceding is given as background not to toot our own horn, but
    to let the committee know that ``value-added'' and ``farmer-owned'' are
    not just cliches at AGP. We have put our money where our mouth is. Many
    in the soybean industry thought we had lost our senses when we started
    into the biodiesel business. There was no biodiesel industry. There
    were no customers. Nobody in the government had even heard of
    biodiesel. All there was back in the early 1990's was a small group of
    farmers in Missouri, a couple of academics, a couple of entrepreneurs
    and AGP.
        Today, as you can see, things have sure changed. Biodiesel and
    ethanol are the flavors of the week. Renewable and green energy have
    gained credence as energy costs soar. America is reawakened to our
    reliance on energy and our vulnerability to supply and demand changes.
        I am not here to claim that renewables can alter fundamental energy
    balance issues. I am here to say the renewables can make a difference.
    If we add up a lot of small differences--be they slightly larger
    domestic oil production, slightly larger refinery capacity, slightly
    more conservation and a small portion of the market reserved for
    renewables--we can begin the process of reversing the trend toward ever
    increasing dependence on unstable and sometimes hostile regions of the
    world for our economic well-being.
        Mr. Chairman, the topic that I was invited to discuss before the
    committee regards the nexus between greenhouse gasses and renewable
    fuels. As a producer of renewable fuels, both ethanol and biodiesel,
    our cooperative is highly interested in whatever value we might be able
    to bring to our farmer-owners through credits for reductions in
    greenhouse gas emissions.
        Agriculture and renewable fuels go hand in hand and must be
    considered a multi-dimensional path to both fossil fuel emission
    reductions and greenhouse gas sinks should the United States embark on
    a voluntary or incentivized path toward reductions in greenhouse
    gasses.
        To put things in perspective it is helpful to state the current
    understanding of global CO2 respiration. Scientists estimate
    that on an annual basis about 9 billion tons (Pg.) of CO2
    are emitted. (6.4Pg. from fossil fuels, 1.1Pg. from land use change and
    1.6 Pg. from deforestation.)
        Where does the CO2 go? Scientists estimate that 3.4Pg.
    goes into the atmosphere, 2.0Pg. is absorbed by forest growth and
    2.0Pg. is absorbed by the ocean. The ``missing'' 1.6Pg. is thought to
    be absorbed by the ``terrestrial biosphere''--meaning mainly soils and
    non-forest plants. The object of those concerned about climate change
    is to reduce the atmospheric loading. That may be accomplished by
    reductions in emissions or increased retention in oceans, forests and
    soils (otherwise known as ``sinks'').
        No other industry has as much to offer, at so cheap a price, in the
    effort to reduce greenhouse gasses as agriculture. After all, we are
    the stewards of the natural carbon cycle when we grow plants. We farm
    hundreds of millions of acres that take in CO2, as plant
    matter is grown and act as storage for carbon dioxide--the major
    greenhouse gas. To say it simply, farmers and ranchers own the
    greenhouse in America. Agriculture can make a huge difference in how
    much greenhouse gas is emitted.
        For example, the greenhouse gas emission reductions from burning
    biodiesel and ethanol are greatly enhanced if the grain and oilseed
    feedstocks are grown in a crop rotation using the best available
    tillage and farming technologies. Not only would fossil fuel emissions
    be reduced through replacement with a renewable, but also
    CO2 (carbon dioxide) would be sequestered in the soil as
    organic matter builds. In addition, NOX (nitrous oxide)
    emission can be reduced through nitrogen fertilizer management and crop
    rotations.
        These agricultural practices are encouraged or discouraged by
    Federal farm policy. The ``Freedom to Farm'', or FAIR Act of 1996, as
    it is officially known, changed the way government and farmers
    interact. No longer does government control what farmers produce by
    telling them where, what and how much of each crop they may plant.
    Government also gave up attempting to manipulate grain prices by
    holding reserves and idling land.
        Farmers are now free to make planting and management decisions
    based on the market. American agriculture has embraced the change with
    gusto. Millions of acres have been freed up and are being switched by
    farmers every year to the type of crops they want or need to grow.
        One of the great benefits of this new policy has been the shift
    toward crops like soybeans that are less energy intensive and
    chemically dependent. The shift to soybeans also means an increase in
    crop rotations that are recognized as good for the environment.
        Way back in 1985, rotations were one of the main benefits Senators
    Boren of Oklahoma and Boschwitz of Minnesota highlighted with their
    ``decoupling'' bill. That bill was the predecessor to Freedom to Farm.
        The farm lobby was generally opposed to decoupling and is now
    similarly concerned about the Kyoto agreement and other attempts to
    reduce greenhouse gasses.
        Some studies suggest that the cost of attaining the goals of the
    Treaty would fall heavily on agriculture--with some projecting
    reductions in net farm income exceeding 20 or even 40 percent.
        Agriculture will be in tough shape if some of the policy options
    suggested come to pass. The Commerce Department estimated that a 25
    cents per gallon fuel tax would need to be imposed--other estimates are
    much higher. However, an even more important consideration for
    agriculture are the areas of manufactured inputs, fertilizers and
    chemicals. These are energy sensitive products. For example, energy in
    the form of natural gas typically accounts for 75 percent of the cash
    cost of manufacturing anhydrous ammonia, a basic feedstock or
    ingredient for all nitrogen fertilizer products.
        Obviously, we cannot cut farmers loose from farm bill supports and
    then hang them on the tree of global warming.
        Agriculture should be viewed as a key part of the solution to
    global warming. The fact that the Kyoto negotiators could not come to
    terms with how to treat agricultural sinks gives a hint of their
    enormous potential. One study reports that agricultural soils alone
    could capture enough CO2 to offset any further increase in
    the atmospheric inventory for 12-24 years. That is why Treaty
    negotiators could not agree on the treatment of agricultural sinks.
        Take ethanol for example. Argone National Laboratory published a
    study in January 1999 that demonstrates that the use of corn-based
    ethanol significantly reduces both greenhouse gas emissions and fossil
    energy use. According to the study, every gallon of grain-based ethanol
    used in 10 percent blends with gasoline achieves:

       90-93% reduction in petroleum use.
       12-19% reduction in greenhouse gas emissions, and
       40% reduction in fossil energy use.

        Another study published by Argone in December of 1997 indicated
    that 10 percent blends of ethanol resulted in net greenhouse gas
    savings on the order of 2-3 percent. (If all gasoline were a 10%
    ethanol blend, greenhouse gas emissions would be reduced 2-3%.)
        The same is true for biodiesel. According to the Institute for
    Local Self-Reliance the energy balance for biodiesel 1:2.5 meaning two
    and one half times more energy is produced than consumed in the full
    life cycle production of biodiesel from soybeans. The greenhouse gas
    reductions are even greater than those for ethanol because less
    fertilizer is used as well as less energy in the conversion process to
    fuel.
        In May of 1998 the USDOE/USDA released the Biodiesel Lifecycle
    Inventory Study. The study concludes that the total fossil energy
    efficiency ratio (i.e. total fuel energy/total fossil energy used in
    production, manufacture, transport, and distribution) for diesel fuel
    and biodiesel shows that biodiesel is four times more efficient in
    utilizing fossil energy.
        The overall lifecycle emissions of CO2 from biodiesel
    are 78 percent lower than the overall CO2 emissions from
    diesel. ``The reduction is a direct result of carbon recycling in
    soybean plants,'' notes the study. The biodiesel results are more
    dramatic than ethanol because of the dramatically reduced need for
    nitrogen fertilizer and the lower energy costs of conversion to fuel.
    Basically, the soybean plant does almost all the work.
        Farm management is another area of potential. Farmers continue to
    become more efficient with the use of inputs. Since 1988, national
    nitrogen use for corn has dropped from 137 lbs. to 127 lbs. per acre;
    phosphorous use dropped from 63 to 56 lbs. per acre.
        In Iowa, average nitrogen use dropped from 90 lbs. to 73 lbs. per
    acre in 1995.
        Why is this important in the climate change debate? Nitrous oxide
    is a more potent greenhouse gas than CO2. Nitrous oxide has
    a carbon dioxide equivalent of 270 times a carbon dioxide molecule.
    Nitrous oxide emission reduction in Iowa has been estimated at 37,908
    tons, or 10.2 million tons of CO2 equivalent. These
    reductions were at no loss in yield and $363 million in production
    input savings.
        Let's put this in perspective. The savings in nitrogen fertilizer
    use--on a voluntary basis--in Iowa alone are the equivalent of planting
    nearly one million acres of trees.
        Now lets examine carbon sinks. Trees, for example, are referred to
    as carbon sinks. They take carbon from the atmosphere and store it in
    their trunks, branches and roots. Projects have already been approved
    as part of ``joint implementation'' strategies whereby utilities in one
    country pay to plant trees in another country in order to reduce their
    net carbon loading impact.
        Soils are also a carbon sink. And who controls soils in this
    country? The same people who own the wetlands, endangered species
    habitat and a good portion of the forests--farmers and ranchers.
        If the United States is about to embark on a program to reduce
    greenhouse gasses why not incentivize farmers to fill up their sinks?
        Typical farmland has about a 2 percent organic matter content.
    Farms that utilize no-till or minimum till have around 4 percent and
    grasslands have about 6 percent organic matter content.
        Said another way; our 30 million acres of Conservation Reserve
    Program (CRP) tripled in carbon value. The tens of millions of acres of
    no-till and minimum till are on their way to doubling their organic
    carbon content. Hundreds of millions of acres with lower organic matter
    content could store enormous amounts of greenhouse gas components.
                     soil management and tillage practices
        Soils act as a gigantic carbon sink. Just as plants and trees use
    CO2 gasses, soils capture carbon as roots grow underground.
        The carbon sequestration ability of farmland is enormous. For
    example, the average organic matter of a traditionally tilled acre is 2
    percent. Through the use of no-till or minimum-till methods the organic
    matter can be increased to 4 percent over 20-30 years. Some scientists
    believe soil organic carbon could be restored to 6 percent or above on
    cropped ground. The CO2 equivalent of greenhouse gasses
    saved would be around 65 tons per acre. That is 39,000 tons of
    CO2 equivalent sequestered on a 600 acre farm verses the
    previous tillage practice.
        Why is that important? It could mean dollars in farmers' pockets.
        I have seen estimates that CO2 could be worth $70/ton.
    That is $2.7 million worth of CO2 gas credits on a 600-acre
    farm.
                           other management practices
        Increasing soil organic matter through farming practices is just
    one of many greenhouse gas reduction options. Others include:

       More efficient nutrient applications. (10-15 tons
            CO2 equivalent/acre)
       Reduced fuel and energy use for production, drying and
            processing of crops. (3-5 percent annual reductions = .02 tn./
            a./yr. = 8 ml.tn.CO2/yr.)
       Manure management for methane--especially from large units.
       Growth and use of fuel crops such as ethanol and biodiesel.
            (current ethanol use saves 4.4 ml.tns. CO2/yr.)
       Growth and use of trees in marginal areas such as buffer
            strips or CRP. (1.4 tns. CO2/a./yr. of trees in
            growth phase).

        The private and public sectors are already engaged in creating a
    mechanism to trade greenhouse gas credits. If the world is headed down
    this road, agriculture needs to become fully engaged in figuring out
    how to take financial advantage of the resources they control.
        We have to spread the word that planting trees is fine and good but
    incentivizing farmers to increase the organic matter of soils could do
    in 5-10 years what it would take a forest to do in 40-50 years.
        So where is this all leading? As I said before, the science about
    greenhouse gasses and global warming and what impact human activity has
    on all this is pretty incomplete.
        What we need to focus on is the fact that the previous
    Administration signed an agreement to cut our greenhouse gas emission
    to 7% below 1990 levels. This means cuts of 20-25 percent of the
    business as usual baseline in the out years. President Bush, while not
    supportive of the Treaty, recently stated his support for voluntary
    measures to reduce greenhouse gasses.
        If we in agriculture do not get inventive and imaginative on this
    issue I am confident we will bear a good portion of the costs. Rather
    than get stuck with the bill, I hope that we work together with
    Congress, the Administration and other industries to see how we can
    contribute to the plus side of the ledger on greenhouse gasses.
        If greenhouse gas reduction strategies are imminent, agriculture
    needs to figure out a way to benefit from the contributions we make and
    the increased contributions we could make if the incentives were
    structured properly.
        What would happen for example if utilities were required to
    purchase 5 percent of their energy needs from renewable sources as part
    of electricity deregulation legislation?
        Or, how about a carbon credit on income taxes for the extra carbon
    a farmer or rancher stores with their new production practices?
        What about giving renewable industrial products a tax incentive
    based on the amount of greenhouse gasses they displace?
        Mr. Chairman, this committee is tasked with one of the most
    important missions in decades--formulate and gain approval of a
    National Energy Strategy. This strategy will be considered in an
    environment where climate change issues are also a high priority. Your
    committee has the opportunity for the proverbial ``two birds with one
    stone'' kill.
        Legislation has been proposed by Senators Hagel and Johnson and
    referred to this committee. The bill establishes a renewable standard
    for transportation fuels. Transportation fuels also happen to be the
    leading source of increased greenhouse gas emissions. With one fell
    swoop we could reduce our dependence on foreign oil and strike a blow
    for greenhouse gas reduction.
        I urge your favorable consideration of this and other measures that
    would encourage renewable fuels and simultaneously reduce greenhouse
    gas emissions.

        The Chairman. Thank you very much.
        Mr. Cassidy, why don't you go right ahead.

            STATEMENT OF FRANK CASSIDY, PRESIDENT AND COO,
                       PSEG POWER LLC, NEWARK, NJ

        Mr. Cassidy. Thank you, Mr. Chairman, and members of the
    committee. I am pleased to be here today representing my
    company, PSEG, and our coalition, the Clean Energy Group.
        PSEG is a diversified energy holding company based in New
    Jersey, with assets and operations overseas as well as in the
    United States. We serve over 5 million energy consumers in the
    United States and abroad. The other Clean Energy Group members
    are Consolidated Edison, Key Span Energy, Northeast Utilities,
    Connective, Exelon, PG&E National Energy Group, and Sempra
    Energy.
        This coalition shares a number of significant attributes
    and principles. We operate and are developing powerplants in
    almost every region of the United States. We operate coal, gas
    and oil-fired fossil fuel generating plants as well as nuclear-
    powered facilities. We believe in responsible environmental
    stewardship and we are committed to working cooperatively with
    the environmental community, government, and other stakeholders
    to promote adoption of progressive policies to provide
    meaningful environmental improvements on an economically sound
    and sustainable basis.
        There is no question that the issue of carbon dioxide
    reductions presents a tremendous challenges for our industry.
    However, members of our coalition share the view that the
    scientific evidence on climate change has progressed to the
    point where prudent action on reducing greenhouse gas emissions
    is warranted. We also share the concerns expressed by members
    of Congress, President Bush and his administration about the
    necessity of maintaining a secure, diverse, reliable, and
    affordable electric energy supply.
        The Clean Energy Group believes we can make progress on
    reducing carbon dioxide and other greenhouse gas emissions
    without bankrupting the economy or eliminating coal as a viable
    fuel supply. This testimony is not about reducing carbon
    dioxide emissions through efficient operations and technology,
    although my company has reduced its greenhouse gas emissions by
    7 percent since 1990. It is about the legislation we believe is
    necessary to properly incentivize these reductions going
    forward.
        One of the key questions that I and my industry colleagues
    confront is how best to accommodate the requirement for
    environmental improvement as we make business decisions that
    affect the lives and livelihood of hundreds of thousands of
    investors and involve billions of dollars. The Clean Energy
    Group believes the best way to provide the business certainty
    on which to base these decisions is through an integrated
    environmental strategy and a multipollutant approach that
    includes carbon.
        We have developed a legislative proposal that would deliver
    significant reductions in powerplant emissions of nitrogen
    oxide, sulfur dioxide and mercury, and implement mandatory
    carbon dioxide reductions in a manner that would not compromise
    the reliability, fuel source diversity, or affordability of the
    Nation's electric energy supply.
        The legislation calls for mandatory emissions caps to be
    achieved on established timetables, and the use of emissions
    trading and other cost-effective, creative, and market-based
    compliance techniques such as multisource trading and an all-
    source allocation for credits that will allow industry to meet
    the emission caps efficiently and at low cost.
        I have attached a copy of the Clean Energy Group's
    legislative proposal to my written testimony, and we look
    forward to discussing it with interested members at any time.
    We believe the legislation will provide real and significant
    environmental benefits. However, there is also a strong
    business rationale for an integrated approach and for
    establishing a clear policy on carbon reductions now. Our
    industry needs to know what the future environmental
    requirements will be in terms of the amount of reductions and
    the timetable.
        Our view is that the best and most prudent course of
    action, and the one that will foster investment in new energy
    technologies in the electric infrastructure our country needs
    is a comprehensive program that establishes clear, unambiguous
    environmental targets and timetables over the next 15 years.
        We also believe that such a program should be mandatory. If
    the goal is to provide business certainty, our view is that
    only a mandatory program in which all participants in the
    electric generating industry are required to internalize the
    cost of making necessary reductions will work. This is
    especially relevant in the highly competitive wholesale power
    market in which even small cost differentials can provide
    material competitive advantage for those who choose not to
    participate in a voluntary program.
        Again, I am honored by the opportunity to make this
    statement, and we look forward to working with Congress and the
    administration to craft policies under which our industry will
    make substantial environmental progress while it fulfills its
    mission of providing secure, reliable, and affordable electric
    energy.
        I would be happy to respond to any of your questions.
        [The prepared statement of Mr. Cassidy follows:]
    Prepared Statement of Frank Cassidy, President and COO, PSEG Power LLC,
                                   Newark, NJ
        Mr. Chairman and members of the committee, I am pleased and honored
    to appear before you this morning to represent my company, PSEG, and
    our coalition, the Clean Energy Group.
        PSEG is a diversified energy holding company based in New Jersey
    with assets and operations overseas as well as in the United States.
    The subsidiary I head, PSEG Power, is an independent power producer
    with more than 17,000 megawatts of electric generating capacity in
    operation, construction, or advanced development. PSEG's other
    subsidiaries include Public Service Electric and Gas Company, one of
    the nation's largest electric and gas utility companies, and PSEG
    Global, which develops and operates energy production and distribution
    facilities internationally. As an entity, PSEG serves more than five
    million energy customers in the U.S. and abroad.
        The Clean Energy Group members are Consolidated Edison Company,
    KeySpan Energy, Northeast Utilities, Conectiv, Exelon Corporation,
    Northeast Utilities, PG&E National Energy Group, Sempra Energy, and my
    company, PSEG.
        Members of our coalition share a number of significant attributes
    and principles:

       We operate and are developing power plants in almost every
            region of the United States.
       We operate coal, gas, and oil-fired fossil-fueled generating
            plants and nuclear-powered facilities.
       We believe in responsible environmental stewardship.
       We are committed to working cooperatively with the
            environmental community, government, and other stakeholders to
            promote adoption of progressive policies that provide
            meaningful environmental improvements on an economically sound
            and sustainable basis.

        There is no question the issue of carbon dioxide reductions
    presents tremendous challenges to our industry. However, members of our
    coalition share the view that the scientific evidence on climate change
    has progressed to the point where prudent action on reducing greenhouse
    gas emissions is warranted.
        We also share the concerns expressed by Members of Congress,
    President Bush, and his Administration about the necessity of
    maintaining a secure, diverse, reliable, and affordable electric energy
    supply.
        The Clean Energy Group believes we can make progress on reducing
    carbon dioxide and other greenhouse gas emissions without bankrupting
    the economy or eliminating coal as a viable fuel supply.
        One of the key questions I and my industry colleagues confront is
    how best to accommodate the requirement for environmental improvements
    as we make business decisions that involve billions of dollars and
    affect the lives and livelihoods of hundreds of thousands of investors
    and employees.
        The Clean Energy Group believes the best way to provide the
    business certainty on which to base these decisions is through an
    integrated environmental strategy and a multi-pollutant approach that
    includes carbon.
        The Clean Energy Group has developed a legislative proposal that
    would deliver significant reductions in power plant emissions of
    nitrogen oxide, sulfur dioxide, and mercury, and implement mandatory
    carbon dioxide reductions in a manner that will not compromise the
    reliability, fuel-source diversity, or affordability of the nation's
    electric energy supply.
        The legislation calls for mandatory emissions caps to be achieved
    on established timetables and use of emissions trading and other cost-
    effective, creative, and market-based compliance techniques such as
    multi-source trading and an all-source allocation for credits--
    including renewables, hydro, and nuclear--that will allow industry to
    meet the emissions caps efficiently and at low cost. Use of these
    mechanisms would be scaled back over time--and on a specific schedule--
    as the transition to a less carbon-intensive energy infrastructure
    gains momentum.
        I've attached a copy of the Clean Energy Group's legislative
    proposal to my written testimony. We would look forward to discussing
    it with interested Members and staff at any time.
        We believe the legislation will provide real and significant
    environmental benefits. However, there also is a strong business
    rationale for an integrated approach and for establishing a clear
    policy on carbon reductions now.
        Our industry needs to know now what the future environmental
    requirements will be in terms of the amount of reductions and the
    timetable.
        The issue boils down to one of business certainty for both the
    electric power industry and the capital markets we turn to for
    financing of new generating projects. We don't want to confront a
    situation in which we are forced to waste or put at risk large-scale
    investments predicated on one set of requirements only to have the
    rules changed a few years down the road.
        Our view is that the best and most prudent course of action--and
    the one that will foster investment in new energy technologies and the
    electric energy infrastructure our country needs--is a comprehensive,
    program that establishes a clear, unambiguous environmental targets and
    timetables over the next fifteen years.
        We also believe such a program should be mandatory.
        Clean Energy Group companies have participated in a number of
    voluntary programs in the past that have been useful tools for the
    industry. However, if a goal is to provide business certainty, our view
    is that only a mandatory program in which all participants in the
    electric generating industry are required to internalize the cost of
    making necessary reductions will work. This is especially relevant in
    the highly competitive wholesale power market in which even small cost
    differentials can provide a material competitive advantage for those
    who choose not to participate in a voluntary program.
        Again, I am honored by the opportunity to make this statement on
    behalf of my company and the Clean Energy Group. We look forward to
    working with Congress and the Administration to craft the policies
    under which our industry will make substantial environmental progress
    while it fulfills its mission of providing a secure, reliable, and
    affordable supply of electric energy. I would be happy to respond to
    your questions.

        The Chairman. Thank you very much.
        Mr. Hill, why don't you go right ahead.

    STATEMENT OF GARDINER HILL, CO2 PROGRAM DIRECTOR, BP

        Mr. Hill. Thank you.
        Mr. Chairman, and members of the committee, good morning.
    My name is Gardiner Hill, and I am the director of BP
    CO2 program worldwide based here in the United
    States. I am also joined today by my colleague, Jeff Morgham,
    who is the manager of our emissions trading program.
        I have been asked to focus today on carbon sequestration
    and emissions trading. I am delighted to have this opportunity
    to share with you BP's ideas on the role of sequestration, to
    address the concern around greenhouse gas emissions and climate
    change.
        BP is no stranger to the topic of climate change. We began
    our no-regrets policy several years ago in a speech given in
    May 1997 by John Browne, our chief executive officer. In that
    speech, we announced a voluntary no-regrets policy which began
    with, among other things, the creation of emissions baseline
    data across all of our facilities, and the commitment with
    Environmental Defense to develop an emissions-trading program
    across our assets worldwide.
        Later in September 1998, we announced targets and
    timetables for a reduction in BP's greenhouse gas emissions of
    a 10-percent figure below the 1990 baseline by 2010. As of
    today, we are halfway there in meeting this target, having
    reduced our emissions by 5 percent. On top of that, our
    emissions trading system has exchanged 5 million tons of
    greenhouse gases. This has been achieved by our employees by
    actively identifying a number of innovative solutions, and the
    majority of these solutions have actually been good business
    sense.
        What has become clear is that there is no one silver
    bullet. There is no one-size-fits-all in how business must
    address the issue of climate change. The most common emission
    reduction approaches being considered today typically include
    improvements in energy efficiency, land use practices such as
    forest management and biofuels, and sequestration technology
    for CO2 separation, capture, and storage.
        BP believes that geologic storage offers enormous potential
    for safe and permanent sequestration of carbon dioxide. To put
    this into some perspective, geological storage has the
    potential to close the entire gap which exists between
    projections of future emissions and emission levels required to
    stabilize atmospheric concentrations at 550 parts per million.
    This technology builds on the oil and gas industry's
    considerable experience of safely injecting, storing and
    monitoring gases in geological formations.
        Carbon sequestration can broadly be broken down into three
    main categories, capture, transportation, and storage. In the
    area of capture, we are looking at technologies which remove
    the carbon before or after the combustion process, as well as
    innovative combustion technologies to produce a concentrated
    stream, which is easier to capture.
        In the area of transportation, we are looking at the
    relationship between purity and pipeline material requirements.
        Lastly, as to storage, we are currently examining
    geological formations of how CO2 can be permanently
    and safely stored in existing oil and gas reservoirs. An
    additional benefit of this application is increased production
    from current fields.
        Today, carbon sequestration projects are small in size and
    scope. The main hurdle is cost. BP is working hard on
    developing new technologies to substantially reduce the cost of
    CO2 separation, capture, and geological storage. In
    one such program, BP is a partner in an international industry
    effort called the CO2 Capture Project. The project
    has nine oil and gas companies from the USA, Canada, EU, and
    Norway.
        The CO2 Capture Project was recently announced
    by the White House and the U.S. Department of Energy as a type
    of project that will be important in the development of new,
    lower cost technologies. The recent announced funding support
    from the DOE recognizes the importance of forming public-
    private partnerships, and we look forward to working with them
    on this exciting program.
        Equally as important as the specific technology development
    are strategies for enabling the effective application. What BP
    has learned is that market-based mechanisms such as greenhouse
    gas trading can be effective at spurring innovation and action.
    For example, in BP's internal emissions trading system, each
    business leader is accountable for delivering the emissions
    target, which is directly tied to his performance review and
    his rewards. At the end of the year, a business must have
    permits in hand to match their actual emissions.
        Trading between business lines has allowed BP to implement
    CO2 reductions in the most cost-effective manner.
    Essential to any trading system are clear goals, clear methods
    of establishing baselines, and clear incentives for taking
    early action.
        Mr. Chairman, I would like to conclude by saying that BP
    believes that technology has a fundamentally important role in
    the solutions set for climate change. Carbon sequestration is
    one example that offers the potential for providing a minimum
    of 30 years of permanent storage at today's emission rates. We
    believe the recently announced DOE partnership is essential in
    expediting and improving the potential for these technologies.
        Lastly, we believe that voluntary market-based mechanisms
    have enormous potential to bring early emissions reductions
    forward in the most cost-effective manner. Indeed, we would
    urge the Congress to consider a policy which would reward these
    early actors for these reductions they voluntarily choose to
    make.
        On behalf of the men and women of BP, we thank the
    committee for the opportunity to appear before you today. I
    look forward to working with the committee in the future as you
    pursue policy solutions to deal with climate change.
        Thank you.
        [The prepared statement of Mr. Hill follows:]
     Prepared Statement of Gardiner Hill, CO2 Program Director,
                                       BP
        Mr. Chairman and members of the committee, good morning. My name is
    Gardiner Hill and I am the Director for BP's CO2 Program
    worldwide based here in the United States. I have been asked to focus
    today on our efforts on carbon sequestration and emissions trading. I
    am delighted to have this opportunity to share with you BP's ideas on
    the role of sequestration to address the concern around greenhouse gas
    emissions and climate change.
        BP is no stranger to the topic of climate change. We began our no
    regrets policy several years ago in a speech given in May of 1997 by
    John Browne, our chief executive officer. In that speech we announced a
    voluntary, no regrets policy, which began with the creation of
    emissions base line data across all of our facilities, a pilot
    sequestration project in the Bolivian Rainforest with the Nature
    Conservancy, a challenge to grow our solar business ten fold in ten
    years, and the commitment with Environmental Defense to develop an
    emissions trading program across our assets worldwide. Later, in
    September 1998, we announced targets and timetables for a reduction in
    BP's greenhouse gas emissions of 10 percent below a 1990 baseline, by
    2010.
        As of today, we are halfway there in meeting this target by
    reducing our emissions by five percent. On top of that, our emissions
    trading system has exchanged five million tons of greenhouse gases.
    This has been achieved by our employees proactively identifying a
    number of innovative solutions. Many of these solutions have actually
    made good business sense. I'd be delighted to provide the committee
    with some specific examples.
        What has become clear is that there is no one silver bullet, i.e.
    no one-size-fits-all in how business must address the challenge of
    climate change. The most common emission reduction approaches being
    considered today by active members in the industrial community
    typically include: improvements in energy efficiency, land use
    practices such as forest management and biofuels, and sequestration
    technology for CO2 separation, capture and storage.
        BP believes that geologic storage offers enormous potential for
    safe and permanent sequestration of carbon dioxide. To put this into
    perspective, geologic storage has the potential to close the entire gap
    which exists between projections of future emissions and emission
    levels required to stabilize atmospheric concentrations at 550ppm--a
    level considered by some as sufficient to avoid dangerous interference
    of the world's climate. This technology builds on the oil and gas
    industry's considerable experience in safely injecting, storing and
    monitoring gases in geologic formations.
        Carbon sequestration can broadly be broken down into three main
    areas: capture, transportation and storage. In the area of capture we
    are looking at technologies which remove the carbon before or after the
    combustion process as well as innovative combustion technologies to
    produce a concentrated stream which is easier to capture. In the area
    of transportation we are looking at the relationship between purity and
    pipeline material requirements. Lastly, as for storage, we are
    currently examining geologic formations and how CO2 can be
    permanently and safely stored in existing oil and gas reservoirs. An
    additional benefit of this application is increased production from
    current fields.
        Today, carbon sequestration projects are small in size and scope.
    The major hurdle is cost. BP is working hard on the development of new
    technologies to substantially reduce cost of CO2 separation,
    capture and geologic storage. In one such program, BP is a partner in
    an international industry effort called the ``CO2 Capture
    Project.'' The project has nine major oil and gas companies from the
    USA, Canada, EU, and Norway. The CO2 Capture Project was
    recently announced by the White House and the U.S. Department of Energy
    (DOE) as the type of project that will be important in the development
    of new, lower cost technologies. The recently announced funding support
    from the DOE recognizes the importance of forming public-private
    partnerships and we look forward to working with them on this exciting
    program, which holds much promise for the future.
        Equally as important as the specific technology development, are
    strategies for enabling the effective application. What BP has learned
    is that market based mechanisms such as greenhouse gas emissions
    trading can be effective at spurring innovation and action. In BP's
    internal emissions trading system the group emissions target, is held
    by each of our business managers throughout the company. Each business
    leader is accountable for delivering the emissions target which is
    directly tied to his performance review and rewards. At the end of the
    year, a business must have permits in hand to match their actual
    emissions. Trading between businesses has allowed BP to implement
    CO2 reductions in the most cost effective manner. Essential
    to any trading system are clear goals, clear methods for establishing
    baselines and clear incentives for taking early action.
        Mr. Chairman, I would like to conclude by saying that BP believes
    that technology has a fundamentally important role in the solutions set
    for climate change. Carbon sequestration is but one example that offers
    a potential to provide a minimum of 30 years of permanent storage at
    today's emissions rates. We believe the recently announced DOE
    partnership is essential in expediting and proving the safety and
    potential for this technology. Lastly, we believe that voluntary market
    based mechanisms have enormous potential to bring early emissions
    reductions forward in the most cost effective manner. We would urge the
    Congress to consider policy which would reward those early actors for
    those reductions they voluntarily choose to make. On behalf of the men
    and women of BP we thank the committee for the opportunity to appear
    before you today and look forward to working with the committee in the
    future as you pursue policy solutions to deal with climate change.
        Thank you for the opportunity to share our thoughts on the
    importance of technology in connection with climate change.

        The Chairman. Thank you very much.
        Mr. Gebolys.

               STATEMENT OF GENE J. GEBOLYS, PRESIDENT,
              WORLD ENERGY ALTERNATIVES, LLC, CHELSEA, MA

        Mr. Gebolys. Mr. Chairman, and members of the committee,
    thank you for the opportunity to share the views of one company
    striving to make the promise of renewable fuels the reality in
    America today.
        Mr. Chairman, just 2 days ago the lead story in the Sunday
    New York Times heralded: ``Allies Tell Bush They Will Act Alone
    on Climate Accord.'' Another front page story that same day in
    the same newspaper reported: ``Boom in Natural Gas Drilling
    Cannot Match Soaring Demand.'' Everywhere we turn today, it
    seems that the need to find new energy solutions is becoming
    more urgent even as our existing options seem less suited to
    the task.
        Even as this global pressure to change intensifies, a new
    and perhaps more pragmatic approach to energy diversification
    is emerging. In both vehicle and fuel formats, hybrid
    technologies are beginning to take center stage. In the vehicle
    sector, gasoline hybrid electric vehicles have recently been
    introduced.
        Practical-minded consumers as well as socially minded
    health and environmental groups have quickly embraced these new
    cars and buses because they offer great efficiency without
    great discomfort or inconvenience. With less fanfare, but
    perhaps far greater impact, the same type of transformation has
    been taking place in alternative fuel consumer markets as well.
        Fuels, too, are going hybrid. Ethanol, and more recently
    biodiesel, have become increasingly popular because they
    augment our existing energy infrastructure rather than replace
    it. Biodiesel, which can be used as a one-for-one replacement
    for diesel, is most often used in blends ranging from 2 to 20
    percent. As such, anything that can be powered by diesel can be
    powered by a biodiesel blend. This ease of use and versatility
    has enabled this technology to realize faster initial market
    penetration than any other fuel.
        Biodiesel blends are being used in existing diesel
    vehicles, and they are being dispensed through our existing
    fossil fuel infrastructure. This ease of use also makes for
    ease of distribution. Energy stalwarts such as Gulf and BP have
    begun making biodiesel blends available to their customers.
    Growth in demand is leading to greater availability, and in
    kind, greater availability is leading to greater use.
        It has not been easy, and we have only begun to make our
    mark, but I am proud to report that World Energy, AGP, and
    others are making enormous strides in advancing the new hybrid
    renewable fuel frontier. With offices in Massachusetts,
    Florida, and California, and distribution outposts in virtually
    all areas of the country, World Energy is actively promoting
    biodiesel throughout the Nation.
        Last month alone, World Energy sold more biodiesel than we
    did in all of 1999. By midyear 2001, we had exceeded our sales
    totals for all of the previous year, and by year end we expect
    a fourfold growth over last year's totals. When the U.S.
    Department of Energy recently announced that biodiesel was the
    fastest-growing form of alternative energy in the United
    States, it came as no surprise to us.
        I am here today to testify to the fact that renewable
    hybrid fuels can work in the United States, and I am here to
    support legislative initiatives that will enable us to advance
    practical and cost-effective measures to gradually increase the
    use of renewable energy into the Nation's energy portfolio. The
    struggle to introduce a cleaner renewable fuel in to the
    Nation's diesel supply is no fad. Since 1994, World Energy and
    its predecessor, Twin Rivers Technologies, have been pioneers
    in bringing biodiesel to America. Far earlier, the Europeans
    had embraced this straightforward technology as a way to
    provide increased energy security, cleaner air, agricultural
    support, and domestic energy stabilization.
        Now, with global warming surfacing as the leading
    environmental topic of our time, the question has begun to
    change from, ``is global warming occurring?'' to ``what can we
    do to stem the growth of greenhouse gases?'' There is certainly
    no single answer to that question, but certainly a component of
    the answer must lie within the lessons we are learning about
    the growing popularity of hybrid vehicles and hybrid fuels.
    That lesson is that if we are to begin to make progress, we
    must find solutions that are easy to introduce, and those that
    provide a wide spectrum of benefits. Under any definition, a
    greater reliance on hybrid renewables meets this criterion.
        According to the National Renewable Energy Lab, life cycle
    emissions of CO2 for biodiesel are 78 percent lower
    than conventional diesel. According to a recent USDA study,
    even relatively modest increases of the use of biodiesel will
    have a significant impact on farmer income. A recent EPA study
    found that more than 75 percent--75 percent--of all cancer risk
    associated with outdoor air contaminants relates directly to
    diesel exhaust. Meanwhile, biodiesel exhaust has been found to
    be completely nontoxic.
        I cite these numbers not to suggest that we should or even
    that we could replace all diesel with biodiesel. The point is
    simple. Fossil fuel resources, vehicles, and infrastructure
    dominate our energy landscape today. Further, we are likely to
    depend on this same infrastructure well into the future. With
    this reality as a starting point, we must begin thinking about
    our existing energy infrastructure as a medium for a
    diversified energy supply, rather than as an obstacle to it.
        Today, Senators Hagel and Johnson have given us the
    opportunity to do just that. S. 1006 provides us the
    opportunity to get started. This is the renewable portfolio
    bill, and this bill is good for air quality, good for energy
    security, good for farmers, good for public health, and good
    for America. The time for hybrid renewables has come. This bill
    gives us the opportunity to get started. I urge you to pass it.
        Thank you for the opportunity to be here.
        The Chairman. Thank you very much.
        Mr. Lyons, we are glad to see you back here.

    STATEMENT OF JAMES R. LYONS, PROFESSOR, YALE SCHOOL OF FORESTRY
                AND ENVIRONMENTAL STUDIES, NEW HAVEN, CT

        Mr. Lyons. Thank you very much, Mr. Chairman. It is
    certainly a pleasure to be back before the committee and have
    an opportunity to address you today on the important issue of
    global climate change. What I would like to do briefly this
    morning is touch on a few things. First of all, I think it is
    important to emphasize why we need to be concerned not only
    about the opportunities for sequestration of carbon in
    agriculture and forestry, but the impacts of climate change on
    our agricultural production systems and on America's forests.
        I would like to talk a little bit about the opportunities
    to increase sequestration opportunities in agricultural and
    forestlands, and then raise some important considerations as
    you look at policies to promote the use of these lands for
    sequestration purposes, and time permitting, maybe I will offer
    a few comments on S. 820, introduced by Senators Craig and
    Wyden.
        Let me emphasize that although many reports, including the
    most recent National Assessment Synthesis Team report,
    emphasize that generally carbon fertilization should increase
    production in agriculture and forestry, there are some dramatic
    and important regional and localized impacts that need to be
    considered.
        Overall, if there is an increase in fertilization as a
    result of CO2 and an increase in agricultural
    production, that may not necessarily be good news for America's
    farm sector. In fact, according to the NAST report, increased
    production could result in an estimated $4 to $5 billion
    reduction in producers' profits, which represent a 13 to 17
    percent loss of income for America's farmers, and as the
    Agriculture Committee today is attempting to mark up another
    disaster bill for agriculture, I think it is fair to say we do
    not need to try and increase production any further and
    exacerbate low commodity prices.
        For forests, while productivity might increase in certain
    areas, there are dramatic regional effects. For example, again
    according to the NAST report, seasonal severity of fire hazard
    would be projected to increase about 10 percent over the next
    century under several of the more popular models that project
    impacts of carbon on terrestrial ecosystems. This translates
    into small decreases in fire hazard in the northern plains, but
    a 30-percent increase in fire hazard for the Southeast and for
    Alaska.
        Also, as one might imagine, there will be dramatic changes
    in the forest landscape. Trees favoring cooler climates would
    move northward, some species would probably disappear in their
    entirety. While that may not seem significant for those of us
    from New England, who have come to enjoy the fall foliage, we
    would see a dramatic change in what occurs there, and it would
    be interesting if, in fact, as a result of the disappearance of
    Aspen, Aspen, Colorado no longer had any Aspen, and those are
    some of the real potential effects of change over time.
        With regard to sequestration potential, let me emphasize as
    a part of our preparation for the first COP-6 at The Hague, we
    prepared some estimates of the opportunities for sequestration.
    We found, for example, that managed forests had the potential
    to remove 288 million metric tons of carbon equivalent under a
    business-as-usual scenario, that croplands had the potential to
    sequester another 16 million metric tons per year, and that
    pasturelands could, in fact, sequester about 8 million metric
    tons per year, so there is a significant benefit and
    opportunity associated with sequestration for agriculture and
    forestry.
        Generally speaking, as management practices improve the
    organic content of soils through changes in tillage practices,
    and the establishment of permanent cover, that sequestration
    benefit will increase.
        Others on the panel have already addressed some of the
    other potential opportunities in agriculture such as the
    production of biomass for energy crops which can serve multiple
    benefits, particularly reducing air pollutants and also,
    depending on cropping practices for crops such as switch grass,
    also help to maintain soil organic matter and improve
    sequestration.
        With regard to forest opportunities, many of the
    opportunities are associated with improvements in management
    practices associated with marginal lands, with improving and
    increasing agroforestry activities, and improving management on
    private industrial and nonindustrial and forestlands.
        For example, it is estimated that 23 to 45 million acres of
    marginal lands may be available for conversion to forests in
    the United States. Much of this is in the East and the
    Southeast, and the estimates indicate that potential gains from
    this conversion could be as much as 50 million metric tons per
    year.
        Now, some utilities have been creative and are already
    capitalizing on those opportunities, and in fact in projects
    currently underway in Louisiana, Arkansas, and Mississippi, the
    planting of these marginal lands is actually leading to
    creation of new habitat opportunities and creation of new lands
    that might be added to the national wildlife refuge system.
        Opportunities to increase sequestration rates on forest
    lands are probably greatest on private forest lands, and I want
    to emphasize there that probably the most limiting factor right
    now is simply knowledge and information and resources to help
    private nonindustrial landowners which manage two-thirds of the
    forestlands in the United States with the opportunity to do a
    better job managing the resources.
        Finally, with regard to some key considerations in the use
    of agriculture and forestlands for carbon sequestration, I
    would emphasize the following, Mr. Chairman. First of all, I
    think it is important, as you look at new policies, that
    emphasis be placed on the development of sound scientifically
    based and viable standards for measuring carbon sequestration.
        Ideally, a single, internationally acceptable standard
    should be developed that provides the means to credit or debit
    carbon sequestered in accordance with a given management
    practice or land use change. I would note that the
    International Panel on Climate Change, IPCC, is currently
    studying this issue, and established a program to develop
    standard for methodologies to estimate anthropogenic emission
    of greenhouse gases by sources and removals by sinks.
        A second important consideration is the need to recognize
    that the value of carbon cycles for farm and forestland will be
    a function of policy and markets. Values must be viewed
    separately from the science of determining what impacts land
    use changes and management activities have in terms of their
    effect on carbon cycles. Clearly, one of the impediments to
    establishing values for carbon associated with changes in
    management practices and land use is the uncertainty associated
    with regulation of carbon emissions. Frank Cassidy has already
    addressed this issue.
        I think it is critically important that that uncertainty be
    addressed. The best way to do that would be passage of
    legislation and the development of regulations to establish
    requirements for reductions in greenhouse gases domestically.
    That would open a wide range of opportunities for investors,
    farmers and ranchers and forestland owners, utilities and
    others to use private markets to address global climate change
    concerns.
        In turn, this would likely spur additional investment in
    carbon sequestration activities, particularly if mechanisms
    exist to trade carbon sequestration credits for emission
    reduction targets.
        Now, some of these markets are already developing on an
    experimental basis. I know you are aware of the Chicago Climate
    Exchange, but they are largely speculative. I think if we want
    to get to the point of promoting emission trading, or carbon
    trading, if we want to spur private investment in sustainable
    forestry and agriculture activities, and if we want to
    encourage investment in bioenergy and related technologies,
    then we need to cure the issue of uncertainty that certainly
    clouds where we are, and I would suggest to you that S. 556,
    introduced by Senator Jeffords and a number of his colleagues,
    the multi-pollutant bill, might be a good place to start.
        The last key consideration I think is that efforts to
    enhance carbon sequestration activities on farm and forestlands
    cannot be viewed in isolation. Through certain management
    practices and land use changes, carbon sequestration values can
    increase, and significant additional environmental benefits
    would accrue, benefits such as improved water quality, wildlife
    habitat, improvements in air quality and the environment
    overall, and if some value were established for carbon that
    might spur investment in these sequestration-enhancing
    activities, then private money might be invested where
    currently landowners and the taxpayer through financial
    assistance programs are footing the entire bill.
        Now, of course, the reverse is also true. Efforts to
    enhance sequestration through practices that improve forest
    productivity should not be permitted to do harm to water
    quality, wildlife habitat, and the like. I would argue that the
    full environmental budget for these activities needs to be
    taken into account.
        So in establishing any rules for measuring carbon
    sequestration, perverse incentives that enhance carbon values
    but lead to conversion of old growth forests or the loss of
    biologically important natural resources or the conversion of
    entire ecosystems should be disallowed.
        If you like, Mr. Chairman, I would offer just a few
    comments on S. 820. I want to commend Senator Craig and Senator
    Wyden for their efforts in bringing this to the fore and
    bringing a focus to the opportunities to promote sequestration
    of carbon through better utilization of America's forests. I
    would offer the following comments, though, for their
    consideration.
        First, I think it is important that carbon sequestration
    potential for all forest lands in the United States be
    accurately assessed and reported upon. It is not clear to me
    from the text of the bill if the bill simply focuses on public
    lands. I think it should take into account private lands as
    well, because that is actually where the greatest potential
    exists, with so many lands in private ownership, and so many of
    those lands frankly more productive in terms of their forest
    potential.
        Second, in lieu of the Carbon and Forestry Advisory Council
    established by the bill, what I would suggest is an independent
    scientific panel be established under the rules of the Federal
    Advisory Committee Act. The reason for this is simple. I think
    the charge given to this advisory panel is largely technical
    and scientific in nature, and not fully consistent with the
    qualifications that are required for that panel in the bill.
        Third, as I noted above, I think it is important for any
    methodologies devised in accordance with that legislation be
    consistent with other methodologies for measuring carbon
    emission and sequestration rates developed in the United
    States, and they have to be applicable internationally as well.
    I think that amplifies the need to have scientific expertise in
    that advisory panel.
        Fourth, I think consistent with the stated purposes of the
    bill, it is important that recommendations stemming from any
    required study and actions of the advisory council give full
    consideration to other environmental consequences associated
    with enhancing carbon, and that is noted in the bill. I think
    it should be emphasized.
        And finally, I want to commend the authors for recommending
    the establishment of cooperative agreements and loan program to
    provide for additional investment in forest stewardship in the
    United States. However, I might suggest that the management
    activities provided for by these funds in forest management
    plans that would be developed be managed through existing
    forest stewardship activities, and perhaps through the existing
    forest stewardship program.
        With that, I will cease, Mr. Chairman, and again I want to
    thank you for the opportunity to appear before the committee
    today.
        [The prepared statement of Mr. Lyons follows:]
        Prepared Statement of James R. Lyons, Professor, Yale School of
               Forestry and Environmental Studies, New Haven, CT
        Mr. Chairman, Senator Murkowski and members of the committee. My
    name is Jim Lyons and I am honored to appear before you today to
    discuss proposals related to global climate change and measures to
    mitigate greenhouse gas emissions. I am currently Professor in the
    Practice of Resource Management at the Yale School of Forestry and
    Environmental Studies in New Haven, Connecticut.
        It is a pleasure to return to this room to address you today. I
    want to commend you and your leadership in investigating the many
    issues associated with the nation's current energy concerns, most
    especially the issues associated with climate change that we will
    discuss today. I also want to commend you for your introduction of S.
    597, the Comprehensive and Balanced Energy Policy Act of 2001. Mr.
    Murkowski, it is also a pleasure to be with you again and similar
    commendation is due you in your efforts to provide leadership on energy
    issues through introduction of S. 388, the National Energy Security Act
    of 2001. I look forward to our discussions this morning.
        My testimony this morning will focus on three aspects of the
    climate change debate. First, I will briefly summarize some of the
    concerns raised regarding the potential impacts of climate change on
    forestry and agriculture. Second, I will address the role that forests,
    crop and rangelands play in mitigating the effects of CO2
    through carbon sequestration and how these functions can be enhanced.
    Finally, I will discuss some important considerations in the use of
    forest and agricultural lands as carbon sinks, and the need to be
    mindful of the greater ecological considerations of changes in policy
    intended to enhance the value of forests and agricultural lands as
    sinks.
           the impacts of climate change on agriculture and forestry
        A number of studies have assessed the likely impacts of increasing
    global climate on the nation's forests and agricultural lands. For
    example, the U.S. National Assessment of Climate Change, released last
    November, noted that ``The impacts of climate change will be
    significant for Americans, [but] the nature and intensity of impacts
    will depend on the location, activity, time period, and geographic
    scale considered.'' (NAST, 2000). According to the National Assessment
    Synthesis Team (NAST) report, nationally, agriculture and forestry are
    likely to benefit in the short term due to climate change and rising
    CO2 levels. The reason is assumed CO2
    fertilization effects. But a closer look at the regional and more
    localized effects of increased climate leads to greater concern.
        Results of the Assessment suggest that the productivity of many
    major crops will likely increase nationally. Pastures, too, will
    benefit. However, for some crops, particularly wheat, rice, oats, hay,
    sugar cane, potatoes, and tomatoes, yields will either increase or
    decrease depending upon the scenarios analyzed. For example, as noted
    by the NAST report, ``while wheat yields are likely to increase at the
    national level, yields in western Kansas, a key breadbasket region, are
    projected to decrease substantially under the Canadian climate model
    scenario.''
        The Pew Center on Global Climate Change report, ``Agriculture and
    Global Climate Change'' (Adams, 1999) warns that other factors such as
    precipitation and temperature can act to affect crop yields, in
    addition to the effects of increased CO2. With regard to
    climate change effects on livestock, the authors noted that warmer
    summer temperatures might impact livestock production (e.g., low milk
    production) and suppress livestock appetites, leading to lower weight
    gain.
        An interesting analysis of the economic effects of overall
    increased crop yields suggests that while consumers might benefit
    slightly from greater commodity production and slightly lower food
    prices, the effects of producers' profits could be substantial. As
    noted by the NAST, ``The estimated $4-5 billion reduction in
    producers'' profits represents a 13-17 percent loss of income, while
    the savings of $3-6 billion to consumers represent less than a 1
    percent reduction in the consumers' food and fiber expenditures.''
    (NAST, 2000).
        For forests, modeling indicates that forest productivity increases
    are likely to occur as a result of increased atmospheric
    CO2, but that these increases will be tempered by local
    variability in moisture and nutrient availability. Other environmental
    factors also are affecting forest productivity. For example, ``current
    ozone levels . . . have likely decreased production by 10 percent in
    the Northeast forests and 5 percent in southern pine plantations.''
    (NAST, 2000)
        As in agriculture, regional variations in response to climate
    change may be more striking and disturbing. For example, the NAST
    reported that ``seasonal severity of fire hazard is projected to
    increase about 10 percent over the next century over much of the U.S.
    under both the Hadly and Canadian climate scenarios.'' (NAST, 2000)
    This translates into small decreases in fire hazard in the northern
    plains, but a 30% increase in fire hazard for the southeastern U.S. and
    Alaska (emphasis added).
        Potential changes in the range and distribution of tree species
    could also result from increasing global climate. Trees favoring cooler
    climates are likely to shift to the north while some alpine and sub-
    alpine spruce-fir could possibly be eliminated. In the northeast, a
    transition could occur from the present maple, beech, and birch tree
    species to oak and hickory. Aspen and eastern birch communities could
    contract dramatically in the U.S. and largely shift to Canada. As a
    result, the fall foliage of New England could be dramatically different
    than we're accustomed to knowing and Aspen, Colorado could find itself
    without aspen if these predictions hold true.
        With changes in forest types would come changes in associated plant
    and animal species. As noted in the Pew Trust report, ``Ecosystems and
    Global Climate Change'', ``The effects of climate change on ecosystems
    and species are likely to be exacerbated in ecosystems that already are
    under pressure from human activities, including air and water
    pollution, habitat destruction and fragmentation, and the introduction
    of invasive species.'' (Malcolm, 2000). The NAST report notes that,
    ``Invasive (weed) species that disperse rapidly are likely to find
    opportunities in newly forming communities.'' (NAST, 2000).
        And how might we respond to these changes? With limited knowledge
    of ecosystem structures and functions, adaptation to changing climate
    regimes would be extremely difficult. As noted by the Pew Trust report,
    ``Even the seemingly simple task of reintroduction plants into former
    parts of their range has met little success so far.'' (Malcolm, 2000).
        In short, the effects of increasing CO2 levels and
    increases in global climate, though regional or localized, may be
    substantial and dramatic. These findings were recently verified by the
    National Academy of Sciences report, ``Climate Change Science: An
    Analysis of some Key Questions'' which was prepared in response to a
    White House request for assistance in its ongoing review of U.S.
    climate change policy. The Committee noted,

              The impacts of these climate changes will be significant, but
            their nature and intensity will depend strongly on the region
            and timing of occurrence . . . [O]n a regional basis the level
            and extent of both beneficial and harmful impacts will grow.
            Some economic sectors may be transformed substantially and
            there may be significant regional transitions associated with
            shifts in agriculture and forestry. . . . The possibility of
            abrupt or unexpected changes could pose greater challenges for
            adaptation. (NAS, 2001)
                agriculture, forestry, and carbon sequestration
        Crop, pasture, and forest lands can play a significant role in
    mitigating the effects of climate change precisely because of their
    ability to sequester or absorb carbon in CO2.
        Last summer, an analysis was conducted of the capability of
    forests, croplands, and pasture to sequester carbon to determine what
    role these so-called ``sinks'' might play in helping to mitigate the
    effects of increasing CO2 emissions. This analysis provided
    the foundation for the U.S. position on the role of sinks in mitigating
    global climate change at the COP VI in the Hague, Netherlands.
        As of 1997, managed forests in the United States removed between
    278 and 341 million metric tons of carbon equivalent (MMTCE) per year,
    with an estimate of central tendency of 310 MMTCE per year. During 2008
    to 2012, the first commitment period under the Kyoto Protocol, managed
    forests are projected to remove between 245 and 331 MMTCE per year or
    an average of 288 MMTCE. Much of this uptake occurs in the
    Southeastern, Pacific Northwest, and Northeastern regions of the
    country.
        Based upon these estimates, managed forests in the U.S. currently
    remove about 17 percent of total U.S. greenhouse gas emissions per year
    on a carbon-equivalent basis or about 21 percent of fossil fuel-related
    CO2 emissions. Assuming business as usual, during the period
    2008-2012, managed forests in the U.S. could remove from 12 to 16
    percent of total U.S. greenhouse gas emissions on a carbon equivalent
    basis.
        Cropland soils in the U.S. are projected to remove between 9 and 24
    MMTCE per year during the commitment period with a central tendency of
    16 MMTCE per year. Assuming business as usual, grazing land soils will
    remove between 3 and 23 MMTCE per year from 2008-2012 or 8 MMTCE, on
    average, per year.
        So it is clear that forests, crop lands, and grazing lands can
    serve an important role as sinks for carbon. It is also clear that
    opportunities exist to increase carbon sequestration for each, through
    improvements in management and changes in land use.
        For example, for grazing lands changes in management that improve
    carbon sequestration potential include improved productivity through
    the use of fertilizer or manure management, management to improve plant
    community stability, and noxious weed control. On croplands, conversion
    to conservation tillage and practices such as no-till leave the soil
    surface undisturbed, and thus increase soil organic carbon.
    Establishment of vegetated buffer strips along waterways and wind
    breaks can also enhance sequestration rates with the added benefit of
    reducing soil erosion, providing wildlife habitat, and improving water
    quality.
        For forests, opportunities to enhance sequestration through
    forestry are also available. Richard Birdsey, Director of the USDA
    Forest Service's Global Change Research Program, recently briefed
    Senate staff on some of these opportunities. Included were:
         1. afforestation of marginal cropland and pasture
         2. reducing conversion of forestland to nonforest use
         3. improving forest management
         4. reducing harvests
         5. increasing agroforestry
         6. substituting renewable biomass for fossil fuel energy
         7. more efficient use of raw materials
         8. increasing paper and wood recycling
         9. planting trees in urban and suburban areas, and
        10. improving energy efficiency in wood production.
        I would like to focus, briefly, on the opportunities to increase
    carbon sequestration on crop and forest lands, particularly as these
    opportunities are associated with changes in management practices and
    land use.
        For crop and rangelands, improvements in the organic content of
    soils through changes in tillage practices and the establishment of
    permanent cover are key elements in efforts to increase carbon
    sequestration. USDA's Environmental Quality Improvement Program (EQIP)
    assists producers in applying improved conservation measures on working
    lands and is one tool that can help increase carbon sequestration
    potential. Agricultural programs like the conservation reserve program
    (CRP), the wetlands reserve program (WRP), and the conservation reserve
    enhancement program (CREP) all serve to increase sequestration
    potential by providing for the maintenance of permanent cover on lands
    which are ``set aside'' from normal agricultural production for
    extended periods of time. Where farmers elect to plant trees on these
    set-aside lands, sequestration is further increased.
        Still other opportunities exist to enhance agriculture's capacity
    to assist in reducing the effects of global climate change. For
    example, an experimental program authorized last year has provided
    opportunities for producers to grow ``energy crops'' such as
    switchgrass which can be co-fired in coal fueled utility plants. This
    renewable source of energy is currently being used in a demonstration
    project in the Chariton Valley in Iowa. There, a coalition of twenty
    organizations is working with an investor owned utility and about 150
    farmers to replace 5 percent of the coal currently burned in a 740mW
    coal fired power plant. Currently, 6000 acres are dedicated to energy
    crop production with plans to increase to 50,000 acres.
        Other sources of biomass, in addition to switchgrass, are currently
    being evaluated to determine their potential to serve as a renewable
    source of energy. Probably best known is ethanol where seven percent of
    the corn crop is currently dedicated to fuel production. Estimates are
    that even at this level of production, ethanol increases net farm
    income by more than $4.5 billion, generates 192,000 jobs, and results
    in net federal budget savings of over $3.5 billion.
        Biomass crops have the benefit of being carbon neutral, thus
    benefiting global warming from two perspectives. Their production,
    particularly in the case of switchgrass, which requires no soil
    tillage, maintains soil carbon over extended periods of time. And their
    use as an alternative for coal reduces greenhouse gas emissions as well
    as other harmful air pollutants.
        Further opportunities exist to enhance the value of agriculture in
    addressing climate change. More efficient use of livestock manure and
    recapture of methane for energy production provides an important means
    of converting a ``waste'' problem into an energy-producing opportunity.
    Similarly, improvements in technology are providing important
    opportunities to use biomass to produce feed products, specialty
    products, and polymer products.
        As noted in a March 14, 2001 issue of Chemical Week Magazine,
    Cargill Dow, a startup company created by Cargill Incorporated and the
    Dow Chemical Company, is building a world-scale facility in Blair,
    Nebraska which will produce a new family of polymers called polyactides
    (PLA). It will employ 33 people by 2005 and produce 300 million pounds
    per year of PLA which will be used to produce packaging and fiber
    products. PLA is the first family of polymers derived entirely from
    annually renewable resources. According to representatives of Cargill
    Dow, these products will be cost and performance competitive with
    traditional fibers and packaging materials.
        For forests, opportunities for increasing carbon sequestration
    potential are greatest in a number of areas. These include the
    reforestation of marginal lands, agroforestry activities, and
    improvements in management of private industrial and non-industrial
    forests and public forests.
        Nearly one-third of the U.S. land base is forested. Of this, nearly
    two-thirds is in private non-industrial ownership.
        Afforestation of marginal crop and pasture pasturelands provides
    one important opportunity to expand this forest land base and increase
    sequestration. It is estimated that between 23 and 45 million acres of
    marginal lands may be available for conversion to forest. Most of this
    is in the east. The potential gains from this conversion according to
    USDA Forest Service estimates are approximately 50 MMTCE/year.
        As evidence of the value of this practice, in 1995, 41 utilities
    established a non-profit corporation--the UtiliTree Carbon Company--
    which is engaged in a number of international and domestic forestry
    projects. The projects range from a mix of rural tree planting, forest
    preservation, and forest management activities. Examples include a
    series of bottomland hardwood projects in the Lower Mississippi River
    Valley in Louisiana, Arkansas and Mississippi on lands recently
    acquired by the U.S. Fish and Wildlife Service for addition to the
    National Wildlife Refuge System. The projects would reestablish the
    bottomland hardwood forests on approximately 2,400 acres. It is
    estimated that the projects will sequester an estimated 9 tons of
    CO2 over the first five years and 600 tons per acre after 70
    years. In Western Oregon, a project that will plant trees on 300 acres
    if unforested non-industrial timberland, will include a long-term
    sustainable forest management plan and sequester approximately 200,000
    tons of CO2 over the life of the project. A dozen or more
    electric utility companies are involved in urban forestry and energy
    conservation programs through American Forests' Global ReLeaf and Cool
    Communities programs.
        Agroforestry opportunities to incorporate tree planting into
    agricultural landscapes also hold great potential to increase carbon
    sequestration. Windbreaks, shelterbelts, and riparian forest buffers
    can further efforts to reduce erosion, improve wildlife habitat, and
    minimize polluted runoff for agricultural lands. Recently, for example,
    the state of Maryland announced that it was approaching completion of
    its goal of planting 600 miles of riparian buffers to trees along the
    Chesapeake Bay and its tributaries.
        Opportunities to increase sequestration rates for non-industrial
    private forests are also significant. While industrial forest lands are
    generally more productive, more intensive management of non-industrial
    forest lands through such activities as regeneration, thinning,
    improved stocking, fertilization, and low-impact harvesting can
    increase their productivity. Forest Service researchers estimate that
    the growth potential of many forest stands is well below their
    biological potential and that more intensive management can increase
    productivity and with it, rates of carbon sequestration. Impediments to
    achieving this potential include landowner knowledge of the
    opportunities, limited technical and financial assistance, and poor
    markets.
        On public forests, particularly national forest system lands,
    additional opportunities exist to increase forest productivity and
    reduce the quantity of woody debris and fuels that heighten risk of
    wildfire. As reflected in the USDA Forest Service's wildfire strategy,
    treatment of fuel loads is a top priority for reducing future wildfire
    risk. Millions of acres of national forest system lands proximate to
    urban landscapes and communities are in need of treatment. Through an
    aggressive program of thinning and fuel removal, these lands can
    provide biomass to generate power and the means to improve forest
    health and productivity, further contributing to their potential to
    sequester carbon. According to the USA Biomass Power Producers
    Alliance70 percent of the biomass fuel consumed in the U.S. is from
    forest-related activities. In fact, sixteen of California's 28
    operating biomass power facilities are dependent, to some degree, on
    fuels derived from public lands.
     key considerations in promoting the use of farm and forest lands for
                              carbon sequestration
        Finally, I would like to focus on some important considerations as
    you develop new policies that might seek to enhance the use of farm and
    forest lands to sequester carbon or produce biomass as a means of
    mitigating the impacts of global climate change.
        Of paramount concern is the development of sound, scientifically-
    based, and viable standards for measuring carbon sequestration.
    Ideally, a single, internationally-accepted standard would be developed
    that provides the means to credit (or debit) carbon sequestered in
    accordance with a given management practice or land use change.
        Extensive work has been done to attempt to develop such
    measurements for forestry. Winrock International has done extensive
    work in this arena, dating back to 1992. The system they devised is now
    being used to measure and monitor carbon in several private projects.
    Less progress has been made in developing similar measures for
    agricultural applications. The International Panel on Climate Change is
    currently studying this issue and has established a program to develop
    standards for methodologies to estimate anthropogenic emission of
    greenhouse gases by sources and removals by sinks.
        If methodologies are successfully established, these measures of
    sequestration could serve as a valuable addition to current efforts to
    measure and certify sustainable forestry in the U.S. Thus, sustainable
    forestry might also be defined as forest management activities which,
    in sum, have no negative impacts in terms of climate change. A valuable
    lesson to be learned from the experiences of those involved in the
    development of methodologies for measuring sustainable forestry would
    be to assure third party verification and certification of the results.
        To his credit, President Bush has called for improving cost-
    effective measurement of land-based emission reduction and carbon
    sequestration projects. In announcing this initiative, the
    Administration noted,

              A fundamental challenge in attracting private sector
            investment to land-based greenhouse gas emission reduction or
            carbon sequestration projects in the ability to accurately
            quantify the net changes. Private sector investors are
            reluctant to participate in projects without reliable and
            credible quantification of the uncertainties associated with
            different land management practices.

        A second important consideration is the need to recognize that the
    value of carbon per acre for farm and forest land will be a function of
    policy and markets. Values must be viewed separately from the science
    of determining what impacts land use changes and management activities
    have in terms of their effects on carbon cycles.
        One of the clear impediments to establishing values for carbon
    associated with changes in management practices and land use is the
    uncertainty associated with regulation of carbon emissions. If
    preliminary reports from Bonn, Germany are true regarding agreement on
    principles for implementation of the Kyoto protocol, then one part of
    this hurdle may be overcome--at least on an international scale. What
    the implications may be for carbon values and markets in the U.S. is
    unclear. What is clear, however, is that removal of this uncertainty
    through passage of legislation and the development of regulations to
    establish requirements for reductions in greenhouse gases domestically,
    would open a wide range of opportunities for investors, farmers and
    ranchers, forest landowners, utilities, and others to use private
    markets to address global climate concerns. In turn, this would likely
    spur significant investment in carbon sequestration activities,
    particularly if mechanisms existed to trade carbon sequestration
    credits for emission reduction targets. While private markets are
    currently developing, such as the Chicago Climate Exchange, they are
    largely speculative, based on the assumption that some emission
    reduction requirements will eventually be put in place. If we want to
    get there sooner, if we want to spur private investment in sustainable
    forestry and agricultural activities, if we want to encourage
    investment in bioenergy and related technologies, then we need to cure
    the uncertainty that currently clouds this issue.
        A third key consideration is that efforts to enhance carbon
    sequestration activities on farm and forest lands should not be viewed
    in isolation. Through certain management practices and land use
    changes, carbon sequestration values can increase and significant
    additional environmental benefits can accrue. The benefits to water
    quality, wildlife habitat, air quality and the environment, overall,
    can be substantial. And, if some value were established for carbon that
    might spur investment in these sequestration-enhancing activities, then
    private money might be invested where currently, landowners and the
    taxpayer, through financial assistance programs, now pay.
        Of course, the reverse is also true. Efforts to enhance
    sequestration, through practices that improve forest productivity or
    promote the production of biomass, should not be permitted to do harm
    to water quality, wildlife habitat and the like. The full
    ``environmental budget'' for these activities needs to be taken into
    consideration. Efforts to promote carbon sequestration through
    investments in forests, crop and range lands need to be viewed in their
    larger environmental context. In establishing the ``rules'' for
    measuring carbon sequestration, perverse incentives that enhance carbon
    values but lead to the conversion of old-growth forests, the loss of
    biologically-important natural resources, or the conversion of entire
    ecosystems should be disallowed.
                            some comments on s. 820
        Before I close, Mr. Chairman, I would like to offer a few comments
    on S. 820, the ``Forest Resources for the Environment and the Economy
    Act.'' I commend Mr. Wyden and Mr. Craig for taking the initiative to
    introduce this legislation and to encourage further thinking about the
    role that national forests can play in helping to address global
    climate change concerns.
        First, I believe it is important that the carbon sequestration
    potential for all forest lands in the United States be accurately
    assessed and reported upon, not simply national forest system lands. It
    was not clear to me if the report required by this bill would include
    industrial and private, non-industrial forest lands as well as native
    American lands and other public lands. If not, I believe it should do
    so.
        Second, in lieu of the carbon and forestry advisory council
    established by the bill, I would suggest that an independent scientific
    panel be established under the rules of the Federal Advisory Committee
    Act. I recommend this because I believe the functions required of the
    council are largely technical and scientific in nature and not fully
    consistent with the qualifications and expertise required in the make-
    up of the council.
        Third, as I noted above, it is important that any methodologies
    devised in accordance with this legislation be consistent with other
    methodologies for measuring carbon emissions and sequestration rates
    developed for the United States and be applicable in an international
    context. This amplifies the need to provide strong scientific input and
    guidance in fulfilling the requirements of S. 820.
        Fourth, consistent with the stated purpose of the bill, it is
    important that any recommendations stemming from the required study and
    actions of the advisory council give full consideration to the other
    environmental concerns associated with efforts to enhance carbon
    sequestration. Sequestration efforts should not be viewed in isolation.
    Trade-offs and co-benefits associated with identified management
    practices and land use changes should be clearly identified.
        Finally, I commend the authors for recommending the establishment
    of cooperative agreements and a loan program for forest carbon
    activities on non-industrial private forest lands. I would suggest that
    the management activities provided for by these funds and the forest
    management plans that would be developed should be incorporated into
    ongoing forest stewardship program activities. In addition, I strongly
    support the notion of cancellation of these loans in return for
    donation of permanent easements that would protect the forest carbon
    reservoir, provided the affected lands continue to be managed under a
    plan that is consistent with all applicable environmental laws.
                                    summary
        Mr. Chairman, tremendous opportunities exist to expand the use of
    farm and forest lands to assist in U.S. efforts to address the effects
    of global climate change. These lands can serves as sinks for carbon,
    as the sources of biomass for renewable energy production, and, at the
    same time, provide opportunities to improve water quality and wildlife
    habitat.
        Carbon sequestering and biomass production activities can provide
    new sources of income for landowners. In addition, should markets
    develop for carbon as a result of changes in domestic and/or
    international policy, new sources of capital are likely to provide the
    funds for improved management activities.
        Effective means of measuring, monitoring, and verifying the carbon
    sequestration benefits of management practices and land use changes
    need to be developed. In addition, the uncertainty associated with
    making investments in carbon sequestration activities needs to be
    eliminated. This can best be done through the establishment of clear
    requirements for reductions in CO2 emissions through the
    enactment of legislation currently pending before the Congress.
        Finally, any strategies for enhancing carbon sequestration
    opportunities on farm and forest lands need to take into consideration
    both the potential environmental benefits and costs. Generally,
    management activities that improve carbon sequestration are likely to
    provide significant conservation benefits as well. This provides an
    exciting opportunity to promote mutually beneficial conservation and
    carbon sequestration activities as components of sustainable forestry
    and agricultural programs. However, a rush to promote land management
    practices that enhance carbon sequestration or other activities
    intended to address global climate change at the expense of other
    environmental values would be a poor investment.
        Mr. Chairman, thank you again, for the opportunity to appear before
    you today.

        The Chairman. Thank you very much.
        Mr. Hill, let me ask you, on the emissions trading
    activity, I am unclear just in trying to understand what our
    exit from the negotiations in Bonn, what the effect of that is.
    Your company is an international company. You have undoubtedly
    been following the discussions in Bonn about establishing an
    emissions trading program. Do you know how this would affect a
    decision you might make on reducing emissions in the United
    States, versus reducing emissions from an operation you might
    have in Europe, or how does that work, as you understand it?
        Mr. Hill. Mr. Chairman, that is certainly an issue I think
    we are going to have to understand very deeply. At this time it
    is too early for us to have really sat down and thought about
    that. That is something we will be looking at over the coming
    months.
        One thing I will add, that our own internal program remains
    unaffected by that. Each year we have a target set within our
    business, and as I mentioned in my testimony, each business
    leader is then responsible for meeting that target.
        What we will have to check is that we are operating within
    the legal framework that is set out in any particular country
    or any particular treaty that has been subsequently introduced,
    but as we understand it today, the program we have within the
    company will remain intact.
        The Chairman. Let me ask Mr. Cassidy, and first let me
    congratulate you and this group that you are part of, the Clean
    Energy Group, for your legislative proposal. There is another
    group that I am also familiar with called the Clean Power
    Group. Are you familiar with them?
        Mr. Cassidy. Vaguely, Mr. Chairman.
        The Chairman. Okay. That is another group of companies that
    have come together and have developed a proposal, but I gather
    from your comments you are not familiar with their proposal and
    would not be able to comment on it relative to your own.
        Mr. Cassidy. I am not, I am sorry, Mr. Chairman.
        The Chairman. We might ask just for the record if I could
    try to get you a description of the outline of what they are
    talking about and get your reaction to it.
        Mr. Cassidy. We would be happy to provide that. I can also
    provide you, Mr. Chairman, with a comparison of our proposal to
    the Jeffords bill which has been referred to several times here
    today.
        The Chairman. That would be very helpful if you could.
        Mr. Cassidy. Sure.
        The Chairman. If we could understand more clearly why you
    think yours is the better proposal, that would be useful.
        What do you see--Mr. Cassidy, let me ask another question
    of you. What do you see as the major impediments to developing
    new coal-fired generation capacity at this time in this
    country?
        Mr. Cassidy. If I look at the development of new generation
    over the last 10 years or so, it has been almost entirely
    natural gas-based, and that has largely been as a result of the
    cost differential between natural gas and coal, not being able
    to overcome the capital cost disadvantage of coal.
        Today, with natural gas dependence being an issue for our
    energy security, as well as the price of natural gas, coal has
    started to become a lot more attractive, and in fact my company
    has been looking at developing new coal-fired plants.
        Also, we were able today, with the technologies that have
    been developed, to be able to produce coal-fired plants that
    are extremely clean in terms of nitrogen oxides, sulfur
    dioxide, and mercury.
        The big impediment, as we see it, is the uncertainty
    surrounding the future of carbon. It is very difficult for us
    to make a decision which has a 20- or 30- or 40-year life span
    with no real certainty about how carbon is going to be
    regulated going forward, and that is thus an inability for us
    to predict how that investment is going to turn out.
        The Chairman. Thank you very much.
        Mr. Lyons, let me ask you about this agreement that has
    been developed in Bonn, or is being developed, as you
    understand it. How does the agreement promote the use of sinks
    to meet these greenhouse gas emission targets? Are there ways
    in which the agreement they are coming to there is going to
    advantage or disadvantage us relative to these so-called carbon
    sinks?
        Mr. Lyons. Well, Mr. Chairman, I have to qualify my
    comments by saying I only pulled down a copy of the text, or at
    least the draft text, off the web last night, so I have only
    had a brief opportunity to review it.
        As I understand, there is some recognition for credits for
    agricultural sinks, opportunities for use of reforestation and
    afforestation in what is called the Clean Development
    Mechanism, and then there is limited credit provided for forest
    sinks, according to an appendix to the document.
        The cap for U.S. forest sinks would be about 28 million
    metric tons per year. Unfortunately that is about where we
    were, at least with regard to forests, in our discussions in
    The Hague, and I know Senator Craig and I spent many a long
    night discussing the potential for incorporating sinks into the
    discussions we had while we were in The Hague.
        What is unclear, and certainly I am not an expert in
    international treaty law, is what the ramifications are for the
    United States should we not participate, and how this sink
    proposal would affect us.
        I mean, to some degree I would characterize it as a lost
    opportunity. We were in The Hague arguing strongly for
    inclusion of additional credits for sinks, given the high
    potential for U.S. forests to serve as sinks for carbon.
    Unfortunately, the agreement seems to have ended up where we
    left off in The Hague, so the implications are not clear,
    although there is some recognition for sequestration as a part
    of the larger package.
        The Chairman. Thank you very much.
        Senator Craig.
        Senator Craig. Mr. Chairman, let me take off from your last
    question to query Mr. Lyons on that issue. I, too, have got a
    copy now--I think it has been pulled off the net--that gives us
    an understanding of where the group may well be as it relates
    to sinks, and Jim, if we take your figures, 288 million metric
    tons in the forest, and if we include croplands at 16, and
    pasture at 8 then 312, somewhere in that range, and I
    understand, though, that the 28 figure, using the formula that
    apparently they are using, would give us less than 1/10th of
    the existing U.S. capacity, potentially, to absorb carbon.
        Now, it is interesting that Canada, with their vast
    forests, got 11, Japan got 13. Japan probably got 13, and I am
    told by those who were there that Japan was able to bargain up,
    and there was willingness to allow them to bargain up. It was
    something about a vote they might get if they kind of included
    Japan a little more. I think it was true of the Russian
    Federation.
        When you look at Russia, at 17 metric tons of carbon per
    year in the their vast steppe lands and their vast forests,
    this is not very reflective of a desire to use sinks and carbon
    sequestration as a right and proper tool based on current
    science, not based on the new science of measurement that is
    evolving as it relates to sinks.
        So I think maybe I am as frustrated as you are by at least
    the current figures and how they get to the formula. My guess--
    as you know, we were about to bargain away at 35 percent of
    capability when we were at The Hague. My guess is this is less,
    or somewhere near that figure.
        Anyway, I bring that up only to say that based on what I
    read now, and what we know now, it is interesting what they are
    doing, with or without us.
        I also find out, just to add to the record, Mr. Chairman,
    under article 12, called Clean Development Mechanism--here is a
    real fascination, and this is subparagraph 2, to recognize that
    parties included in Annex I are to refrain from using certified
    emission reductions generated from nuclear facilities to meet
    their commitments under article 3.1.
        That is the exclusion of new nuclear, probably the cleanest
    source of nonemitting energy sources there are today, and it is
    fascinating that they would exclude it as a measurement. To me,
    that is a statement of politics, not of good science, or the
    reality of a problem and how you meet that problem. I do not
    know how to meet it otherwise. I was not there, and should not
    react.
        But let me come to you, Mr. Hill, because I think all of us
    recognize what BP is trying to do, and we applaud it. What you
    have done voluntarily and collectively as a multinational
    company is to be applauded.
        Given your estimate of the potential for carbon
    sequestration, I guess I would ask you what is your view of the
    decision taken in Bonn this past weekend that appears to limit
    the use of sinks under the Kyoto Protocol?
        Now, do not take my interpretation. I trust that you have
    some working knowledge of where they were.
        Mr. Hill. I only have a very basic working knowledge of
    that, and my area of expertise is indeed in the technology area
    of carbon capture, separation, and storage.
        What I can talk about is the experience that BP has had. As
    you have said, we have taken a lot of preventative measures,
    and what we have established is that we need to have the
    flexibility to investigate and learn from all types of
    sequestration, and by limiting that, and limiting the amount of
    tons you can bring to the table, could have an impact on
    reducing the costs in line with the way you would like to
    reduce costs.
        So I think I would have a concern that in any event, if we
    are limiting the flexibility we have in the area of
    sequestration, that could have an impact on how much we are
    able to just cause the flexibility we have to offset
    CO2.
        Senator Craig. Given your experience with internal trading
    programs, would BP support the development of a national
    registry for emissions reduction, and would you use such a
    registry?
        Mr. Hill. I think our track record shows that we are
    extremely supportive of open and transparent data, so we would
    support mechanisms where we can actually report our emissions.
        Senator Craig. BP has said we could store 30 years of
    emissions in geologic reservoirs, is that accurate?
        Mr. Hill. Right. In fact, these are not BP numbers. these
    are numbers that have been determined independently by
    research, and the numbers indicate that there is the capacity
    in geological formations to store something in the order, at a
    minimum, of 30 years of emissions as they currently exist
    today.
        Senator Craig. How does that relate to U.S. capacity?
        Mr. Hill. How does that relate to U.S. capacity? I do not
    actually have the split-down. That was actually a global figure
    that was quoted, and I do not actually have the split-down into
    U.S. capacity versus the rest of the world, but that is
    something I can actually forward to you in a written statement.
        Senator Craig. I would appreciate that.
        Mr. Chairman, my light is on. I would like to ask a
    question of Mr. Cassidy, if I might.
        Mr. Cassidy, how do you respond to the Energy Information
    Administration's study on multiple pollutant legislation? By
    that, I mean they say that the costs of approaching multiple
    pollutant legislation in relation to CO2 means
    generally higher energy costs. Their figures are $80 billion
    electrical cost to the United States annually, a 50 percent
    reduction in coal generation.
        Now, that is the price per kilowatt hour of electricity up
    from 6.2 to about 8.5 cents, about a 30 to 40 percent increase
    based on a multiple pollutant strategy, and you know, this
    committee, in a bipartisan way, looks at the Energy Information
    Administration as a fairly neutral agent of measurement and
    information for us. How do you react to that?
        Mr. Cassidy. Senator, we have done quite a bit of analysis
    of the EIA's report, and first off I would say that the
    scenario that they analyzed was one where there was a very
    sudden carbon cap imposed with very little chance for a
    transition into it, limited flexibility mechanisms, and no
    trading involved, very different than the proposal which we are
    proposing both in terms of timing and the amount of
    flexibility.
        I guess I would also comment that if you look back 20 years
    ago at some of the estimates of the effect on electricity cost
    that the Clean Air Act was going to have, we heard some of
    these same kinds of statements, and it has turned out that the
    actual cost to implement the Clean Air Act has been a small
    fraction of what was estimated at the time.
        Senator Craig. Is it not true, though, that mandatory
    CO2 reduction would help the Clean Energy Group
    companies from a competitive standpoint? Would it not just
    inflict higher cost on your competitors?
        Mr. Cassidy. I would say that that is absolutely true, that
    we believe that part of what we are trying to do with this
    proposal is to level the competitive playing field and to
    assure that all competitors are internalizing the costs of
    emissions control.
        Senator Craig. Thank you.
        Thank you, Mr. Chairman.
        The Chairman. Senator Johnson.
        Senator Johnson. Thank you, Mr. Chairman. Thanks to this
    panel. Mr. Campbell and Mr. Lyons demonstrate that there is
    life after public service, indeed. We are glad to have them
    here, and Mr. Campbell, again thank you for participating in
    this committee's first field hearing in Sioux Falls, South
    Dakota here this past month.
        I have a particular interest in the biofuel side of things.
    It seems to me that both in the case of ethanol and in the case
    of biodiesel, an issue that Mr. Campbell and I discussed a bit
    at the previous hearing has to do with the classic chicken-and-
    egg issue here, and that is a reluctance on the part of the
    private sector to make significant investments in the
    production of either biodiesel or ethanol absent some at least
    minimal assurance of what the market is going to be over a
    longer period of time. It takes a significant amount of time to
    recover the investment for these plants.
        There has been some going forward of production capability
    in this country, and I am grateful for that, but a high level
    of uncertainty about the ultimate market. Currently, only about
    7/10ths of 1 percent of motor fuel contains a biofuel product.
    Senator Hagel and I are suggesting that we slowly ramp that up
    to about 5 percent by the year 2016.
        That is a long window, and we do not suggest that this is
    going to displace all the petroleum in the world, but
    nonetheless we would create by a matter of national policy a
    volume of market that the private sector could respond to, and
    I wonder, if Mr. Campbell, would you care to comment about that
    chicken-and-egg problem that we currently have?
        Mr. Campbell. Certainly from an investment perspective it
    is very difficult to responsibly make 20- and 30-year
    investments without the investment climate being more certain.
        In renewables, we are constantly at the mercy of whatever
    Congress decides to do, whether it be extending the excise tax
    exemption or other EPACT-type strategies. It is a highly
    unstable environment. However, I do see some change in at least
    the political support for renewables. I see that as a positive
    step.
        I also see, at the ground level, at least a change in the
    attitude of the petroleum industry. Certainly we see statements
    from the top level that is supportive of renewables. We see
    hundreds of millions of dollars of investment going into
    renewables, but yet there is still the political fight. There
    is still the political fight going on, and it needs to stop. We
    need to come to closure on whether renewables are going to have
    a place in the energy spectrum or not, and if they are, what is
    it? We set up a framework, and we go forward, and I think that
    is what your bill does. Other pieces of legislation address
    that issues as well.
        Senator Johnson. Mr. Gebolys, a lot of attention is given
    to ethanol around here, but biodiesel also holds great prospect
    I think for the country. We have some experience in that area
    in particular.
        One of the problems we have had with biofuels has been the
    shortage of outlets, places where consumers can buy the fuel.
    Where are we in terms of the availability of biodiesel fuel in
    terms of stations around the country?
        Mr. Gebolys. Biodiesel has come a long way in a short
    period of time, as you know, Senator, because you were very
    instrumental in leading the effort to make biodiesel an
    eligible fuel for compliance with the Energy Policy Act that
    was signed into law with the Energy Conservation
    Reauthorization Act in late 1998, so biodiesel as a viable
    alternative fuel in America has only been around for 2\1/2\
    years.
        Given that, we are now--we have distribution in most major
    cities in the United States. Diesel fuel is distributed very
    differently than gasoline. It does not get distributed at your
    corner filling station. It largely is filled through central
    fueling sites, and generally most diesel fuel is used by big
    fleets, and therefore the challenge to introduce biodiesel into
    the American mainstream petroleum supply is somewhat less
    challenging than is getting other alternative fuels into the
    mix.
        Biodiesel, also by virtue of the fact that it goes into
    existing vehicles, can go into anything. It can go into
    stationary diesel generators, and it can go into virtually
    anything.
        So the real challenge here, as John Campbell had said, is
    how do we create a movement in which the folks that will be
    buying this know that it is going to be available and know that
    there is a motivation to buy. Where there is an appetite for
    biodiesel, we can satisfy that appetite, literally within a
    week, and are doing that all over the country.
        All major cities must have access to biodiesel now, and
    really it is just a matter of getting the word out, getting the
    product out, and putting in more stable sources of supply and
    demand.
        Senator Johnson. Does using a biodiesel blend require any
    changes to the vehicle, or can any diesel use biodiesel?
        Mr. Gebolys. Yes. That is really what sets biodiesel apart
    from anything else in this framework. Biodiesel can go into
    anything without any change at any blend level. There is no
    thing like it that we have encountered in the past.
        There is a real temptation to lump biodiesel in with
    ethanol, but there is a pretty significant difference in the
    sense that ethanol at higher volume levels has to go into
    specifically designed vehicles, and therefore the--the
    challenge to get biodiesel into the mainstream in America is
    enormous. It is just smaller than anything else.
        Senator Johnson. I think you raise a good point. Ethanol
    fuels up to about a 10-percent blend can go into any vehicle,
    and you can burn ethanol blend one day and not burn it the next
    day. The same with biodiesel.
        Now, if you get to the E-85 ethanol blends, the very high
    ethanol, that does require a dual technology, and we have had
    some controversy about Federal policy in that regard, but at
    the lower percent blends, ethanol and biodiesel are the same in
    that way.
        The red light is on, but let me just ask you, we have had
    some very great success in the State of South Dakota, where the
    Black Hills National Forest has had its Federal forest fleet
    use biodiesel in its diesel vehicles with great satisfaction.
    The only complication they had was that they were being
    requested to blend it themselves rather than buying preblended
    biodiesel. Is there any complication with the pre-blended
    biodiesel? Is this just part of the early stages of the
    industry, or is there a problem with transporting a preblended
    biodiesel fuel?
        Mr. Gebolys. There is no problem at all. In fact, I am very
    happy to report to you that working with our friends at BP we
    are delivering preblended B-20, which is 20-percent biodiesel
    products, throughout the State of Ohio. The entire Ohio
    Department of Transportation is using biodiesel, and everybody
    that receives those shipments, whether it is small or large
    shipments, are getting preblended product, and unless someone
    told them they would not know any difference from getting their
    regular diesel fuel, so I guess in short, the answer is, we are
    getting there, and in South Dakota we will be getting there,
    too.
        It is just a matter of, we have only been at this game for
    a couple of years, and in the event that we are able to get
    enough support that says this industry is going to continue to
    be supported, and there is going to be a continued interest in
    us continuing to make these kinds of investments, you will see
    the AGP's and the World Energies of the world being joined by
    the BP's and the Gulf Oil's of the world, and we will be moving
    further and further down the road.
        Senator Johnson. Thank you.
        The Chairman. Thank you very much. Due to the late hour, I
    think I will postpone additional questions and just do those
    for the record as a follow-up. Senator Craig said he had an
    additional question, so I will defer to him.
        Senator Craig. Mr. Chairman, with your admonishment as it
    relates to time, I will follow suit, but I did want to thank
    Jim Lyons for his comments as it relates to the Craig-Wyden
    bill, and hope that you will stay tuned, Jim, as we work to get
    that into public policy and continue to give us your thoughts
    and advice on it.
        Let me ask the one question in closing. Do you believe that
    carbon sequestration necessarily--does it mean, as it relates
    to forests, a lock-up, or does it mean that we can include a
    sustainable use pattern on these forests?
        Mr. Lyons. I think the answer to that, Senator Craig, is
    that it means a mix of practices to suit particular conditions
    and needs. In some places it means retaining the carbon that is
    already stored in trees vertically there. In other places it
    means a much more aggressive management strategy such as the
    Forest Service is attempting to do in dealing with the high
    levels of fuels, particularly near communities at risk. That, I
    think, affords tremendous potential to produce biomass as a
    renewable energy source, and also to accelerate sequestration
    opportunities through reforestation and improvement of forest
    health in those areas.
        Senator Craig. Thank you. To all the panelists, thank you
    very much. Mr. Chairman.
        The Chairman. Senator Johnson, did you have any other
    questions?
        Senator Johnson. Just one last question. Just to expedite
    this, but I did want to ask either Mr. Campbell or Mr. Gebolys,
    there has been a lot of testimony, a lot of science on record
    about the environmental benefits of biodiesel.
        There have been some individuals who have raised an issue
    about nitrogen oxide, and I wonder if either of you would care
    to comment about that particular issue.
        Mr. Gebolys. Yes. Biodiesel has--it is amazing how many
    different areas it helps. One area that in and of itself it
    does not help is reductions of oxides of nitrogen. The broader
    issue there is, does biodiesel lead to increased or decreased
    smog. Smog results from the presence of hydrocarbons and oxides
    of nitrogen coming together in the presence of sunlight.
    Biodiesel does reduce hydrocarbons, and does, in fact, have
    overall smog reduction potential.
        We are working very hard in the industry to come up with a
    liquid solution to the NOX issue, so that we can
    unequivocally across the board address the issues relating to
    all pollutant categories, but at this point oxides of nitrogen
    is not one of them.
        Senator Johnson. Is biodiesel an all-season fuel?
        Mr. Gebolys. It is absolutely an all-season fuel. the
    Michigan Department of Transportation ran its snow plows on it
    all year last year, and I am happy to report that the folks in
    Michigan got up and down the highways there just fine.
        Senator Johnson. Very good. Mr. Chairman.
        The Chairman. Well, thank you all very much for your
    testimony. We appreciate it very much, and that will conclude
    the hearing.
        [Whereupon, at 12:03 p.m., the hearing was recessed, to be
    reconvened on July 25, 2001.]

                             NATIONAL ENERGY ISSUES

                                  ----------

                                 JULY 25, 2001

                                           U.S. Senate,
                     Committee on Energy and Natural Resources,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 9:35 a.m., in
    room SD-366, Dirksen Senate Office Building, Hon. Jeff
    Bingaman, chairman, presiding.

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

        The Chairman. Why don't we go ahead with the hearing.
    Senator Murkowski is on his way. If, at some point during the
    hearing this morning, we get twelve members, we're going to
    interrupt the testimony, or the questioning, to do a very short
    business meeting to try to take action on Dan Brouillette to be
    the Assistant Secretary of Energy for Congressional and
    Intergovernmental Affairs, but we will see whether the
    membership arrives that allows us to do that this morning.
        We're here to begin to address what I believe is one of our
    most important issues coming before this committee this year.
    That is the restructuring of the Nation's electricity markets.
    Over the last few years, we have received several warnings that
    this issue does require attention. Three years ago, there were
    severe price spikes in wholesale electric markets--electricity
    markets in the Midwest and the West.
        Last year, beginning in California and spreading to much of
    the rest of the West, prices began to spiral out of control.
    Prices have come to levels that are not as high as they were
    only a few weeks ago, but they still remain high.
        We were warned that prices could rise again if weather
    turns hotter in the remainder of the summer and that prices may
    be high this winter in the Northwest, unless there is unusually
    high rainfall.
        Supplies of electricity are so short and demand is so high
    that we have seen blackouts in California. We are further
    warned that this pattern could emerge in other parts of the
    country. New York and New England are mentioned. We are warned
    that reliability of delivery is threatened in the South and in
    the West.
        During the 105th Congress and the 106th Congress, I
    introduced legislation intended to facilitate the development
    of competitive wholesale markets in electricity. Senator
    Murkowski also introduced legislation with that same purpose.
        The Clinton administration introduced legislation that
    introduced wholesale and retail markets as well. The current
    administration came into office announcing its intent to deal
    with energy issues and mentioned electricity among those.
        I believe that the warnings have been frequent and regular
    enough. I believe we need to act. This is an opportunity for us
    to do that; to set the stage for action. I circulated a White
    Paper that contains a legislative proposal. Leon Lowry, on our
    staff here, developed that. It's intended to address what I
    believe are the critical issues to ensure that the country
    continues to have the most reliable, affordable, clean
    electricity delivery system in the world, and I hope that that
    White Paper can represent a good starting point for the
    committee. I know that the administration is looking at a
    legislative proposal as well, and I look forward to working
    with Senator Murkowski and the other members of this committee
    to see if we can work with the administration to get something
    actually done in this area.
        Why don't we go ahead with the testimony, and we have a
    great many witnesses this morning. So, if Secretary Blake will
    come forward. He starts all of our hearings. It seems that way,
    I'm sure, to him and to us as well, but we welcome him back;
    and why don't you go ahead and summarize your comments and then
    I'll have a few questions of you.
        If you'd like to go ahead.

             STATEMENT OF FRANCIS BLAKE, DEPUTY SECRETARY
                               OF ENERGY

        Mr. Blake. Thank you, Mr. Chairman, and members of the
    committee. I would like to submit my testimony for the record
    and just briefly summarize it.
        First, you and this committee should be commended for
    taking up comprehensive electricity legislation. We need to
    learn from the lessons of the past year and revise our
    electricity laws that were written in the 1930's, and are no
    longer responsive to the needs of the 21st century.
        Mr. Chairman, we agree with the statement in your White
    Paper, that to prevent the problems in California and the West
    from appearing elsewhere, it is essential that the structural
    defects in the market be cured. Electricity legislation is
    needed to make these markets more competitive to lower prices
    and to assure adequate and reliable supply.
        The legislation should focus on core Federal issues that
    are beyond the State authority. Mr. Chairman, there's a great
    deal of agreement between the legislation that you're now
    considering and the administration's views of the critical
    areas requiring Federal legislation.
        First, our transmission system. We're in the midst of a
    planned increase of probably about 25 percent in generating
    capacity, yet only 4 percent increase in planned transmission
    capacity additions. The current system has bottlenecks and
    reliability issues that need to be addressed and we support
    legislation that, among other things, would aid in the siting
    of transmission facilities.
        Second, the reliability of the system is a matter of
    Federal concern and their need to be enforceable reliability
    standards.
        Third, on consumer protection, we need to make sure that,
    as we move forward with the competitive industry, consumers are
    adequately protected and given the data they need for informed
    decision making.
        Fourth, we need to reform and clarify some important roles
    and responsibilities in the current Federal-State structure.
    For instance, clarifying the authority of States to impose fees
    to fund public purpose programs. We also need to move forward
    with the repeal of the Public Utility Holding Company Act,
    PUHCA, a law that has largely outlived its usefulness, and is
    now preventing the flow of needed capital into the utility
    sector. And we need to reform PURPA, the Public Utility
    Regulatory Policies Act.
        As these acronyms indicate, much of the needed legislation
    is very technical in nature, but it is still extremely
    important. The committee is doing a great service in addressing
    these issues and we look forward to working with you. I would
    be glad to answer any questions from you or other members of
    the committee. Thank you.
        [The prepared statement of Secretary Blake follows:]
        Prepared Statement of Francis Blake, Deputy Secretary of Energy
        Mr. Chairman and Members of the Committee, I welcome the
    opportunity to testify before you today on comprehensive electricity
    legislation.
        I commend you for holding this hearing. Earlier in the year, many
    believed there was little likelihood the Congress would consider
    electricity legislation. The view was that the California electricity
    crisis would discourage both the Administration and the Congress from
    dealing with electricity legislation. Your hearing disproves this
    common wisdom.
                    need for federal electricity legislation
        The Administration recognizes the need for the Congress to pass
    comprehensive electricity legislation. The National Energy Policy
    included a recommendation that the ``Secretary of Energy propose
    comprehensive electricity legislation that promotes competition,
    protects consumers, enhances reliability, promotes renewable energy,
    improves efficiency, repeals the Public Utility Holding Company Act of
    1935, and reforms the Public Utility Regulatory Policies Act of 1978.''
    We are working to that end.
        Since 1995, the Congress has been grappling with electricity
    legislation. Initial efforts sought to require states to open their
    retail electricity market by a date certain. Subsequent legislation
    focused on promoting competition in electricity markets and
    complementing state retail competition programs.
        We clearly need to revise Federal electricity laws to recognize
    changes in electricity markets. The principal Federal electricity law--
    the Federal Power Act--was written in 1935. At the time, there was
    virtually no interstate commerce in electricity, there was no
    interstate transmission grid, electricity markets were local, power
    plants were built right next to consumers, and electricity generation
    was perceived to be a natural monopoly.
        Today, the transmission grid is both interstate and international,
    electricity markets encompass entire regions, almost all wholesale
    electricity sales are in interstate commerce, and the natural monopoly
    in generation has long since been disproved.
        Mr. Chairman, your white paper describes the changes that have
    taken place in the electricity industry since 1935, and concludes:
    ``The business of supplying electricity has changed. So must the
    regulatory and legal framework within which it operates now change.''
    We could not agree more. The Administration believes the time has come
    to make changes to Federal electricity law to reflect changes that have
    occurred over the past 66 years, and the sweeping changes that are
    underway in the industry.
        The California electricity crisis demonstrates that mistakes made
    by a single state can extend to an entire region. The impact of the
    California electricity crisis on the West has been significant. The
    Bonneville Power Administration recently announced a 46 percent
    increase in its wholesale rates. That increase was caused in large part
    by the California electricity crisis, which drove up electricity prices
    throughout the West.
        The Administration believes it is essential that Congress pass
    comprehensive electricity legislation. Electricity legislation can make
    electricity markets more competitive, lower prices, and assure ample
    and reliable electricity supplies.
        The Administration believes that electricity legislation should
    focus on core Federal issues that are beyond State authority.
        Before I review these core Federal issues, I want to make it very
    clear that the Administration respects the state role in electricity
    regulation. For example, the Administration does not support proposals
    to require that states open their retail electricity markets by a date
    certain.
    Regulation of Interstate Commerce
        Electricity markets are increasingly regional in nature. Under the
    Constitution, states have no authority to regulate interstate commerce
    and regulation of interstate commerce is a Federal responsibility. The
    California experience shows that actions taken by one state can have
    regional consequences.
    Transmission
        Assuring that our transmission system can deliver reliable
    electricity supplies is a core Federal issue. As the National Energy
    Policy noted, investment in new transmission capacity has failed to
    keep pace with growth in demand and with changes in the industry's
    structure. Since 1989, electricity sales have increased by 2.1 percent
    per year, yet transmission capacity has increased by only 0.8 percent
    per year. There is widespread recognition that there is a need to
    expand the transmission system, remove bottlenecks, and provide for
    open access. Since the transmission system is both interstate and
    international, regulation of the grid is a Federal responsibility.
        There are various reasons why transmission constraints exist. In
    some cases, the problem is a lack of economic incentive. The national
    energy policy proposes a solution to that problem: encouraging the
    Federal Energy Regulatory Commission (FERC) to develop incentive rates
    to promote transmission expansion. FERC has great flexibility under
    current law to set transmission rates at a level to attract investment.
    Recently, FERC has shown flexibility in considering non-traditional
    transmission rates. For those reasons, it is not clear legislation is
    needed to address transmission pricing.
        In other cases, the problem is the siting process itself. Under
    current law, transmission siting is an exclusively state function. That
    law was written 66 years ago, at a time when power plants were located
    right next to customers, and decades before transmission lines
    interconnected states and regions. Congress did not provide for
    transmission siting by the Federal government because it did not
    foresee the transmission system would develop into not only an
    interstate but also an international grid.
        Much has changed since 1935. The transmission grid is the
    interstate highway system for electricity. It should not be a system of
    local toll roads.
        Electricity legislation can remove transmission bottlenecks by
    providing for siting by the Federal government of transmission
    facilities used for interstate transmission. Legislation could provide
    for Federal siting of transmission facilities in certain limited
    circumstances.
    Reliability
        Ensuring the reliability of the interstate transmission system is
    also a Federal responsibility. Since the 1960s, the reliability of our
    transmission system has been based on voluntary compliance with
    unenforceable reliability standards. That is no longer tenable, and
    Federal legislation is needed to provide for enforceable standards
    developed by a self-regulating organization subject to FERC oversight.
    Market Power
        In our view, the debate about market power often starts with a
    misunderstanding about FERC authority under current law. Under the
    Federal Power Act, FERC is responsible for ensuring that rates charged
    by public utilities are just and reasonable. As a general matter, the
    ability to set rates is the ability to prevent the exercise of market
    power. An exercise of market power generally entails charging rates
    that are higher than those produced in a truly competitive market. For
    that reason, FERC can prevent the exercise of market power through its
    authority over wholesale rates and by ordering refunds of unjust and
    unreasonable rates.
        A discussion of market power issues must start with a recognition
    of FERC's authority under existing law, and a determination of whether
    existing FERC authority to address market power is inadequate.
        Legislation is needed to address some issues in this area. For
    example, the Administration agrees with the Chairman that legislation
    is needed to clarify FERC authority to approve holding company mergers
    as well as mergers and asset dispositions involving generation
    facilities.
    Consumer Protection
        Consumer protection is another core Federal issue. Electricity
    markets are regional in nature, and are no longer confined neatly
    within individual States. For that reason, there is a need for
    electricity legislation that: protects consumers against ``slamming''
    and ``cramming,'' strengthens the bargaining power of consumers through
    aggregation, protects consumer privacy, and ensures that consumers have
    the information to make informed decisions to meet their needs.
    Federal Electric Utilities
        Another core Federal issue is defining the role of Federal electric
    utilities such as the Tennessee Valley Authority (TVA) and Bonneville
    Power Administration in competitive electricity markets. Obviously,
    states have no authority over Federal electric utilities. Legislation
    is needed to provide open access to transmission systems operated by
    the Federal electric utilities and ensure that one set of rules governs
    the entire interstate transmission system.
    Reform of Federal Electricity Laws
        There is a need to reform Federal electricity laws, such as the
    Public Utility Holding Company Act of 1935 (PUHCA) and the Public
    Utility Regulatory Policies Act of 1978 (PURPA). With respect to PUHCA,
    each of the past four presidents have supported PUHCA repeal, and
    earlier this year the Senate Banking, Housing, and Urban Affairs
    Committee reported out legislation to repeal PUHCA by a vote of 19 to
    1. PUHCA repeal is an idea whose time came a long time ago. There is
    also a need to repeal the PURPA mandatory purchase obligation
    prospectively.
    Jurisdiction
        The jurisdictional boundaries between the Federal and state
    regulatory roles have blurred as the electricity industry has changed.
    The Federal Power Act was enacted to fill a regulatory gap when the
    Supreme Court found that states lacked legal authority under the
    Constitution to regulate interstate commerce in electricity.
        One jurisdictional issue is state authority to charge public
    purpose fees. The Administration believes that states are in the best
    position to develop public purpose programs to suit their needs. One
    state may prefer to develop strong low income assistance programs,
    while another may elect to encourage aggressive conservation. States
    have different needs, and need the flexibility to craft programs to
    suit those needs. These programs can be funded through the distribution
    charges--an area where states have exclusive jurisdiction--or charges
    on retail sales of electricity.
        Electricity legislation can clarify the authority of states to
    impose fees to fund public purpose programs that meet their needs and
    avoid bypass of state fees. We believe this is a better approach than
    imposing a Federal tax to fund a Public Benefits Fund. One concern
    relating to a Public Benefits Fund that has not received much attention
    is that of equities in allocating funds. There is no assurance that tax
    revenues raised in one state to finance a Public Benefits Fund will not
    be spent in other states.
        By no means is this intended to be an exclusive list and there are
    other issues that may be appropriate to address in Federal electricity
    legislation.
                                   conclusion
        We have a rare opportunity to learn a lesson from the California
    experience and act to prevent a future electricity crisis. The Congress
    normally passes energy legislation in the wake of a crisis, and it is
    rare for it to act to prevent an energy crisis.
        Mr. Chairman, the Congress has been slowly reforming Federal
    electricity laws for over twenty years. This process began with the
    Public Utility Regulatory Policies Act of 1978, which the encouraged
    the development of independent power producers. This process continued
    with enactment of the Energy Policy Act of 1992, which provided greater
    access to the transmission system and further encouraged the
    development of independent power producers. The time has come for
    Congress to take another step, a bigger step, one that can make
    electricity markets more competitive and result in lower electricity
    prices, and ample and reliable electricity suppliers.
        The Administration looks forward to working closely with the
    Committee to develop comprehensive electricity legislation.
        I appreciate the opportunity to testify before you today.

        The Chairman. Well, thank you very much, and I am aware
    that you are, as you indicated, the committee--or the
    administration is working on legislation which addresses many
    of these same issues and we are anxious to work jointly with
    you to try to come up with something that we can all be behind.
        Do you have a timetable for actually getting legislation to
    the committee that we would be able to consider?
        Mr. Blake. We are working on that now, Mr. Chairman. I
    don't have a specific timetable for you. I hope that it will be
    in the near term. There's obviously a lot of coordination
    within the Federal branch that is still required.
        The Chairman. Just as I'm sure you are aware, we are going
    to try to start a markup next week and do a section--not the
    section that relates to electricity restructuring, but a
    different part of the bill--of a comprehensive bill, and then
    come back in September; and probably the second week, we are
    back in September, go on with that markup. And so, if we had
    your bill in time to be considered before that, that would be
    very useful.
        Do you think that Federal siting authority for transmission
    lines can be meaningful without clarifying the jurisdiction
    over those lines?
        Mr. Blake. I think it is useful to clarify the jurisdiction
    as part of that. Yes, sir.
        The Chairman. So, you think we need both? We need to
    clarify the jurisdiction of the lines, but we also need to vest
    some authority, at FERC, for the siting of those transmission
    lines?
        Mr. Blake. I think your White Paper said it well on the
    issue of a Federal eminent domain and the siting issue, which
    is that, by itself, that doesn't solve the problem, but having
    some backstop authority in the Federal Government for eminent
    domain is, we believe, needed.
        The Chairman. Do we need to be doing something to ensure
    adequate reserve margins in order to ensure reliability of
    supply? Is that something that should be addressed specifically
    in legislation?
        Mr. Blake. Well, I think the reliability standards that we
    believe should be made enforceable, presumably, but also
    address reserve margins as well.
        The Chairman. We have this proposal that some sort of
    regional authority, either a pooling of State authority, or
    dependence on regional transmission organizations be given
    siting authority with the Federal Government sort of providing
    a backstop to that. Is that the right formulation as you
    understand it, or as you would have us pursue it?
        Mr. Blake. I think there are a number of issues associated
    with the siting question.
        First, is a large number of States, I believe over 25,
    actually by State law, cannot consider the benefits that are
    external to the State in making siting decisions. I think there
    is also a role for regional planning, whether setting up a
    regional structure as part of the question of siting will be
    positive in that I think we are still reviewing.
        The Chairman. Does FERC's authority to address market power
    need to be extended to public power entities?
        Mr. Blake. If I understand the question, let me phrase it
    as I would understand it, which is the rate making authority
    that FERC would have over power generation supplied by public
    power.
        The standards that FERC exercises for that are, for
    example, in what I'm familiar with, which is BPA, quite
    different and the standards that would apply to BPA, and I
    don't think you would want to disrupt that. I think you would
    want BPA's standard setting continue to be governed under the
    same--on the generation side--on the same approach that it is
    now governed.
        The Chairman. Let me defer to Senator Murkowski for any
    opening statement he has, then any questions.

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

        Senator Murkowski. Thank you very much. I apologize, but I
    had an earlier meeting this morning. I want to thank our
    witness, who has become a regular.
        I think the discussion today is certainly timely on PUHCA
    and PURPA and reliability, and as you know, in the last
    Congress, and from previous bills, we have pretty much covered
    the issues previously, but I think it is appropriate to have
    the new administration reflect their views, and as a
    consequence, I want to commend Senator Bingaman and his
    professional staff.
        Now, I'm going to refer to the memorandum Senator Bingaman
    has circulated, to some extent, in my statement, because I
    think it represents, collectively, the corresponding views--my
    own, as well as his. There are some exceptions.
        One of the concerns involves a major shift in jurisdiction
    from the States to FERC. Particularly, over retail
    transmission, giving new authorization to FERC as I believe is
    the intent of the chairman; and one facet focuses on the
    electric power system, which, in the White Paper, proposes to
    pay for social programs through a so-called public benefits
    fund. As I understand the fund's purpose, is that it should
    support such programs as low income assistance, research and
    development efficiency, conservation investment, renewable
    resource investment, universal services and other public good
    programs that are left behind by the transition to a
    competitive industry.
        I'm going to keep an open mind on this, but I think it is a
    pretty tall order to try and encompass that kind of a
    responsibility on the electric power system, and I would look
    forward to hearing from those representing the utility
    companies and others relative to this, because, in fairness,
    without actual language, it is pretty difficult to gauge the
    extent of the proposal, so I just point that out, since it is
    extraordinarily broad and we will see the legislative language.
    But, I'm a little skeptical about increasing FERC's authority,
    particularly when it comes at the expense of the States. I've
    always felt that the State' politics is local, in a sense,
    motivating people and Senator Bingaman and I have had
    discussions on this before and we could never quite come to
    grips with it. But, we will try it again.
        I think events in California demonstrate how important
    electricity is to our economy and our way of life. Certainly
    price reliability, security, we're all aboard on that. But,
    most importantly, California demonstrates the following: I
    think the real folly of trying to bend the laws of supply and
    demand through the heavy hand of government regulation.
    California's problems are not the result of a failure to
    conserve. California is the second in the Nation in
    conservation. California's problems are directly traceable to
    government interference in the market, in my opinion, not by
    the failure of competition.
        California did not deregulate. Instead, California mandated
    powerplant divestiture. California mandated 100 percent
    reliance on a spot market. California refused to allow cost
    pass-throughs. California failed to allow new potential
    powerplants and transmission launch to keep up with growing
    demand. The permitting time was just abominable, and so the
    experience in California makes me a bit weary of two things.
        First, I do not support more government control over the
    marketplace, no matter how good or politically popular it
    sounds at the time. And second, I do not support a one size
    fits all program. Suppose FERC had approved the California
    model for the entire United States. There's a little food for
    thought there.
        Having stated my philosophical view, let me also observe
    that, because my State is not connected to the interstate grid,
    it has very little effect on my State or my constituency, so
    perhaps I can claim to be somewhat, to a degree, objective on
    this point.
        Accordingly, I'm very interested in the views of other
    members of the committee who live in States that would be
    directly affected and I will note that I will have a series of
    questions for the witnesses to respond to, regarding the issues
    raised in the memorandum of the chairman of July 20. But, I
    would simply ask the Honorable Francis Blake to comment very
    briefly on the idea of giving expanded authorities to FERC in
    the shifting jurisdiction from States to FERC and whether the
    administration has a position on that.
        Mr. Blake. Well, I think as we understand the proposal,
    certainly as outlined in the White Paper, much of what's
    involved there is a clarification of the jurisdictional roles.
    For example, on bundled transmission rates and FERC's authority
    to look at the bundled rate and then separate out the part that
    is State versus the part that is interstate and Federal, I
    think, in principle, we certainly agree with the notion that
    States are better able to make a number of decisions, but we
    also have to recognize that it is an interstate transmission
    grid. There are critical concerns in terms of open access that
    have to be taken into account.
        Senator Murkowski. An eminent domain, I assume, is one?
        Mr. Blake. We see the need for eminent domain as a
    backstop, again, relying principally on the local decision
    making and understanding that that is not the solution, but as
    a backstop it can be helpful.
        Senator Murkowski. As you know, when we introduced our
    comprehensive bill on our side sometime ago, we had a good deal
    of debate about eminent domain and, as ours differentiates from
    Senator Bingaman, who included eminent domain. I was of the
    opinion that this was an obligation of the States to step up to
    reality, but I reserve the right, that if the States didn't, we
    would have to go to the other extreme, and that is to include
    eminent domain. So, I'm still open on that issue.
        The Chairman. Thank you very much.
        Senator Johnson, do you have questions of Secretary Blake?
        Senator Johnson. No.
        The Chairman. Senator Smith?
        Senator Smith. I have no questions.
        The Chairman. Senator Craig?

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

        Senator Craig. Mr. Chairman, thank you. First, let me thank
    you for putting out some dates to schedule a markup on a
    comprehensive energy policy for our country and the work that
    this committee has been underway and that you picked up and are
    now carrying on. The House is doing their work, we must do our
    work, and I think probably one of the more valuable debates
    we'll have this year on the floor of the U.S. Senate, for the
    sake of our country and its future, is an energy policy that
    will finally begin to direct this country and our energy needs.
        Francis, a couple of thoughts to add to the comments of the
    ranking member and the chairman. I was a bit of the dog in the
    manger when it came to eminent domain, recognizing that States
    should be a player here, and that private property is a bit
    sacred, and the Federal Government shouldn't be running
    roughshod.
        There are a lot of good reasons, and I understand when we
    built the interstate highway system, we needed the right of
    eminent domain. Let's work to see if we can't create a balance
    of the State rule there. I think that's awfully important.
        At the same time, we understand that the current electrical
    gridding system in our country is a bunch of country roads that
    kind of run together and we probably, in a truly deregulated
    system, if that's where we get, do need an interstate system to
    tie it all together so that marketers can, in fact, move their
    product without limitation or restriction.
        Speaking of transmission, one of the things that we need to
    get right, and somehow we're not getting it quite right, yet,
    with the administration, with OMB, is borrowing authority for
    the Bonneville Power Administration. We're talking about
    Oregon, Washington, Idaho, western Montana, a tie to
    California; and clearly the need to modernize, as a part of a
    total energy package for our country.
        The country believes that all you have to do is modernize
    and add new technology and we'll solve this problem. There is
    some truth to that. To take a 40-plus year old system and
    modernize it, as we need to do with Bonneville, and Bonneville
    represents about 75 percent of the Northwest's transmission
    capacity, we've got some new stuff wanting to come on line out
    there, but it can't get to the consumer, because Bonneville
    can't act quickly enough, or it doesn't have the resources to
    do so.
        As you know, we need borrowing capacity and we need the
    administration to be with us on that as we move this issue, to
    be able to create that kind of flexibility to modernize this
    system. And that's just a piece of this greater puzzle we're
    all trying to put together here called a national energy
    policy, both for the publics and the privates and the national
    perspective when it comes to electrical generation.
        One of my frustrations, departing from the issue of
    borrowing capacity now, Francis, a good example, Mr. Chairman,
    of what happens when you create total national authority or
    have national overriding power, insensitive, or less sensitive
    to State needs. When President Clinton, in his final days here,
    created a Federal order to sell power to California, what he
    did was he ordered the Pacific Northwest to open its penstocks
    and generate electricity out of its hydro system and, draining
    a reservoir in a drought cycle when the West, especially
    Oregon, Washington, and Idaho knew they were in trouble, is not
    such a good move.
        President Bush, when he got to town, found the need to
    renew it because he really didn't quite grasp it yet, but
    finally did and said we'd not renew it again, and, as we know,
    the reservoir behind the great Grand Coulee Dam, Lake
    Roosevelt, is now probably at the lowest it's been since the
    dam started filling all these years ago.
        That's what happens when there appears to be a national
    interest, but you don't incorporate regional and/or State
    interests in decision making processes. And while I respect the
    FERC, and see its role, I'm not sure that we give it the right
    of everything, or the power to bring about those kinds of
    decisions in many instances, and I think the publics are
    independent here and, as it relates to rate--and we need to see
    it kept that way.
        But, that was a policy that, from this perspective in
    Washington, and inside the Beltway, sounded good, but out in
    Oregon, Washington, and Idaho it was hurting us. Not that we
    weren't going to get paid. We were willing to contribute to the
    disaster in California. At the same time, it was creating a
    future disaster for Idaho, Oregon, and Washington, and that's
    what we deal with, when we look at it from a national
    perspective only. States do play a role, should play a role.
    Let's work on the borrowing capacity for Bonneville and see if
    we can't incorporate that into the broader picture so that we
    can retain and--that expanded capacity out there in a very
    rapidly growing area of the county.
        Francis, thank you.
        Mr. Blake. Senator, thank you.
        The Chairman. Senator Cantwell, did you have questions of
    Secretary Blake?
        Senator Cantwell. Thank you, Mr. Chairman, I would just
    like to add my concern and comments to the Senator from Idaho
    in regards to BPA borrowing authority and the critical nature
    of that, when there's so much transmission capacity that is
    currently available to us, but could be an integration of
    between 8,000 and 12,000 megawatts of new supply, and yet the
    administration has not been supportive of that. I don't know if
    you have any comments on that or----
        Mr. Blake. Senator, in comment to that question, and also
    Senator Craig's comments, I have reviewed the BPA plans. This
    is critically important. It is in the President's energy
    policy.
        As you say, there are 8 to 12 gigawatts of potential
    capacity that are going to need some new transmission lines.
    The view, at this time, is that BPA is adequately--has adequate
    authorization, through at least '03, and that was the response
    that the administration gave. But it was not at all intended to
    suggest that the needed upgrades on the transmission lines,
    needed upgrades on the hydro facilities--that we don't agree
    with that.
        Senator Cantwell. Well, but it puts BPA at a position of
    not being able to plan for the future. I mean, this
    infrastructure can't come on line without a commitment of the
    resources, in this case, bonding and the Federal Government
    putting up a commitment to that, so I'm not sure I understand
    the administration's position, on one hand saying they support
    it, but not coming up with the resources to back it.
        Mr. Blake. It may have been more the mechanism for the
    support rather than the support, because I believe the
    statement of the administration's position also said, yes we
    recognize that this is important, there is an analysis underway
    on the spending required. It appears to be that it's covered
    through 2003. To the extent more money is needed after that, we
    will address it.
        Senator Cantwell. I think that there's a disagreement on--I
    think that a commitment of resources through 2003 is committed,
    and to get new capacity on line, this new bonding authority
    must be in place. So, without it, it isn't that the project is
    continuing, there are other things where those resources are
    committed, so we're obviously, in the Northwest, very
    concerned, given the impacts that my colleague from Idaho----
        Senator Craig. Will the Senator yield?
        Senator Cantwell. Yes.
        Senator Craig. I think the concern we're talking about
    here, Francis, in the overall picture, if we're looking at 5-
    year construction projects, how do you commit to a long-term
    plan when you only have a couple of years worth of authority?
    And my guess is the perspective there is--yes, there is short
    term availability and short term needs and short term
    capability, but there's not long term capability for extended
    construction programs of the kind we're talking about.
        Mr. Blake. I understand that concern.
        Senator Cantwell. And I would just add that I think your
    putting the rate payers in the Puget Sound area and other parts
    of Washington who've seen 50 percent rate increases--I mean,
    you're basically telling them that, within the Department of
    Energy, you don't agree on the budget assessments of one of the
    groups within that agency, and so what we'd like to see is OMB
    and the Department of Energy sit back down with Bonneville and
    come to conclusion on what the transmission needs are for the
    future, that we'll get this power on line and make the long
    term commitment, and Mr. Chairman, I hope that as we go through
    our process on the energy bill, that we take a very close look
    at this and what we need to do to make sure that this message
    is clear about getting more transmission capacity on line in
    the Northwest.
        The Chairman. Thank you very much.
        Senator Thomas.
        Senator Thomas. Thank you, Mr. Chairman.
        Mr. Blake, it seems to me that we have all these issues and
    so on, but we don't seem to have yet developed an overall
    picture of where we want to go. It would seem to me that it
    would seem like we need an interstate grid of some kind,
    probably with the RTOs attaching to that, but we don't seem to
    focus on that. We get all diverted into different kinds of
    things. But if that's where we're going, it seems to me that
    that's one of the things that we really need to look at. And
    your testimony here indicates you want incentives for building
    transmission. Now do you think that lends into an overall plan?
        Mr. Blake. I think when you think about transmission issues
    you have basically three issues: access, siting, and pricing.
    The access issue is largely addressed by FERC. The siting issue
    we've been discussing in terms of the backup of Federal eminent
    domain. And then pricing, incentive based rates, as indicated
    in the President's policy, we think is very important to
    incentivize the----
        Senator Thomas. I'm sure it's very important. I don't agree
    with that. It seems to me like that's just working with what we
    have. That's just dealing with the current situation. And we've
    got to do better than that. We've got to look for some kind of
    a system, probably with a third party operator, with some kind
    of a national grid, which is a little different than we have
    not.
        I mean we're wondering why people haven't invested. Well,
    they haven't invested because they don't know where we're
    going, they don't know where we're going to be. There's not
    investment in generation because we've talked about re-
    regulation and so on, but we have pretty much decided that
    wholesale power is going to be deregulated and we're going to
    be buying it all over. We've got more market generators now
    than we do for their own system, but we don't have a system to
    transmit it. And it seems to me we'd be thinking in just a
    little broader sense than what we're doing here.
        And, in fact, you say here that the President's policy has
    said to the Department we want legislation from you, but I
    don't think we're going to get there by simply continuing to
    look at where we already are and making little bitsy things. Do
    you have a broad plan?
        Mr. Blake. We are also, as directed by the President, doing
    an overall transmission study that I think is addressing
    exactly the point that you were raising, which is going to look
    at where the constraints are in the system now, what we need to
    do to address those constraints, and move towards a more
    effective national system. I would still say parts of the
    answers are in the legislation you're considering on access
    issues and siting issues and pricing issues.
        Senator Thomas. I think it's fairly clear we've made some
    changes in generation. If you're going to have that kind of
    generation and encourage people to build generation facilities
    to put it in the market, you got to have a way to get it there.
    You talk about California and Washington all the time. Well,
    you can make power, but there's no way to get it there. And I
    don't think we want to have a national system that does
    everything but we ought to have a national responsibility for
    an interstate system that ties into RTOs that are run locally.
    Isn't that the concept that we want to pursue?
        Mr. Blake. Senator, I think we're going to take a national
    look and we're going to--but I don't think there's any intent
    at this point to move more broadly than beyond the RTOs, the
    regional transmission organizations that the parties----
        Senator Thomas. How do you--I don't understand how you can
    defend that. If you're moving power, how can you just deal with
    RTOs and talk about a national grid?
        Mr. Blake. I think RTOs themselves are going to be--moving
    to a regional organization will be a challenge in itself before
    taking the next step and moving to a national organization.
        Senator Thomas. I'm not sure I agree with you. I'm not sure
    that's the next step. If you're going to be talking about
    shortages of power in different parts, like the Northwest, then
    the RTO isn't the answer. You got to move stuff often within
    the RTOs. Well, I'd just urge you to take a broader look and
    just kind of--rather than stand where we are, which is where I
    sense you are.
        The Chairman. Senator Bayh, did you have questions of
    Secretary Blake?
        Senator Bayh. Thank you, Mr. Chairman. Just a few brief
    comments. Just a few brief comments, Mr. Secretary Blake, and
    then two brief questions, Mr. Chairman.
        First, Mr. Chairman, I'd like to salute you for your
    leadership on this very, very important issue of electricity
    restructuring and the energy issue in general. It's one of the
    few issues that in Congress we'll address that affects every
    consumer and every home across our entire country.
        It's also going to be vitally important to our economic
    competitiveness. As we look at those overseas with whom we
    compete and what they're doing in their energy markets, it's
    important that we stay up ahead of the curve with regard to our
    own electricity efficiency and production capabilities to
    insure affordable and reliable energy sources for our
    industries and producers across our country.
        Finally, I'd just point to the savings. The estimates have
    varied anywhere from 20 billion to several tens of billions of
    dollars more than that for both residential customers and
    business customers, possibly achieved through electricity
    restructuring. That is of the same magnitude as the tax cut
    that was recently enacted and could do a lot to help spur our
    economy.
        For all these reasons, Mr. Chairman, I salute you for your
    leadership. I am a strong proponent of electricity
    restructuring. I believe that in the long run markets are more
    likely to deliver the outcomes that we seek in a highly
    regulated structure, but of course we have to have safeguards,
    as the recent experience in California has demonstrated. We
    have to make sure that we not just do it, but do it correctly,
    learning from both our experience and our mistakes. But the
    recent experience in California, we might say the recent
    mistakes in California, should not dissuade us from going
    forward and getting it right for the entire country for the
    economic competitiveness benefits to be accrued, as well as the
    savings to consumers across the board.
        Mr. Chairman, I look forward to working with you on this
    important issue. It's something that I think could benefit our
    country if done correctly for a long, long time to come. It's
    one of these few once in a generation opportunities we have,
    and I thank you for your leadership. I had a chance to briefly
    review the White Paper. I think it's an excellent starting
    point and I commend you for your work in that regard.
        Two very brief questions, Secretary Blake. I noticed in
    your testimony you say the administration believes it's
    essential that Congress pass comprehensive electricity
    legislation, and that the National Energy Plan in fact calls
    for this also. Will the administration be sending us a
    proposal?
        Mr. Blake. We are working on legislative language now, as I
    mentioned, to the chairman. It is going through the process.
    We'll have an internal review process within the
    administration. And I hope that we will have something----
        Senator Bayh. Do you have a time frame for us?
        Mr. Blake. I don't, but I--the chairman just gave us a time
    frame.
        Senator Bayh. Good. Well, it's--I endorse the chairman's
    time frame. How about that, Mr. Chairman?
        Finally, my last question. It's a rather small item, but
    when Secretary Abraham was before us I asked and I followed up
    with a letter; this was back in June; asking if he could update
    us on the Department's review of energy efficiency programs. I
    know you all have a lot going on over there, but now that we've
    confirmed a legislative liaison I would respectfully ask that
    perhaps that letter could be responded to and we could get an
    update on the review of the efficiency programs. Many of us
    believe that that's an important component of comprehensive
    energy strategy. So if you could put that somewhere on the list
    for our new----
        Mr. Blake. We will get an immediate response to you, and
    the review is underway.
        Senator Bayh. I couldn't ask for more than immediate. So I
    appreciate that very much, Mr. Blake. Thank you for your
    presence today.
        The Chairman. Senator Hagel.
        Senator Hagel. No questions.
        Senator Burns. If the Senator could hold, could I just ask
    to cast my vote in favor of the nominee.
        The Chairman. We will have the record show that you favor
    the nominee.
        Senator Burns. And I have a statement for this hearing and
    I'm going to go back to another hearing. And I think that you--
    --
        The Chairman. We'll include your statement and we
    appreciate your attendance.
        [The prepared statement of Senator Burns follows:]
       Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
        Mr. Chairman, thank you for calling this hearing today. Since the
    Energy Policy Act of 1992, legislation dealing with the structure of
    our electric utility industry has barely seen the light of day. Even
    more significant is that legislation opening up some of our nation's
    most significant supply sources to production didn't see the ink of the
    President's pen in the eight previous years. I'm hopeful that today we
    can focus this debate on what needs to be done in this Committee to
    prepare for electric restructuring.
        There are obviously issues that arise when we discuss the Public
    Utility Holding Companies Act (PUHCA) and Public Utility Regulatory
    Policies Act (PURPA), many of my-constituents and I have serious
    concerns with the proposal to place Rural Electric Cooperatives and
    public power providers under FERC jurisdiction.
        The members of this Committee have heard me say this before, but I
    think it particularly applies to today's hearing on electricity
    restructuring. We cannot have a significant federal deregulation or
    restructuring bill until we have the transmission grid available to
    support it. If we truly want to address the long term energy needs of
    this country, and truly want a more competitive market, transmission is
    the first issue for Congress to deal with.
        Over the next ten years, demand for electric power is expected to
    increase by about 25 percent, and more than 200,000 megawatts of new
    capacity will be required. Under current plans, electric transmission
    capacity will only increase by four percent.
        California may think they can escape the need for building new
    transmission lines, by instead building plants closer to the source.
    However, I've heard that in one year of the high fuel costs paid this
    past year, the fuel costs alone would have paid for the transmission
    lines.
        Our large energy deposits are located great distances from urban
    centers where the electricity is needed. Urban areas are continuing to
    expand geographically thus making it difficult to build high capacity
    generation plants near the areas of high demand. Furthermore, the
    environment around and near populated areas cannot sustain even the
    cleanest of new high capacity power plants in their air emissions.
        Strategically, our nation is the most dependent upon its electrical
    distribution system. Several nations and non-state actors are actively
    considering this dependency for possible targeting of asymmetrical
    warfare/terrorist tactics. The lack of diverse interstate transmission
    networks raise the likelihood that a natural or man-made event could
    deprive electricity to major sectors of our nation for days or even
    weeks.
        These challenges and national security interest can all be
    satisfied by increasing our nation's high capacity interstate electric
    transmission network. We can bring life to the economies of rural
    western states by creating energy at the mine-mouth. In addition, we
    will provide energy for the economies of the larger cities without
    adding to the stresses of urban sprawl. The safety of each and every
    American will also be in mind when we make our electricity
    infrastructure less vulnerable to terrorist attack.
        It's a very simple choice here folks. To my friends representing
    rural America--it means jobs and tax revenues for schools. To my
    friends representing inner cities--it means cleaner air and a reliable
    energy supply for business. To all of us, it means a stronger American
    economy and energy infrastructure safer from terrorist activities.

        The Chairman. Senator Hagel had no questions.
        Senator Dorgan.
        Senator Dorgan. Mr. Chairman, I'm in the same situation as
    Senator Burns. I have a Commerce Committee hearing going on and
    I'm trying to get to several places, and I regret that I missed
    Secretary Blake's presentation.
        This is, in my judgment, one of the most important elements
    of an energy policy. We have the capacity in our State, for
    example, to produce a substantial amount of additional energy
    using late night coal, especially wind energy potential as
    identified by the Department of Energy, but if we can't find
    ways to transmit that energy and move that energy, its
    production is irrelevant to the rest of the country. So
    transmission issues are critically important. And I appreciate
    this hearing and your leadership, Mr. Chairman.
        Let me ask, Mr. Blake, you were discussing the RTOs
    earlier, I believe with Senator Thomas. What is the
    administration's position on the reliability language that a
    number of organizations have developed and has been kicking
    around legislation here? Do you have--are we pretty much agreed
    on reliability language, do you think?
        Mr. Blake. We support enforceable reliability standards. I
    think we'd want to work with the committee on the particular
    language in the legislation.
        Senator Dorgan. You will obviously provide us----
        Mr. Blake. Yes, sir.
        Senator Dorgan [continuing]. The discussion about the
    language that you want to work with us on?
        Mr. Blake. Yes, sir.
        Senator Dorgan. Let me ask you about the issue of
    technology and transmission. I mean there are a couple ways to
    enhance transmission capabilities. One is to build additional
    lines; the other is to upgrade lines; the other is to invest in
    new technology, composite conductors and so on. Tell me your
    evaluation of technology being able to substantially address
    some of our transmission issues.
        Mr. Blake. There is some very interesting technology that's
    under development that will improve both the throughput of the
    lines, allow additional capacity on what we already have. That
    has a lot of advantages very obviously, and we're working to
    fund a number of those technologies.
        Senator Dorgan. What is the most promising, do you think?
        Mr. Blake. Well, there is--super conductivity is one area.
    I'm aware of another area that I think is being worked on in
    the Northeast that involves basically moving from analog
    switching to digital switching on the transmission lines, which
    will allow a dramatically increased throughput on the line. And
    that that's under--it's actually in testing now in New York
    State, I believe.
        Senator Dorgan. I wonder if you--if I might, Mr. Chairman,
    ask Mr. Blake to have your technical people provide the
    committee with their assessment of the potential of these
    technologies, what you're looking at, how much money you're
    investing in them, and the work that's going on. I think that
    would be helpful to us.
        Again, Mr. Chairman, I regret not being able to be at the
    entire hearing because of the Commerce Committee hearing, but I
    think this is a critically important issue and I look forward
    that we can work together on this committee to address it.
    Thank you.
        The Chairman. Thank you very much.
        Secretary Blake, thank you very much for testifying again
    today, and we will allow you to leave and call panel 2 forward
    please.
        Let me introduce this panel. It's a very distinguished
    panel. We appreciate them being here.
        Mr. Jeffery Ayers, who is senior vice president and general
    counsel for Aquila, Inc., which is located in Kansas City,
    Missouri.
        Mr. John Rowe, who is a--not a frequent testifier here, but
    one that we always welcome. He is the co-CEO and president of
    Exelon Corporation in Chicago.
        Mr. Roy Thilly, who is the chief executive officer,
    Wisconsin Public Power. Thank you for being here.
        Mr. Glenn English, thank you very much for being here. He's
    the chief executive officer for the National Rural Electric Co-
    op Association.
        Why don't we just go across the table in the order that I
    introduced you there and if you'll take 5 or 6 minutes and
    summarize your main points. We would include the full
    statements you have prepared in the record.

       STATEMENT OF JEFFREY D. AYERS, SENIOR VICE PRESIDENT AND
                     GENERAL COUNSEL, AQUILA, INC.

        Mr. Ayers. Mr. Chairman, Senator Murkowski and members of
    the committee, my name is Jeff Ayers. I am the senior vice
    president and general counsel for Aquila, Inc. based in Kansas
    City, Missouri. Aquila is a provider of risk management, a
    developer of powerplants, and a wholesale supplier of
    electricity, natural gas and coal in North America and Europe.
        I'm here today representing Aquila and the member companies
    of the Electric Power Supply Association, or EPSA, the National
    Trade Association, representing competitive power suppliers,
    including independent power producers, merchant generators and
    power marketers.
        Mr. Chairman, we commend you for your far-sighted White
    Paper. It provides a strong template for a national
    transmission policy.
        While we addressed many issues in our written testimony
    which I would like to submit for the record, I would like to
    concentrate my comments on the following three key points that
    are critical for the development of a sound national
    transmission policy.
        First, FERC oversight for the electric transmission grid
    must include all owners of interstate transmission assets.
        Second, a clear deadline for all transmission owners,
    including non-FERC jurisdictional owners to join regional
    transmission organizations must be set.
        Third, uniform interconnection rules for new sources of
    power supply must be adopted.
        Unless a sound national transmission policy develops, Mr.
    Chairman, I can assure you that private capital will not
    provide the $56 billion that a recent EEI study estimated is
    necessary for transmission upgrades and investment in the
    current decade. The interstate transmission grid is the
    lynchpin of our national electricity infrastructure. In order
    to attract private capital to fix our national transmission
    system, the structural defects in the wholesale market must be
    cured. This magnitude of capital investment will require a
    consistent FERC-led approach throughout the Nation and
    innovative incentives.
        Regarding my first point, FERC oversight must cover all
    owners of interstate transmission assets, regardless of whether
    private companies, public power, cooperatives, or the Federal
    Government hold these transmission assets. The industry needs
    clear and consistent rules that apply to all owners of
    transmission assets to insure a fair and even playing field.
        Second, Congress must set a clear deadline for all
    transmission owners, including currently non-FERC
    jurisdictional owners, to join RTOs. We are supportive of the
    White Paper's call for legislation to support FERC's authority
    to order transmission owners to join RTOs. We also support
    FERC's recent effort to organize large, regional RTOs that
    reflect the way power flows. Pricing for transmission should
    prohibit multiple charges as power flows from one transmission
    system to the next, commonly known as pancaking. And each use
    of the transmission grid must be required to take service under
    a single open access transmission tariff.
        Regarding my third point. The power industry must have
    clarification of interconnection rules for new sources of power
    generation. We cannot overemphasize how important this issue is
    for investment and construction of new generation. For
    companies interested in expanding electric generation capacity
    which is critical to expanded supply throughout the country,
    the physical interconnection of the generation plant to the
    power grid has become too often a choke point for project
    development. Ad hoc interconnection standards create
    uncertainty, extensive delays, and unexpected or unreasonable
    costs for developers. We need to assure the right of new
    generation to interconnect on a nondiscriminatory basis to
    transmission facilities. We must provide a clear avenue for
    FERC review of interconnection policies.
        Federal legislation should require FERC to promote
    competitive markets by providing clear, consistent rules
    applied evenly to all market participants. This committee began
    addressing open wholesale electric policy in 1978 with PURPA,
    and in 1992 with EPAct. It is now time to finish what was
    started a quarter century ago, creating a national grid under
    FERC oversight for the open, nondiscriminatory movement of
    wholesale power. The result will be a reliable, affordable
    supply of electricity that fosters the creation of new
    technologies and attracts the necessary private capital for
    infrastructure that insures a robust marketplace for the
    future.
        Thank you. And I would be happy to answer any questions.
        [The prepared statement of Mr. Ayers follows:]
         Prepared Statement of Jeffery D. Ayers, Senior Vice President
                       and General Counsel, Aquila, Inc.
        Mr. Chairman, Senator Murkowski and members of the Committee, my
    name is Jeffrey Ayers. I am the Senior Vice President and General
    Counsel for Aquila, Inc. (NYSE: ILA). Based in Kansas City, Missouri,
    Aquila is a provider of risk management services including weather and
    plant outage protection, and a wholesale supplier of electricity,
    natural gas and coal in North America as well as a developer of power
    plants. It also provides wholesale energy services in the United
    Kingdom and continental Europe. Aquila is an 80% owned subsidiary of
    UtiliCorp United (NYSE:UCU), an international energy company with more
    than 4 million customers across the U.S. and internationally.
        I am here today representing Aquila and the member companies of the
    Electric Power Supply Association (EPSA). EPSA is the national trade
    association representing competitive power suppliers, including
    independent power producers, merchant generators and power marketers.
    EPSA members provide reliable, competitively priced electricity from
    environmentally responsible facilities in U.S. and global power
    markets. On behalf of the competitive power industry, I thank you for
    this opportunity to respond to legislative proposals to address
    electricity markets.
        We believe that the keys to a secure energy future are well-
    functioning, competitive energy markets and a national infrastructure
    that is robust and efficient. While EPSA's vision of the future
    ultimately demands a national, competitive retail market for
    electricity, there is a broad consensus that additional federal action
    is needed today to promote truly competitive wholesale power markets,
    and your white paper provides an outstanding set of principles upon
    which to draft legislation for federal policy.
        One of the crucial lessons from the electricity crisis in the
    Western states is that no market can function without adequate supply
    or without transmission policies--the ``rules of the road''--that are
    fair and consistent to all market participants. Appropriate reform of
    the regulatory framework that governs the interstate transmission grid
    is essential to ending the crisis in the West and avoiding these same
    pitfalls elsewhere.
        Competitive power suppliers stand ready to commit hundreds of
    billions of dollars of private sector investment to increase the supply
    of electricity. This new investment in efficient, cleaner technologies
    is desperately needed not only in the West, but nationwide. Since 1990,
    the competitive power supply industry has accounted for more than half
    of all the power generation capacity brought online in this country,
    and we expect this percentage to increase as competitive wholesale
    markets develop.
        More and more, however, EPSA companies view their investment
    decisions as contingent upon the continued development and regulatory
    reform of the interstate transmission grid. I can also assure you, Mr.
    Chairman, that the financial community will not provide the $56 billion
    that EEI estimates is necessary for transmission upgrades and
    investment in the current decade, unless reform occurs. This magnitude
    of investment will require a consistent, FERC-led approach, throughout
    the nation, and innovative financial incentives. In addition, even with
    new generation supply, there will be no long-term remedy to the
    situation in the West and elsewhere without critical changes to
    transmission regulatory policies and expansion of the interstate
    transmission grid.
        Federal energy policy must recognize power flows from state-to-
    state and region-to-region on a regular basis. The interstate
    transmission grid is the linchpin of our electricity infrastructure and
    regulation of that grid needs to be uniform, predictable and capable of
    fostering regional and national wholesale power markets. Although I
    will comment on a wide range of policies outlined in the White Paper,
    we will focus much of our attention on proposals to reform and improve
    the regulation of the interstate transmission grid.
                           transmission jurisdiction
    Clarification of Federal/State Authority over the Interstate Grid
        We agree that the division of authority between state and federal
    regulatory organizations must be clear and consistent, and cannot be
    allowed to Balkanize the wholesale power market. Today, there is too
    often ambiguity as to whether a transmission asset lies within state or
    federal jurisdiction. While a state role in retail markets should be
    maintained, more uniform and efficient regulation of the interstate
    transmission grid--with consistent, predictable regulatory oversight at
    the federal level--is essential.
        As the White Paper makes clear, these rules must cover all owners
    of interstate transmission assets, regardless of whether these assets
    are held by private companies, public power, co-operatives or the
    federal government.
    Assurance of a Robust Interstate Transmission Grid
        The White Paper affirms FERC's authority to order utilities to join
    Regional Transmission Organizations (RTOs). We are supportive of FERC's
    recent bold step to organize large, regional RTOs to reflect the way
    power flows. FERC's action was a very important step, but we urge you
    to go further. The transmission system is sporadically open to
    competition, and barriers to new plant development are slowing the
    infusion of critical investment for increased generation supply.
    Congress must set a clear deadline for all utilities to join Regional
    Transmission Organizations (RTOs). RTOs should be large and conducive
    to competition. Pricing for transmission should preclude ``pancaking''
    (multiple charges as power flows from one transmission system to the
    next), and each use of the transmission grid must be required to take
    service under a single open access transmission tariff. Also, Congress
    should also explicitly require currently non-FERC-jurisdictional
    entities that own interstate transmission assets to join RTOs.
    Standardized Interconnection to the Transmission Grid
        The White Paper endorses a clarification of interconnection rules
    for new sources of power generation. We cannot overemphasize how
    important this issue is for investment and construction of new
    generation. For companies interested in expanding electric generation
    capacity (critical to affordable power rates throughout the country),
    the physical interconnection of the generation plant to the power grid
    has become too often the ``choke point'' for project development. Ad
    hoc interconnection standards create uncertainty, extensive delays and
    unexpected or unfair costs for developers. Legislation needs to affirm
    the right of new generation to interconnect on a non-discriminatory
    basis to transmission facilities, provide a clear avenue for the
    federal review of interconnection policies, and establish a timely
    remedy, if necessary, for any abuse.
        We will comment briefly on the remaining policy proposals of the
    White Paper:
                                  reliability
        We support establishing a national framework for electric grid
    reliability that will assist, not impede, the growth of robust,
    competitive power markets. EPSA has been an active participant in the
    NERC ``consensus'' process. We are engaged today in an effort to update
    the legislative proposal from last Congress and hope that this effort
    will succeed. A national self-regulating reliability organization must
    have adequate representation from all segments of the industry, be
    consistent with existing and future market structures, and be subject
    to federal oversight.
                             rates and market power
        Federal legislation should require FERC to promote competitive
    markets by providing clear, consistent rules applied evenly to all
    market participants--and addressing any abuse of market power. EPSA
    believes strongly that the development of a pro-competitive framework
    for transmission regulation and the adoption of reforms identified
    earlier in this statement will go far towards reducing the risks of
    abusive market practices and protecting electricity consumers. In
    addition, market participants should be encouraged to use risk
    management mechanisms, such as long-term contracting, to reduce their
    exposure to price volatility. The California experience has
    demonstrated the effects of a prohibition of basic risk management
    tools.
                          regional planning and siting
        Expansion of the interstate transmission grid must occur in a
    timely fashion and fully reflect the best interests of the whole
    region. Siting issues remain an enormous roadblock to critically needed
    facilities. Any transmission expansion provision should encourage the
    construction and siting of much-needed transmission lines and ensure
    that costs are fairly borne by all users of transmission. We reiterate,
    however, that additional transmission assets and an expanded
    transmission grid will do little to prevent future bottlenecks if there
    is no concomitant regulatory reform of this same grid.
                                other provisions
       PURPA--If PURPA is amended as part of a comprehensive
            federal electricity bill, there must be explicit recognition
            and preservation of existing PURPA contracts. We also endorse
            your efforts to guarantee the recovery of PURPA contract costs
            as appropriate federal policy. However, such cost recovery must
            be explicitly related to the honoring of existing contracts.
            Moreover, EPSA urges the repeal of the ownership restrictions
            on PURPA Qualifying Facilities (QFs). In 1992, the Congress
            placed no such restrictions on Exempt Wholesale Generators
            (EWGs) and the time has come for similar treatment for QFs.
       PUHCA--EPSA supports the repeal of PUHCA as part of
            comprehensive federal legislation.
       Public Benefits Fund--If a Public Benefits Fund is included
            in federal legislation, its costs and benefits should be
            allocated so that no market participant is favored over any
            other. We would urge you to avoid a provision that places the
            costs of such a fund solely on generators. Given that some
            generators operate pursuant to long-term contracts, it is not
            clear that the costs of such a fund will have a balanced and
            fair impact on all sources of generation and operators. If the
            Committee endorses a Fund, its costs should be truly non-
            discriminatory.
       Renewable Energy--Renewable energy plays a vital role in
            energy markets today and this role will increase in the future.
            EPSA believes that federal legislation should recognize the
            value of fuel diversity and continued investment in a broad
            range of energy resources. The full range of renewable
            technologies, including solar energy, wind, landfill gas,
            biomass, geothermal and waste-to-energy should be supported in
            any renewable provisions. EPSA has also endorsed the extension
            and expansion of tax credits for renewable power resources.
       Tax Provisions--The White Paper identifies a number of
            changes in tax law that are important to the development of
            competitive markets. Federal legislation is also needed to
            resolve uncertainties associated with the tax treatment of
            assets associated with interconnection. Although tax issues are
            not under the direct purview of your Committee, one issue
            (referred to generally as ``Contributions in Aid to
            Construction'') should be addressed in federal electricity
            legislation. IRS policies since 1988 have generally held that
            interconnection costs should not be classified as income to a
            utility. However, the IRS is now studying this issue and has
            opened the door to possible revisions in this policy. This, in
            turn, has caused significant financial uncertainty for our
            members who make the investments in capital necessary to
            establish interconnections and to build power plants. The
            Energy Policy Tax Act of 2001 should be amended to clarify that
            the costs of interconnection, which are essential for power
            plant developers to supply power to the electric grid, should
            not be treated as taxable income to transmission owners.
            Treating the costs of interconnection as income to the
            transmission owning utility increases the cost of connecting to
            the transmission grid and impedes construction of new
            generation. As a consequence, electricity consumers face higher
            costs, whether due to shortages of available electricity or
            higher tax bills to new plant developers.

        EPSA appreciates this opportunity to provide you with comments on
    the White Paper. We applaud your leadership on this matter, and
    appreciate all the time and energy that the Committee has dedicated to
    this matter over the past few years. We believe that appropriate
    federal legislation can finish the job that this Committee began in
    1978 with PURPA and in 1992 with EPAct to create a national grid under
    FERC oversight for open, non-discriminatory movement of wholesale
    power. This action is necessary to ensure a reliable, affordable supply
    of electricity, to foster the creation of new technologies, to attract
    the necessary capital for this infrastructure and to ensure a robust
    marketplace for the future.

        The Chairman. Thank you very much for your testimony.
        Mr. Rowe, why don't you go right ahead with your comments.

      STATEMENT OF JOHN W. ROWE, PRESIDENT AND CO-CHIEF EXECUTIVE
     OFFICER, EXELON CORPORATION, ON BEHALF OF THE EDISON ELECTRIC
                               INSTITUTE

        Mr. Rowe. Thank you, Mr. Chairman.
        I'm delighted to be here today and am pleased that you are
    continuing the tradition of this committee in active
    involvement in these very important issues. My company serves
    about 5 million retail customers, principally in Illinois and
    Pennsylvania, but we have generation investments in most parts
    of the country and are involved in issues of transmission
    access in both parts of the--in most parts of the country.
        I am submitting prepared testimony today on behalf of the
    Edison Electric Institute, of which I am the past chairman. In
    that written testimony I comment on the White Paper which you
    released recently, which in my opinion is a very accurate
    summary of the issues we're dealing with on the proposed S. 388
    and on the Cheney task force report.
        In my opinion, you and your colleagues here have a set of
    issues which are of very great importance, a set of problems to
    solve which are sometimes painful to address, and a set of
    opportunities which are large indeed. For as I cautioned
    members of my industry, we are dealing with issues like energy
    supply and energy conservation and environmental effects which
    involve investments of tens or scores of years and which
    involve effects on reliability and the economy and the
    environment of tens or scores of years. And in that context,
    there is simply no alternative to seeking a broad, bipartisan
    energy policy.
        We have been greatly fortunate in this country for most of
    the past two decades in having plentiful, cheap natural gas and
    improving technologies to burn it. They have allowed us to put
    off some of the difficult issues which face us all. We cannot
    continue to put off those issues, however. The supply issues,
    the jurisdictional issues, the environmental issues must be
    addressed to the best of this committee's capability, and of
    course to the best of folks like the rest of us capability in
    both contributing to your decisions and in acting upon them.
        I believe we ought to start with supply, for we all fool
    ourselves if we think there are any substitutes for adequate
    supplies. No system of regulation, no system of jurisdiction
    will work if we don't have adequate supplies to start with.
    Natural gas has been, as I have said, the fuel of choice for
    new electric generation due to its favorable economics and
    environmental qualities. And I commend many of you for the work
    you've done on making natural gas more available, and
    particular Senator Murkowski on his constant work in this
    regard. But as we have seen from the vicissitudes of the
    marketplace in the past 6 months, we cannot rely on natural gas
    alone.
        We must have stable policies for nuclear power and for
    coal. I strongly believe that this Nation must live up to its
    commitments to build a permanent waste repository for nuclear
    fuel; and I certainly hope Congress will choose to extend the
    Price Anderson Act, which are the two key activities in the
    nuclear area.
        In the coal area, I submit respectfully that more work
    needs to be done with respect to environmental standards for
    existing coal fired powerplants. EEI is actively negotiating
    with members of the environmental community on proposals to
    present to all of you. I also believe that the combination of
    the President's action on the proposed Kyoto Accord (phonetic)
    and the recent concessions made in Europe with respect to the
    treatment of sinks for carbon dioxide create a climate in which
    this committee can begin to address the CO2 issue on
    a long-term basis.
        With respect to transmission, we believe that we must
    continue to encourage RTOs, that we must have reliability
    standards, and that we must have favorable tax treatment for
    the transmission of the--for the transition of transmission
    assets to such RTOs. Chairman Bingaman, your White Paper is
    very helpful in this respect.
        We, of course, believe that PUHCA and PURPA must be
    repealed, but we also believe that in a time when energy
    remains intensely regulated we are not getting true free market
    decisions in the development of energy conservation. Thus, we
    at my company support a broad range of energy efficiency
    standards. The EEI and our company support the proposals which
    have recently passed the House Energy & Commerce Committee and
    the House Ways & Means Committee. We believe that requiring new
    buildings and new appliances to have state-of-the-art energy
    efficiency technology is important.
        In sum, we respectfully ask this committee to grasp these
    hard issues and to formulate rules in which the marketplace can
    continue to evolve to provide both a more reliable supply and a
    cleaner supply of energy for your constituents and our
    consumers.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Rowe follows:]
     Prepared Statement of John W. Rowe, President and Co-Chief Executive
                          Officer, Exelon Corporation
        Mr. Chairman and Members of the Committee:
        My name is John W. Rowe. I am the President and Co-Chief Executive
    Officer of Exelon Corporation. Exelon, formed last year by the merger
    of Unicom Corporation and PECO Energy, is headquartered in Chicago,
    Illinois. We serve over five million customers principally in Illinois
    and Pennsylvania, which have both restructured their electricity
    markets.
        I am testifying today on behalf of the Edison Electric Institute
    (EEI), which is the association of U.S. shareholder-owned electric
    utilities and industry affiliates and associates worldwide. We are
    pleased to have the opportunity to testify before the Committee on the
    development of a comprehensive national energy policy. My testimony
    today includes comments on Chairman Bingaman's recently released White
    Paper on Electricity Legislation which includes a comprehensive
    legislative proposal, as well as S. 388, the ``National Energy Security
    Act of 2001,'' S. 597, the ``Comprehensive and Balanced Energy Policy
    Act of 2001,'' and the Administration's National Energy Policy
    Development Group (NEPD Group) Report, released on May 17 (the ``Cheney
    Task Force Report'').
        The electricity industry is in the middle of a sometimes painful
    transition from an industry composed of highly regulated integrated
    utilities with monopoly service territories and cost-based pricing, to
    an industry with competitive power generation markets, market-based
    pricing and a wide diversity of market participants. New institutions
    are emerging, such as regional transmission organizations. It remains
    our firm belief that market-oriented restructuring of the electric
    industry remains the best opportunity we have to provide consumer
    benefits and to develop reliable new sources of supply. We must work
    together to make competitive markets work.
        To accomplish the goal of a competitive market-oriented electricity
    industry, EEI strongly supports passage of a comprehensive national
    energy policy that achieves the following objectives: (1) assures a
    stable and diverse supply of fuel sources, consistent with responsible
    environmental goals; (2) facilitates the ability of utilities and other
    generators to build adequate, competitive generation to meet consumer
    demand; (3) enables regional transmission organizations (RTOs) and
    other transmission-owning utilities to expand the Nation's transmission
    grid; (4) enhances energy efficiency and conservation initiatives; and
    (5) helps protect lower income consumers.
        We are pleased, Mr. Chairman, that you have announced your
    intention to ask the Committee to consider comprehensive legislation
    designed to ensure the integrity of our Nation's electricity supply
    infrastructure. While EEI has not had an opportunity to develop a
    detailed position on the White Paper on Electricity Legislation which
    you released last week, Mr. Chairman, I feel safe in saying that most
    utility executives that I know would support your effort to enact a
    comprehensive proposal.
        Let me highlight each of the objectives we believe should form the
    basis for comprehensive legislation.
                  (1) assure a stable, diverse supply of fuels
        Maintaining a diversity of fuel supply options is essential for
    affordable and reliable electricity. No individual fuel is capable of
    providing the energy required to meet all of our Nation's electricity
    demands. Policy makers and regulators should work together to maximize
    the development and viability of all our fuel sources. And, they should
    reconcile conflicting energy, environmental and other public policy
    goals.
        Right now natural gas is nearly always the fuel of choice for new
    generation. That is unlikely to change soon. But, gas prices rose to
    painfully high levels in recent months and may do so again. A sustained
    change could affect the economics of the fuel choice for new
    generation.
        We must enable the continued operation of our nuclear fleet by
    completing a permanent spent fuel repository and by renewing the Price-
    Anderson Act.
        Given President Bush's rejection of the Kyoto accord, it is
    appropriate for this Committee to reexamine what this Nation's policy
    should be on a going forward basis. Many of us--including myself and my
    company--believe it is time for the federal government to limit
    CO2 in a ``no regrets'' way. I also believe that we need to
    revisit the standards for SO2, NOX, and mercury
    so that decisions on life extensions for existing coal-fired plants can
    be made on a sound economic basis.
            (2) assure adequate, competitive electricity generation
        Rapid economic growth, combined with the increasing electrification
    of our homes, businesses and industries, has strained our energy
    infrastructure. Between 1995 and 1999, U.S. electric demand increased
    by 9.5 percent, while total electricity generation additions rose by
    only 1.6 percent. This has resulted in a decline in utility reserve
    margins.
        The dramatic increase in electricity prices we have seen in
    California is proof positive of what happens when capacity does not
    keep up with demand. Responsible public officials must support the
    siting and construction of generating facilities to ensure reliable and
    adequate electricity supplies; otherwise consumers will pay a very high
    price.
        Congress can facilitate the availability of adequate generation by
    removing federal roadblocks that hinder development of sufficient and
    affordable generation capacity. These barriers include the Public
    Utility Holding Company Act (PUHCA) and the Public Utility Regulatory
    Policies Act (PURPA).
    Public Utility Holding Company Act
        Comprehensive national energy legislation should repeal PUHCA.
    PUHCA repeal is included in the Chairman's White Paper, in S. 388, and
    in the Cheney Task Force Report. The Securities and Exchange Commission
    (SEC), which administers PUHCA, also calls for PUHCA repeal. Clearly
    there is a consensus in favor of PUHCA repeal.
        PUHCA is an outmoded 1935 statute that acts as a barrier to
    competition. PUHCA restricts the flow of capital into new generation
    and limits the number of new suppliers in electricity markets by
    prohibiting exempt wholesale generators from selling directly to retail
    consumers. PUHCA also acts as an impediment to the formation of RTOs--a
    problem I will discuss in greater detail later.
    Public Utility Regulatory Policies Act
        Comprehensive national energy legislation also should repeal
    PURPA's mandatory purchase obligation, protect existing contracts and
    provide for the recovery of federally mandated (``FERC'')
    jurisdictional PURPA costs. Again, repeal of PURPA's mandatory purchase
    obligation is included in the Chairman's White Paper, in S. 388, and in
    the Cheney Task Force Report. Clearly there is a consensus in favor of
    repealing PURPA's mandatory purchase requirements.
        PURPA has failed to achieve one of its primary goals, to encourage
    the development of renewable energy resources. Even though PURPA was
    enacted 23 years ago, only 2 percent of the electricity generated in
    this country is from non-hydroelectric renewable energy resources.
        PURPA is also anti-competitive and anti-consumer. PURPA's mandatory
    purchase obligation forces utilities to purchase power they may not
    need at above-market prices even when more efficient and less expensive
    generating resources are available. As a result, utility consumers pay
    more than $8 billion a year in above-market electricity prices.
    Distributed Generation/Net Metering
        Distributed generation involves the use of small generation
    facilities built at customer locations to serve some or all of a
    consumer's energy needs, which also can deliver surplus power to the
    distribution network. Distributed generation is becoming a viable
    option to meet consumers' electricity needs. This is especially true
    for consumers who can use distributed generation to hedge against price
    volatility, those who place a premium on reliability and power quality
    and for consumers who are in isolated, hard-to-serve areas.
        Recognizing the growing utilization of distributed generation
    facilities, EEI's member companies have been working with proponents of
    distributed generation to reach a compromise on legislation that will
    facilitate the interconnection of distributed generation to the grid
    while addressing issues relating to jurisdiction, backup power
    requirements and cost recovery. Again, the Chairman's White Paper
    recognizes the need to develop interconnection standards for
    distributed generation. We support doing so.
    Market Power
        California's electricity crisis has increased the focus on FERC's
    market power authority. I personally believe that FERC already has
    adequate authority to address the market power issues posed by public
    utilities that are already subject to its jurisdiction under the
    Federal Power Act. Under Sections 205 and 206 of the Federal Power Act,
    FERC has the authority to regulate prices for wholesale power and
    transmission services charged by investor-owned utilities, and to order
    refunds when it finds those prices unjust and unreasonable.
        FERC has utilized its existing authority in a series of orders that
    impose just and reasonable standards appropriate to different kinds of
    markets. FERC is actively discussing revisions to its market power
    analysis for its market-based rate standards with regard to
    jurisdictional utilities. However, FERC lacks comparable authority over
    federal, state and municipal utilities, as well as electric
    cooperatives, which are engaged in interstate commerce.
        Government-owned utilities and electric cooperatives argue that the
    rates they charge for wholesale power sales and transmission services
    should not be subject to FERC's ``just and reasonable'' standard
    because they are not-for-profit entities. However, we believe their
    not-for-profit status is irrelevant when they engage in wholesale sales
    and provide interstate transmission for others.
        No solution to any regional price issues can occur as long as a
    significant number of energy suppliers in those markets are outside of
    FERC's jurisdiction. Thus, a comprehensive energy bill should extend
    FERC's ``just and reasonable'' rate standard to all electricity
    suppliers by making all utilities subject to Sections 205 and 206 of
    the Federal Power Act. The Chairman's White Paper includes such a
    proposal.
                 (3) expand the electricity transmission system
        Like the Nation's generation capacity, our transmission capacity
    has not expanded to keep pace with demand. The current situation is
    comparable to a country road trying to carry the traffic of an
    interstate highway. All segments of the electricity industry are
    imposing tremendous demands on the transmission system to carry more
    and more transactions across even greater distances. As a result, the
    transmission system is facing significant increases in congestion.
    Between 1999 and 2000, transmission congestion grew by more than 200
    percent. In the first quarter of 2001, transmission congestion was
    already three times the level experienced during the same period in
    2000.
        Annual investment in transmission has been declining by almost $120
    million a year for the past 25 years. Transmission investment in 1999
    was less than half of what it had been 20 years earlier. Maintaining
    transmission adequacy at current levels would require about $56 billion
    in investment during the present decade. The Electric Power Research
    Institute (``EPRI'') estimates it will cost up to $30 billion to bring
    the western regional transmission system back to a stable condition and
    $1 billion to $3 billion a year after that to maintain this condition
    in the face of continued growth.
        How do we ensure sufficient transmission capacity to help assure
    the success of competitive electricity markets? We believe the
    following proposals should be included in a comprehensive national
    energy policy.
    Transmission Siting Authority
        EEI supports granting FERC a backstop role to help site new
    transmission lines when states are unable or unwilling to act on new
    transmission line applications. The Cheney Task Force Report recommends
    developing legislation to grant FERC siting authority for new
    transmission. S. 2098, introduced by Senator Murkowski and Senator
    Landrieu in the 106th Congress, included FERC transmission siting
    authority if a state failed to act on an application within a year.
    Such an approach would give states the first opportunity to act on
    transmission siting applications. EEI would not favor the portion of
    the transmission siting proposal contained in the Chairman's White
    Paper that provides for regional compacts because it could create yet
    another bureaucracy governing our industry. RTOs are emerging as
    regional planning entities. Establishing yet another regional
    bureaucracy would be counter-productive.
        It made sense in 1935 when the Federal Power Act was adopted to
    leave transmission siting authority with the states, since transmission
    lines were generally local in nature. Now, however, our transmission
    system is being asked move large amounts of energy across long
    distances and across state lines. Under these circumstances, it could
    be increasingly difficult to obtain the necessary siting permits from
    affected states, which may receive few direct benefits and thus have
    little incentive to approve construction.
        Under this proposal, FERC would be given the authority to issue a
    certificate of public convenience and necessity for a transmission
    line. Eminent domain authority will rest with the holder of the
    certificate. Electric utilities that are issued such certificates by
    the states also may exercise the power of eminent domain if they are
    unable to acquire the rights-of-way through other means.
        Federal electric utilities that own transmission, including the
    Tennessee Valley Authority, Bonneville Power Administration and the
    other power marketing administrations, already have such authority. In
    addition, FERC has this authority for transmission for hydroelectric
    facilities.
    Innovative Pricing
        Current returns on transmission are too low to attract the huge
    amounts of capital needed to fund investments in transmission
    expansion. A comprehensive national energy policy should include
    direction to FERC to utilize innovative transmission pricing
    incentives, including rates of return more appropriate with the higher
    levels of investor risk in a restructured electricity industry. These
    incentives must be available to all transmission owners; not just to
    owners who have made transmission improvements and not just to RTO
    operators--which is the current FERC policy. The Cheney Task Force
    Report called for DOE to work with FERC to encourage the use of
    incentive ratemaking proposals.
    Reliability
        As NERC testified recently before this Committee, it is seeing
    increasing violations of its reliability rules. A voluntary reliability
    regime lacks the enforcement authority needed in a competitive
    electricity market. A comprehensive national energy policy should
    include provisions to establish a self-regulating reliability
    organization, with FERC oversight, to develop and enforce reliability
    rules and standards that are binding on all market participants. We are
    extremely pleased that the Chairman's White Paper, S. 388, and S. 597
    include these provisions and that the Cheney Task Force Report calls
    for such legislation. This Committee approved and the Senate passed a
    similar bill last year.
    PUHCA
        As I mentioned earlier, PUHCA also acts as a barrier to the
    formation of interstate independent transmission companies.
    Shareholder-owned utilities and FERC are working quickly to meet FERC's
    goal, established in Order No. 2000, of having RTOs operational by the
    end of 2001.
        PUHCA is an impediment to this effort. An RTO could be required to
    become a registered holding company and subject to PUHCA restrictions
    and additional regulation. As our companies attempt to raise financing
    for these newly formed RTOs, they are discovering that PUHCA's
    restrictions are a significant concern to Wall Street firms and a
    barrier to investment.
    Federal Lands Issues
        A comprehensive national energy policy should provide for the
    coordination of transmission siting activities among multiple federal
    land management agencies. FERC should be designated as the lead agency
    for any environmental analysis necessary to site transmission lines. A
    FERC decision to grant a transmission line a certificate of public
    convenience and necessity should be conclusive as to the need for the
    facility for the purposes of any other permits that might be necessary
    to build the line. A comprehensive national energy policy also should
    include provisions to help reduce delays associated with transmission
    permit processing and approval by requiring federal land management
    agencies to develop and implement uniform regulations and practices to
    utilize qualified third-party contractors to assist in these
    responsibilities.
    Transmission Tax Issues
        A number of tax law changes are critical to expanding our
    transmission infrastructure. Chairman Bingaman's White Paper correctly
    highlights the need for changes to the tax code to expand our
    transmission infrastructure. Also, we commend Senator Murkowski for
    including in S. 389 the tax compromise agreement reached between EEI,
    LPPC and APPA last year. This agreement would (1) grant ``private use''
    relief for government-owned utilities that provide open access to their
    transmission systems, (2) grant tax relief for the sale or spin-off of
    transmission facilities to form FERC-approved RTOs or independent
    transmission companies that are part of a FERC-approved RTO, (3) allow
    continued contributions to nuclear decommissioning trust funds in a
    restructured electricity market and (4) remove the tax on contributions
    in aid of construction.
        We also support the provisions included in both S. 389 and S. 596
    that would shorten the depreciable life for transmission facilities.
    Chairman Bingaman's White Paper addresses these issues as well, though
    the tax relief is limited to spinoffs of transmission systems; it
    should cover sales as well.
                 (4) enhance energy efficiency and conservation
        Wise energy use and improved energy efficiency and conservation can
    reduce demand for energy and can help lower consumers' energy bills.
    Today, the U.S. economy uses 42 percent less energy to produce one
    dollar of gross domestic product when compared to 1970 energy intensity
    levels. However, there still is obvious room for improvement, beginning
    with public sector facilities.
        I would like to call the Committee's attention to the conservation
    and efficiency provisions in legislation passed in the last two weeks
    by the House Energy and Commerce and Ways and Means Committees. They
    have broad support in both the utility and conservation/efficiency
    communities.
        New metering technologies that enable consumers to respond to
    variable energy prices can help reduce energy costs and consumption.
    Utilities are working closely with their customers, particularly larger
    energy users, to install real-time meters so consumers will know when
    to reduce or modify their energy usage to help reduce peak demands for
    electricity. We also support tax incentives for real-time metering, as
    contained in H.R. 2511, the Energy Tax Policy Act of 2001.
        The federal government is the largest single user of electricity in
    the world. Utilities work closely with their federal customers to
    improve their energy efficiency. S. 388 includes provisions
    specifically intended to help achieve this goal. The Cheney Task Force
    Report also calls for reducing energy use in federal facilities. EEI
    believes that any legislation to promote greater energy efficiency in
    federal facilities should ensure the continued viability of utility
    incentive programs as well as Energy Savings Performance Contracts
    (ESPCs). Section 605 of S. 388 would continue this policy as well as
    enhance it.
        We support including provisions in a comprehensive energy bill to
    establish a federal grants program to local school districts to improve
    energy efficiency of school buildings. Both S. 388 and S. 597 contain
    such provisions.
        We support the inclusion of provisions to expand and extend the
    authorization for state energy conservation programs, as called for in
    S. 388. In addition, we support federal funding for enhanced research
    and development programs, as outlined in S. 597. And, while tax issues
    fall outside of this Committee's jurisdiction, we also support tax
    incentives to purchase energy efficient homes, appliances and vehicles.
        The Cheney Task Force Report calls for increasing public awareness
    of Energy Star-labeled products and for expanding the scope of
    appliance standards programs, where appropriate. We support both of
    these initiatives.
        Many of these issues are included in the Chairman's White Paper; we
    would be pleased to work with the Committee staff to help develop
    specific proposals for the Committee's consideration.
                       (5) protect lower income consumers
        We believe comprehensive energy legislation should expand and
    increase funding for the Low Income Home Energy Assistance Program
    (LIHEAP). We are pleased that S. 388 and S. 352, introduced by Chairman
    Bingaman, call for increased funding for the LIHEAP program. In
    addition, the Chairman's White Paper and the Cheney Task Force Report
    both call for a higher funding level for LIHEAP.
        Similarly, funding for the low-income weatherization assistance
    program should be increased to assist low-income families with lowering
    their energy bills through increased energy efficiency and
    conservation. Again, S. 388, S. 352, the Chairman's White Paper, and
    the Cheney Task Force Report support additional financial support for
    this program.
                                   conclusion
        Our country needs a comprehensive national energy policy. The
    bedrock principle upon which the policy should be based is the
    encouragement of competitive electricity markets. Action is needed to
    ensure our country has affordable and reliable electricity for years to
    come. Congress has been debating electricity issues for six years. In
    the meantime our Nation's electricity infrastructure has not kept pace
    with the growing demands of our new economy. California's woes have
    clearly sounded an alarm bell that must be heeded by the Congress. The
    time to act is now. We look forward to working with this Committee to
    achieve these objectives.
        I would be pleased to answer any questions the Committee may have.

        The Chairman. Thank you very much for that statement.
        Mr. Thilly, why don't you go ahead.

      STATEMENT OF ROY THILLY, CHIEF EXECUTIVE OFFICER, WISCONSIN
      PUBLIC POWER, INC., ON BEHALF OF THE AMERICAN PUBLIC POWER
                              ASSOCIATION

        Mr. Thilly. Mr. Chairman, Senator Murkowski, members of the
    committee, I'd like to thank you for the opportunity to testify
    today.
        I'm here on behalf of the America Public Power Association,
    which represents the interest of the Nation's 2,000 public
    power utilities. We have submitted formal testimony that
    addresses the issues point by point.
        In summary, we believe the White Paper is excellent. And
    Public Power would like very much to work with the committee
    and its staff to turn the ideas in the White Paper into
    legislation. We are very pleased that the White Paper
    recognizes that public power systems are different than many
    other players in the industry, and seeks to achieve the paper's
    objectives without unnecessarily or unduly interfering with the
    local control of community owned systems. Any extension of
    Federal jurisdiction to local public power systems is a very
    sensitive matter.
        In terms of differences, I note that the White Paper states
    that the regulatory compact; that is, the obligation to serve;
    has been severed in States that have adopted retail competition
    programs, and also that utilities are no longer building
    generation as utilities. And I agree with that in general, but
    it's important to recognize that Public Power's compact with
    its communities and with its customers is and will remain very
    much intact. Public power systems, regardless of State
    deregulation programs, will continue to provide highly reliable
    electric service on a cost basis, not whatever the market will
    bear, to the residents and the businesses of their communities
    over the long term. That's why we're here.
        Also, public power systems, a number have commenced
    construction or announced construction of new generation
    dedicated to their customers. We strongly support the
    development of a vigorously competitive wholesale market
    because we believe it will benefit all customers, and that
    vigorous competition at wholesale is obviously essential for
    retail competition programs to work. But I would caution the
    committee to recognize that the competitive model will not work
    today in some places, and clearly will not result in just and
    reasonable prices because we lack the transmission
    infrastructure that's necessary for the market to work.
    Deregulation in a highly constrained market would be a
    disaster.
        In my State, we are highly constrained and we have a highly
    concentrated market. Our transmission import capability is down
    to about 15 percent. California, I think, has 30 percent import
    capability. One entity controls 54 percent of our generation. I
    think in California the largest generator controls about 11
    percent of the generation, and yet there are market power
    problems. The consensus within Wisconsin, I think across the
    board, is that deregulation in this circumstance today would
    result in higher prices, significantly higher prices. And this
    is not a unique situation.
        Unfortunately, transmission is becoming more and more
    constrained across the country. This week there were firm
    transmission curtailments in Iowa. I don't think there have
    ever been firm curtailments in Iowa in the past. And we have
    seen more and more curtailments in our State. The weakness of
    the transmission system is a significant threat to the
    objective to achieve robust, competitive markets.
        And the White Paper correctly focuses on transmission as
    the key. We need strong, independent regional transmission
    organizations, and Congress needs to affirm FERC's authority in
    this regard or we'll be in litigation indefinitely in trying to
    create those organizations. But we also need to build, and we
    need to build a significant amount of new transmission.
        The APPA supports Federal eminent domain authority, but we
    also recognize the real interest, important interest of States
    in siting. So I think the idea of enabling the States to come
    together in regional compacts to jointly approve projects that
    are in RTO plans, regional plans, based upon regional need and
    reliability, is very important and very--an excellent idea.
    There needs to be a Federal backstop, however, that if the
    States don't pick up the ball in this regard regionally that
    the FERC will have siting authority.
        I was--we were very pleased to see that the White Paper
    does not advocate incentive transmission rates, as were
    mentioned earlier today. There is, of course, a chorus from
    transmission owners on the need for incentives, and I've never
    met a utility that thought its return was adequate. But the
    problem is not really--the problem is the disincentive for a
    vertically integrated system to build transmission.
        A weak transmission system protects generation. In most
    vertically integrated systems, major investment is in
    generation. Building new transmission opens that generation up
    to competition. And transmission's got to compete in that
    environment with other investments that don't have that down
    side, and I think it's lost consistently in the last 10 years.
    Trying to force construction through incentives in this
    circumstance is a no win proposition for consumers.
        In Wisconsin, companies have now divested their
    transmission into a for profit transco that is a single purpose
    company. It has an obligation to build for a robust market.
    There is no internal competition for capital, and the only way
    for this company to grow is to build additional facilities. I
    think these incentives will provide much better planning and a
    much more robust construction program. And I would urge you to
    look at RTOs in terms of the authority to build and to bid out
    construction to passive investors so we put competitive
    pressure on the cost of new transmission.
        Finally, the other key issue is the Public Utility Holding
    Company Act repeal. I would simply caution the committee there
    that any repeal will clearly lead to much more consolidation in
    the industry and of complex affiliate transactions, and
    consolidation will threaten the objective to achieve
    competitive markets. So we need to be very, very careful there.
    We need to extend the authority to include acquisitions of
    generation as well as mergers of holding companies.
        In closing, I'd like to thank Senator Murkowski personally
    for his very important leadership in helping public power and
    private power forge a historic compromise on tax issues. Thank
    you.
        [The prepared statement of Mr. Thilly follows:]
          Prepared Statement of Roy Thilly, Chief Executive Officer,
                          Wisconsin Public Power, Inc.
        Thank you, Chairman Bingaman and Ranking Member Murkowski. On
    behalf of the American Public Power Association, I am pleased to appear
    today to discuss electricity restructuring.
        I am the Chief Executive Officer of Wisconsin Public Power, Inc.,
    and past Chair of the APPA Board of Directors from June 1999 through
    June 2000. APPA represents the interests of more than 2000 publicly
    owned electric utility systems across the country, serving about 40
    million customers. APPA member utilities include state public power
    agencies and municipal electric utilities that serve some of the
    nation's largest cities. However, the vast majority of these publicly
    owned electric utilities serve small and medium-sized communities in 49
    states, all but Hawaii. In fact, 75 percent of our members are located
    in cities with populations of 10,000 people or less.
        Public power systems' first and only purpose is to provide
    reliable, efficient service to their local customers at the lowest
    possible cost. Public power exists for a purpose, not a profit. Like
    hospitals, public schools, police and fire departments, and publicly
    owned water and waste water utilities, public power systems are locally
    created governmental institutions that address a basic community need:
    they operate to provide an essential public service, reliably and
    efficiently at a reasonable, not-for-profit price. Publicly owned
    utilities also have an obligation to serve the electricity needs of
    their customers. And, because they are governed democratically through
    their state and local government structures, public power systems
    operate in the sunshine, subject to open meeting laws, public record
    laws and conflict of interest rules. Most, especially the smaller
    systems, are governed by an elected city council, while an elected or
    appointed board independently governs others. Democratically governed,
    not-for-profit, obligation to serve--the importance of these unique
    characteristics has been highlighted by the recent events in the West.
    Under California's restructuring law, public power was able to retain
    its obligation to plan for and serve the electricity needs of our
    consumer-owners. As a consequence, municipal utilities retained their
    power plants dedicated to serve native load customers, and they engaged
    in long-range planning to satisfy demands that exceeded their own
    generation resources. This gave public power utilities the ability to
    mitigate market risk for their customer-owners.
        Understanding the underlying structure and mission of public power
    is essential in crafting balanced electricity legislation that will
    maintain industry diversity. This diversity has helped many public
    power communities in the West endure the electricity crisis with bumps
    and bruises rather than broken bones. We believe the entire nation has
    been well served by this diverse mix of publicly, privately and
    cooperatively owned utilities combined with federal institutions
    including the Tennessee Valley Authority and the federal power
    marketing administrations. In restructuring our industry, every effort
    should be made to ensure the preservation of this diversity.
        wholesale competition first--the role of the federal government
        The rush to restructure the electric utility industry in several
    states has truly put the cart before the horse. Retail choice programs
    adopted by states and localities cannot succeed without truly
    competitive wholesale markets. (This is certainly one of many lessons
    learned from what has happened in California.) The fundamental
    characteristics of a competitive market include, among other things:
    access of buyers to numerous sellers; mitigation of market power; ease
    of entry into the market for new participants; a sufficient number of
    participants to impose discipline on all; and transparency of
    information.
        APPA has supported legislative efforts to make the wholesale
    electric market more competitive for decades. APPA was one of the major
    supporters of the transmission access provisions of the Energy Policy
    Act of 1992. On numerous occasions over the past few years, we have
    testified in support of additional legislation to ensure that the
    promises of wholesale competition become reality. In our view,
    comprehensive federal restructuring legislation must, at a minimum,
    achieve the following objectives:

       Promote more effective wholesale competition by providing
            sufficient federal authority to ensure non-discriminatory
            access to regional transmission facilities at fair and
            comparable rates.
       Promote the maintenance and expansion of the nation's
            transmission facilities including, where necessary and subject
            to appropriate limitations, the exercise of federal eminent
            domain authority.
       Establish policies to maintain the reliability of the
            nation's electricity industry through competitively neutral
            means.
       Eliminate market power in generation and transmission by: 1)
            Providing for truly neutral management of the nation's
            transmission system--allowing for federal oversight to ensure
            RTO development, independence and effectiveness, 2) Clearly
            articulating FERC's role in monitoring the wholesale market,
            directing FERC to investigate and mitigate market power, and
            enhancing its power to accomplish this difficult task, and; 3)
            Strengthening FERC's merger review process to allow for
            consideration of a proposed merger's impact on the development
            of competition.
       Eliminate the tax-related impediments to competition for
            municipal utilities imposed by the private use restrictions on
            tax-exempt bonds while retaining local control over municipal
            decisions.
       Consider changes to PUHCA only in the context of providing
            reasonable substitutes to protect consumers and promote
            competition.
             appa comments on chairman bingaman's ``white paper on
                           electricity legislation''
        APPA believes that Chairman Bingaman's White Paper memorandum of
    July 20, 2001, represents an excellent starting point for industry
    restructuring legislation. Many of the principles are absolutely
    essential to the creation of truly competitive wholesale markets. The
    remainder of my testimony will focus on these topics following, for the
    most part, in the order in which they are delineated in the white
    paper. I will reference existing legislation as appropriate.
                           transmission jurisdiction
        Local control is one of the most fundamental aspects of public
    power. However, it is difficult to envision effective wholesale
    markets, which, as noted, APPA strongly supports, without some degree
    of federal involvement in public power transmission that is part of the
    regional grid. APPA members have struggled with the problem of
    balancing the retention of local control with the recognition that
    transmission is a matter of interstate commerce.
        The White Paper recommends that ``FERC [transmission] jurisdiction
    should be extended to public, cooperative and federal utilities. Such
    jurisdiction should not extend to setting transmission rates for these
    entities, but should require that rates set by these transmitting
    utilities should be comparable to those that the public power utilities
    charge to themselves.'' While publicly owned utilities with
    transmission facilities are not anxious to be subjected to FERC
    jurisdiction, the limited jurisdiction contemplated in this portion of
    the White Paper is an acceptable compromise and is consistent with a
    resolution adopted by APPA in 1998.
        The White Paper states that ``[l]egislation should affirm FERC's
    authority to order utilities to join regional transmission
    organizations.'' Presumably, this authority would extend to all
    ``transmitting'' utilities regardless of ownership. For the most part,
    publicly owned utilities have been anxious to participate in RTOs that
    are consistent with the specific criteria set forth by FERC in Order
    No. 888. In fact, FERC commissioners and various FERC orders have
    specifically addressed public power participation, not to encourage
    public power systems to join but rather to encourage private utilities
    to let them join on fair and reasonable terms.
        FERC has indicated that it believes it currently has the authority
    to order jurisdictional utilities to participate in RTOs, and we agree
    that Congress should affirm this authority. FERC should be required to
    condition market-based pricing for jurisdictional utilities on becoming
    part of a large, regional RTO.
        It is not clear from the White Paper whether FERC authority to
    order RTO participation would apply only to jurisdictional utilities,
    or whether this would extend to publicly owned utilities as well. If
    the latter, then deference should be provided to publicly owned
    utilities, similar to the restraints on FERC jurisdiction over
    transmission noted above. Specifically, APPA recommends that FERC
    authority to order publicly owned utilities to join a regional
    transmission organization should be limited to situations in which FERC
    finds that (1) the publicly owned transmission owner has (a) engaged in
    undue discrimination in the provision of transmission services, or (b)
    abused its control over transmission so as to disadvantage competitors;
    and (2) that the FERC open access transmission tariff has not and is
    not likely to remedy the problem. In such cases, APPA agrees FERC
    should be authorized to require the publicly owned utility at issue to
    surrender control of its transmission to an independent regional
    transmission organization that meets FERC RTO criteria. We also believe
    Congress, in clarifying FERC's authority to order utilities to join
    RTOs, should take into consideration the cost consequences of such
    action. Clearly, RTOs should decrease, not increase, total transmission
    costs. Cost shifts and increases have been a very significant problem
    for public power systems in California. Obviously, it would be
    imprudent for a public power system, which has financed transmission
    with public funds, to join an RTO that will significantly increase the
    cost of power to its customers. Some cost shifting may be inevitable,
    but any FERC action in this area should be premised on the principle
    that adverse cost consequences for utilities ordered to join RTOs
    should be held to the minimum possible, and this is particularly
    important with respect to public power systems that have constructed
    their facilities with public funds.
        The White Paper also recommends clarification of the Federal Power
    Act to ensure that ``FERC has jurisdiction over all transmission,
    whether bundled or unbundled. Once jurisdiction has been clarified, the
    Commission can use its existing legal authority [to] determine which
    facilities are transmission in interstate commerce and which are
    distribution facilities and thus state jurisdictional.'' (We assume
    that ``state jurisdictional'' includes ``local jurisdictional'' in the
    case of publicly owned utilities.) In some respects, this statement is
    similar to H.R. 2944, legislation reported from the House Subcommittee
    on Energy and Power in the last Congress. That measure authorized FERC
    to determine whether particular facilities were transmission or
    distribution based on function. We supported that aspect of H.R. 2944.
    We disagreed with another aspect of the same section of H.R. 2944
    because, while it attempted to establish a bright line between federal
    and state regulatory jurisdiction, it compromised FERC jurisdiction by
    failing to allow sufficient FERC regulation over the transmission
    component of bundled retail sales. We support the clarification of
    interconnection rules suggested in the White Paper including a
    sufficient reservation of local authority to address system-specific
    issues. Not addressed here, however, is the issue of who bears the cost
    of interconnection. We are concerned over a possible trend to shift
    onto the bulk power grid costs that should be borne by generation
    owners. We do not believe it is appropriate to force all users of the
    interstate grid to assume interconnection costs driven by the decisions
    of individual generators.
        It is not clear whether the provisions in the White Paper would
    apply to utilities within Electric Reliability Council of Texas
    (ERCOT). FERC does have limited jurisdiction over utilities in ERCOT
    under section 211. The need for further expansion of FERC jurisdiction
    over ERCOT utilities is not readily apparent, at least until ERCOT is
    interconnected through AC facilities with other regions. APPA's
    policies with respect to FERC jurisdiction have generally been adopted
    with the understanding that they would not apply to ERCOT unless or
    until public utilities in that region become jurisdictional through
    interconnections.
                                  reliability
        APPA urges the Committee to require mandatory involvement by all
    industry participants in a national compliance program to ensure
    continued reliability of the high voltage electric transmission grid.
    The Administration's National Energy Policy report also calls for
    enactment of mandatory reliability standards by an independent body and
    overseen by FERC to ``address the problems created by increased demands
    on the transmission system that have resulted from changes within the
    industry brought on by wholesale competition.'' In their respective
    energy policy bills, Chairman Bingaman and Ranking Member Murkowski
    have included reliability language supported by APPA and other industry
    stakeholders.
        Even though the United States has the most reliable electric system
    in the world, the crisis in the West has demonstrated the delicate
    balance between reliability and the markets within which the electric
    grid must operate. Consequently, great care needs to be taken to ensure
    that the current level of reliability is not sacrificed in any
    restructuring of the industry. As the industry has become more
    competitive, more participants have been executing an increasingly
    larger number of transactions every day. The focus of most of these
    transactions is on short-term costs rather than system stability. While
    the current voluntary system of compliance with reliability standards
    worked reasonably well in the regulated environment in which the
    industry previously operated, it will not continue to provide the
    necessary safeguards in a competitive market.
        Currently, reliability standards are established and monitored by
    the North American Electric Reliability Council (NERC), which is a non-
    profit organization that monitors the electric utility industry's
    voluntary compliance with policies, standards, principles, and guides,
    and assesses the future reliability of the bulk electric systems. The
    NERC Board of Trustees has approved and begun the transformation of
    NERC to the North American Electric Reliability Organization (NAERO),
    in which participation and adherence to standards and practices would
    be mandatory. Federal legislation is required to give NAERO the
    enforcement tools necessary to ensure compliance and achieve a system
    that properly balances reliability with market pressures and decisions.
    An industry-wide effort to forge a compromise on such legislation
    resulted in the language being advanced by the Chairman and Ranking
    Member and by Members in the House.
        APPA has worked actively on the NERC consensus proposal, and we
    continue to support it. However, we could also support simplifying that
    proposal so long as the basic tenets are adhered to. We do have
    concerns about reliability being delegated exclusively to RTOs, some of
    which may be for-profit entities, that would not only set the rules,
    but must comply with them.
        An item of particular importance to APPA in the consensus
    reliability legislation is a sentence developed during negotiations in
    late 2000. The sentence would clarify that FERC is granted oversight
    authority over public power systems in the regulatory title only for
    the purposes of enforcement of reliability standards. Public power
    systems support oversight with regard to reliability standards but this
    provision should not be used by FERC to impose additional regulation at
    a later date. Through an oversight, this sentence was not included in
    reliability legislation pending in Congress. We would appreciate it if
    the sentence were added to your draft bill.
          rates and market power, market transparency rules and puhca
        We have combined three different areas of the White Paper to
    address in this portion of our testimony because, from our perspective,
    they are interrelated and all must be addressed to achieve the goal of
    workably competitive wholesale markets. Here again, we believe there
    are some extremely important lessons to be learned from California.
    These include:

       Market structure is critical to market performance.
       Market power is a very real problem that must be addressed.
       Markets need rules and market monitors to enforce them.
       Market monitors need data.

        There are many aspects of the White Paper that we endorse. We agree
    that, where feasible, ``legislation should require the FERC to promote
    competitive markets.'' From our perspective, however, the paramount
    role of a regulatory agency must be to protect the public interest and
    the interests of consumers. Competition is a means to this end, not the
    end itself. In California and throughout the West over the last year,
    we believe FERC was so focused on promoting competition that it
    completely lost sight of its obligation to permit only just and
    reasonable wholesale rates, and its responsibility to ensure consumers
    were protected from abuses of market power. We hope that, in clarifying
    FERC's mission, Congress will provide that, first and foremost, FERC
    must protect the public interest and the interests of consumers.
        We support the proposition in the White Paper that, if markets are
    allowed to set rates, FERC must ensure that such markets are workably
    competitive. This begs the question, however, with respect to the
    methodology used to make such a determination, and also doesn't specify
    how rates should be established in markets that are not competitive.
    APPA believes market based rates for jurisdictional utilities should
    only be approved on a finding that the applicant will not possess
    market power and that effective and sustainable competition will exist
    in that market. The analysis must include an examination not only of
    the resources available to individual applicants and whether such
    assets could be used to set the market clearing price, but also of the
    effect of transmission constraints and how those assets fit into the
    broader market structure. Location-specific constraints must be taken
    into account, as should requirements for grid reliability. Further, and
    frequently ignored in traditional market analysis, is the time-
    sensitive nature of electricity. In some markets, an entity controlling
    a very small amount of generation can exercise market power.
        FERC should be given other ``tools'' in addition to those it
    already has to address market power problems. It should, for example,
    require jurisdictional utilities to submit market power mitigation
    plans for approval or modification. Its merger review process should be
    revised to require that merger approval be granted on an affirmative
    finding that the proposed merger is in the public interest as opposed
    to the current standard which only requires that the merger be
    consistent with the public interest. In reviewing mergers, FERC should
    be required to consider whether they will promote effective wholesale
    competition, or undermine it. FERC should also have the authority to
    require shared access to essential assets, including reserve/risk
    sharing mechanisms, on a non-discriminatory basis and with just and
    reasonable rates. Further, FERC should be able to preserve the
    integrity of the market through preliminary relief in order to prevent
    irreparable harm pending issuance of a final order.
        The White Paper states that ``all sellers (which we assume includes
    public power sellers) into such [competitive] markets should be clearly
    subject to market rules and market mitigation measures ordered by the
    Commission. It should be made clear that normal transactions, not into
    market-based rate setting institutions, by public power entities should
    continue to be non-jurisdictional.'' As consumer-owned utilities,
    APPA's members certainly believe that no market participant should be
    able to abuse market power to the detriment of end users. Until the
    debacle in the West, application of this principle to public power
    systems in wholesale markets has not been an issue, and therefore this
    specific issue has not been addressed by APPA. However, publicly owned
    utilities in California and elsewhere in the West have stated that they
    would voluntarily abide by market rules applicable to jurisdictional
    utilities. The exclusion for ``normal'' transactions is clearly
    appropriate, but the extent to which sales by public power systems into
    market institutions would be subject to FERC oversight is unclear and
    could be problematic. APPA is confident that, if FERC clearly defines
    in advance the rules applicable to jurisdictional utilities who are
    responsible for the vast majority of all such transactions, public
    power systems will live within that framework without the need for any
    expansion of FERC jurisdiction.
        As this particular element of the White Paper is given additional
    consideration, it is important for members of the Committee to keep in
    mind that publicly owned utilities are units of local government. They
    have their own unique set of legal requirements imposed by state and
    local laws as well as under contracts or, more specifically, bond
    covenants. Accounting principles, that apply to governmental entities
    are not the same as those that apply to private, for-profit
    corporations. Power sold, whether through bi-lateral contracts or into
    the spot market, is publicly owned property. Public power systems have
    a fiduciary responsibility to ensure that they and their customer-
    owners receive reasonable compensation.
        The White Paper notes that ``legislation must ensure transparent
    information on market transactions and should grant clear authority to
    the Energy Information Administration and the FERC to collect and
    publish appropriate data, while protecting proprietary information.''
    APPA agrees and strongly supports this proposition with the important
    clarification that ``proprietary information'' warranting protection
    must be narrowly circumscribed. APPA would, in fact, encourage that
    congressional direction be absolutely clear that data must be collected
    and made public. Claims of confidentiality of data based on commercial
    sensitivity are already being made to limit data collection or
    dissemination. There is a danger that commercial sensitivity arguments
    will completely undermine the legitimate right of the public to this
    data. Transparency of market information is a fundamental prerequisite
    of competitive markets and necessary to protect consumers. (We would
    note that disclosure is required under the security laws, and such
    disclosure has had a salutary effect on the markets. If the SEC's rules
    did not exist today, almost every company that is subject to SEC
    regulation would claim that much of the information they are required
    to disclose today is in fact proprietary.) Congress should be very
    clear in telling EIA and FERC that close calls should be resolved in
    favor of transparency, not secrecy.
        We believe consideration of PUHCA repeal should logically be
    undertaken within the context of the discussion of market power. This
    is recognized within the White Paper, which states that PUHCA should be
    repealed ``only if FERC is given enhanced authority to address market
    power problems, and both FERC and the states are given greater access
    to the books and records of holding companies to prevent affiliate
    abuses.''
        While these are appropriate pre-conditions to PUHCA repeal, APPA
    does not believe they are sufficient.
        In addition to the recommendations regarding authority for FERC to
    address market power issues, APPA would recommend specific authority
    for FERC to review mergers of utility holding companies as well as the
    disposition of generation assets by jurisdictional utilities and
    acquisition of natural gas companies. The FERC lacks the clear
    authority to review the former. While we believe it has the authority
    and responsibility to review the latter, it has recently declined to do
    so. This action has come at precisely the same time that utilities and
    utility holding companies are swapping assets like trading cards. A
    utility with a significant presence in generation in one region sells
    those assets, then buys similar assets in another region. Such
    transactions can clearly lead to the concentration of significant
    amounts of generation in specific geographic markets, yet no one is
    examining what consequences these asset trades will have on
    competition.
        FERC and state commission access to books and records of holding
    companies to prevent affiliate abuses is an inadequate substitute for
    the protections provided consumers, state commissions and others under
    PUHCA. As a practical matter, many state commissions don't have the
    resources to examine the books and records of today's extremely complex
    utility holding companies and all of their subsidiary companies. And
    even if they do, it isn't clear what remedies they can impose when the
    keeper of the funds--the parent holding company--may exist outside of
    the jurisdiction of specific state utility commission.
        Advocates of PUHCA repeal have argued that the statute is no longer
    necessary, that it is redundant with other statutes, and, incredibly,
    that it is an impediment to competition. S. 206, the Public Utility
    Holding Company Act of 2001, reported out of the Senate Banking
    Committee earlier this year, provides, in the statement of findings and
    purposes, the following:

       Developments since 1935, including changes in other
            regulation and in the electric and gas industries, have called
            into question the continued relevance of the model of
            regulation established by that Act.
       Limited Federal regulation is necessary to supplement the
            work of State commissions for the continued rate protection of
            electric and gas utility customers.

        The Attorney General of California strongly disagrees with these
    two statements. Earlier this month, he filed a petition with the
    Securities and Exchange Commission (the agency with responsibility to
    enforce PUHCA) for review and revocation of PG&E Corporation's
    exemption from PUHCA. As stated in the petition ``PG&E Co. [the
    electric operating utility] has now filed for bankruptcy after
    upstreaming billions of dollars from the utility to the utility holding
    company--the precise type of behavior identified in PUHCA as a primary
    basis for the law.'' He concludes his petition as follows: ``All of the
    primary evils addressed by PUHCA are relevant to PG&E Corp. [the
    utility holding company], including movement of capital and assets from
    its utilities to the holding company and affiliated, wholly-owned
    subsidiaries as well as massive investments in out-of-state non-utility
    activities and properties. The Commission has the chance, indeed the
    obligation, to address potential holding company abuses by PG&E Corp.
    before additional damage is done. The current crisis in California has
    been a catalyst for closer scrutiny of federal and state regulation of
    the utility industry. This crisis highlights the fact that Commission
    enforcement of PUHCA is still needed.''
        Clearly, times have changed since PUHCA was enacted in 1935.
    Utilities have changed. Human nature hasn't. The abusive practices that
    gave rise to PUHCA 65 years ago have been more difficult to accomplish,
    because of the existence of PUHCA's restraint on corporate structure
    and behavior, but have not disappeared entirely. It may be that some
    elements of PUHCA need to be revised. But the opportunity for the
    California Attorney General, and perhaps others similarly situated in
    the future, to have a forum at FERC or the SEC in which they can
    examine the financial transactions within a monstrously complex
    interstate holding company structure to determine whether electric
    consumers have been abused, must not be eliminated.
                          regional planning and siting
        APPA supports federal eminent domain authority to form a more
    cohesive and functional national approach to the expansion of the
    transmission grid. The more certainty that exists in transmission, the
    better our members are able to serve their customers. However,
    permitting private parties to use this extraordinary tool of government
    should be undertaken very carefully, permitting the maximum possible
    involvement of state and local governments. It could, for example, be a
    last resort remedy. It should also be exercised in a manner that
    ensures the optimal expansion of the grid, which will require regional
    transmission planning. Finally, facilities constructed when this
    authority is exercised must be dedicated to serve the general public
    interest, including the lowest reasonable rates for transmission
    service. We believe that the White Paper's suggestion that regional
    siting compacts be authorized and encouraged is definitely worth
    pursuing. These compacts should recognize RTO orders and regional
    needs. FERC should be available as a backstop if states do not deal
    with siting issues jointly on a regional-needs basis.
                                other provisions
        APPA offers the following comments with respect to the ``other
    provisions'' in the White Paper.
        1) Repeal PURPA's mandatory purchase requirements with certain
    replacements--interconnection standards for distributed generation.
    APPA does not oppose the repeal of PURPA's purchase requirements, so
    long as stranded cost recovery is addressed using FERC's current
    process. APPA strongly supports increased use of distributed resources
    and efforts at the federal level to promote such use. We therefore
    encourage the committee to pursue legislative language on transmission
    and distribution interconnection policies that provide FERC the
    authority to order the use of standardized technical interconnections
    while at the same time preserving local authority to require any
    additional measures necessary for system reliability, safety, or other
    factors deemed to be in the public interest. A positive step has been
    taken with the introduction of S. 933 by Senator Jeffords, which for
    the first time addresses the concern of local utilities.
        2) Incentives for renewable resources. In preparing its recently-
    published report on public power's renewable profile, entitled ``Shades
    of Green,'' (copies of which were previously sent to all members of
    this Committee) , APPA discovered that public power systems have a
    higher proportion of renewable, non-hydropower generation than other
    segments of the industry--but we still have more work to do. APPA
    therefore applauds the idea of creating market-based incentives for all
    segments of the industry. I'll discuss comparable incentives for public
    power systems in the section on tax provisions below.
        3) Public Benefits Fund. APPA believes such programs are better
    suited to state and local initiatives as opposed to federal
    legislation.
        4) Tax Provisions. An area of great importance to public power
    systems is their treatment in the tax code. Tax exempt bonds issued to
    finance generation, transmission and distribution facilities owned by
    public power systems carry with them restrictions on the amount of
    private use allowed for those facilities. While sound tax policies
    warrant certain restrictions on private use of public facilities, such
    policies must change with changing times. These private use
    restrictions, which were manageable several years ago, are now
    unreasonable in the new competitive environment and need to be modified
    to conform to the goal of enhancing greater competition. The
    restrictions are contrary to the goals of the Energy Policy Act of
    1992. The public power community and the Investor Owned Utilities have
    worked together to come up with language to remedy this situation and
    certain tax code problems that they are encountering as a result of
    industry changes. Ranking Member Murkowski has taken the lead to
    address this problem with his bill, the Electric Power Industry Tax
    Modernization Act, S. 972, which provides greater flexibility to
    publicly owned utilities to accommodate industry changes. APPA
    sincerely appreciates Senator Murkowski's leadership on this issue. We
    hope that the Finance Committee will act soon to address this vital
    issue.
        Finally, I would like to mention one other tax related issue. It is
    clear that additional generation is needed in this country. It is also
    clear that such generation should come from non-traditional renewable
    energy sources as well as from better and cleaner utilization of our
    nation's most abundant resource, coal. Traditionally, Congress has
    turned to tax credits to provide incentives to industry to achieve
    socially desirable goals. If the goal is to promote renewable energy
    and clean coal technology development and utilization by the electric
    utility industry, then incentives must be provided that work for all
    elements of the industry. Tax credits can be utilized by IOUs, which
    serve about 75 percent of the nation's electric consumers, but cannot
    be used by not-for-profit publicly and cooperatively owned utilities
    that serve the balance. As a policy matter, it seems to make little
    sense to refuse to provide comparable incentives to ensure that 100
    percent of the nation's utilities are encouraged to develop these
    resources. We have recommended ``tradable tax credits'' for publicly
    and cooperatively owned utilities. These tradable credits could be sold
    to tax paying entities at a discount to help them reduce their own tax
    liability. This concept has been developed by municipal public power
    systems and the rural electric cooperatives and is supported by the
    entire electric utility industry. APPA commends Chairman Bingaman for
    including tradable tax credits language in his comprehensive bill S.
    597. We hope this proposal receives favorable action in the Senate
    Finance Committee.
        Thank you again for inviting me to testify and I will be happy to
    answer any questions you may have.

        The Chairman. Thank you very much.
        Mr. English, why don't you go right ahead.

     STATEMENT OF GLENN ENGLISH, CHIEF EXECUTVE OFFICER, NATIONAL
         RURAL ELECTRIC COOPERATIVE ASSOCIATION, ARLINGTON, VA

        Mr. English. Thank you very much, Mr. Chairman. I
    appreciate that.
        My name is Glenn English. I'm the chief executive officer
    of the National Rural Electric Cooperative Association, which
    is a service organization for some 34 million consumers who own
    their own electric utility as cooperatives. We're situated in
    some 46 States all across this country.
        Very quickly, Mr. Chairman, I want to hit some high points
    and then focus on one particular area of my testimony. Electric
    cooperatives strongly support the efforts of Congress to
    replace the North American Electric Reliability Council with a
    new entity that has the authority under the Federal Energy
    Regulatory Commission for oversight to develop and enforce
    mandatory reliability standards. Electric cooperatives applaud
    the chairman and the ranking member in the administration for
    recognizing the importance of fuel diversity.
        Electric cooperatives, however, oppose the expansion of
    Federal energy regulatory jurisdiction over rural electric
    cooperatives, the reason being that many small electric
    cooperatives, this is additional Federal regulation in addition
    to rural utility service which would duplicate and become
    extremely burdensome and expensive for them. And electric
    cooperatives applaud the chairman for recognizing the need for
    additional market power oversight.
        But, Mr. Chairman, the one thing that we feel is the most
    critical element as far as any kind of coming to grips with the
    energy difficulties that this country is facing is in the area
    of transmission. When you really look at transmission, unless
    the transmission system works, unless it has the ability to
    move power around this country under the 1992 Energy Act, then
    much of the rest of the debate and discussion that we're having
    really doesn't mean a great deal, because the system just won't
    work. So for that reason, we would strongly urge that this
    committee focus its attention on the development of an
    interstate highway system approach to remove the transmission
    restraints that exist today.
        Now up until this point, Mr. Chairman, what I think this
    committee has heard so much about, as has the Congress, has
    been the focus on the risk of building transmission. And as a
    result of that, the risk needs to be offset with incentives or
    with other means in which to compensate those who would build
    transmission for that risk. Mr. Chairman, it's my understanding
    that the Federal Energy Regulatory Commission has such
    authority now. And we don't see a great deal of transmission
    being built in this country and I think there are a host of
    different reasons as to why that is taking place.
        In addition to looking at compensating for the risk, I
    would suggest that this committee focus its attention on how
    they might reduce the risk of building transmission in this
    country; how in fact we can make it easier, how in fact we can
    focus our attention on certain areas of development, so that we
    in fact can develop a true interstate type of system for the
    electric utility industry to transmit its power.
        I think that without question, Mr. Chairman, that we have
    to understand that any competition that exists will likely take
    place on the generation side. And in those States that in fact
    pass it, on the retail side. When you look in the area of
    transmission, this may be the one impediment for competition
    working either on the wholesale or the retail side. And we've
    seen examples of that. You mentioned in your testimony earlier,
    or in your statement earlier this morning about price spikes
    and the difficulties in California. And I think virtually
    everyone understands that those problems are transmission
    related. And certainly if we continue to focus our attention
    elsewhere, this congestion and these difficulties will
    continue.
        We've got to understand, however, there are those who
    benefit by congestion and by the impasses that exist in the
    existing system, people who in fact make a great deal of money
    out of the difficulties that exist in the system and will
    resist the changes. That's the reason that we strongly believe
    that local entities, whether it's through some kind of joint
    planning group or whether it's through RTOs, should in fact
    take the lead in determining and identifying what portions of
    the existing transmission system should be part of an
    interstate system. And they should have the opportunity to
    focus their attention on what is the best way to link up the
    various regional systems that exist, link up the various
    elements that would be included in any kind of interstate
    transmission system.
        We also think this makes great sense from a regulatory
    point of view. The Federal Energy Regulatory Commission does
    not have unlimited resources, either in manpower or in funds.
    And it should be understood that those resources should be
    focused on where they'll do the greatest amount of good. By
    obviously identifying certain segments of the existing
    transmission system and also focusing on how to connect up
    those systems with other systems that are identified in other
    regions, that we in fact can make a great deal of sense from
    making sure that the limited resources of FERC are focused
    where they'll do the most good.
        But we think that what can be done, Mr. Chairman, is to
    focus on reducing risk, focus on in fact giving the people of
    this country the opportunity to keep their transmission costs
    as low as they possibly can, to do so by building transmission
    systems at cost with a modest return for the investment. This
    is a system that has served this country well in the past. It's
    one that we think will serve us well as we develop a truly
    interstate transmission system in this Nation today.
        Thank you very much, Mr. Chairman.
        [The prepared statement of Mr. English follows:]
    Prepared Statement of Glenn English, Chief Executive Officer, National
             Rural Electric Cooperative Association, Arlington, VA
                               executive summary
       NRECA supports the development of an Interstate Highway
            system approach to relieve transmission constraints; the
            current transmission system cannot reliably handle the dramatic
            increase in transactions since enactment of the Energy Policy
            Act and FERC order 888, four years ago.
       NRECA supports the efforts of Congress to replace the North
            American Electric Reliability Council (NERC) with a new entity
            that has the authority under the Federal Energy Regulatory
            Commission (FERC) oversight, to develop and enforce mandatory
            reliability standards. This much-needed legislation should be
            passed immediately.
       NRECA applauds the Chairman, Ranking Member, and the
            Administration for recognizing the importance of fuel
            diversity.
       NRECA opposes the expansion of FERC jurisdiction over rural
            electric cooperatives. For many small electric cooperatives
            this additional federal regulation would be duplicative and
            overly burdensome.
       NRECA commends the Chairman for recognizing the need for
            additional market power oversight.

        The National Rural Electric Cooperative Association (NRECA) is the
    national service organization that represents 930 rural electric
    systems providing central station service to approximately 34 million
    consumers in 46 states. Of these rural systems, 60 are generation and
    transmission cooperatives, which are owned by and serve approximately
    695 of 870 distribution cooperatives. Kilowatt-hour sales by rural
    systems amount to 9% of total electricity sales in the United States,
    approximately 45% of the electricity sold by cooperatives is purchased
    from others.
                            transmission reliability
        North America needs the new electric transmission equivalent of the
    interstate highway system. The current transmission system cannot
    reliably handle the dramatic increase in transactions since the 1992
    Energy Policy Act. Transmission deficiencies are contributing to
    wholesale and retail electric market failures that are harming
    consumers.
        NRECA strongly opposes the argument that the transmission problem
    can be fixed only if utilities are offered enough money through
    incentive transmission rates or other financial incentives. NRECA
    believes that high rates of return are not an acceptable means of
    attracting investment in transmission. The incentive approach only
    increases costs for consumers, the people who were supposed to have
    seen lower prices from competition, without guaranteeing that
    transmission will be built.
        Moreover, high transmission costs do not strengthen wholesale
    electric markets, they severely curtail them. The high rates act as
    ``toll gates,'' narrowing generation markets and protecting the
    monopoly power of local generators.
        NRECA believes the best approach is to lower the risk of building
    transmission instead of raising rates of return and increasing costs to
    consumers. Congress should direct FERC to ensure that any entity that
    builds a qualifying transmission project recovers its costs. To qualify
    for guaranteed cost recovery, NRECA believes that transmission projects
    must:

       be identified through a regional joint-planning process that
            coordinates and has oversight for the reliable operation of the
            regional transmission system
       be constructed according to best engineering practices
       be operated by the relevant Regional Transmission
            Organization (RTO)
       offer service pursuant to traditional cost-of-service
            principles, with the cost-of-service analysis taking into
            account the low risk provided by FERC's obligation to assure
            cost recovery.

        By mitigating risk, spreading the cost of new facilities broadly,
    and enabling new competitors to build transmission, NRECA's approach to
    new transmission helps to ensure that the interstate highway system can
    be built at the lowest possible cost to consumers.
                              electric reliability
        Since 1968, the electric utilities of the United States, Canada,
    and part of Mexico have worked together through NERC to develop
    voluntary standards that have provided North Americans with the most
    reliable energy in the world.
        The introduction of restructuring, however, is putting pressure on
    the voluntary system. Under regulation, regulators have placed a
    premium on reliability and utilities were guaranteed to recover
    reasonable reliability-related expenses. In a competitive environment,
    however, investor-owned utilities are rewarded for cutting costs and no
    one has the authority to ensure that those cost-cutting measures do not
    degrade the reliability of the bulk transmission system.
        It is necessary for Congress to replace NERC with a new entity that
    has the authority, under FERC oversight, to develop and enforce
    mandatory reliability standards.
        For that reason, NRECA supported S. 2071 in the 106th Congress.
    That language would require FERC to approve a new North American
    Electric Reliability Organization that would have the power to ensure
    the reliable operation of the interstate bulk transmission grid. NRECA
    believes that similar legislation needs to be enacted as soon as
    possible.
                                 energy supply
        NRECA strongly supports a national energy policy that recognizes
    the importance of fuel diversity. The recent increase in natural gas
    and petroleum prices clearly demonstrates the important role that coal,
    nuclear energy, and other fuels continue to play in North America's
    energy portfolio. NRECA supports the full development of all needed
    U.S. energy and power resources including hydro, nuclear and fossil in
    a manner that strengthens fuel diversity while balancing appropriate
    environmental considerations. That national energy policy should also
    provide financing for research and development and incentives to fully
    utilize domestic resources. These programs should be made available to
    all segments of the industry on an equitable basis.
        NRECA supports the development and implementation of clean coal
    technologies and renewable resources. We advocate continued funding for
    research, development and demonstration to continue to reduce the cost
    of power from these clean sources of energy. Clean coal and renewable
    resources should be an integral part of a total energy package.
        NRECA also believes in the future of nuclear power and is a strong
    supporter of this ``emission-free'' source of energy. Nuclear power is
    a safe, efficient source of electricity, with an adequate supply of
    fuel. Nuclear power currently provides 20 percent of the nation's
    electricity at affordable and stable prices. With spiking prices in
    natural gas and oil, nuclear power plants offer a stable, levelized
    source of electricity. NRECA supports the relicensing of existing
    operating reactors, and encourages the Department of Energy to begin
    accepting the spent nuclear fuel, as DOE promised and contracted for
    under the Nuclear Waste Fuel Act. NRECA supports the development of the
    Yucca Mountain Repository. NRECA also supports continued development of
    future safer and cheaper nuclear reactor technologies as well as the
    improved Nuclear Regulatory Commission (NRC) licensing programs to
    support future development. NRECA believes that the Price Anderson Act,
    due to expire in 2002, should be extended.
                               ferc jurisdiction
        NRECA opposes efforts to subject electric cooperatives to the
    jurisdiction of FERC (under Federal Power Act (FPA) Sections 205 and
    206, 16 U.S.C. 791a, et seq. by including them within the definition of
    ``public utility'' in Section 201(e) of the FPA). Electric cooperatives
    are owned and controlled by their consumers so there is no conflict
    between shareholders and customers requiring governmental economic
    regulation.
        Similarly, the federal agencies that provide reliable, low-cost
    electrical power are already regulated by Congressional oversight and
    are under the authority of the Secretary of Energy. Moreover, electric
    cooperatives were formed in response to the national need to extend
    electric service at the lowest possible cost to primarily rural areas
    under a program providing that federal governmental oversight would
    only be through the Rural Utilities Service (RUS). NRECA's position was
    confirmed in the Dairyland case, decided by the Federal Power
    Commission (FERC's predecessor) more than 30 years ago, which held that
    electric cooperative borrowers from the RUS are not ``public
    utilities'' as defined in Section 201(e) of the Federal Power Act.
    NRECA opposes efforts to subject the RUS-borrower electric
    cooperatives, involuntarily, to FERC jurisdiction under FPA Sections
    205 and 206, which continues to be good public policy. NRECA also
    recognizes the important regional federal power issues that are part of
    this restructuring debate in the Pacific Northwest and have supported
    previous efforts to establish a ``Northwest Title'' in restructuring
    legislation. NRECA supports legislative efforts to exclude from FERC
    jurisdiction:

       RUS borrower electric cooperatives,
       not-for-profit, consumer-owned utilities, and
       federal power marketing agencies.
                                  market power
        Market power is a problem that must be confronted in the move
    toward a more competitive marketplace. Insufficient federal oversight
    and authority exists for distinguishing between pro-competitive and
    anti-competitive mergers and acquisitions. Under the Public Utility
    Holding Company Act (PUHCA), only one regulatory entity--the Securities
    and Exchange Commission (SEC)--has comprehensive authority to protect
    consumers against registered holding company abuses. The elimination of
    PUHCA or substantial changes to the Act without offsetting consumer
    protections will result in greater monopoly power for these holding
    companies and their utility subsidiaries, and higher electricity costs
    for consumers.
        Congress should adopt rigorous merger and acquisition guidelines at
    the federal level that will prevent the accumulation of market power by
    one or a few dominant firms. These changes would include:

       Placing the burden of proof on entities seeking to transfer
            generation or seeking ``mega-mergers'' of existing monopolies
            to demonstrate that the acquisitions will enhance competition
            and benefit consumers through lower rates, increased
            reliability and expanded services, while reducing regulatory
            burdens on pro-competitive mergers and ventures.
       Providing regulators (FERC) with tools to protect consumers
            and enhance competition, including the authority to impose
            structural solutions that remedy or prevent public utilities
            from accumulating or exercising undue market power.
       Strengthen the antitrust provisions in the Federal Trade
            Commission Act and Federal Power Act to prevent market power
            abuses, and deny approvals for mergers and acquisitions that
            lessen competition.
       Authorizing FERC to impose civil penalties for market power
            abuses.

        In closing, I appreciate the opportunity to testify before the
    Committee and look forward to working with you to address these
    important issues.

        The Chairman. Thank you very much. I think all the
    testimony has been very useful. Let me ask just a few
    questions.
        Mr. Rowe, let me ask you first. In your written statement
    that you gave us I understand you oppose a new layer of
    regulation at the regional level in these decisions on siting
    of transmission lines. Is there some other way that we can have
    those decisions made at the regional level that would make more
    sense from your point of view; more dependence on RTOs, for
    example? What is--could you maybe elaborate on your views as to
    how siting decisions ought to be made and where that authority
    ought to be?
        Mr. Rowe. Surely, Mr. Chairman.
        It is obvious to us, as your White Paper makes clear it is
    to you, that the transmission system is the regional
    superhighway for the competitive marketplace we're all trying
    to work on. And in that sense, we believe that FERC has the
    essence of it in its emphasis on strong, large, regional
    transmission organizations. We think it will help to have those
    be quite large. We think strengthening FERC's authority in that
    respect is positive. We believe that making the RTOs for profit
    businesses is positive. We believe that the reference in your
    White Paper to making it easier from a tax point of view to
    create transcos and RTOs is positive. And we believe as these
    regional entities are created they will allow for some of the
    goals that your White Paper seeks in terms of input from the
    different States without creating, you know, one more layer of
    process.
        The Chairman. All right. Thank you very much.
        Mr. Thilly, let me ask you about the issue of obviously one
    of the things we promote in this White Paper is that sales by
    public power entities into the market rate generating
    institutions should be subject to the same rules as other
    sales. Can you help us figure out where the line needs to be
    drawn between sales that should be subject to market rules
    established by FERC, how we separate those sales from other
    sales that should not be subject to these rules set by FERC?
        Mr. Thilly. I hope so. I think that we generally agree with
    the characterizations in the White Paper. As I understand it,
    what that means is where there is a RTO developed market or a
    power exchange market that has been approved by FERC, that all
    participants will have to adhere to the rules of that market,
    including any circuit breakers or price caps that exist. And we
    certainly, I think, agree with that. We believe that will
    happen with or without legislation.
        We would certainly also oppose the notion of full cost of
    service regulation for public power systems. There has been no
    call for the need for that that I know of in the last 50 years.
    And the--those--so we see no need there. But we do believe that
    in the formal institutions that are established for a
    competitive market, that the rules would apply to all
    participants in those markets.
        The Chairman. Okay. Mr. English, you state in your
    testimony that you oppose extending FERC jurisdiction over
    cooperatives. FERC has already declared that it has some
    jurisdiction over your members in the West by subjecting them
    to the market mitigation plan that they issued on the 18th of
    June. Have your members given you reason to believe that that
    order goes too far in including what would otherwise be normal
    transactions between co-ops?
        Mr. English. I think, Mr. Chairman, that many of our
    members would challenge whether or not FERC does have that
    authority. And that may be an issue that the court would have
    to decide. That seems to be an open question.
        The point is though that we recognize there's a problem in
    the West. And electric cooperatives fully understand that they
    have a moral obligation and responsibility to help out. And so
    they are in fact cooperating and working with that order as if
    it was in fact a point of law. But, you know, we're not
    conceding the fact that there is an open question as to whether
    they do have that jurisdiction and certainly--but we right now
    feel that the bigger question is responding to the problem in
    the West.
        The Chairman. Okay. One of the points we make in the White
    Paper is our belief that it's necessary to include all
    transmission under the same rules. Do you believe there are
    some ways that we could work to build in protections for the
    smaller co-ops that you represent, members that do not have
    transmission systems, so that they can--they would be agreeable
    to that kind of a explicit grant of authority to FERC?
        Mr. English. Well, as I stated in my testimony, we're very
    concerned about particularly some of our smaller cooperatives.
    But not just exclusively smaller cooperatives, but the
    distribution cooperatives that under the interpretation, more
    lenient interpretation of some of the regulations, would
    encompass some 400 distribution cooperatives, which I don't
    think either FERC or certainly the Congress intended to be
    included. There's also this question of the relationship
    between the cooperative, the management and employees of the
    cooperative and those consumers, and it is that self-governance
    regulation.
        The real issue here, I think before us, is the question of
    what portion of the transmission system that electric
    cooperatives owns truly plays in any kind of interstate
    commerce. And as we begin to define and to narrow that in, you
    know, that's probably where the open issue is.
        But with this particular point, that's the reason we think
    an interstate designation or an interstate type system that is
    focused on moving power across this country is where FERC
    should be focusing its attention. And certainly if that is the
    case, obviously any transmission that doesn't fall under that
    category would either be left up to the States, or in the case
    of electric cooperatives, our own self-governance.
        The Chairman. We'd be anxious to work with you as we try to
    refine some language that'll keep the protections that you
    think are essential, but also provide that we do have one set
    of rules for transmission around the country.
        Mr. English. Thank you.
        The Chairman. Senator Murkowski.
        Senator Murkowski. Thank you very much, Mr. Chairman.
        Mr. Thilly, relative to your statement, you indicated there
    isn't enough transmission. We certainly agree with that. But
    you also said that you are opposed to incentive pricing, as I
    recall, for transmission. How do you get there from here?
        Mr. Thilly. I believe that there is adequate capital in the
    market that--to finance the new construction that's needed at a
    reasonable rate of return, 12 percent by FERC, with a
    reasonable depreciation schedule. That that capital is there,
    that there are investors that are looking for that solid and
    very safe return.
        Senator Murkowski. Why hasn't it been done?
        Mr. Thilly. Because we've been relying on vertically
    integrated utilities to build the transmission. And when they
    make that transmission investment they may realize the return,
    but they also expose their generation to competition and loss.
    And it's that offsetting, or that down side of construction
    that is the problem.
        Senator Murkowski. Mr. Rowe, would you agree with that?
        Mr. Rowe. I'm afraid I totally disagree with it. I have
    been unable to discern why there is so much opposition to
    incentive regulations with transmission, when the total cost of
    transmission is a relatively small portion of the end price of
    electricity and when proper incentives for greater throughput
    on transmission lines and greater access to transmission lines
    can help so much in making the competitive generation market we
    all want effective.
        I mean I believe that building transmission in today's
    economic and political world is a difficult and risky business.
    And it just isn't as easy to do as 12 percent sounds. In my
    company, we are putting our transmission where our mouth is,
    not only by joining the Alliance RTO, but yesterday our board
    voted to authorize us to be the first company in that RTO to
    announce its intention to sell its assets to the RTO if an
    independent operator can be found.
        Senator Murkowski. Well, it appears then that the need's
    been there. You've not chosen to do so because the incentive
    hasn't been adequate. And, you know, we have two views on
    what's adequate, but clearly the marketplace is going to
    determine where they're going to direct their capital.
        And it seems to me that it's pretty obvious here. We've got
    a problem, we need to increase capacity. In order to get it we
    can jawbone about whether 12 percent return on equity is
    adequate and therefore they ought to do it, but, you know, you
    can't force them to do it if they can deploy their capital at a
    better return. And so am I missing something here, Mr. English?
        Mr. English. I think you are, Senator.
        Senator Murkowski. My time's short, so I want to----
        Senator Murkowski. I'll make it very, very quick then. As I
    said, I think you put your finger on it, it is the question of
    risk. And the question is how you're going to deal with this
    risk. Are in fact we going to provide additional rewards for
    taking the risks, or do we reduce the risk? What we have not
    explored is reducing the risk.
        Senator Murkowski. What we need to do is increase the
    transmission.
        Mr. English. And that's exactly getting to the point. The
    issue is how do we take hold of this. And I think that we do
    have to make it a national priority to designate existing
    transmission systems and making the connections within the
    regions as interstate systems. That's where we put our energy
    and that's what we're really focused on.
        Senator Murkowski. Is that going to be sufficient for Mr.
    Rowe to invest his capital?
        Mr. English. At this particular point, already as I
    mentioned in my testimony, that the Federal Energy Regulatory
    Commission has the opportunity to provide for that kind of
    incentives, if you wish. What I'm suggesting is that you also
    give them the opportunity to reduce the risk, to provide for a
    guarantee return if they build that transmission. In other
    words, let's have competing options to them.
        Senator Murkowski. Well, this is a little different than
    Mr. Thilly's statement.
        Mr. English. Exactly, it is.
        Senator Murkowski. Mr. Rowe, do you want to jump in here?
        Mr. Rowe. Well, I think our decision to propose the sale of
    our transmission reflects two judgments. One is that it is not
    a strategically opportune asset for us under the present rules.
    And two, in independent hands, it has more chance of getting
    favorable economic rules. So again, I would respectfully submit
    that we're putting our capital behind our words.
        Senator Murkowski. Mr. Ayers, do you want to jump in to
    this?
        Mr. Ayers. Yeah. I would add that in this case, if you look
    at transmission, it's very much up front costs for 50 years of
    transmission being there with not a lot of operating costs. So
    from a business proposition of wanting to finance this, you
    have to look at what the return and the value of that
    transmission over 50 years. And that has changed over the last
    few years. You've got to be able to determine whether you will
    still need the transmission over that time frame. And the risk
    profile of someone investing and wanting to line up financing
    has changed. And in order, I think in today's market, it's
    necessary to look at incentive in order to have that
    transmission built.
        Senator Murkowski. Well, it seems that we have reached a
    significant point relative to just how we're going to increase
    transmission and whether we can do it without incentives,
    pricing incentives. The market is going to have to make that
    determination.
        My final question is to Mr. Thilly and Mr. English relative
    to your support for giving FERC authority to order the IOUs to
    join a transmission organization. And I think you support
    giving FERC additional market power authority and so the
    question comes to mind, shouldn't public power and cooperatives
    be subject to basically the same rules?
        Mr. English. I'll take a crack at that first, Senator.
        Senator Murkowski. Very short.
        Mr. English. First of all, we support the voluntary
    approach with regard to RTOs. The second thing is that we think
    there ought to be incentives for people to participate in RTOs,
    since we're talking about incentives and that makes sense. And
    the third thing is that RTOs have to be independent and open,
    and everyone has to have the opportunity to participate in it.
    We don't think that's been the case to this point.
        Mr. Thilly. We strongly support RTOs. And it's important
    that public power participate. Public power is at the table. A
    number are. The difficulty has been it is not prudent for a
    public power system to join if it's going to dramatically
    increase its costs, which is what the situation in California
    has been.
        Senator Murkowski. All right. Well, I thank you. And hope
    that we can understand here the implications in the White Paper
    suggest that public power would remain more flexible in setting
    its own rate structure, but by the same token, be
    nondiscriminatory. But by setting its own rate structure, there
    are--there has to be a safeguard and a balance for
    efficiencies. And that gets a little out of our area of
    responsibility, but is certainly in the public interest.
        The Chairman. Senator Carper.
        Senator Carper. Thank you, Mr. Chairman. Mr. Chairman, a
    number of years ago Mr. Craig and Mr. Thomas and Mr. English
    and I worked together in the House of Representatives. We all
    served together for a number of years. And I just want to say
    welcome. It is great to see you, Glenn. And you had a
    reputation then for being clear thinking, plain spoken, get
    right to the point. And I'm pleased to say that he hasn't
    changed in that respect.
        I'm a new member of this committee. I've been on it for all
    of about 14 days. And some of the people that have already
    served here have forgotten more than I'm likely to ever know.
    So I'm just struggling to come up to speed. I feel like
    somebody who's walked into a party about 11 o'clock at night
    and everybody else is three sheets to the wind and I'm trying
    to figure out where the bar is.
        [Laughter.]
        Senator Carper. It would be helpful for me--and just keep
    in mind I'm still trying to understand all of the acronyms that
    we're talking about here. But what would be helpful for me is
    for each of you to take a minute or so and with respect to
    interconnection standards, with respect to transmission
    capability and capacity, where do you agree. What we've got to
    figure out is how to develop some consensus here. And in those
    two areas especially, if you could just tell me where do you
    all agree in a way that would be helpful for us in formulating
    some bipartisan approach here.
        Glenn.
        Mr. English. If I could take a very quick crack at that,
    Senator. And let me just say I've always been struck by your
    wisdom and your candor, and I see that that hasn't changed and
    delighted that you're here. I think you've got an excellent
    view of what's taken place in the energy industry, let me also
    say, with the 14 days you've been here.
        Very quickly this. I don't think that you have to choose. I
    don't think that you have to choose. Let's have a little
    competition. Isn't this what this is all about? We talk about
    competition in the electric utility industry. We've got
    incentive pricing that's already available to the Federal
    Energy Regulatory Commission. Let's give them the other option
    of reducing risk, then let's let them make the choice.
        Let's go even beyond that. We're talking about joint
    planning groups, we're talking about RTOs. Let's let them get
    into this act and decide what's best in their region. You know,
    we wholeheartedly agree that we need to bring all the
    interested parties together in an RTO or whatever else you want
    to call it for that region, and let them make the decision.
        Let them play the role and identify what portion of the
    transmission system within that region that truly should be a
    part of an interstate system. And then let's let them say
    here's the best way to link it up with neighboring systems as a
    part of the grid. And then let's give the Federal Energy
    Regulatory Commission the authority then to say yes, that makes
    sense. We agree with that, and give their blessings. And we
    move on and we go to a competitive process, and let's see which
    way this thing goes out.
        What we're suggesting to you is if you can reduce the risk,
    if you can do that by in fact guaranteeing the return and by
    the very nature that any of this new construction that's taking
    place or any upgrades that are taking place in the transmission
    system. In fact, if that's a part of an interstate system,
    you're going to have the traffic to get the return. And that's
    what you're really telling the investors, you're going to be
    guaranteed that return. And then let's stretch it over an
    extended period of time, and say 30, 35 years.
        We've been in the construction and transmission business
    for some time. That's normally what our--we've got a record on
    that kind of stuff. We're not interested in getting in and
    building transmission, by the way, if you're looking at this as
    the electric co-op way of approaching it. What we're really
    interested in is making sure that we have low cost
    transmissions, you're able to move power. So if you're going to
    have competition and make some sense in this country, the
    transmission system in itself is a conveyance, just like the
    interstate highway system. And we're not interested in adding
    more toll booths, we're not interested in adding a lot of
    unnecessary cost. Let's make this as least costly as we can for
    the American people.
        But we're not saying hey, let's exclude the whole
    opportunity to have incentive pricing. If FERC comes to the
    conclusion that's what they need, give them that chance. But
    let's give them both opportunities. That's all we're asking.
        Mr. Rowe. Senator, I believe that----
        Senator Carper. Let me just say something. I've heard a lot
    of people testify over the years. I really like the way that
    you speak slowly. No kidding, it's just----
        Mr. Rowe. My wife says I follow my mother in that respect
    and it has little to do with learning.
        Senator Carper. Give your mom our best if she's still
    around.
        [Laughter.]
        Mr. Rowe. I think there are three large issues on which
    those at this table and those who govern us fundamentally
    agree. We need more supplies of energy, we need them to be
    cleaner and consistently so, and we need the energy to be used
    efficiently. I believe that around those principles detailed
    legislation can be hammered.
        I think those at this table agree on the importance of
    reliability standards for the regional transmission
    organizations and for people who are participating in the
    supply marketplace. I believe we agree on the importance of
    regional transmission organizations. I believe we agree on the
    fundamental principles of open access. Those are the--about the
    furtherest (sic) list we all probably agree on, but with a
    little work you can get some more out of us.
        Senator Carper. Good. Okay. Thank you, Mr. Rowe.
        Please.
        Mr. Thilly. I agree with what Mr. Rowe just said. I think
    that's very accurate. There are differences obviously, the one
    that has been identified this morning on incentive rates. And,
    you know, maybe if we step back from that one, I agree with Mr.
    English.
        The FERC has authority to set transmission rates and can do
    a number of things, but it has to be just and reasonable within
    the Federal Power Act. If we're talking and if an incentive is
    just and reasonable, then we already have the authority to do
    it. It's going beyond that to authorize incentives that would
    not pass the just and reasonable test that we have very
    significant problems with.
        Mr. Ayers. I would also agree with Mr. Rowe's comments. I
    think that's a good, accurate summary.
        I would like to add with respect to you mentioned
    interconnection requirements; that I would hope that everyone
    would agree here that the current process for interconnection
    and the ability for new powerplants to connect to the grid is a
    time frame that does not work. Just to give you an example of a
    recent experience we've had, in a process that should take 120
    to 180 days, this process took over 600 days to negotiate and
    place the necessary requirements to interconnect to the grid.
    And clearly I think that is not a process that is going to
    allow new generation to be built and come on line in this
    country.
        And so with respect to that, I think that is clearly an
    area I would hope most people would agree we need some
    different standards. Maybe there may be open issues on what
    those are, but the current process doesn't work.
        On transmission, I think I would support all of Mr. Rowe's
    comments.
        Senator Carper. All right, good. Well, thank you. Thank you
    all very much.
        The Chairman. Thank you very much.
        Senator Craig.
        Senator Craig. Then we all agree that transmission is the
    number one problem in today's current electric markets of this
    country?
        Mr. Ayers. Yes.
        Senator Craig. Is that correct, Mr. Rowe?
        Mr. Rowe. It is. I would say transmission and diversity of
    generation supply are about equal, but they're together the
    number one problem.
        Senator Craig. Mr. Rowe, in reading your testimony, while
    you touched on it in passing, as it related to sequestration in
    your testimony you say something a bit more bold. Let me read
    it. ``Given President Bush's rejection of the Kyoto Accord, it
    is appropriate for this committee to re-examine what this
    nation's policy should be on a going forward basis. Many of us,
    including myself and my company, believe it is time for the
    Federal Government to limit CO2 in a no regrets way.
    I also believe that we need to revisit the standards of
    SOX and NOX and mercury so that decisions
    on life extension for existing coal-fired plants can be made on
    a sound economic basis.''
        With that statement, my question--one of my questions would
    be what is an appropriate CO2 limit that the Federal
    Government could mandate that wouldn't be arbitrary?
        Mr. Rowe. I think there are so many uncertainties in this
    area that almost anything is arbitrary, and yet something
    probably should be done. It is my personal opinion that the
    Kyoto Accord went too far and involved promises by some
    governments that they had no intention of meeting. At the same
    time, I think the gathering weight of evidence on the long run
    carbon issue is more impressive all the time.
        There is an engineer at Illinois Institute of Technology
    named Henry Linden who's been on the board of BAS Corporation;
    I think he's retired now; but he's done several papers on
    preliminary steps that can be taken. And if you would permit
    me, sir, I would like to offer one of those papers for the
    committee, because I think there are ways, particularly as we
    increase efficiency and increase the use of natural gas, that
    we can take steps to reduce carbon and do them without some of
    the economic consequences that the Kyoto Accord would have had,
    at least before the recent steps in Europe this week.
        Senator Craig. Well, I agree with you that technology is
    leading us toward reduction. But is it not true that if we were
    to set a cap, and that were arbitrary, we would be picking
    winners and losers? And that means a heck of a lot of lawsuits
    around the country.
        Mr. Rowe. I smile just a little, because----
        Senator Craig. And I guess my follow-up question would be
    as the CEO of a company, are you a winner or you a loser?
        Mr. Rowe. We are the largest nuclear generator in this
    country.
        Senator Craig. Ah, the winner.
        Mr. Rowe. And therefore----
        Senator Craig. Maybe that's why you were bold.
        Mr. Rowe. Well, that may be why my suggestion wasn't bold
    at all, Senator. But we believe that as this country evolves,
    coal must have a continued role. I think that's essential. But
    I think most new coal will replace existing coal in a cleaner
    fashion, and we believe that gas and nuclear and efficiency
    have to have increasing roles if we take the global warming
    issue seriously.
        Senator Craig. Well, you had mentioned, I believe in your
    comments, that you sensed what they did in relation to
    sequestration to be a positive.
        Mr. Rowe. Yes, I do. It's my understanding that this
    government argued in the original Kyoto negotiations to allow
    more credit toward the carbon goals if you promoted
    sequestration programs. In my own previous company, we had some
    experience investing in tropical forests as carbon
    sequestration tools. And it's very clear that today, carbon
    sequestration in forests of the like can be a cheaper way of
    limiting carbon in some circumstances than some attempt to
    remove it from the initial process.
        I still don't believe there are a lot of ways to burn
    carbon without creating carbon dioxide. So to me, adding more
    credit for sequestration, as happened last week, was a partial
    response to the U.S. position. I'm not saying whether it was an
    adequate one. And one that we should take seriously, because it
    also tends to reduce some of the international wealth transfer
    issues that I think haunted the original Kyoto Accord.
        Senator Craig. I was curious about that, because it limits
    us by their formula to about 28 mmpces, or whatever that term
    is. And we have a capability based upon reasonable estimates,
    both forest, farmlands, pasture lands, upwards of 300 million
    metric tons of carbon sequestration on an annualized basis.
        It also, I noticed, was interesting that they were trying
    to buy a Japanese vote, so they gave them a good deal more than
    they otherwise had the capability of sequestering. It appeared
    to me that their charts were a good deal more political than
    they were real.
        Mr. Rowe. I have always felt that, Senator. I'm quite
    certain that you're right on that. And I commend you and
    Chairman Bingaman and others on this committee for brokering
    with this issue with the interest of this Nation so deeply at
    heart.
        Senator Craig. Well, I thank you for those observations.
    I'm just not sure that we have yet determined what levels of
    CO2 are harmful and/or beneficial. I think you and I
    would collectively agree that more is not good.
        And in the long term, our technology is clearly leading us
    toward reductions. And if we benefitted in that direction or
    incentivized it in that direction, a good deal more will come.
    I'm not quite sure that we need to play the politics of
    capping. My guess is there's a greater risk there than there is
    a reality.
        Mr. Rowe. As somebody who's in business, as my colleagues
    at this table have suggested, I always like incentives better
    than caps, Senator.
        Senator Craig. Oh, by the way, the red light's on, but did
    you check--you need to check the paragraph that Bond did on
    nuclear. They did you in.
        Mr. Rowe. It's always been a hard slog, sir, but we're a
    lot better off in this country because we have what we have.
        Senator Craig. Well, we will try to deal you back in. Thank
    you.
        The Chairman. Senator Thomas.
        Senator Thomas. Thank you. You know, as I sit and listen,
    it sounds like maybe sometimes we don't recognize some of the
    fairly significant changes that have taken place in generation,
    where almost in the past always the generation and the
    transmission was designed to fit your service area. And so but
    that's changing. Now we got people selling generation, getting
    into the marketer. And so you have to have a different kind of,
    seems to me, a different kind of a transmission system.
        Mr. Rowe, you sort of indicate let's keep on doing what
    we're doing. Give us a little tax break. It doesn't seem to me
    that that's enough difference. What's wrong with the idea of
    having an interstate highway system that connects RTOs, do
    something about having a third party operator. You pay for it
    when you use the system. Over some bonding and over some time
    you do that. So you're not expecting a generator or a
    distribution system to do the transmission.
        Mr. Rowe. I think that works. Forgive me if I were
    inarticulate, because I think you have it exactly right. You
    described correctly, as does the chairman's White Paper, the
    history of generation and transmission being tied together. To
    make what we're talking about work it does need to be a
    competitive interstate highway system. That's why we support
    strong, large, regional transmission organizations. And that's
    why our board voted yesterday to express its intention to sell
    our transmission assets to the RTO if it has an adequate
    transmission operator that would meet your standards. We agree
    exactly.
        Senator Thomas. But an RTO is not an interstate national
    system.
        Mr. Rowe. But if there are, as FERC contemplates, four or
    five big ones, then it becomes simpler and simpler to regulate
    the connections between them. I mean the issue is whether we
    get there in one step, or two or three. But it has to be a
    broad interstate system, and the question is only how big are
    the regions such that you get operating efficiency. I suspect
    you wouldn't want the whole U.S. transmission system----
        Senator Thomas. Well, we already have regions pretty much
    established. That's not a new idea. But we need to move, be
    able to move it.
        Mr. English, would you support a system that's a third
    party operator with the funding coming back from bonding or
    whatever by people who pay to get on, and everyone pays the
    same rate and so on?
        Mr. English. I think there's merit in that, in the concept.
    As having--as Senator Craig and you and Senator Carper and I
    have worked in the other body for many years, I'm also very
    sensitive and aware of the politics. That obviously becomes a
    great deal more difficult politically.
        What I'm focusing on now and suggesting is we need
    something in the short-term. We need something that can be done
    right now. We need some kind of focus in this country on the
    transmission system so that you got the physical infrastructure
    to do these other things that we talk about. And until that
    infrastructure's in place, quite frankly, there's no way the
    rest of this works.
        And so what I'm suggesting is this: I think you're on the
    right track with regard to the interstate system. I think
    you're absolutely correct with regard to obviously what an RTO
    needs to do as far as the operation of that system, is where I
    understand you're coming from. But at this point, I would
    suggest that we need immediate action on the whole concept of
    designating we're going to build an interstate highway
    transmission system in this country, the equivalent of that,
    and we're going to start upgrading existing systems that are
    part of that, just as we did the interstate highway system, and
    to move forward on it.
        Senator Thomas. That's fine. Except I sense that we don't
    have a vision of where we want to be. If you're going to do
    something that is going to be as complicated as this, you had
    better get a pretty good vision of where you want to be when
    it's over, so that what you do in the interim leads to that.
    And we've talked about interstate movement and this and that,
    but we haven't had a notion of how those things fit into an
    ultimate vision of where we are.
        Now, Mr. Ayers, you're primarily generators; right? You're
    not distributors?
        Mr. Ayers. No. We do wholesale marketing.
        Senator Thomas. So your whole life depends upon your
    ability to move your product?
        Mr. Ayers. That's correct.
        Senator Thomas. And you would support, I would suppose,
    wouldn't you, an intestate system that would move among the
    RTOs and be a third party operator, and you would pay to get on
    there just like everybody else?
        Mr. Ayers. Absolutely. And I think the recent FERC activity
    of four large RTO systems is a step in that direction. There
    are some natural marketplaces in the United States currently,
    and to design the RTOs around where those natural marketplaces
    exist as a starting point is a good step that could lead then
    eventually to combining even those RTOs.
        Senator Thomas. Well, again, I hope that we can kind of
    devise in our mind where we want to be in 15 years, or
    whatever, so that as we move, why what we do will accomplish
    that. I sense that--and FERC, frankly, doesn't impress me as
    being a group that looks out in the future very much. They're
    pretty much--and I'm not critical of it. Their designed to deal
    with today's problems. And someone has to take a little more
    vision and then let them implement, it seems to me. Thank you
    all for being here.
        The Chairman. Well, let me thank the whole panel for your
    excellent testimony. We appreciate it very much.
        We will take a 5-minute break. And during that time, if the
    people who are on panels 3 and 4 could all come forward or be
    available when we start up again, we will combine those two
    panels and go ahead with the balance of the hearing.
        [Recess.]
        The Chairman. Why don't we get going again. We have got six
    additional witnesses we want to hear from each of them. Let me
    just start over here at the left-hand side of the table.
        We have Mr. William Nugent, who is the president of the
    National Association of Regulatory and Utility Commissioners,
    NARUC. We're very pleased to have Commissioner Nugent here.
        Mr. James Dushaw, who is the director of utility department
    for the International Brotherhood of Electrical Workers, IBEW.
    Thank you very much for being here.
        David Hamilton, who is the policy director for the Alliance
    to Save Energy. In the spirit of full disclosure, I'm
    associated with that organization, which I have been for many
    years.
        Mr. James Rouse, who is the chairman of ELCON in Danbury,
    Connecticut. We very much appreciate you being here.
        Mr. Stephen Ward is the president of the National
    Association of State Utility Consumer Advocates. Thank you very
    much for being here.
        And Mr. David Cook, who is general counsel for the North
    American Electrical Reliability Council, NAERC, in Princeton,
    New Jersey.
        So thank you all for being here. If you'd each take 5 or 6
    minutes and give us your perspective on the proposals that
    we're considering here on the committee. Let me state at the
    outset that your full statements will be included in the
    record. And if you could just summarize the main points that
    you think we need to be aware of, I'd appreciate it.
    Commissioner Nugent, why don't you start out.

      STATEMENT OF WILLIAM M. NUGENT, COMMISSIONER, MAINE PUBLIC
     UTILITIES COMMISSION, AND PRESIDENT, NATIONAL ASSOCIATION OF
                    REGULATORY UTILITY COMMISSIONERS

        Commissioner Nugent. Thank you, Mr. Chairman. And thank you
    for the courtesy that you've shown to me on this and my
    previous opportunities to appear here. I appreciate your
    including the comments in the record, the written comments.
        Let me talk about briefly some--an overview on this. And
    that is let me offer you some caution. This is an
    extraordinarily complex subject. I'm sure you're aware of that.
    But we have been wrestling with this for some time trying to
    figure out the proper way to do this, and I would look forward
    to working with you and members, other members of the committee
    and staff to work our way through this.
        Electricity is not gas----
        The Chairman. Let me just say by way of response, I agree
    with you. We have got to approach it with caution, but that is
    about all we've approached it with so far for the last two or
    three Congresses. I think we also need to try to act. And so
    we're anxious to get your input as to how to do that
    responsibly.
        Commissioner Nugent. I will not dispute the utility of
    acting on this.
        First of all, gas is not electricity. On previous
    appearances here I have been complimentary of the FERC and the
    manner in which it has sited transmission. It has done so
    expeditiously and enabled us to get important new
    infrastructure into Maine. But gas and electricity differ in
    important respects.
        In gas, you pick up a commodity from wherever it happens to
    be coming out of the ground, you transport it to end users who
    decide the manner in which they're going to do it. In
    electricity, you do have alternatives to that. You can generate
    at some distant place and then deliver it, but there are
    important tradeoffs with the siting of generation and the
    manner in which this articulates with the retail markets.
        I think those differences make it important that State
    regulators work closely with the FERC, and that entire
    authority for transmission siting, generation and generation
    siting, if that enters your plan, not be reposed solely at the
    Federal level. There are a whole lot of fine points here that
    will tend to get missed in that particular approach.
        I believe in addition, that the proposals that are under
    discussion here load an awful lot on FERC. And I have questions
    about the capacity of that staff. It's not that they're not
    bright people and that they're not working hard, but there is
    an enormous additional volume of work. First of all, these are
    very difficult matters of first impression for them to think
    their way through and come to reasonable solutions. I think
    what you do have in State regulators is a body of people who
    are already committed to the public interest, who are there and
    available and knowledgeable about the local situations who can
    work with the FERC to offer a decent solution to these things.
        Now going down in the specifics, let me add a third one,
    because it occurs late in the White Paper, and that is the
    question that the White Paper raises about transmission,
    transferring assets into either an affiliated interest or
    freeing them entirely. There is a very, very big question there
    of at what value. These are assets that have been constructed
    over time with important support from rate payers.
        And I don't say this should be the solution, but it may be
    instructive. Maine, in going to retail competition in
    electricity, mandated a separation that the vertically
    integrated utilities sell their generation assets and continue
    to operate as wires company. It was our concern that we provide
    a level playing field for all sellers of generation within
    Maine; that the wires company not favor any particular provider
    of generation. That has worked well. We have attracted more
    competition in Maine than any other State. We have about 40
    percent of our load that has gone to competitive suppliers. So
    the proof is in the pudding in that regard.
        But the point for this White Paper is that in directing the
    vertically integrated utility to divest itself of its
    generation assets, we--they were fully compensated for the book
    value of those assets. The value of those assets in excess of
    book went to rate payers, in return for which rate payers
    assumed the responsibility of 100 percent of stranded costs.
    There was a tradeoff, but I think it was an equitable solution
    to that.
        One of the concerns that I have is that if the assets go
    to--transmission assets go into the--a separate, unregulated or
    less tightly regulated entity, the question is what are the
    rates of return, where is the equity for an investment over
    time that rate payers have made? I'm not going to--I can't, in
    the few minutes we have here, fully discuss at great length
    this kind of an issue. I want to flag it for you and suggest
    that it's worthy of very careful investigation in the future,
    which we will do with staff or any of the members who wants to
    do it.
        But I've done my--gone through my 5 minutes and I've
    probably got 18 more pages, and I'm going to rely on the
    written testimony to do that. And I'll be happy to answer any
    questions, either now, in writing, or at any time you wish.
    Thank you for the courtesy.
        [The prepared statement of Commissioner Nugent follows:]
      Prepared Statement of William M. Nugent, Commissioner, Maine Public
    Utilities Commission, and President, National Association of Regulatory
                           and Utility Commissioners
        Mr. Chairman and Members of the Committee:
        Good morning. My name is William M. Nugent. I am a Commissioner on
    the Maine Public Utilities Commission and President of the National
    Association of Regulatory Utility Commissioners, commonly known as
    NARUC. I respectfully request that NARUC's written statement be
    included in today's hearing record as if fully read.
        NARUC is a quasi-governmental nonprofit organization founded in
    1889. Its membership includes the state public utility commissions for
    all states and territories. NARUC's mission is to serve the public
    interest by improving the quality and effectiveness of public utility
    regulation. NARUC's members regulate the retail rates and services of
    electric, gas, water and telephone utilities. We have the obligation
    under State law to assure the establishment and maintenance of such
    energy utility services as may be required by the public convenience
    and necessity, and to ensure that such services are provided at rates
    and conditions that are just, reasonable and nondiscriminatory for all
    consumers.
        I greatly appreciate the opportunity to appear again, on behalf of
    NARUC, before the Senate Energy and Natural Resources Committee.
        Today, I have been asked to comment on S. 388 and S. 597 from the
    107th Congress and S. 1273 and S. 2098 from the 106th Congress.
    Additionally, I have been asked to comment on a White Paper containing
    a legislative proposal for the Committee. I believe NARUC witnesses
    have testified a number of times, during the last Congress, and are on
    record with regard to S. 1273 and S. 2098, therefore I will limit my
    remarks to S. 388, S. 597, and the White Paper.
                           transmission jurisdiction
        NARUC supports legislation affirming State authority to regulate
    retail power delivery regardless of the facilities used (transmission
    or distribution). We oppose the expansion of FERC jurisdiction to
    include unbundled retail transmission service. It is our position that
    States should retain authority to establish retail transmission rates
    unless the State tariffs violate Federally determined open-access, non-
    discriminatory, competitive transmission policies. FERC should continue
    to have ratemaking authority for interstate wholesale transactions and
    should have jurisdiction over transactions between suppliers and retail
    customers located in different States. However, States should be
    authorized to form voluntary regional bodies to address regional
    transmission system issues and FERC should be required to defer to
    States acting on a regional basis.
        States have an important stake in how retail services over
    transmission facilities are provided. Transmission facilities were
    approved by state governmental entities, and importantly have been paid
    for by retail customers. However, we are keenly aware of the interstate
    commerce implications of transmission service and we believe that the
    issue of transmission jurisdiction is correctly being adjudicated
    before the Supreme Court. Therefore, NARUC would respectfully recommend
    that Congress follow precedent and allow the Court to rule on this
    issue prior to taking legislative action.
        States should be primarily responsible for expeditiously handling
    retail complaints alleging undue discrimination in the market place.
    Appeals by market participants could then be made to FERC.
        NARUC supports legislation leading to voluntary formation of
    Regional Transmission Organizations (RTOs), with deference given to
    States in RTO development and to States acting collectively on a
    regional basis. Congress should develop a mechanism for States to
    address ongoing concerns in RTO functions after the initial RTO
    development period. State interests include reliability, market
    monitoring, pricing, congestion management, planning and interregional
    coordination. Additionally, Congress should provide for a State
    commission advisory role in RTO governance that allows for deference to
    State commissions that reach consensus concerning governance issues
    within a region.
        NARUC supports legislation establishing national interconnection
    and power quality standards, developed and adopted by appropriate
    technical standards organizations, such as the Institute of Electrical
    and Electronics Engineers, Inc., for generating facilities by a date
    certain. However, the States should have the ability to adopt these
    rules or more tailored rules that a State chooses.
        NARUC further supports legislation removing federal barriers to
    State implementation of net metering. The most critical barrier
    involves the current lack of jurisdictional clarity over net metering.
    The Federal Power Act has been alleged to preempt State net metering
    programs, slowing development of this promising new approach to
    promoting competition and resource divesting.
        For the reasons I just iterated, NARUC has serious concerns with
    the White Paper section on transmission jurisdiction and must
    respectfully oppose legislation based upon the language included in
    this section of the White Paper.
                                  reliability
        NARUC continues to support the NERC process and legislation that
    establishes mandatory compliance with industry-developed reliability
    standards and provides explicit authority to FERC and the States to
    cooperate to enforce those standards. NARUC also supports legislation
    that includes workable mechanisms to support energy efficiency programs
    that enhance reliability.
        The reliability of the nation's electric system is one of the most
    important issues in this debate, and NARUC believes that Federal
    legislation must indeed address reliability. Enforcement of operational
    standards and criteria should be supervised by the FERC in cooperation
    with the States through existing state authority, joint boards, or
    other mechanisms. Enforcement of compliance with planning and system
    adequacy standards should rest first with the States and regional
    bodies. Congress should explicitly affirm the public interest in
    transmission grid reliability and the need for mandatory compliance
    with reliability standards.
        Federal legislation should also facilitate effective decision-
    making by the States and recognize the authority of the States to
    create regional mechanisms including but not limited to inter-state
    compacts, or regional reliability boards, for the purpose of addressing
    transmission reliability issues. NARUC cannot support reliability
    language that fails to provide a continuing role for States in ensuring
    reliability of all aspects of electrical service, including generation,
    transmission, and power delivery services or results in FERC preemption
    of State authority to ensure safe and reliable service to retail
    consumers. State officials will be held accountable by the public when
    the lights fail to come on. Additionally, because of this
    responsibility, State officials and State regulators are particularly
    concerned with the ability to promote actions that ensure uninterrupted
    electricity service.
        NARUC believes that Congress should expressly include in
    legislation: (1) A savings clause to protect existing State authority
    to ensure reliable transmission service, and (2) a regional advisory
    role for the States. Therefore, NARUC supports the reliability
    provisions on these points found in S. 388 and S. 597 and commends both
    you, Mr. Chairman, and Senator Murkowski for including these two
    provisions in your respective bills.
                             rates and market power
        Congress should not preempt jurisdiction in the States to address
    market power concerns, including the authority to require behavioral
    and structural remedies to address excessive market power. NARUC
    advocates a continuum of options, such as accounting conventions and
    codes of conduct, for the mitigation of market power, and urges
    Congress to preserve State flexibility to use these options as needed.
        Legislation should clarify: 1) the authority of the States to
    require and police the separation of utility and non-utility, and
    monopoly and competitive businesses, and to impose affiliate
    transaction and other rules to assure that electric customers do not
    subsidize non-utility ventures; 2) that States have authority to
    require the formation of appropriate State, territory, and regional
    institutions where necessary to ensure a competitive electricity
    market; 3) as market power abuse may require the application of well-
    tailored structural solutions, legislation should clarify the States
    are authorized to require divestiture where appropriate and necessary;
    and 4) that State regulators have authority to ensure effective retail
    markets and should eliminate any barriers to the exercise of that
    authority by the States.
        We believe these legislative suggestions should be included in both
    S. 388 and S. 597. Additionally, NARUC is concerned that the White
    Paper implies preemption of State market power jurisdiction by
    remaining silent on any role for the States.
                          regional planning and siting
        The main impediment to siting energy infrastructure is the great
    difficulty in getting public acceptance for needed facilities. Quite
    frankly, this tells us that no matter where siting responsibility
    falls, with State government or the Federal government, siting energy
    infrastructure will not be easy and there will be no ``quick fix'' to
    this situation.
        NARUC believes that the States should do more to improve upon the
    tremendous success story of the nation's electricity infrastructure.
    States exercising jurisdiction over the siting and certification of
    transmission facilities should not discriminate against interstate
    facilities, meaning that in general, interstate facilities should be
    sited, certificated, and otherwise regulated under the same standards
    and procedures as intrastate facilities.
        NARUC is strongly opposed to Federal eminent domain and siting
    authority. However, NARUC supports voluntary regional bodies that
    permit the States in which an interstate transmission facility is
    proposed to be sited, to issue certificates authorizing the
    construction of the proposed facility through collective
    decisionmaking. If States choose to retain certification authority for
    themselves, there should be agreed upon mechanisms to resolve disputes
    where individual States involved have come to conflicting and/or
    inconsistent determinations in their respective deliberations. These
    voluntary regional bodies could: address siting of transmission;
    identify regional bulk power market needs for State siting agencies to
    consider in their respective deliberations; and, plan for the
    construction of new interstate transmission facilities.
        Congress should affirm that States have the primary authority to
    establish, operate and govern these voluntary regional siting bodies,
    and the Federal Energy Regulatory Commission (FERC) could act as an
    appropriate ``backstop'' authority where States or regions fail to act.
    Additionally, Congress should provide an explicit grant of authority to
    the States and FERC to act in cooperation.
        Because the White Paper develops a necessity for FERC siting
    authority we must strongly oppose the provisions of this section that
    contemplate such authority going to FERC. While NARUC is supportive of
    the concept of a voluntary regional approach, NARUC is equally in
    opposition to the proposal found in the White Paper that contemplates
    FERC preemption of the regional bodies and the non-voluntary nature of
    the White Paper proposal. Additionally, as a matter of public safety,
    the States should continue oversight of maintenance requirements.
                           market transparency rules
        Many regional electric markets throughout the country have
    experienced price spikes of unusual and unexpected proportions. These
    price spikes have led to curtailment or shutdown of operations of some
    large industrial customers and to increased prices for smaller
    commercial and residential customers.
        The high market price volatility has raised concerns about the
    integrity of the markets, leading to calls from numerous participants,
    consumers and policy makers for heightened monitoring of these markets
    by regulatory bodies. In order to identify corrective policy options to
    assure the public of the competitiveness and efficiency of the
    developing wholesale electricity market and its prices, regulatory
    bodies need access to data such as production for generating plants,
    transmission path schedules and actual flows.
        The electric industry restructuring efforts of the Federal
    government and the various States are based upon an assumption that
    wholesale markets are workably competitive. To that end, policy makers
    must have the ability to provide confidence to an already skeptical and
    uneasy public that the market is not being ``gamed.'' This confidence
    can only be provided if regulators are able to access the data
    necessary to ensure that the market is functioning in a truly
    competitive fashion. To the extent data is currently shared among
    market participants for purposes of reliability, it should also be
    available to regulators and the public.
        NARUC supports legislation recently introduced by Senator Wyden and
    co-sponsored by Senator Burns as an effective way to ensure both
    Federal and State regulators have the information necessary to
    adequately monitor wholesale electricity markets and to assure proper
    access to such information. NARUC believes this legislation would
    provide great benefits to the market and its customers and should be
    included in any comprehensive energy bill.
                                puhca and purpa
        NARUC has adopted resolutions that support Congressional action to
    address the Public Utility Holding Company Act (PUHCA) and the Public
    Utility Regulatory Policies Act (PURPA) provided certain conditions are
    met. In the case of PUHCA, we believe that Congress could substantially
    streamline the statute (while providing State commissions and FERC
    enforceable access to holding company books and records, such as in
    sections 814 and 815 of S. 389) only as part of a broader legislative
    effort to restructure the utility industry. With respect to PURPA, we
    would support prospectively repealing the utility mandatory purchase
    requirements, conditioned upon the development of competitive electric
    markets and as part of broader restructuring legislation, not as a
    stand alone initiative.
        As a general matter, it is NARUC policy that neither PUHCA nor
    PURPA should be repealed on a stand-alone basis or in a vacuum. NARUC
    believes that relief from these statutes should be contingent upon the
    development of competitive markets as determined through a State
    commission supervised restructuring program.
        I wish to address a specific concern with S. 388. Section 803 is
    intended to protect prior PURPA contracts by preempting State
    ratemaking authority. Specifically, it restricts the ability of State
    commissions to require utilities to take steps to mitigate stranded
    costs that may result from above-market contracts. Section 803 of S.
    388 would leave little incentive for utility companies to minimize
    costs passed through to customers, holding harmless utilities and
    qualifying facilities.
                      consumer information and protection
        As we have seen in restructured telecommunications markets, the
    movement to competition in retail energy markets will require State
    regulators to be especially vigilant on such consumer protection issues
    as slamming (unauthorized switching of consumers to alternative service
    providers) and cramming (charging consumers for services they did not
    request).
        Complaints to State commissions about utility service quality and
    about specific practice have burgeoned in recent years. Most States
    have expanded their customer service programs. Many State legislatures
    have adopted tough new laws to protect customers from practices such as
    slamming and cramming. Through NARUC and the National Regulatory
    Research Institute, State commissions have worked together to develop
    creative and effective new customer education and protection programs.
    NARUC has strongly supported policies to provide consumers with price
    and environmental impact information concerning their electricity
    consumption. These efforts strengthen competition, especially for small
    business and residential customers by giving customers the confidence
    they need to participate in energy markets and by keeping the bad
    apples out of the energy market barrel.
        Federal restructuring legislation must not interfere with State
    efforts to protect consumers, either by preempting State authority or
    precluding States from adopting more protective standards in areas
    where Federal standards apply.
                                public benefits
        NARUC continues its insistence that public benefits programs must
    be included in any federal legislation, however we believe that further
    study of societal costs and benefits is warranted prior to NARUC
    supporting any particular implementation or funding mechanism for the
    continued support of public benefits programs.
                                 tax provisions
        NARUC has taken no position on the tax provisions described in the
    White Paper or in S. 388 and S. 597.
        In conclusion, I would like to thank the Chairman, the Ranking
    Member and the Committee for giving me an opportunity to appear on
    behalf of NARUC. On the jurisdictional issues where consensus is
    difficult to reach, such as siting RTO membership and retail
    transmission, we would urge the Committee to defer to the courts and
    FERC to wrestle with these issues. In other critical areas such as
    enforceable reliability standards, uniform interconnection rules and
    development of market monitoring tools, we urge the Committee to move
    forward with legislation to serve the goal of establishing workably
    competitive and transparent wholesale power markets.
        Thank you for your attention, and I look forward to any questions
    the Committee may have.

        The Chairman. Thank you very much for your testimony.
        Mr. Dushaw.

      STATEMENT OF JAMES L. DUSHAW, DIRECTOR, UTILITY DEPARTMENT,
            INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS

        Mr. Dushaw. Thank you, Mr. Chairman. I guess it's enough to
    say the IBEW, the International Brotherhood of Electrical
    Workers, is the union that represents the majority of the
    unionized electric utility employees in the Nation, some
    220,000 more in Canada, and working in all aspects of the
    industry and in all types of ownership, Federal, municipal,
    investor owned, coop.
        It should be clearly understood, Mr. Chairman, that the
    IBEW doesn't believe that average Americans, workers and
    families are calling for commoditization and restructuring of
    the industry. They are becoming aggravated with the risks and
    they're becoming more apparent. Not to mention what has been a
    huge transfer of wealth taking place. Those real energy costs
    take a bigger bite out of workers' household budgets.
        This morning, I want to briefly address the relationship
    between the American electric utility worker and the
    reliability of the utility system, I think a faction that has
    been overlooked up to this point. Some energy marketers would
    have us believe it's been said their reliability or it should
    be just a function of the marketplace. Some have urged that the
    Nation should not afford ``a gold plated system'' as they
    believed the earlier compact had delivered.
        Obviously, we would have to accept less reliability as a
    quid pro quo for competition. IBEW workers take serious issue
    with all these philosophies. They see that for the overwhelming
    majority of Americans, reliable electric power is an essential
    service, not just to market commodity.
        Beginning in 1990, in the advent of competition, electric
    utilities, mostly the large IOUs, began to downsize their
    companies to look good in the Wall Street Journal and to gain
    more efficiencies. The Energy Information Administration
    documents the cascade of the utility downsizing over a 10-year
    period that has resulted in more than a 27 percent smaller
    electric utility operations workforce. These are not
    administrative personnel. These are hands on work force people.
    That trend continues to this day and I think is a cause for
    serious concern.
        Now what do these numbers actually mean in terms of real
    world reliability experiences? Well, the report of the U.S.
    Department of Energy Power Outage Study Team uncovered several
    factors common to the eight major outages of the summer of 1999
    which were the object of this study. The IBEW measured several
    of the findings as attributable to cutbacks in the work force
    and lack of maintenance as budgets were compressed in order to
    meet the challenges of competition. The Keystone Study released
    just last month found that from 1994 to 1999 Pennsylvania
    utilities decreased their work force by about 6,500 people.
    Perhaps coincidentally at this same time period, customer
    complaints more than doubled.
        Electric utility outages not including major storms lasted
    on average, in Pennsylvania, 30 minutes longer in 1999 than
    they did in 1994. During the 6 years examined by the study,
    Pennsylvania's utilities reinvested just 5 percent of their
    profits in Pennsylvania's utility systems. The rest amounting
    to more than $15 billion was spent elsewhere off in another
    State or even in other countries. Consumers and workers do not
    appear to have gained ground and investment trends raised
    questions about the long term adequacy and safety of
    Pennsylvania's utility infrastructure.
        With competition, the economic players pushing electric
    restructuring have no allegiance to the broader public
    interest. Evidence, how all the deal makers ducked
    responsibility when California went sour. Nobody seemed to be a
    part of that deal in the end now. The market is not designed
    nor equipped to address reliability issues for the average
    consumer. We believe it will take a proactive public sector
    working with the appropriate government entities to safeguard
    reliability.
        Common sense tells you that if the customer base for
    electricity is growing, and it is, and the work force that
    supplies that electricity is shrinking, cut to the bone and
    then some, we've got problems and things are going to get worse
    before they get better because there are other negative factors
    that impact the worker reliability equation.
        I've shown you a work force dramatically diminished in
    numbers. Add that to the fact that the average utility worker
    is in their 1940's, mid-1940's, and top that with the fact that
    almost all utilities stopped funding apprentice and training
    programs about 8 to 10 years ago. In other words, we're facing
    a generation gap. There are few trained workers anywhere in the
    United States to step up and fill the jobs that even now are
    going begging. Some utilities are hiring directly now from
    Canada now. These are trained workers.
        Utility employers have cannibalized each other's work
    forces until there's nobody left to hire. So where will this
    new skilled work force come from? Obviously, the training of
    this new utility work force will continue to be a key
    reliability issue. At the end of the policy chain, there is
    somebody with hands on responsibilities to make the system
    work. These people have huge responsibilities for reliability
    and require training typically 5 years for a trained worker as
    a lineman at this hands on stuff.
        Well, the IBEW and the EEI in accordance with the National
    Skills Standards Act of 1994 have been working with each other
    and with the National Electric Cooperative Association and the
    American Public Power Association that's trying to come to some
    sort of an approach to this. So the IBEW here urges Congress to
    assist this process by endorsing guidelines for model codes and
    standards for training and reliability.
        Basically, the idea is is that Congress would in some way
    urge the Secretary of Energy to facilitate development of codes
    and standards for worker training and also for reliability.
    There are innumerous standards that the industry has invested a
    lot of time and money and effort in developing but it is not
    homogenized or coordinated in any way.
        So we would urge that Congress take a hard look at urging
    the Secretary of Energy to develop guidelines in both of these
    areas, worker training and reliability, to put forth for
    adoption voluntarily by the States. In other words, we bring
    the best in the industry together to develop the best possible
    approach to this. Thank you.
        [The prepared statement of Mr. Dushaw follows.]
       Prepared Statement of James Dushaw, Director, Utility Department,
                International Brotherhood of Electrical Workers
        Good morning Mr. Chairman, and Members of the Committee:
        My name is Jim Dushaw and I am the Director of the International
    Brotherhood of Electrical Workers Utility Department. Thank you for
    inviting the IBEW to comment this morning.
        Of the 95% of investor-owned electric utilities that employ union
    members, the International Brotherhood of Electrical Workers represents
    98% of those workers. We also represent the largest number of unionized
    employees working for municipal and rural cooperative employers, and
    the IBEW represents workers at federal electricity facilities, such as
    TVA and Bonneville Power. Of the three-quarter million membership of
    IBEW, more than two-hundred-fifty thousand of them are utility workers,
    who are covered by some 1400 collective bargaining agreements in the
    U.S. and Canada.
        It should be clearly understood from the outset that the IBEW does
    not believe that average Americans, workers and families, are calling
    for the commoditization and restructuring of electricity and, indeed,
    are becoming aggravated with the risks that are becoming more apparent;
    not to mention the huge transfer of wealth taking place, as real energy
    costs take a bigger bite out of household budgeting.
        This morning I will briefly address the relationship between the
    American electric utility worker and the reliability of the electric
    utility system. Some energy marketers would have us believe that
    reliability is, or should be, just a function of the market. Some have
    urged that the nation should not afford a ``gold-plated system'' as
    before the drive to restructuring. Others would have us accept less
    reliability as the quid pro quo for achieving competition. The IBEW
    utility workers take serious issue with all of these philosophies. For
    the overwhelming majority of Americans, reliable electric power is an
    essential service--not a market commodity.
        Beginning in 1990, in anticipation of the coming competitive
    marketplace, electric utilities, mostly the large IOU's, began
    downsizing workforces in order to cut costs and gain the edge they
    believed would secure success, or at least survival, in the
    marketplace. The Energy Information Administration documents the
    cascade of utility downsizing over a 10-year period that has resulted
    in a 27% smaller workforce overall--and that trend continues to this
    day.
        What do those numbers actually mean in terms of real-world
    reliability experiences?
        The report of the U.S. Department of Energy Power Outage Study Team
    uncovered several factors common to the eight major outages of summer
    1999, which were the object of their study. The IBEW measured several
    of the findings as attributable to cutbacks in the workforce and
    maintenance.
        The Keystone Study, released last month, found that from 1994 to
    1999, Pennsylvania utilities decreased their workforce by about 6,500
    people. Perhaps coincidentally during this same time period, customer
    complaints more than doubled to over 10,000. Electric utility outages
    (not including major storms) lasted, on average, 30 minutes longer in
    1999 than they did in 1994.
        During the six years examined by the study, Pennsylvania's
    utilities reinvested just 5% of their profits in Pennsylvania's utility
    systems. The rest, amounting to more than $15 billion, was spent
    elsewhere (often in other states or even in other countries). The study
    concluded that utility CEOs (with 76% pay hikes in that time frame),
    and the electric utilities themselves have prospered most as
    deregulation has moved forward. Consumers and workers ``do not appear
    to have gained.'' And investment trends raise questions about the long-
    run adequacy and safety of Pennsylvania's utility infrastructure.
        Pennsylvania has been touted as the poster child of electricity
    deregulation. Residential customers have indeed enjoyed lower
    electricity rates--mandated by a legislated price cap (recently
    extended for up to five years). No one in Pennsylvania has had to
    suffer free-market electricity prices.
        With competition, the economic players pushing electric
    restructuring have no allegiance to the broader public interest.
    Evidence: how all the dealmakers ducked responsibility when California
    went sour. The market is not designed nor equipped to address
    reliability issues for the average consumer. We believe it will take a
    proactive public sector working with the appropriate government
    entities to safeguard reliability.
        Common sense tells you that if the customer base for electricity is
    growing, and it is, and the workforce that supplies that electricity is
    shrinking, cut to the bone and then some, we've got problems. And
    things are going to get worse before they get better, because there are
    other negative factors that impact the worker/reliability equation.
        I've shown you a workforce dramatically diminished in numbers; add
    to that the Edison Electric Institute statistic that the average
    utility worker is in their forties, and top that with the fact that
    almost all utilities stopped funding apprentice training programs about
    8-10 years ago. In other words, we're facing a generation gap--there
    are few trained workers anywhere in the U.S. to step up and fill the
    jobs that even now are going begging. Utility employers have
    cannibalized each other's workforces until there's nobody left to hire.
        So where will this new, skilled workforce come from? Obviously, the
    training of this new utility workforce will continue to be a key
    reliability issue. Sooner or later it may, of necessity, become an
    important regulatory issue.
        The IBEW and Edison Electric Institute, in accordance with the
    National Skills Standard Act of 1994, have been working with other
    industry stakeholders to develop skills standards for electric utility
    workers.
        The IBEW urges Congress to assist this process by endorsing
    guidelines for model codes and standards for training and reliability.
        A national training standard would require every employer in the
    electricity industry to employ only workers certified to that standard,
    and to train them to that standard if they were not. This would
    increase system reliability because industry across the board would be
    required to employ workers who are trained to established minimum
    levels, know their jobs, and be able to do the work efficiently and
    safely.
        Congress envisioned that the 1992 Energy Policy Act would create a
    vibrant robust wholesale electricity market, which would lower bulk
    power prices and benefit all consumers.
        The ensuing years have brought forth everything but. The electric
    power industry has become destabilized to the degree that industrial
    customers feel they must buy their own electricity generators to insure
    supply! Reliability has become a function of the market all right--go
    to the market and buy your own generator!
        To summarize, system reliability depends in great measure upon a
    trained, experienced and adequate workforce. Presently, the aging
    workforce has been diminished by layoffs, working longer hours on
    systems poorly maintained, with no relief in sight. Training programs,
    buttressed with national skills standards, and having mechanisms to
    attract and retain qualified workers, are critical to the maintenance
    and expansion of the national electrical systems.
        Additionally, Mr. Chairman, the IBEW recognizes your remarkable
    effort to distill the vital issues needed to be addressed in order to
    begin to calm the industry. Among these, we would rank accelerated
    development and investment in the combined U.S. transmission grid
    system as most important.

        The Chairman. Thank you very much for your testimony.
        Mr. Hamilton.

    STATEMENT OF DAVID HAMILTON, POLICY DIRECTOR, ALLIANCE TO SAVE
                                 ENERGY

        Mr. Hamilton. Mr. Chairman, my name is David Hamilton. I'm
    policy director of the Alliance to Save Energy, a bipartisan
    non-profit coalition of business, government, environmental and
    consumer leaders dedicated to improving the efficiency with
    which our economy uses energy. And considering your familiarity
    with the organization, I'll leave that at that.
        But I appreciate the opportunity today to testify in
    support of the creation of a public benefits fund, a mechanism
    designed to help attack energy waste in our Nation's electric
    systems, save taxpayers money, increase the availability and
    the reliability of the nation's electricity supply, improve
    services for low income Americans, reduce environmental
    pollution, and help meet our future electricity needs more
    cheaply, quickly, and cleanly.
        One might say, Mr. Chairman, that 2001, considering the
    huge amount of coverage and the swirling debates over energy
    issues could be described as 2001, an energy odyssey. We have
    heard in different places that we have an energy crisis. We've
    heard that we don't have an energy crisis. We've heard that
    California's problems have been the result of the lack of
    Arctic oil and that actually California's attempts to save
    energy have been the cause of their problems.
        It's been very difficult to sort out exactly what the truth
    is in the swirling issues of energy but what we do know is that
    we're at a point at which we need to make decisions and move
    forward. And the one thing that most parties seem to agree with
    is that energy efficiency needs to be an elemental component in
    a balanced energy program.
        The Vice President, the President, leaders of Congress and
    both parties have expressed that, but coming up with policies
    that are agreeable, that actually aggressively dip into energy
    waste, have been more elusive to come by and there's been a
    general resistance to the policies that either take a lot of
    resources or that require producers of products to make their
    products much more efficient.
        I'm here to testify in support of your proposal to create a
    public benefits fund, Mr. Chairman. There are a number of
    conditions in the system and in the economy right now which
    make this a wise and sound thing to do, including rampant
    energy waste in the system, lack of guidance for consumers as
    to how to save energy while their bills are rising, large
    decreases over the past decade in public benefit spending,
    we've got reliability problems that have affected most regions
    of the country over the last several years, and a dearth of
    substantive measures to achieve greater energy efficiency.
        The bottom line, Mr. Chairman, is that the Alliance to Save
    Energy estimates that the public benefits fund that you
    recommend can displace up to a 130,000 megawatts over the
    next--by 2020. That's more than 400 300-megawatt powerplants
    and nearly one-third of the needed capacity increases estimated
    by the Energy Information Administration in 1999. We believe it
    could cut America's energy bills by $135 billion.
        Public benefits programs have a long and fruitful history
    of success. I'll point up a couple of examples. The Vermont
    legislature could not agree on utility restructuring. What they
    could agree on was that they needed to do spending on energy
    efficiency and over the last 10 months of the year 2000, they
    spent a little over $5 million on energy efficiency programs
    and were able to displace six megawatts of winter peak and over
    two megawatts of summer peak at a cost of 2.6 cents per
    kilowatt hour at a time when the wholesale price in Vermont was
    over 5 cents a kilowatt hour. When we make the claim that
    energy efficiency can deliver electricity resources, you know,
    quickly, cheaply and cleanly, this is the kind of thing we
    mean.
        Savings in Vermont over 10 months amounted to $17 million
    on a $5 million investment and a 220 percent return on
    investment in a very short period of time. These investments
    are out there and waiting to be capitalized on and reaped.
        The Rand Corp. did a study on California energy efficiency
    programs from 1977 to 1995 and came up with again startling
    conclusions that they--the commercial and industrial programs
    returned over approximately $1,000 per capita over that time
    period for $125 per capita expenditure. At the same time, it
    prevented a 40 percent increase in stationary source air
    pollution by not having to go to powerplants and perhaps most
    indicative of the ancillary economic benefits of increased
    energy efficiency of taking capital away from unproductive uses
    like keeping the lights on and putting them into productive
    uses like innovation and investment, the 3 percent of the
    California gross State product in 1995 was the result of
    lowered energy intensity that the multiplier effect for taking
    money out of unproductive and putting it into productive uses
    is greater than in most cases.
        And in a year of hand wringing over what we can do in the
    short term, these programs remain out there. Now public
    benefits programs have been decreased by 43 percent since the
    early 90's. Part of that is the restructuring in States where
    separating generation, distribution and transmission where you
    don't have a single interest in building less generation that
    you used to.
        You've got States that have promoted deregulation and feel
    that they have less authority to require utilities to do
    spending than in the past. But in any case, we have less than
    half the resources to do this kind of spending at a time when
    we need a great deal more of those kind of resources.
        Finally, there--all we've heard about, the difficulties of
    the transmission system and how to insure reliability, there is
    another way to look at it. And if you can--rather than thinking
    about what is the next weakest link in the chain, think about
    lightening the load at the end of the chain so that, you know,
    ultimately the system is more secure because you're less likely
    to reach that critical point because you've saved energy.
        The red light's on and those are my basic points. Thank you
    very much, Mr. Chairman.
        [The prepared statement of Mr. Hamilton follows.]
            Prepared Statement of David Hamilton, Policy Director,
                            Alliance to Save Energy
        Mr. Chairman and Members of the Committee, thank you for the
    opportunity to testify before you today in support of the creation of a
    Public Benefits Fund, a mechanism designed to help attack energy waste
    in our nation's electric system, save taxpayers money, increase the
    availability and reliability of the nation's electricity supply,
    improve services for low-income Americans, reduce environmental
    pollution, and help to meet our future electricity needs more cheaply,
    quickly, and cleanly.
        My name is David Hamilton. I am Policy Director of the Alliance to
    Save Energy, a bi-partisan, non-profit coalition of business,
    government, environmental, and consumer leaders dedicated to improving
    the efficiency with which our economy uses energy. Senators Charles
    Percy and Hubert Humphrey founded the Alliance in 1977; we are grateful
    to have you as our Chairman, Sen. Bingaman, and, as you know, the
    current Vice Chairs are Sen. James Jeffords and Rep. Ed Markey.
        Over sixty companies and organizations currently support the
    Alliance to Save Energy under our well-known Alliance Associates
    Program. If it pleases the Chairman I would like to include for the
    record a complete list of the Alliance's Board of Directors and
    Associates, which includes many of the nation's leading energy
    efficiency manufacturers and end users, electric and gas utilities,
    research organizations, state energy programs, and others providing
    cost savings and pollution reduction to the marketplace.
        The Alliance has a long history of researching and evaluating
    federal energy efficiency efforts. We also have a well-established
    history of supporting and participating in efforts to promote energy
    efficiency that rely not on mandatory federal regulations, but on
    partnerships between government and business and between the federal
    and State governments. Federal energy efficiency programs at the
    Department of Energy (DOE), the Environmental Protection Agency (EPA),
    and other agencies are largely voluntary programs that further the
    national goals of environmental protection, as well as broad-based
    economic growth, national security and economic competitiveness.
                 summary: energy efficiency in an energy crisis
        Mr. Chairman, the economic and political developments surrounding
    energy issues that have occurred this year could--in cinematic form--be
    titled ``2001: An Energy Odyssey.'' The vast media coverage of energy
    issues and the resultant spin have some pundits predicting a full blown
    energy crisis requiring the dismantling of our infrastructure of
    environmental regulations, while others denounce a crisis mentality as
    an opportunistic spin on a few price and supply blips. California's
    unusual situation has had people blaming the rolling blackouts and
    financial woes that have occurred on everything from the lack of oil
    from the Arctic National Wildlife Refuge, to California's aggressive
    efforts to save energy in the 1980s and early 1990s,
        Whatever the final resolution of these questions, we are at a
    political point at which we need to make decisions about how we proceed
    in the future to provide clean, cheap, reliable energy supplies to our
    nation. Mr. Chairman, nearly everyone in this debate--either sooner or
    later--has advocated the nation's need to pursue aggressive energy-
    efficiency measures as part of a balanced energy bill. The President
    and Vice-President have, after initial equivocation, now include energy
    efficiency and conservation in their discussions on energy policy
    options. House and Senate leaders on both sides of the aisle have done
    the same. Public opinion polls have demonstrated overwhelming support
    for making energy-efficiency a key, active component of any energy
    plan.
        Mr. Chairman, developing sound policies to accomplish this goal has
    proven somewhat more elusive. While the President's energy plan
    contained excellent arguments for improving energy-efficiency, the
    actual details of the plan failed to provide methods to substantially
    reduce America's energy use in transportation, electricity, or home
    heating fuels. Similarly, the bill expected to reach the House floor
    next week--with the exception of the tax title--fails to produce
    meaningful energy-efficiency improvements. Although we anticipate that
    the provisions of the tax title will help to reduce energy use in the
    residential sector, the Alliance feels that much more can and should be
    done by Congress to take advantage of this golden opportunity to
    promote energy efficiency. Member's have focused their concerns on
    possible costs to consumers and industries--however we have strong
    analytical evidence that demonstrates the overall savings with the
    implementation of aggressive energy efficiency measures and policies.
        If we are to actually improve energy-efficiency and achieve the
    ``balanced'' energy policy that nearly all interests claim to seek, Mr.
    Chairman, we need to have the will to commit resources to where they
    are needed and to carry out these improvements. The Alliance to Save
    Energy regards the creation of a public benefits fund as a critical
    element in any energy plan that hopes to bridge the electric system of
    today with a deregulated market of tomorrow. Mr. Chairman, we cannot
    just do what is easy in a national energy plan. We have to have the
    commitment to take ambitious steps to capture the benefits of energy-
    efficiency for the budgets of Americans, our environment, our national
    security, and our economy.
                          why a public benefits fund?
        Mr. Chairman, the concept of a public benefits fund is designed to
    solve a number of the problems with the way we generate, transport, and
    sell electricity in the United States that are not currently being
    effectively addressed. A public benefits fund will pull together
    resources through which states can--in a targeted, flexible fashion--
    attack pockets of energy waste, seize opportunities to employ renewable
    energy, improve electric services for low-income Americans, and develop
    targeted mechanisms for providing electricity cleanly and cheaply.
        We praise your introduction of this provision in your own
    legislation and see it as a logical and critical compliment to other
    measures in your bill to further the deregulation of the electricity
    industry.
        The current conditions that warrant the creation of a federal
    public benefits fund are:
        1. Rampant energy waste in the electricity system;
        2. Lack of guidance for consumers in identifying ways to save
    energy;
        3. Large decreases over the past decade, in spending on public
    benefits programs;
        4. Problems with the reliability of the electric system in the
    Western, Mid-Western, and Eastern United States over the past three
    years; and
        5. A dearth of substantive measures to achieve greater energy-
    efficiency in the electric system.
                        what is a public benefits fund?
        As created in S. 597 and in other legislation introduced in the
    last Congress, a public benefits fund would be created through the
    imposition of a non-bypassable charge on electricity entering the
    transmission grid. The fund would be collected and administered by an
    independent fiscal agent. The monies collected in the fund would then
    be redistributed to the state and tribal governments for specific uses
    to promote public benefits that are not addressed through the interests
    of power generators, or transmission and distribution utilities.
        Proposals to date have varied as to the level of the charge, how
    the money is administered, and the specific public purposes qualifying
    for funding under the proposal. Some are set up as matching funds for
    public purpose expenditures, others leave the distribution scheme to
    the Secretary. Some contain caps on the amount of money that can be
    collected, while others set out a procedure by which states apply for
    funding according to their previous year's expenditures.
        Twenty-three states now have public benefits programs--ways of
    conglomerating resources to be targeted toward saving energy and other
    public purposes. These states are: Arizona, California, Connecticut,
    Delaware, District of Columbia, Illinois, Maine, Maryland,
    Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico,
    New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Vermont,
    West Virginia, and Wisconsin. Some of these programs are funded by
    wires charges, some are funded by direct state appropriations or other
    methods.
        A federal public benefits fund is needed to augment state resources
    devoted to these public purposes, and to spur the creation of public
    benefits programs in the more than one-half of the states that do not
    undertake them now.
                         the bingaman proposal (s. 597)
        S. 597 would levy a one mill per kilowatt-hour charge on generators
    of electricity. This charge would be collected as the electricity
    enters the transmission system. Such a minor charge would raise a
    significant amount of money for the fund--estimates run as high as $3.4
    billion each year given current levels of usage. The Alliance to Save
    Energy estimates the residential share of the cost to be approximately
    $1.00 per month. An independent fiscal agent appointed by the Secretary
    of Energy on a monthly basis would collect the monies monthly from
    transmission utilities and disbursed in block grants to states and
    tribes. Imported electricity will also be assessed the one mill charge.
        The specific public purpose programs delineated in the Bingaman
    proposal include:

       low-income assistance;
       improvement of electric facilities for rural or remote
            communities;
       electricity demand reduction;
       greenhouse gas mitigation projects (must be 50 percent cost-
            shared);
       new renewable energy capacity or efficiency improvements to
            existing renewable energy capacity;
       increased efficiency of hydroelectric dams or providing
            additional capacity at existing dams.

        The Secretary of Energy would be charged with developing a formula
    to allocate public benefit funds among the states and tribes based on
    the number of low-income households and the average annual cost of
    electricity to households in those jurisdictions. In addition, the
    Secretary would be responsible for developing criteria that delineate
    what are and what are not public purpose programs as guided by the
    legislation. The states and tribes may either receive and administer
    the monies themselves, or they may designate a separate entity to
    perform that function. If enacted, the fund in S. 597 will remain in
    existence until December 31, 2015.
        The bottom line, Mr. Chairman, is that the Alliance to Save Energy
    estimates that the public benefits fund in your legislation can
    displace up to 130,000 MW of electric capacity by the year 2020! That
    is equivalent to more than 400 300-MW power plants, and nearly one-
    third of needed capacity increases by 2020 estimated by the Energy
    Information Administration in 1999. We believe it could cut America's
    energy bills by $135 billion, and bring with it significant reductions
    in both criteria air pollutants and greenhouse gases.
                       comments on the bingaman proposal
        1. Greenhouse gas mitigation needs further definition. In addition,
    we don't believe it is appropriate for a state to spend its entire
    share of the fund in this area only, so we would favor a cap on the
    amount of the fund available for this purpose.
        2. As opposed to other proposals, this public benefits fund does
    not include a state match. A match or partial match provides
    significant incentive for a state to maximize its efforts on public
    purpose programs, and thus stands to save more energy than the program
    outlined here. While we acknowledge political constraints in this area,
    we support continued consideration of measures to maximize state
    participation.
        3. The legislation leaves the determination of what is an eligible
    public purpose program up to the Secretary. This provides less public
    accountability than other mechanisms. We urge that the proposal include
    opportunity for public input and comment to the criteria developed by
    the Secretary.
      capturing energy waste in the electric system cleanly, cheaply, and
                                    quickly
        Public benefits programs have been startlingly successful at
    attacking energy waste on a local and regional basis. During the decade
    leading up to 1994, demand side programs in the nation were able to
    displace 30,000 MW of electric capacity--or the equivalent of 100 300-
    MW power plants. This substantial savings was achieved for a utility
    cost of less than $0.03 per kilowatt hour, considerably less than many
    wholesale rates for electricity then and now.
        Take the Vermont experience in 2000. Several years ago, the Vermont
    Legislature took up utility restructuring legislation. Like the state
    of Wisconsin, after a tough political fight over deregulation ground to
    stalemate, what they decided they could agree on was to initiate
    investments in energy-efficiency. To do this, the state set up an
    ``energy-efficiency utility,'' run by a private contractor and
    accountable to the Vermont Public Service Board. During the final 10
    months of 2000--while undergoing all the additional burdens of setting
    up a major project--Efficiency Vermont was able to displace 2.1 MW of
    summer peak power and 6.3 MW of winter peak. All for a cost of $0.026
    per kilowatt hour. This rate was achieved at a time when wholesale
    rates in Vermont are more than $0.052 per kWh. In 10 months, the
    Vermont effort netted $17.7 million in saved electricity against
    expenditures of $5.4 million--a 227 percent return on investment in the
    first year of operation.
        In this year of hand-wringing over what we can do in the short term
    to relieve the burden of high energy prices and supply constraints,
    Vermont provides an example of high returns in a very short period of
    time.
        In March 1999, the Rand Corporation published a study of the
    results California utility energy-efficiency investments between 1977
    and 1995. The Rand study came to some remarkable conclusions, Mr.
    Chairman. Rand concluded that energy-efficiency efforts paid back into
    the state's economy at roughly $1000 per capita on investments of $125
    per capita over that period. In addition, the energy saved prevented a
    40 percent increase in stationary source air pollution by avoiding the
    construction of many new power plants. Most startling of all, Mr.
    Chairman, might be that Rand estimates that 3 percent of the California
    gross state product in 1995 was produced due to lowered energy
    intensity in the state over the preceding period. An entire year's
    worth of healthy economic growth, derived from taking money out of
    relatively unproductive uses like keeping the lights on, and made
    available for productive uses like investment and innovation.
        I could spend the entire hearing recounting success stories
    achieved by demand-side energy-efficiency investments, Mr. Chairman.
    The message is, however, that these programs work, and we need more of
    them in more places.
    consumers need additional guidance and help to lower their energy bills
        Inherent in a wide variety of public benefits programs, Mr.
    Chairman, is consumer education and in many cases, actual subsidies for
    the purchase of energy-efficient equipment for home owners. While
    residential consumers will pay as much as an extra dollar per month for
    electricity under the public benefits fund contained in S. 579, public
    benefits programs give them the tools to save a much greater amount
    than that on their electricity bills. For example, rebates offered for
    compact flourescent light bulbs can create substantial savings for
    consumers, while public education programs like the aggressive
    marketing of the Energy Star label in New York is giving consumers
    direction in targeting the purchases of appliances, refrigerators, and
    other energy-gulping devices toward the most energy-efficient options.
        In many cases, the public information extends well beyond
    electricity into other areas of home energy use. The spike in natural
    gas prices last winter resulted in millions of Americans scrambling to
    pay substantially higher home energy bills. The double duty now
    expected of natural gas supply to meet the home heating needs of over
    50 percent of American families and to power the lion's share of new
    electric generation will likely continue to be an issue in coming
    years. Public benefits programs can step in to substantially meet this
    need for information and even provide discounts to induce consumers to
    buy more efficient equipment.
        Along with making it easier to build more plants and transmission
    facilities, we must make it easier for consumers to trim their own
    energy use. The public benefits fund contained in the legislation is an
    excellent mechanism to achieve this.
               resources for public benefits: shrinking over time
        In the 1980s and early 1990s, Mr. Chairman, States justified their
    public benefits programs on the basis that saving energy to augment
    electricity supply was largely cheaper for utilities and ratepayers
    than building new generation. In addition, saving energy avoided the
    environmental downside of burning fossil fuels, could be deployed in a
    relatively short period of time, and reduced--rather than increased--
    strain on transmission and distribution infrastructure.
        In addition, in many states a process known as Integrated Resource
    Planning (IRP) was employed to determine the best way to meet demand
    growth for the state or region. That involved actually considering
    alternatives like cost, environmental values, time of deployment, and
    overall load considerations before deciding on a course to expand
    capacity. In this context, many States required utilities to expend
    resources on public purpose programs and made those expenditures
    recoverable in rates. National expenditures for public benefits reached
    an estimated high of $3 billion in the early 1990s. Unfortunately,
    these impressive numbers have been steadily declining due to changes in
    the utility industry and lack of attention by States and spending on
    public benefit funds has fallen to an estimated $1.7 billion this year.
        Fast forward, Mr. Chairman, to the mid-to-late 1990s when States
    were involved in a frenzied effort to go in the other direction, away
    from considering options for the development of the electric system and
    toward market competition for electricity. In addition to the loss of
    rational comparison of alternatives, many States also no longer felt
    they could compel utilities to undertake public benefits programs when
    the overall direction of the market was toward deregulation. Finally,
    the widespread separation of generation, transmission, and distribution
    resources away from the traditional vertically integrated utility
    erased the inherent interest of utilities in meeting demand in the
    cheapest way. Distribution utilities no longer cared where the power
    came from, as long as they could get it cheaply, and generators had no
    desire to be constrained from building plants. In addition, almost all
    players braced for fierce competition in the industry and believed that
    payouts for public purpose programs would constitute both a hindrance
    to their competitive position and investments that might pay off for
    others, but not for them.
        All this brings us to today, where we are in a suspended transition
    to competition--some states have struck restructuring agreements, some
    have not begun the process, and still others have begun the process
    only to stop dead in their tracks. Major jurisdictional, environmental,
    physical, economic, and other questions need yet to be answered before
    the seamless national highway for electricity purchases--envisioned by
    those who originally espoused the brave new world of competitive
    electricity markets--can be realized. Sorting out all of these concerns
    is likely to take many years.
        In the meantime, Mr. Chairman, the need for the achievement of
    energy efficiency is greater than ever to help stabilize supply and
    price, reduce air pollution and greenhouse gases, and ease the need for
    massive infrastructure replacement. Public benefits programs are high-
    yield, short term investments that provide nearly as much in ancillary
    benefits as in their considerable economic returns. The 43 percent
    reduction in public benefits spending since the peak in the early 1990s
    represents a critical missed-opportunity for the American consumer,
    environment, and economy.
                     cheaper, quicker, cleaner reliability
        Rising consumption of electricity in the United States has created
    a situation where peak demand for power is straining generation,
    transmission, and distribution capacity in many regions of the country.
    We have a variety of tools to address this problem. The one most
    pursued by regional power pools and organizations to date has been to
    focus on the weakest link in the chain that fails and to replace it,
    whether it is the transformer, transmission line, or the substation.
    Building new generation won't cure a transmission bottleneck or make a
    piece of equipment withstand the greater strain of a demand spike. Mr.
    Chairman, unless we are to replace our entire electricity
    infrastructure, this way of managing reliability will always sink to
    the next weakest link. The weakest link has to be addressed, of course.
    When a link breaks we have to fix it.
        But a better way to proceed, Mr. Chairman, is to reduce the strain
    on every link by lightening the load at the end of the chain. In many
    of the reliability incidents and price spikes we have observed over the
    past several years, the difference between a small increase in price
    and a major spiral has been a small amount of electricity in real
    terms. Energy-efficiency should play a major role in ensuring that the
    supply of electricity meets the demand. It is in policy-makers'
    interest and the interest of consumers to avoid being faced with
    rolling blackouts, severe price increases, and other disasters. The
    public benefits fund can contribute to the reliability of the system in
    a cheaper, quicker, cleaner, more targeted way than a wholesale drive
    to build more generation.
        Earlier, I outlined how pursuing greater energy-efficiency is no
    longer in the interest of generators or distribution utilities. That
    does not apply in cases where the reliability of the system is in
    question. We can look to California to supply the lesson that when
    power is scarce, or the ability to get it to the right place at the
    right time is impaired, the distribution utility faces significant
    exposure to price gouging by generators. Energy saved through a public
    benefits fund increases the stability of the system, thus lessening the
    risk to all parties in the regulatory and distribution process for
    electricity.
      a balanced energy policy: we must address waste in the electricity
                                     system
        A federal public benefits fund is an aggressive, credible method by
    which to capture energy savings in the electric system. This is the
    kind of ambitious program that can deliver the kind of energy-
    efficiency resources that will create a legitimately ``balanced''
    national energy policy.
        Mr. Chairman, if we pass by this huge potential for energy savings,
    we will be denying electricity consumers the assistance they need to
    control their own energy use, the savings to the economy and their
    individual bills that is ripe for the taking, and the opportunity to
    have their electricity needs met without the environmental damage
    caused by the construction of more power plants than we really need.
        Thank you for this opportunity to testify in support of the public
    benefits fund proposal in S. 597. I'd be happy to take any questions
    you might have.

        The Chairman. Thank you very much for that testimony.
        Mr. Rouse, why don't you go ahead.

       STATEMENT OF JAMES B. ROUSE, ASSOCIATE DIRECTOR OF ENERGY
    POLICY, PRAXAIR, INC., AND CHAIRMAN, THE ELECTRICITY CONSUMERS
                            RESOURCE COUNCIL

        Mr. Rouse. Thank you, Mr. Chairman. I am the Associate
    Director of Energy Policy for Praxair, a large energy intensive
    producer of industrial gases which is in Danbury, Connecticut,
    and I appear before you today as chairman of ELCON, the
    National Association of Large Industrial Consumers of
    Electricity which is based here in Washington.
        Let me say with some pride, Mr. Chairman, that the major
    concerns of ELCON members are nearly identical to those set
    forth in your White Paper issued July 20. That is market power,
    repeal the PUHCA reliability, transmission grid governance, and
    the two additional categories, regional planning and siting and
    market transparency rules.
        ELCON strongly supports FERC authority to promulgate rules
    for the independent operation of the grid and to compel
    utilities to turn over control of the transmission facilities
    to large regional independent organizations or regional
    transmission organizations or RTOs. FERC's recent July 12 order
    anticipates what the White Paper propounds and what you
    included in the last Congress and S. 1273, Mr. Chairman.
    Reliability will always be of paramount importance. ELCON was
    an active participant in the NERC process and supported the
    consensus language on reliability contained in S. 2071 last
    year. In addition to the creation of new statutorily authorized
    self-regulating organizations, any legislation must guarantee
    non-discriminatory access to the grid and clarify the current
    uncertainty about Federal and State jurisdiction over
    transmission.
        Market power will continue to be of intense interest as
    you've heard earlier today. Where buyers and sellers are able
    to engage in commercial transactions for supply sourcing, the
    FERC will encourage the development of a workably competitive
    market through setting of rates, terms and conditions for the
    transmission of that power through--and through the oversight
    of RTOs.
        In turn, RTOs will have an independent market surveillance
    function to monitor such markets for potential design flaws,
    gaming behavior and the exercise of market power. That function
    currently exists in the RTOs that have already been approved.
        ELCON is also pleased to note the reference to ``demand
    response mechanisms'' in the White Paper. ELCON has proposed
    that FERC add a ``ninth function'' to the list of the eight
    functions in Order 2000. This would require that markets for
    customer load response be integrated with other FERC real time
    markets.
        Regional planning and siting of new transmission capacity
    poses a challenge for you as legislators and policy makers
    alike. ELCON believes that Congress should delegate to the FERC
    the same authorities under the Federal Power Act with respect
    to the siting of interstate transmission as FERC is currently
    authorized under the Natural Gas Act with respect to interstate
    natural gas pipelines.
        As for transmission planning, expansion, and siting, ELCON
    believes that any FERC siting authority could be seated to the
    regional transmission organizations rather than creating a
    duplicative entity such as a regional compact.
        The RTOs can or can also oversee regional reserve
    requirements, maintenance obligations and market monitoring
    functions as I mentioned earlier. As with all other RTO
    functions, FERC maintains its oversight role in this area.
        Market transparency will clearly be a requirement for the
    new regime and market participants will need real time
    information on the regulated services including transmission
    capacity, ancillary services, and line loading. The Energy
    Information Administration and numerous commercial entities
    should guarantee an abundance of non-proprietary market
    information to encourage the efficient operation of the system
    and also vigorous commercial activity among the participants.
        Mr. Chairman, I would like to briefly address two of the
    other provisions in the White Paper. Regarding the repeal of
    PUHCA, in such eventuality, we need clear authority vested in
    the FERC to prohibit anti-competitive practices involving
    regulated utilities and their unregulated affiliates. And we
    argue that optimally PUHCA repeal should not be effective until
    competition on a nationwide basis is achieved.
        And finally while on the subject of repeal of laws
    beginning with the words public utility, any repeal of the
    mandatory purchase provisions of section 210 of PURPA must
    preserve the Federal guarantee of backup power at just and
    reasonable rates and those States without reasonable real
    customer choice. And there must remain the requirements for
    interconnect to the grid for all co-generators just as there
    would be for other suppliers of electricity.
        Mr. Chairman, for the reasons set forth at greater length
    in my written testimony, we believe this committee and this
    Congress must enact strong comprehensive Federal legislation to
    achieve workably competitive electricity markets and ELCON
    stands ready as it has for a quarter century to represent its
    members, to engage in the debate as we have and to propose
    policy alternatives and to participate in this momentous shift
    in the provision of an essential service which is electricity.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Rouse follows.]
      Prepared Statement of James B. Rouse, Associate Director of Energy
    Policy, Praxair, Inc., and Chairman, the Electricity Consumers Resource
                                    Council
        Good morning, my name is James B. Rouse, associate director, energy
    policy for Praxair, Inc. Praxair is a large industrial gases company,
    producing atmospheric gases: oxygen, nitrogen, argon and rare gases;
    our process gases include hydrogen, helium and carbon dioxide. For us,
    electricity is a raw material, constituting up to 70% of our operating
    costs. We operate in some 44 countries and are the largest industrial
    gases producer in North and South America. I am here today as chairman
    of the Electricity Consumers Resource Council, or ELCON. ELCON,
    established in 1976, is the national association representing large
    industrial users of electricity. ELCON's member companies come from
    virtually every segment of the manufacturing community.
        ELCON's members operate in a competitive, international environment
    and require an adequate and reliable supply of electricity at
    competitive prices in a vibrant interstate marketplace. Large users of
    electricity know very well that the decisions made in this Committee
    and by Congress will have a direct impact on their businesses' well
    being as well as business decisions. ELCON greatly appreciates the
    opportunity to testify. ELCON and its member companies favor
    competition over regulation and have long advocated truly open and
    fully competitive electricity markets, including retail access
    guaranteeing that all consumers have the right to choose their supplier
    of electricity and electricity services. We also believe that, just as
    is true for other energy products, a large national or even
    international market with consistent rules and standards is optimal for
    the sale and purchase of electricity. When it comes to electricity, we
    are dealing with a commodity sold in interstate commerce. Our existing
    electricity system clearly transcends state lines. We need a national
    framework and a strong federal bill. Consumers should benefit from a
    large, seamless interstate electricity market.
        ELCON members continue to support competition. However, we would
    assert that we do not have true competition anywhere. Several states,
    in attempting to restructure, has simply deregulated, or in some cases
    reregulated, existing monopolies. The failures to date, and California
    is perhaps the most egregious but there are others, represent failures
    of reregulation and failures of state legislative plans that included
    too many political compromises. The experiences in California and
    elsewhere cannot and should not be described as failures of
    competition.
        The major concerns of ELCON members are nearly identical to those
    set forth in the chairman's ``White Paper on Electricity Legislation''
    issued July 20, 2001. As we identified those issues in testimony before
    this committee on April 20, 2000, they are the linked issues of Market
    Power, Repeal of the Public Utility Holding Company Act (PUHCA),
    Reliability, and Transmission and Grid Governance. The White Paper adds
    two other categories: (1) Regional Planning and Siting; and (2) Market
    Transparency Rules. Customer choice and retail access are wonderful
    goals, but they are worthless if the transmission system, which will
    remain monopolistic for many years, does not allow for the free and
    non-discriminatory movement of electricity from seller to buyer. Given
    that owners of monopoly transmission facilities will still exercise
    market power--that is monopoly power--I cannot emphasize too strongly
    that regulation is needed to ensure that the owners of the transmission
    system do not use their position to the detriment of real competition.
        We concur with the White Paper that FERC must have the authority
    and be required both to (1) promulgate rules for the independent
    operation of the grid and (2) compel utilities to turn over control of
    their transmission facilities to independent Regional Transmission
    Organizations, or RTOs. Such rules should preserve the reliability of
    the grid and encourage the sale and transportation of electricity from
    any seller to any buyer in an open, competitively neutral, and
    nondiscriminatory manner.
        FERC's recent order of July 12 on the RTO issue is a major FERC
    initiative. FERC, for the first time, has clearly set forth its policy
    that there should be large, regional RTOs: One to comprise what is now
    the Western Interconnect; and three that comprise the Eastern
    Interconnect. FERC has established mediation dockets to bring the
    utilities together to establish RTOs for the Northeast and Southeast.
    But we believe that utility membership in an appropriate RTO should not
    be voluntary as provided for in Order 2000, but mandatory, and that
    legislation should affirm FERC's authority to order utilities to join
    regional transmission organizations. As an aside, in the last Congress,
    the provisions of S. 1273, offered by Chairman Bingaman, best addressed
    the question of RTOs. It granted FERC the authority to oversee the
    creation of an RTO and compel utilities to turn over control of their
    transmission facilities. Senator Bingaman deserves special praise for
    being the first to introduce this concept in his earlier legislation,
    and we are pleased he has reintroduced that same idea in this Congress.
        ELCON has been an active participant in the NERC process and
    supported the consensus language on reliability contained in S. 2071
    last year on the condition that it be considered as part of a
    comprehensive bill and not on a stand-alone basis. This position is
    based on sound policy. While we recognize the need to establish a new,
    statutorily authorized self-regulating reliability organization, such
    action will barely begin to address reliability. Legislation to reduce
    the potential for reliability problems must do more than simply provide
    accreditation to a new oversight body. It must establish a framework
    for appropriately-sized regional transmission organizations, it must
    guarantee non-discriminatory access to the grid, and it must clarify
    the current uncertainty about federal and state jurisdiction over
    transmission. Moreover, it cannot give new market regulating authority
    to those who now have, directly or indirectly, substantial market
    power. We concur that legislation should require sanctions and
    penalties for failure to comply with rules developed by a new electric
    reliability organization and that the entire framework is subject to
    federal oversight. ELCON is continuing to work with various
    stakeholders in an effort to develop new language. It is becoming
    increasingly clear that the ``consensus'' language approved in February
    1999 is too complicated, too prescriptive, and too long. There have
    been several new proposals put forth even in the last few weeks that
    offer improved ways to establish a new electric reliability
    organization.
        Market power is a subject of intense recent interest, growing out
    of the wildly fluctuating rates and volatile supply situation in the
    West. Market power arises from several sources. Where there is an
    imbalance in supply and demand, market power is often held by a few
    producers who can demand higher rates during periods of shortage. Where
    there is transmission congestion, the owner and operator of the grid
    can favor his own generation affiliate in denying access to competitive
    sources. Where the integrated system favors the native load utility
    over competing generators, new entrants are discouraged. Where an
    artificial power exchange is created for non-market purposes, true
    competition is thwarted.
        Markets will eventually be workably competitive when there is an
    adequate generation supply in all sections of the country and where
    that supply can move freely over a transmission system under control
    and supervision of large RTOs. Transmission rates, terms and conditions
    will be set by the RTOs and administered by the RTOs, subject to FERC
    oversight. Any market operated by an RTO or on behalf of an RTO should
    be subject to an independent market surveillance function to monitor
    such markets for potential design flaws, gaming behavior and the
    exercise of vertical, horizontal or localized market power. This
    includes markets for transmission services, ancillary services and
    power exchanges.
        The White Paper posits that legislation should require the
    Commission to take into account the impact of ``demand response
    mechanisms'' on rates. ELCON has proposed that FERC add a Ninth
    Function for Customer Load Response (CLR) curtailment service (in
    addition to the Eight Functions set forth in Order 2000). This would
    require that markets for CLR be integrated with other FERC real-time
    markets. This would also ensure that such markets are reasonably
    standardized in each RTO. Participation in the CLR market should be
    voluntary and open to any customer.
        Regional Planning and Siting for new transmission capacity poses a
    challenge for policymakers. ELCON believes that Congress should
    delegate to FERC the same authorities under the Federal Power Act with
    respect to the siting of interstate transmission facilities as FERC is
    currently authorized under the Natural Gas Act with respect to
    interstate natural gas pipelines. ELCON agrees that a regionally based
    approach to transmission planning, planning and siting is desirable.
    However, the RTOs, rather than some new regional regulatory compact,
    should be delegated with that responsibility, or as the White Paper
    states, FERC should ``cede such authority to appropriately constituted
    regional entities,'' which should be RTOs. They would also establish
    and monitor regional reserve requirements, maintenance and market
    monitoring functions noted above.
        Besides the ongoing operation of the grid, RTOs should play a major
    role in the planning of new and upgraded transmission facilities, as
    required under Order 2000, but which authority would need be augmented
    and reaffirmed in legislation. Regulated transmission providers are
    entitled to a reasonable opportunity to recover all costs associated
    with their prudently incurred investments, plus a return on those
    investments that are deemed used and useful. Working through RTO
    processes, transmission providers will be assured that all needed
    expansions and upgrades will be fully compensated according to FERC
    rules.
        Market Transparency Rules are integral to the successful operation
    of a workably competitive market. While proprietary information on
    commodity pricing will continue to receive the protection it deserves,
    market participants need real-time information on the regulated
    services, including transmission capacity, ancillary services and line
    loading. This will be necessary for buyers, sellers, grid operators and
    regulators to assure that markets are indeed workably competitive on a
    continuing basis. Short-term operational planning and long-term
    capacity planning are both well-served by adequate information,
    furnished by both the Energy Information Administration and also by an
    expected plethora of commercial entities who are already vying for
    customers in anticipating of the opening of markets.
        The White Paper also addresses other ``Other Provisions.''
    Regarding the repeal of PUHCA, we first emphasize that PUHCA is the
    only federal consumer protection statute for electric utility
    customers. We believe that, if PUHCA is repealed, we need clear
    authority vested in FERC to prohibit any potential anti-competitive
    practices involving regulated utilities and unregulated affiliates.
    Rules are needed to address the operational unbundling of generation,
    transmission, system control, marketing and local distribution
    functions. State and Federal regulators must have complete access to
    all books and records of all regulated entities and entities owned or
    controlled by regulated entities. In addition, we argue that,
    optimally, PUHCA repeal not be effective until all states have retail
    access or until competition on a nation-wide basis is otherwise
    achieved.
        The White Paper calls for repeal of the mandatory purchase
    requirements of the Public Utility Regulatory Policies Act (or PURPA)
    of 1978. Many ELCON members cogenerate and sell electricity to
    utilities as Qualifying Facilities (or QFs) pursuant to PURPA. Despite
    its bad press, as long as consumers are held captive to monopoly
    utilities, PURPA is an essential law. It has produced a broader, more
    efficient base of electricity generation. Due to PURPA, electricity
    capacity was added in smaller increments, thus not burdening users with
    paying for generators that proved to be much larger than necessary. And
    entrepreneurs with private non-regulated capital funded generation.
        That having been said, the ``mandatory purchase'' provisions of
    PURPA are an anachronism in a truly competitive market and should be
    recognized as such. With regard to existing PURPA contracts, be they at
    market or above today's market, no one is suggesting that such
    contracts be rescinded. Existing PURPA contracts are and should be a
    non-issue. The impact of repealing the mandatory purchase provisions of
    PURPA on a prospective basis is virtually non-existent. The number of
    new, uneconomic PURPA-based contracts being signed today based on the
    often above market ``avoided cost'' formula is close to nil. In
    addition, the much-maligned avoided cost principle is not to blame. If
    properly implemented, it harms no one. Some states, for their own
    reasons, set avoided cost at artificially high levels. Again, this is
    no longer the case.
        I hasten to add, however, that even without the use of these
    mandatory purchase requirements, the majority of new capacity being
    brought on line is from non-utility generation and that has been the
    case over several years. PURPA has succeeded in demonstrating that
    electricity can be generated by non-utility sources in an efficient,
    reliable, and environmentally favorable manner. Some 25 years ago
    utilities vehemently disputed what is now fact.
        While the mandatory purchase provisions are no longer necessary in
    a truly competitive electricity market, it is important to note that
    PURPA and Section 210 are much more than simply mandatory purchase
    requirements, including its requirements that utilities interconnect
    with cogenerators. However, I cannot overemphasize the importance of a
    federal guarantee for back-up power at just and reasonable rates in
    states that remain non-competitive. Without such a guarantee,
    cogenerators would be captive to unregulated monopolies that could
    charge what they wish, and the cogenerators would have no alternative.
    In states without real customer choice, retaining the federal guarantee
    for back-up power now in PURPA is essential if there is to be any
    investment in cogeneration capacity.
        Over the past three decades, the growth of electricity-dependent
    businesses and industry has been remarkable. In just the past five
    years, we have seen demand far outstrip supply in many regions. While
    the economy has become ever more electricity dependent, our
    infrastructure, market mechanisms and regulations have not kept pace.
    We need strong, but not excessive, federal regulatory authority to
    guarantee that electricity is available throughout the nation on a non-
    discriminatory basis. It is up to this Committee and other oversight
    bodies to ensure that such regulation is not over-reaching, that it is
    encouraging and not hindering true competition.
        In conclusion, ELCON and its member companies favor a strong
    federal bill so that all electricity consumers can enjoy the benefits
    of competition. California notwithstanding, competition is coming. But
    the reality is that we face a long transition period before we get
    there. Truly comprehensive Federal legislation is needed to achieve
    workably competitive electricity markets. States will continue to have
    an important role, but that role does not extend to the regulation of
    interstate commerce. And electricity is clearly interstate commerce.
    That is why this Committee and this Congress must enact strong,
    comprehensive federal legislation. ELCON stands ready as it has for a
    quarter century to represent its members, to engage the debate, to
    propose policy alternatives and to participate in a momentous shift in
    the provision of an essential service, electricity.

        The Chairman. Thank you very much for that testimony.
        Mr. Ward.

    STATEMENT OF STEPHEN WARD, PUBLIC ADVOCATE, STATE OF MAINE, AND
     PRESIDENT, THE NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER
                               ADVOCATES

        Mr. Ward. Chairman Bingaman, it's an honor, it's a
    privilege to appear on this panel today on behalf of NASUCA,
    the National Association of State Utility Consumer Advocates
    for whom I serve as president. I've also served as Public
    Advocate in the State of Maine since 1986.
        Just since April of last year when I testified before this
    committee on behalf of NASUCA, NASUCA's representatives have
    testified on four occasions before committees of the House and
    the Senate of this Congress pertaining to electric
    restructuring and we are very happy to be invited here today.
        In April 2000, the testimony I presented to this committee
    included a consumer checklist of 12 items which we regarded as
    the litmus test for desirable outcomes from a consumer's
    perspective and I have attached that consumer checklist to the
    written testimony which I furnished the committee.
        Since 1996, NASUCA has adopted 16 resolutions that concern
    restructuring of the electric industry and the creation of
    competitive retail markets. Of these 16 resolutions, 10
    directly address the topics that are in the White Paper which
    has been circulated by the committee.
        I am pleased to state that NASUCA's resolutions provide
    strong support for most of the proposals in the White Paper.
    For example, NASUCA's membership in 40 States across the
    country strongly endorses the grant of FERC authority to NERC
    or to North American Electric Reliability Organization, the
    successor, to insure reliability in the Nation's electric grid
    and to impose penalties when they are appropriate. NASUCA has
    been a supporter of the NERC legislation that is before this
    Congress.
        Similarly, NASUCA has adopted resolutions in 1998 and 1999
    that echo the White Paper's endorsement of functional
    independence for independent system operators, for RTOs, and
    for NERC from the preferences of any market participants. It is
    a critical principle in our view to assure that consumers,
    marketers, sellers and electricity markets all have confidence
    that the grid is being operated without bias or without
    preference.
        Linked to this principle is the White Paper's proposal that
    PUHCA not be repealed unless FERC receives enhanced authority
    to address market power problems with particular authority to
    examine the books and records of affiliates within a holding
    company structure. We strongly support those suggestions.
        It's been NASUCA's long term position on PUHCA repeal that
    the removal of PUHCA protection should not occur without
    development of adequate FERC oversight in competitive markets.
        The principle underlying all of these resolutions is this.
    The elimination of regulatory controls is not the same thing as
    creating competitive markets. Until markets are workably
    competitive, regulatory oversight is critical throughout any
    transition period. Likewise, NASUCA has supported PURPA repeal
    but only when markets are workably competitive.
        In a resolution adopted last month at its midyear meeting
    in Santa Fe, NASUCA took a further step and urged FERC not
    simply to approve market-based rates whenever they are filed
    with the commission in the case of any market that's
    dysfunctional such as those in California. But instead to
    require once more a cost basis for just and reasonable rates.
    Until markets in States like California are workably
    competitive, FERC should rely on the tried and true standard of
    just and reasonable rates and not leave customers at the mercy
    of a market-based rate.
        That same resolution also called for FERC to address the
    problem of market power and to force generators who exercise
    market power to disgorge the profits associated with its use.
        NASUCA strongly supports the grant of additional authority
    to FERC to pursue market mitigation and other market power
    remedies. Without those remedies, in the long run, consumers
    can only lose in wholesale markets that are dysfunctional in
    markets that are subject to gaming.
        NASUCA has also adopted resolutions that are fully
    consistent with the White Paper proposal on a public benefits
    fund. We strongly support the implementation of a Federal fund
    for vulnerable populations, low income in particular, and in
    support of renewable generation and in support where necessary
    of energy efficiency. In fact, NASUCA's members have been for
    years strong supporters of energy efficiency efforts as an
    alternative to new generation siting and to some extent
    transmission siting.
        With respect to the FERC, the proposal for FERC
    jurisdiction over bundled transmission prices, and the proposal
    for a Federal power of eminent domain for transmission line
    siting, I have to report that NASUCA has no resolutions on
    either of those points so I cannot present any consensus NASUCA
    position today.
        Finally, with reference to the White Paper's concluding
    discussion about tax benefits and tax code changes, NASUCA has
    adopted a resolution urging Congress to mandate the flow
    through to retail customers in rates of any tax benefits
    associated with generating units when they are sold. In a State
    like Maine which divested its generating units, it turned out
    that the tax benefits, the excess deferred income taxes, the
    investment tax credits were captured by shareholders in a one
    time windfall rather than being flowed through to rate payers.
        This really is a billion dollar loophole and it is
    incumbent I think on Congress to make some firm action in
    amendments to the tax code.
        In conclusion, the White Paper advances a series of
    propositions which NASUCA supports. We urge your serious
    consideration of the White Paper and are grateful for the
    chance to contribute to this discussion. Thank you very much.
        [The prepared statement of Mr. Ward follows.]
     Prepared Statement of Stephen Ward, Public Advocate, State of Maine,
    and President, National Association of State Utility Consumer Advocates
        Chairman Bingaman, distinguished members of the Committee on Energy
    and Natural Resources: I am Stephen Ward and have served since 1986 as
    Maine's Public Advocate representing utility consumers before Maine's
    Public Utilities Commission, before FERC, the FCC and the courts. I
    also have served since March of 2000 as President of NASUCA, the
    National Association of State Utility Consumer Advocates. NASUCA
    consists of organizations charged by statute with the representation of
    utility consumers and currently has members in 40 states. I also serve
    as an appointed member of NERC's Market Interface Committee.
        It is an honor and a privilege to appear on this distinguished
    panel and I thank you for the extending this invitation to NASUCA and
    its 43 member offices for whom I am testifying today. Just since April
    of last year when I testified on behalf of NASUCA before this
    Committee, NASUCA's representatives have testified on four occasions
    before committees of the House or Senate on matters pertaining to
    electricity restructuring. We are very happy to be invited once more to
    provide the consumer's perspective at these hearings, as I will attempt
    to do again today. In April of 2000 in my testimony before this
    Committee, I presented NASUCA's ``Consumer Checklist'' of necessary
    safeguards in any federal restructuring legislation. Because of
    turnover on this Committee I thought it might be useful to provide a
    copy of the ``Consumer Checklist,'' which is attached to this
    testimony.
        The Chairman's White Paper on Electricity Legislation seems to me
    to an auspicious start in the process of marking up comprehensive
    energy legislation. That is because the White Paper takes a broad
    overview of the history and current functioning of utility electricity
    markets, focusing as much on the forest as the trees. This is
    appropriate in the case of a commodity like electricity that has so
    many unique characteristics. Unlike virtually any other commodity, it
    cannot be stored and therefore must have production match usage in
    every moment of the day. Electricity is a commodity that, over the
    years, has been heavily freighted with the public interest, benefiting
    from the exercise of eminent domain in the construction of its
    transmission lines and being subject to multiple expectations for
    affordability, for low-income support and for protections against
    disconnection. But most importantly, electricity is a commodity which
    virtually every citizen, every family, every business depends on as a
    necessity of life. For all of these reasons, it makes great sense to
    proceed cautiously and with great care in undertaking fundamental
    changes in this industry, by means of federal legislation. I urge you
    not to hurry as you take up this task.
        The White Paper also provides a very convenient framework for
    discussion and analysis of key issues, laying out the issues in several
    general areas (including ``Other Provisions'' and ``Tax Provisions'').
    Since many of these issues correspond to proposals that have been
    debated by NASUCA's membership in 40 states around the country, I can
    provide commentary on some of the White Paper's proposals from NASUCA's
    perspective. In other cases, NASUCA has adopted no resolution that is
    directly germane to a proposal in the White Paper. In such cases, I
    will note the absence of a NASUCA Position.
        Since 1986, NASUCA has adopted 16 resolutions that directly address
    the restructuring of the electricity industry and the creation of
    competitive choices for consumers--large and small. Of these sixteen
    resolutions, ten directly address desirable or necessary features of
    federal law or regulation, as opposed to policy proposals that are
    entirely within the scope of state jurisdiction. Probably the most
    vexing aspect of any effort to transform a system of vertically
    integrated utilities into a system relying in part on competitive
    markets, it seems to me, is the inter-mixture of state and federal
    responsibilities. As the Committee is fully aware, aspects of the
    electric industry (such as retail pricing) have been entirely under
    state jurisdiction since the first decades of the last century. It is
    equally so that, since enactment of the Federal Power Act in 1935,
    other aspects (such as interstate transmission pricing) have been
    completely under federal jurisdiction. Any comprehensive effort to
    restructure this industry must tread lightly on these jurisdictional
    dividing line.
        The White Paper proposes to reconfigure jurisdiction over all
    transmission-related questions so as to make FERC's jurisdiction pre-
    eminent. For a near-majority of states today where transmission rates
    are bundled together with distribution and generation rates, however,
    this proposal does represent a departure from the status quo. NASUCA
    has no formal resolution addressing the question of whether bundled
    transmission prices should be set by FERC in a way that pre-empts state
    action. Due to the multiplicity of views within NASUCA, on the part of
    states like Maine that have undertaken comprehensive restructuring and
    as well for states in low-cost regions that have no incentive to
    restructure, it is doubtful that NASUCA will ever adopt a final view as
    to whether FERC authority over transmission should properly supersede
    state authority. In any event, I won't offer one today.
        Similarly, NASUCA has no formal position as to whether public,
    cooperative and federal entities like TVA, REA cooperatives and
    marketing authorities should be subject to FERC oversight under the
    Federal Power Act. Speaking just for myself, however, it appears to me
    to be difficult to establish workable protections against market power
    and against malfunctions that jeopardize the reliability of the grid
    without establishing broad and consistent authority within FERC across
    all types of utilities public and private. NASUCA has taken a strong
    stance in favor of granting FERC authority to require electric
    utilities to join Regional Transmission Organizations and, to the
    extent possible, enabling public entities like TVA likewise to
    participate in the operation of regional RTO's. A NASUCA resolution,
    adopted two years ago, recognizes the primacy of FERC jurisdiction over
    RTO development but urges collaboration with state PUC's in formulating
    common agendas for managing transmission congestion and developing new
    transmission facilities.
        With respect to the reliability proposals in the White Paper,
    NASUCA has strongly supported the creation of an independent NERC
    (North American Electric Reliability Council) that is not dependent on
    the short-term preferences of any user of the transmission system. With
    NARUC and other parties, NASUCA has endorsed the stand-alone NERC
    legislation that is pending before Congress. In a 1998 Resolution,
    NASUCA unanimously supported enactment of ``federal legislation that
    would clarify FERC authority to review the reliability requirements
    imposed by NERC (or any successor national organization) and to ensure
    that such requirements are adopted and implemented in a manner that
    benefits all consumers.'' Key among the interests that NASUCA has
    advanced in three of its resolutions is the principle that for RTO's,
    for ISO's and for NERC, Congress or FERC should assure the operational
    independence of grid managers from players in national and regional
    electric markets. One good reason for guaranteeing this independence is
    to enable grid managers to act impartially with sanctions and
    penalties, as an enforcement entity in the event of malfeasance or grid
    disruption rather than merely as a scheduler of transaction in a
    regional market. For this reason I applaud the White Paper's
    suggestions on this point.
        The White Paper's third major area addresses ``Rates and Market
    Power'' and does so in a manner that, to me, may be too optimistic in
    endorsing market-based outcomes. This section of the White Paper
    doesn't appear to focus on what is unfortunate reality today:
    competitive markets are not generating just and reasonable prices in
    many hours of the year in Western markets, and in some hours of the
    year in New York and New England markets. In view of the price spikes
    and blackouts that have plagued California, I think it is premature to
    base a discussion of rates and market power entirely on the hope that
    markets can be made workably competitive. NASUCA addressed these issues
    in a resolution adopted at its mid-year meeting last month. That
    resolution urges FERC not to rely on market-based rates in situations
    where markets are not functioning adequately but, instead, to use its
    powers under the Federal Power Act to set just and reasonable rates
    based on a cost analysis or other appropriate means of mitigation. In
    essence, the resolution urges FERC not to accept the prices produced by
    any market as necessarily just and reasonable but to investigate for
    evidence of market power and marketing anomalies. Possibly the
    difference between NASUCA's position and the White Paper is a question
    of degree, or merely a matter of emphasis but, to my mind, this nuance
    is an important one.
        The final portion of the ``Rates and Market Power'' section
    concerns market mitigation measures as ordered by FERC. We agree that
    market mitigation (i.e. following up on evidence of market power or of
    marketing anomalies with a formal investigation and, where warranted,
    an enforcement action) is a critical aspect of discipline that keeps
    bidders honest and helps markets function. To my mind, this mitigation
    function is a key aspect of ISO operations, and shouldn't necessarily
    reside at FERC rather than in the regions. At present, both ISO-New
    England and the New York ISO have authority to reset any price that is
    excessive or that results from market power. I don't think it makes
    sense to take away such authority as already exists.
        With respect to regional planning and siting, NASUCA has no
    specific resolution that addresses the exercise of eminent domain for a
    project under federal jurisdiction. As a general matter, it makes great
    good sense to promote the coordination of state and federal siting
    authority, wherever possible. But I doubt that NASUCA's members would
    endorse the proposal that FERC receive eminent domain authority for
    electricity comparable to what already exists for gas pipelines--and
    certainly not unanimously. As a matter of practice, all of NASUCA's
    resolutions are adopted by consensus, so I would be very surprised to
    see a unified NASUCA position on a matter as controversial as a federal
    transmission line siting.
        The White Paper discusses the potential repeal of PUHCA and PURPA
    on terms that are very close to NASUCA resolutions adopted in 1996 and
    1997. NASUCA has explicitly endorsed adoption of a renewable portfolio
    standard as a device for creating diversity in the nation's supply mix
    and supporting new, non-polluting sources of generation. Historically,
    NASUCA's members have been defenders of PURPA as a technique for
    injecting competition into the closed operations of electric utilities.
    NASUCA also has repeatedly testified in opposition to PUHCA repeal--at
    least until new systematic protections against affiliate abuse and cost
    shifting within holding companies are in place. Competition in
    wholesale markets is too powerful a force to operate without the
    structural restraints that PUHCA has imposed since 1935, in my opinion.
    The last thing that we should be doing today is to assume that the
    absence of regulation is the same as vigorous competition. As the
    nation learned from Sam Insull 80 years ago, the absence of regulation
    leads directly to unregulated monopoly power.
        The White Paper also endorses the creation of a Public Benefits
    Fund from which financial support can be drawn for a variety of
    purposes including low-income assistance, conservation programming, and
    R&D activities. States like Maine, since 2000, have had in place a
    state-mandate for ratepayer-supported public benefits programs. They
    should not see federal legislation disturbing or replacing these
    mechanisms. Having said this, however, I am confident that NASUCA's
    membership today would endorse the same approach as was adopted in a
    1998 resolution: any comprehensive federal electricity legislation
    should beef up support for ratepayer-funded weatherization, and for
    targeted low-income support assistance in addition to the support
    already provided through the LIHEAP and DOE Weatherization programs. It
    is critical that, as markets evolve, the ability to afford electricity
    not separate ``the haves'' from ``the have-nots.'' We cannot tolerate
    having the nation's most vulnerable populations become the casualties
    of competition.
        Finally, and before closing, I should turn to the last substantive
    set of issues raised in the White Paper, concerning changes in the tax
    code. While it is true that the federal tax law is beyond the purview
    of this Committee, it also is the case that tax policy establishes
    long-lived incentives that directly affect investment decisions and, in
    the case of utility plant, can affect the bottom-line earnings of
    investors. Missing from the list of ideas that appear in the White
    Paper's final paragraph is a proposal that NASUCA endorsed by
    resolution last year and that also has received support from NARUC and
    the American Public Power Association. The proposal is to require that
    any tax benefits (so-called Excess Deferred Income Taxes and
    unamortized Investment Tax Credits) that are on the books of an
    electric utility for generating units that are divested by operation of
    state law or sold voluntarily should be flowed-through to ratepayers in
    lowered distribution rates and not be captured by the utility's
    shareholders. Such a one-time windfall for shareholders was never
    envisioned when the tax rate was lowered in 1986, was not sought by the
    utilities and EEI at that time, and cannot be justified today. We urge
    the Committee to recommend action to close this billion dollar
    loophole.
        In sum, it should be clear that NASUCA has formally endorsed many
    of the specific proposals that appear in the White Paper. Dating back
    to 1996, NASUCA's resolutions have anticipated key impacts on consumers
    that may result from industry restructuring if regulators and
    legislators are not vigilant. You are to be congratulated for the
    breadth and depth of the White Paper's proposals. NASUCA as an
    organization will make every effort to assist you in your deliberations
    as you refine these proposals.
        Thank you again for the opportunity of testifying today on behalf
    of the nation's electricity consumers.
                                  (attachment)
                NASUCA Consumer Checklist for Federal Electric
                           Restructuring Legislation
     No Federal Preemption: Permit, but don't require, retail
            competition.
     Stranded costs: Stranded cost issues should be left to the
            states.
     Market power: Allow FERC to remedy abuses of market power.
     Transmission and ISOs: Allow FERC to require ISOs and remedy
            transmission problems.
     Reliability Standards: Allow FERC to review reliability.
     Consumer Protection: Establish minimum federal standards for
            consumer protection.
     Universal Service: Adapt universal service standards and
            principles, buy requirement.
     Aggregation: Aggregation of customers should be encouraged.
     Renewable Energy: Remove any barriers to net energy metering.
     Mergers: Expand FERC merger authority and require a net be
            benefit to consumers.
     PUHCA: Competition first, then remove regulatory impediments.
     PURPA: Competition first, then waiver of Section 210 must-buy
            requirement.

        The Chairman. Thank you very much.
        Mr. Cook.

             STATEMENT OF DAVID N. COOK, GENERAL COUNSEL,
              NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL

        Mr. Cook. Thank you, Mr. Chairman. I am general counsel for
    the North American Electric Reliability Counsel. NERC commends
    your leadership and this committee's attention to the
    critically important issue of the reliability of the bulk
    electric system.
        NERC urges the Congress to enact reliability legislation in
    this session of Congress. NERC in a broad coalition of State,
    consumer and industry representatives are supporting
    legislation that would transform the current system of
    voluntary operating guidelines into a set of mandatory
    transmission system reliability rules promulgated and enforced
    by an industry based self-regulatory reliability organization
    with FERC oversight in the United States.
        The NERC legislative proposal has been included in both S.
    388 and S. 597. It has also been introduced in the House. I'm
    pleased to note that within the past 2 weeks, the Western
    Governor's Association sent a letter to this committee in
    support of the pending NERC legislative proposal.
        For more than 30 years, this country has depended upon
    voluntary compliance with reliability rules. The system has
    worked very well and we have had an extremely reliable electric
    system but the reliability rules have no enforcement mechanism.
    Peer pressure has been the only means available to achieving
    compliance.
        As good as that system has been, the voluntary system will
    not serve as well for the future. Here's why. The grid is now
    being used in ways for which it was not designed. There has
    been a quantum leap in the number of hourly transactions and in
    the complexity of those transactions.
        Transmission providers and other industry participants that
    formerly cooperated willingly are now competitors. The rate
    mechanisms that in the past permitted utilities to recover the
    costs of operating systems reliably are no longer in place or
    are inadequate given increased risks and uncertainties.
        The single vertically integrated utility that formerly
    performed all reliability functions for a particular area is
    being disaggregated. Meaning that reliability responsibilities
    are being divided among many participants. Some entities appear
    to be deriving economic benefit from bending or violating the
    reliability rules. Construction of additional transmission
    capacity has not kept pace with either the growth and demand or
    the construction of new generating capacity meaning the
    existing grid is being used much more aggressively.
        The result of all of this is that the transmission grid is
    being increasingly stressed. NERC is seeing more congestion on
    the grid for more hours of the day. NERC is also seeing
    increased violations of its reliability rules.
        Here are the goals for the NERC reliability legislation.
    Mandatory and enforceable rules that apply to all operators and
    users of the bulk power system in North America. The rules
    would be fairly developed and fairly applied by an independent
    industry self-regulatory organization with oversight by FERC in
    the United States.
        The proposal must respect the international character of
    the interconnected North American Electrical Transmission
    System. Regional entities will have a significant role in
    implementing and enforcing compliance with those reliability
    standards with delegated authority to develop appropriate
    regional standards.
        The White Paper distributed in advance of this hearing
    proposes the following criteria for the reliability provision.
    Legislation should authorize a system for assuring reliability
    of the grid that is mandatory, that requires sanctions and
    penalties for failure to comply with the rules that
    institutions for that purpose develop, and that is subject to
    Federal oversight.
        The NERC legislative proposal included in both S. 597 and
    S. 388 satisfies those criteria and NERC agrees with those
    criteria but they are not the only relevant criteria. Two
    others are necessary.
        First, the bulk power system is a single very large machine
    that spans the international border. The reliability
    legislation must provide a mechanism for setting a single set
    of reliability rules that are acceptable to regulators on both
    sides of the border. Without having one set of regulators
    impose its decisions on how the grid will be operated across
    the border, the NERC legislative proposal satisfies this
    criteria and by having a standard set in a single forum with
    active participation by all interested parties on both sides of
    the border, subject to appropriate oversight by the respective
    regulators on each side of the border.
        Second, the bulk power system is technically very complex
    and demands a high degree of coordinated activity in order to
    assure reliable operations. The reliability legislation must
    provide a means for harnessing the collective engineering
    expertise and collective market expertise of the industry in
    fashioning a set of reliability rules that are compatible with
    well-functioning competitive markets and also assure the
    reliable operation of the transmission grid to support those
    markets.
        An industry self-regulatory organization provides an
    effective and efficient mechanism for bringing that industry
    expertise to bear on the task of setting the standards
    necessary to assure the reliable operation of the bulk system.
    FERC oversight in the United States assures that the self-
    regulatory organizations' processes are fair and that the
    reliability rules work in harmony with FERC's evolving
    competitive market and RTO policies.
        Although a broad coalition of State, consumer and industry
    representatives are supporting passage of the NERC legislative
    proposal, that support is not universal. NERC and its
    supporting coalition are continuing discussions with those who
    are not now supporting the legislation to determine whether
    changes to the proposal could broaden the base of support even
    further.
        One of the criticisms in the legislative language in the
    proposal now is that it is longer and more detailed than may be
    appropriate for a legislative enactment. NERC is exploring
    whether a shorter less detailed bill that nonetheless retains
    the essentials needed for creation of an independent industry
    self-regulatory organization will command at least the same
    level of support as exists for the current version. Any shorter
    version of reliability legislation must still satisfy the
    legislative goals that I mentioned above.
        Those discussions are continuing and we will keep the
    committee informed as to their outcome. NERC commends the
    committee for attending to the critical issue of assuring the
    reliability of the interconnected bulk system as the electric
    industry undergoes restructuring. NERC urges prompt action on
    pending legislation that would allow for the timely creation
    and FERC oversight of a viable self-regulatory reliability
    organization.
        Thank you very much, Mr. Chairman.
        [The prepared statement of Mr. Cook follows.]
     Prepared Statement of David N. Cook, General Counsel, North American
                         Electrical Reliability Council
                                    summary
        The North American Electric Reliability Council (NERC) urges
    Congress to enact reliability legislation in this session of Congress.
    NERC and a broad coalition of state, consumer, and industry
    representatives are supporting legislation that would transform the
    current system of voluntary operating guidelines into a set of
    mandatory transmission system reliability rules, promulgated and
    enforced by an industry-led reliability organization, with FERC
    oversight in the U.S. NERC firmly believes steps must be taken now to
    ensure the continued reliability of the electricity transmission system
    if the Nation is to reap the benefits of competitive electricity
    markets. The changes taking place as the electric industry undergoes
    restructuring are recasting the long-established relationships that
    reliably provided electricity to the Nation's homes and businesses.
    Those changes will not jeopardize the reliability of our electric
    transmission system IF we adapt how we deal with reliability of the
    bulk power system to keep pace with the rest of the changes that the
    electric industry is now experiencing.
        NERC is a not-for-profit organization formed after the Northeast
    blackout in 1965 to promote the reliability of the bulk electric
    systems that serve North America. It works with all segments of the
    electric industry as well as consumers and regulators to ``keep the
    lights on'' by developing and encouraging compliance with rules for the
    reliable operation of these systems. NERC comprises ten Regional
    Reliability Councils that account for virtually all the electricity
    supplied in the United States, Canada, and a portion of Baja California
    Norte, Mexico.
                                  reliability
        Reliability means different things to different people. For the
    consumer it could mean, ``Does the light come on when I flip the
    switch?'' Or, ``Does a momentary surge or blip re-boot my computer or
    cause me to lose a whole production run of computer chips I was
    manufacturing?''
        To NERC, reliability means making sure that all the elements of the
    bulk power system are operated within equipment and electric system
    thermal, voltage, and stability limits so that instability,
    uncontrolled separation, or cascading failures of that system will not
    occur as a result of sudden disturbances such as electric short
    circuits or unanticipated failure of system elements. It also means
    planning, designing, and operating each portion of the bulk power
    system in a manner that will promote security in interconnected
    operations and not burden other interconnected systems.
                              how the system works
        California's experience with electricity has focused peoples'
    attention on electricity issues in ways they never have in the past.
    Because of that increased awareness, we can draw on the California
    experience to understand more about how the bulk electric system really
    works. California is not an island; it is part of a much larger
    grouping of electric systems that we refer to as an Interconnection.
    The North American grid is divided into three Interconnections that are
    connected to each other by way of direct current ties. The Western
    Interconnection includes not only California, but also the rest of the
    United States from the Rocky Mountains to the Pacific coast, as well as
    the Canadian provinces of British Columbia and Alberta, and a portion
    of Baja California Norte, Mexico. The Eastern Interconnection includes
    not only most of the United States east of the Rocky Mountains, but
    also Canadian provinces from Saskatchewan through the Maritimes. The
    third Interconnection comprises the Electric Reliability Council of
    Texas. Attached to my testimony is a map depicting the three
    Interconnections. The map also shows the ten NERC Regional Reliability
    Councils.
        Each Interconnection is a single very large machine. Power flows
    freely throughout the grid in each of these Interconnections--there are
    no valves or switches. With very limited exceptions, there is no
    ability to direct, or route, power flows over a particular line;
    instead, power flows over all lines in the system, according to the
    laws of physics. All generators within an interconnection are
    magnetically linked, in effect as though all the generators are on a
    single shaft--all rotating at the same speed (think of a tandem
    bicycle--the front and back pedals are linked together by a chain, and
    rotate at the same speed; if one rider takes his feet off the pedals,
    the other rider has to work harder to maintain the same speed). What
    happens on one part of an interconnection affects the entire rest of
    the interconnection. The frequency of the system in British Columbia is
    the same as the frequency in Arizona, and also at all points in
    between. When the frequency declines, because a large generating unit
    trips off, the rest of the generators automatically and instantaneously
    work harder to serve the customer demands.
        The interconnected nature of electric system operations makes
    possible the transfer of power from one area to another for economic
    reasons as well as sharing resources in emergencies. California is a
    summer-peaking area, and it normally imports surplus power from the
    Pacific Northwest in the summertime to augment its own generating
    resources. By contrast, the Pacific Northwest is a winter-peaking area,
    and it normally imports surplus power from California in the
    wintertime. Over the past year, this pattern of mutually beneficial
    exchange has been disrupted. Load has grown throughout the West, and
    other areas in the West have less power to export to California. In
    addition, the Pacific Northwest and California both depend
    substantially on hydroelectric power. Severe drought conditions this
    year have seriously depleted the ability of the hydroelectric plants to
    produce energy. Power exchanges can also take place between
    Interconnections, but the capability to do so is limited by the
    capability of the direct current ties that exist. For example, the
    Western and Eastern Interconnections can exchange up to about 1,850 MW
    in either direction, and the Texas and Eastern Interconnections can
    exchange about 850 MW.
        California has also demonstrated the limits on the transmission
    system. Path 15 is a major transmission link between Southern and
    Northern California. Earlier this year, on some days the California
    Independent System Operator had to curtail firm load in Northern
    California, even though additional generation was available in Southern
    California to meet the load. Path 15 was loaded to its maximum safe
    reliability limit and there simply was no way to move additional energy
    into Northern California without risking the reliability of the entire
    Western Interconnection.
        Interconnected operations also mean that a disturbance occurring in
    one part of an Interconnection can have adverse effects throughout the
    Interconnection. The 1996 Western outage that affected San Francisco,
    Los Angeles, and the desert Southwest and shut down the Diablo Canyon
    nuclear power plant started with a tree contacting a power line in
    Idaho. And whether an individual state chooses to open up to retail
    competition or not, the electric systems in those states are still
    connected together, and dependent on one another, as part of one
    Interconnection.
        The grid is generally operated in a first contingency mode, that
    is, so that the grid can withstand the loss of any single transmission
    line, generator, or transformer and remain stable and secure. That
    means that all the remaining transmission lines will still be operating
    within their own limits and that the failure of a particular element
    won't cause a cascading, uncontrolled failure of the entire grid. When
    a large transformer or generator fails or lightning strikes a power
    line, as happens as a matter of course, the grid must be able to absorb
    that loss without causing other elements to fail. Operating in this
    manner preserves the stability of the grid, but it does sometimes place
    necessary limits on the amount of power that can be moved from one part
    of the grid to another.
        This is the area where NERC's rules operate, setting the standards
    by which the grid is operated from moment to moment, as well as the
    standards for what needs to be taken into account when one plans,
    designs, and constructs an integrated system that is capable of being
    operated securely. The NERC standards do not specify how many
    generators or transmission lines to build, or where to build them. They
    do indicate what tests the future system must be able to meet to ensure
    that it is capable of secure operation. Up to now, NERC's rules have
    generally been followed, but they have not been enforceable. As more
    entities become involved in the operation and use of the bulk electric
    systems, and use these systems to full competitive advantage, NERC is
    seeing an increase in the number and severity of rules violations.
    Hence the voluntary approach is no longer adequate for maintaining the
    reliability of the bulk power system. Just as the rest of the electric
    industry is changing, the reliability infrastructure must change, too.
        voluntary reliability rules will not work in a more competitive
                               electric industry
        NERC's formation was the electric industry's response to
    legislation that had been introduced in the Congress following the 1965
    blackout in the Northeast that would have given the then Federal Power
    Commission a central role in the reliability of the bulk electric
    system. Instead of adopting that legislation, the country opted for a
    voluntary industry-led effort. For more than thirty years, this
    voluntary system has worked very well, and we have had an extremely
    reliable electric system. But the reliability rules or standards have
    no enforcement mechanism. Peer pressure has been the only means
    available to achieving compliance.
        As good as that system has been, the voluntary system will not
    serve us well for the future. Here's why:

       The grid is now being used in ways for which it was not
            designed.
       There has been a quantum leap in the number of hourly
            transactions, and in the complexity of those transactions.
       Transmission providers and other industry participants that
            formerly cooperated willingly are now competitors.
       Rate mechanisms that in the past permitted utilities to
            recover the costs of operating systems reliably are no longer
            in place, or are inadequate given increased risks and
            uncertainties.
       The single, vertically integrated utility that formerly
            performed all reliability functions for an area is being
            disaggregated, meaning that reliability responsibilities are
            being divided among many participants.
       Some entities appear to be deriving economic benefit from
            bending or violating the reliability rules.
       Construction of additional transmission capacity has not
            kept pace with either the growth in demand or the construction
            of new generating capacity, meaning the existing grid is being
            used much more aggressively.

        Not dealing with the reliability side of the business as the
    industry restructures would be like the airlines switching to jet
    airplanes without increasing the length of the runways.
                  what's happening now: demand and generation
        A number of factors have contributed to our present circumstance.
    First, demand has been steadily increasing. The consensus projection
    for the average annual growth in both peak demand and energy use over
    the next ten years is a relatively modest 1.9%. (Figure 1.) *
    ``Demand'' is a measure of the highest aggregate load that all
    customers place on a system at a particular point in time. ``Energy
    use'' is a measure of the total amount of electricity that all
    customers use over a certain period of time (e.g., one year). The
    projected growth in demand is similar to the projections of the last
    several years. High and low bands around the base forecast show a range
    of the forecast uncertainty to account for weather, economic growth,
    industry deregulation, and other factors. Both peak demand and energy
    projections are substantially below the actual growth rates experienced
    over the last ten years as demand has been driven by extreme weather at
    peak times and a strong economy. Actual demand and energy growth rates
    experienced in the United States over the last ten years have been
    closer to the projected high band rate of about 3% for both demand and
    energy.
    ---------------------------------------------------------------------------
        * Retained in committee files.
    ---------------------------------------------------------------------------
        Second, in many parts of the country merchant generators are now
    building new plants to meet that increased demand, in response to the
    increased prices that we have been seeing in the wholesale electricity
    markets. During the past ten years, generating capacity increased at
    the rate of less than 1% per year, even while demand was growing at the
    rate of 2.7% per year. That picture is changing, although in some parts
    of the country supplies will be tight for the next few years. Over
    20,000 MW of new merchant capacity came on line to serve demand in the
    United States for the summer 2000. This year, New England has added
    another 2,300 MW. The Electric Reliability Council of Texas has added
    more than 6,000 MW. The East Central Area Coordination Agreement has
    added more than 4,000 MW since last summer. A crucial 600 MW is being
    added within New York City and Long Island. While that story is not
    being repeated everywhere, even California is expected to have
    significantly increased reserve margins within a few years.
                       what's happening now: transmission
        The same is not true for transmission. Over the last ten years,
    circuit-miles of high voltage transmission lines (230 kV and above)
    increased at only 0.75% per year. Over the next ten years we are
    projecting that circuit-miles of high voltage transmission will
    increase a total of just 4.2%, or a rate of less than 0.5% per year.
    Stated another way, in North America ten years ago we had a little less
    than 200,000 circuit-miles of high voltage transmission lines. Right
    now we have about 200,000 circuit-miles of those lines. And ten years
    from now we are projecting that we will have just a little over 200,000
    circuit-miles of high voltage transmission lines. For the most part,
    the transmission dollars that are being spent today are to connect new
    generation to the grid--they are not going to build major new lines to
    strengthen the grid's ability to move large blocks of power from one
    part of the country to another. That lack of additional transmission
    capacity means that we will increasingly experience limits on our
    ability to move power around the country and that commercial
    transactions that could displace higher priced generation won't occur.
    And, it will mean that areas experiencing supply shortages, like
    California has, won't be able to count on other areas with ample
    generating resources to help.
        Moreover, the existing grid is being pushed harder and is being
    used in ways for which it was not designed. Historically, each utility
    built its system starting in the city-centers, because the early
    generating stations were located close to load centers. As the cities
    grew, the electric systems grew with them, spreading outward from the
    center. The weakest part of the electric grid is generally at the
    places where one system abuts another. Initially utilities installed
    connections between two systems for emergency purposes and to share
    generating reserves to keep costs down. Gradually those
    interconnections were strengthened so that adjoining utilities could
    buy and sell electricity when one had lower cost generation available
    than did the other. But the systems were not generally designed to move
    large blocks of power from one part of the country to another, across
    multiple systems. Yet that is the way business is being conducted
    today. The volume and complexity of transactions on the grid have grown
    enormously since the advent of open access transmission.
        Electric industry restructuring adds to the challenge. In the past,
    a vertically integrated utility had complete responsibility for all
    aspects of its electric system, from planning and building the
    transmission system, through assuring that sufficient generation was
    constructed, to operating and maintaining the transmission and
    distribution systems, all to serve consumers in a designated area. With
    restructuring, there may no longer be a designated group of consumers
    for which to plan service. Instead, responsibilities to construct and
    maintain generation, transmission, and distribution are being divided
    among multiple entities and, in some cases, those responsibilities may
    be falling between the cracks. Regional Transmission Organizations may
    provide a means to reintegrate some of these functions. But the RTO
    proposals that have been filed to date vary considerably in the extent
    to which the RTO has the authority to plan and expand the transmission
    system, not only to connect new generation, but to meet broader needs
    of regional reliability.
        The result of all this is that the transmission grid is being
    increasingly stressed. That stress shows up in two ways. First, NERC is
    seeing more congestion on the grid, for more hours of the day. Last
    summer in the Eastern Interconnection there were substantial transfers
    of power from north to south. Cooler temperatures in the north meant
    that surplus generation could be sent to the south where the
    temperatures were hot and natural gas prices were high. On many days
    security coordinators had to invoke NERC transmission loading relief
    procedures to curtail transactions that were overloading transmission
    facilities between north and south. For generation sellers, these
    curtailed transactions resulted in lost business. Buyers were forced to
    replace these transactions with higher priced power, or in some cases,
    to cut off power to certain ``interruptible'' customers. In addition,
    what do not show up are the transactions that merchants or marketers
    decided not to engage in because of the likelihood they would be
    interrupted. Today, we know that those same transmission facilities are
    fully subscribed for the coming summer, meaning we could see a repeat
    of last year's pattern if we experience similar weather conditions and
    fuel prices.
        Second, NERC is seeing increasing violations of its reliability
    rules. As I mentioned earlier, the grid is generally operated in a
    first contingency mode, that is, so that the grid can withstand the
    loss of its largest element and remain stable and secure. Last summer
    there were a number of instances where operators allowed facilities to
    remain loaded above their known security limits for extended periods of
    time, placing the grid at prolonged risk of major failure. Some
    entities have made the economic judgment that it is less costly to them
    to violate the rules than to follow them. We have seen entities
    improperly ``leaning on,'' or taking power from, the Interconnection,
    causing unscheduled and unmanageable flows and potential voltage
    problems. As the limits of the system are reached and transactions must
    be curtailed, we are beginning to hear suggestions to relax the
    reliability rules to allow higher flows to occur. In an interconnected
    system, however, taking increased risks to allow some entities to
    realize short-term economic gain affects not only the system where the
    limit occurs, but also all the systems in the same Interconnection. For
    example, in the 1996 outages in the Western Interconnection, customers
    far away from the initiating problems were interrupted for significant
    periods of time.
        what's needed to assure bulk power system reliability in a more
                         competitive electricity market
        We need legislation to change from a system of voluntary
    transmission system reliability rules to one that has an industry-led
    organization promulgating and enforcing mandatory rules, backed by FERC
    in the U.S. In August 1997, NERC convened a panel of outside experts to
    recommend the best way to ensure the continued reliability of North
    America's interconnected bulk electric systems in a competitive and
    restructured electric industry. On a parallel track, in the aftermath
    of two major system outages that blacked out significant portions of
    the West in July and August 1996, the Secretary of Energy convened a
    task force on reliability, chaired by former Congressman Phil Sharp.
    Both groups came to the same conclusion: The current system of
    voluntary guidelines should be transformed into a system of mandatory,
    enforceable reliability rules, AND the best way to accomplish that was
    to create an independent industry self-regulatory organization,
    patterned after the self-regulatory organizations in the securities
    industry, with oversight in the United States by the Federal Energy
    Regulatory Commission.
        NERC and a broad coalition of state, consumer, and industry
    representatives have been pursuing legislation to implement those
    recommendations. That coalition includes the American Public Power
    Association, the Canadian Electricity Association, the Edison Electric
    Institute, Institute for Electrical and Electronics Engineers--USA, the
    Large Public Power Council, the National Association of Regulatory
    Utility Commissioners, the National Association of State Energy
    Officials, the National Association of State Utility Consumer
    Advocates, the National Electrical Manufacturers' Association, the
    National Rural Electric Cooperative Association, the Northwest Regional
    Transmission Association, the Transmission Access Policy Study Group,
    and the Western Interconnection Coordination Forum.
        On June 18, 2001, that coalition sent a letter to this Committee,
    the House Energy and Commerce Committee, and the Administration in
    support of the NERC legislative proposal embodied in both S. 388 and S.
    597. On July 13, 2001, the Western Governors Association also sent a
    letter to this Committee, the House Committee, and the Administration
    in support of the pending NERC legislative proposal.
                        goals of reliability legislation
       Mandatory and enforceable reliability rules
       Apply to all operators and users of the bulk power system in
            North America
       Rules fairly developed and fairly applied
       Independent, industry self-regulatory organization
       Oversight within U.S. by FERC
       Must respect the international character of the
            interconnected North American electric transmission system
       Regional entities will have a significant role in
            implementing and enforcing compliance with these reliability
            standards, with delegated authority to develop appropriate
            Regional reliability standards.
                          the committee's white paper
        The Committee has invited comment on whether the criteria set out
    in the white paper that the Committee distributed are the appropriate
    criteria for a reliability measure. The white paper states the
    following criteria for the reliability provisions:

              Legislation should authorize a system for assuring the
            reliability of the grid that is mandatory, that requires
            sanctions and penalties for failure to comply with the rules
            that institutions for that purpose develop, and that is subject
            to federal oversight.

        The reliability title that is included in both S. 597 and S. 389
    satisfies those criteria. But those are not the only relevant criteria.
    The reliability provisions must also take account of two other factors.
    First, the bulk power system is a single, very large machine that spans
    the international border. Because it is a single machine, it must be
    operated under a common set of rules on both sides of the border. The
    reliability legislation must provide a mechanism for setting a single
    set of reliability rules that are acceptable to regulators on both
    sides of the border, without having one set of regulators impose its
    decisions on how the grid will be operated across the border. The NERC
    legislative proposal satisfies this criterion by having the standards
    set in a single forum with active participation by all interested
    parties on both sides of the border, subject to appropriate oversight
    by the respective regulators on each side of the border.
        Second, the bulk power system is technically complex and demands a
    high degree of coordinated activity in order to assure reliable
    operations. The reliability legislation must provide a means of
    harnessing the collective engineering expertise and collective market
    expertise of the industry in fashioning a set of reliability rules that
    are compatible with well-functioning competitive markets and also
    assure the reliable operation of the transmission grid to support those
    markets. NERC's standing committees, subcommittees, and working groups
    involve literally hundreds of experts in ongoing activity to develop
    standards and monitor activity to assure the reliable operation of the
    grid. An industry self-regulatory organization provides an effective
    and efficient mechanism for bringing that industry expertise to bear on
    the task of setting the standards necessary to assure the reliable
    operation of the bulk power system. FERC does not now possess and is
    never likely to achieve anything approaching that level of technical
    sophistication. Having FERC itself set the reliability standards
    through its rulemaking proceedings, even if based on advice from
    outside organizations, converts matters that ought to be resolved by
    those with technical engineering expertise and commercial expertise
    into matters that are the province of the lawyers. These complex rules
    need to be worked out together by all segments of the industry. FERC
    was created for the purpose of economic regulation. It also has strong
    competence in assuring fairness and openness of process and regularity
    of proceedings. The combination of industry technical expertise to work
    on substantive reliability rules and FERC oversight to assure due
    process is an effective and efficient way to address the issues.
        ferc should not be given the job of promulgating and enforcing
                             reliability standards
        Because of FERC's limited jurisdiction and authority, because of
    the international character of the North American grid, and because of
    the technical expertise required to develop and oversee compliance with
    bulk power system reliability standards, this is not a job that can
    simply be given to FERC. FERC does not have clear authority over
    reliability matters. Legislation that would have given FERC's
    predecessor, the Federal Power Commission, plenary authority over
    reliability matters was introduced in Congress following the Northeast
    blackout in 1965, but that legislation was not passed. Instead, the
    electric industry took on responsibility for assuring the reliability
    of the interconnected bulk power system. NERC was formed in 1968 to
    lead that industry effort.
        The most direct statement in the Federal statutes on this subject
    is found in section 209(c) of the Public Utility Regulatory Policies
    Act, and it provides only for the making of recommendations with
    respect to industry reliability standards:

              The Secretary, in consultation with the [Federal Energy
            Regulatory] Commission, and after opportunity for public
            comment, may recommend industry standards for reliability, to
            the electric industry, including standards with respect to
            equipment, operating procedures and training of personnel, and
            standards related to the level or levels of reliability
            appropriate to adequately and reliably serve the needs of
            electric consumers. The Secretary shall include in his annual
            report--
                      (1) any recommendations made under this subsection or
                    any recommendation respecting electric utility
                    reliability problems under any other provision of law,
                    and
                      (2) a description of actions taken by electric
                    utilities with respect to such recommendations. (16
                    U.S.C. Sec. 824a-2, emphasis added)

        FERC also lacks jurisdiction over approximately one-third of the
    transmission facilities in the United States. It lacks jurisdiction
    over facilities owned by municipalities and state agencies, rural
    electric cooperatives that have Rural Utility Service financing, the
    Federal power marketing administrations (such as the Bonneville Power
    Administration and the Western Area Power Administration), the
    Tennessee Valley Authority, and utilities within the Electric
    Reliability Council of Texas.
        As discussed above, a further impediment to FERC's acting directly
    on reliability matters is that the grid is international in nature.
    There is strong Canadian participation within NERC now, and that is
    expected to continue with the new organization. Having reliability
    rules developed and enforced by a private organization in which varied
    interests from both countries participate, with oversight in the United
    States by FERC and with oversight by Canadian regulators in Canada, is
    a practical way to address the international character of the grid.
    Otherwise, U.S. regulators would be dictating the rules that Canadian
    interests must follow--a prospect that would be unacceptable to them.
    There are also efforts under way to interconnect more fully the
    electric systems in Mexico with those in the U.S., primarily to expand
    electricity trade between the two countries. This is one element of the
    President's National Energy Policy. With that increased trade, the
    international nature of the self-regulatory organization will take on
    even more importance, further underscoring the necessity of having such
    an organization, rather than FERC, set and enforce compliance with
    overall grid reliability standards.
        Having an industry self-regulatory organization develop and enforce
    reliability rules under government oversight also takes advantage of
    the huge pool of technical expertise that the industry currently brings
    to bear on this subject. FERC does not now have the technical expertise
    and resources to take on that effort, and it would not be cost-
    effective for it to do so. FERC's strong competence lies in assuring
    fairness and openness of process and regularity of proceedings. The
    combination of industry technical expertise to work on substantive
    reliability rules and FERC oversight to assure due process is an
    effective and efficient way to address the issues.
                status of reliability legislation and rtos/isos
        Last year, the Senate adopted the NERC legislation as S. 2071, but
    the bill died in the House. Senator Smith reintroduced that legislation
    this year (S. 172). In addition, the NERC legislation (including
    provisions addressing coordination with regional transmission
    organizations (RTOs)) has been included as part of both Senator
    Bingaman's bill (S. 597) and Senator Murkowski's bill (S. 389). Similar
    language has been introduced in the House of Representatives by Mr.
    Wynn (H.R. 312).
        The pending legislation addresses the role of both independent
    system operators (ISOs) and RTOs, as well as the role of state
    commissions. Independent system operators and regional transmission
    organizations fall within the defined term ``system operator'' in the
    pending legislation. As system operators, both ISOs and RTOs would be
    obligated to comply with established reliability rules, just as other
    kinds of system operators and other users of the bulk power system
    would be obligated to comply with those rules. In Order No. 2000, FERC
    stated that RTOs must perform their short-term reliability functions.
    An RTO is directed to notify the Commission immediately if
    implementation of those or any other externally established reliability
    standards would prevent it from meeting its obligation to provide
    reliable, non-discriminatory transmission service.
        The issue of coordinating the reliability-related activities of the
    new electric reliability organization envisioned by this legislation
    and RTOs arose during last year's legislative efforts. NERC worked with
    FERC, PJM, the California Independent System Operator and several
    others to address that issue. We agreed to specific language to address
    that issue, and that language has been incorporated in both Senator
    Bingaman's bill (S. 597) and Senator Murkowski's bill (S. 389). It is
    also included in the bill pending in the House of Representatives (H.R.
    312).
        The NERC reliability legislation also addresses the role of state
    commissions. The legislation gives the new electric reliability
    organization authority to set and enforce rules for only the bulk power
    system. Eighty percent of power outages take place on local
    distribution systems, and those remain wholly under state jurisdiction.
    Language has been included to make clear that issues concerning the
    adequacy and safety of electric facilities and services, matters
    traditionally within the purview of state commissions, remain with the
    state commissions. The new reliability legislation specifically would
    not preempt actions by a state commission with respect to the safety,
    adequacy, and reliability of electric service within that state, unless
    the state's actions were inconsistent with reliability rules adopted by
    the new reliability organization. Those provisions were worked out with
    representatives of the states. Both Senator Bingaman's and Senator
    Murkowski's bills contain that language.
        NERC strongly urges you to adopt legislation containing these
    reliability provisions in this session of Congress. That will enable
    the industry and the regulators to develop an independent self-
    regulatory organization and infrastructure to enforce the reliability
    rules and keep the grid secure.
                  current industry discussions of legislation
        Although a broad coalition of state, consumer, and industry
    representatives are supporting passage of the NERC legislative
    proposal, that support is not unanimous. Just as NERC and its coalition
    worked with state regulators in 1999 and with the RTO representatives
    last year, NERC and its supporting coalition are continuing discussions
    with those who are not now supporting the legislation to determine
    whether changes to the proposal could broaden the base of support even
    further. One of the criticisms of the legislative language is that the
    proposal is longer and more detailed than may be appropriate for a
    legislative enactment. NERC is exploring whether a shorter, less
    detailed bill that nonetheless retains the essentials needed for
    creation of an independent industry self-regulatory organization will
    command at least the same level of support as exists for the current
    version. Any shorter version of reliability legislation must still
    satisfy the legislative goals that I mentioned above. Those discussions
    are continuing.
        FERC's recent RTO orders do not change the need for Congress to
    enact reliability legislation. Those orders, even assuming their goal
    of fewer, larger RTOs is ultimately realized, do not address any of the
    reasons why we are seeking that legislation. Those orders cannot confer
    jurisdiction that FERC does not now have, either over reliability
    matters or over non-jurisdictional entities. Those orders do not
    address in any way the international nature of the interconnected grid.
    Furthermore, they do not provide FERC with the resources or technical
    competence to undertake the task of setting and enforcing reliability
    rules itself. Even if FERC's vision were someday completely realized,
    there would be six (not four) RTOs in the United States. Northeast,
    Southeast, Midwest, Florida, ERCOT, and West. The Canadian provinces
    and Mexican states are not accounted for. It is also questionable
    whether all non-jurisdictional transmission-owning entities will join
    an RTO. Finally, there is the question of the time it will take for the
    RTOs that FERC envisions will actually come into being. With the
    additional uncertainty generated by those orders as to who will
    ultimately operate and plan transmission, it is more important than
    ever that an industry-led self-regulatory organization be created to
    establish and enforce reliability standards applicable to the entire
    North American grid, regardless of who owns or manages it. Because FERC
    will provide oversight of the self-regulatory organization in the U.S.,
    FERC can ensure that the self-regulatory organization's actions and
    FERC's evolving RTO policies are closely coordinated.
                                   conclusion
        NERC commends the Committee for attending to the critical issue of
    assuring the reliability of the interconnected bulk power system as the
    electric industry undergoes restructuring.
        A new electric reliability oversight system is needed now. The
    continued reliability of North America's high-voltage electricity
    grids, and the security of the customers whose electricity supplies
    depend on them, are at stake. An industry self-regulatory system is
    superior to a system of direct government regulation for setting and
    enforcing compliance with grid reliability rules. Pending legislation
    would allow for the timely creation and FERC oversight of a viable
    self-regulatory reliability organization. The reliability of North
    America's interconnected transmission grid need not be compromised by
    changes taking place in the industry, provided reliability legislation
    is enacted now.

        The Chairman. Thank you all very much for that excellent
    testimony. Let me just follow up, Mr. Cook. You pointed out a
    concern which I have had with the legislation that was
    consensus legislation from your group in that it was not
    simple. It's a lot of detail in there and more detail than is
    common for legislative provisions. I'm encouraged to hear that
    you're working to see if something a little more streamlined
    could be adequate to the purpose and agreeable to your members.
        Since this committee is going to be trying to mark up
    legislation when we come back in September, will you have
    anything by the time we come back in September that we could
    work with.
        Mr. Cook. I certainly hope we can, Mr. Chairman. I think
    your indication of the timetable will provide a spur to the
    efforts of that group to come together. It is certainly my
    intention to be able to come back to you with something. I
    believe it is possible to streamline that language and still
    retain the essence of the proposal we are supporting.
        The Chairman. Thank you. Commissioner Nugent, let me ask on
    this issue of regional authorities, you suggest that regional
    authorities over planning and siting of transmission should be
    voluntary and that FERC should have this backup role. Are there
    going to be areas where there is no regional entity that
    develops and if so, what do we do about that?
        Commissioner Nugent. The very fairly widely across the
    country but across the country it is apparent that there is
    cooperation among the State commissions. I think you are likely
    to have a strong response. If you feel the response from State
    commissions is inadequate, I would consider if I were you where
    you are in perhaps making that a stronger requirement. I don't
    think we ought to be establishing parallel organizations. Let
    me suggest how this might work.
        A witness, Mr. Rouse, suggested that responsibility for
    developing some transmission planning and so on be delegated by
    the FERC to the RTOs. Frankly I would think RTOs if they come
    into full play are the place we ought to do that planning and
    develop the details on that and they would suggest it for
    subsequent review by a regional organization. That regional
    organization ought to operate within the framework of advising
    the FERC on the outcome of it. I would think that the FERC
    would be wise to give great deference to the detailed solutions
    developed by those regional organizations and ultimately
    implement them as long as they're consistent with the policies
    that you set here and are further elaborated by the FERC. Is
    that your response?
        The Chairman. Yes, that's helpful. Mr. Ward, in your
    testimony, you suggested additional protections for consumers
    are necessary before we repeal PUHCA as I understand it.
    Particularly protections against costs subsidy and cost
    shifting. Do you think that FERC would need additional
    authority above what we talk about in this White Paper? Have
    you had a chance to really look at the White Paper from that
    perspective as to whether we are contemplating enough authority
    for FERC at the present time?
        Mr. Ward. I haven't made a study of the Federal Power Act
    from that perspective in terms of analyzing whether PUHCA's
    repeal would necessitate amendments to the Federal Power Acts
    to provide that kind of protection for consumers from cross
    subsidies. So I can't give you a legal opinion.
        I certainly think the White Paper is moving in the right
    direction in saying that any PUHCA repeal should be
    conditional. It should not be flash, cut, shift into
    unregulated holding company arrangements.
        The Chairman. All right. Mr. Dushaw, would eligibility for
    training programs and retraining programs for displaced workers
    be something that should be considered under this public
    benefits fund in your view? Does that solve some of the
    problems that you alluded to in your testimony about some of
    the downsizing and displacement of workers in this industry?
        Mr. Dushaw. It would be extremely helpful. I don't know--I
    can't say, Mr. Chairman, whether the downsizing has hit bottom
    or not. I rather doubt it. I think the industry is going to
    take on a different character with a lot of outsourcing of work
    but retraining for those who are displaced under a definitive
    program would be most helpful. But really what's needed in
    terms of reliability is training of tomorrow's work force and
    putting some characteristics on that training.
        The Chairman. Okay. Well, thank you, I understand,
    Commissioner Nugent, you have a plane you have to catch and we
    would excuse you at this point. Thank you very much for coming.
        Commissioner Nugent. Thank you.
        Senator Wyden. Mr. Chairman.
        The Chairman. Senator Wyden, did you have a question of
    Commissioner Nugent before he left?
        Senator Wyden. I did and just very briefly, Commissioner,
    as you know Senator Burns and I have been very involved in the
    effort to try to get more information to the public at a time
    when clearly energy is being commoditized and we've got trading
    floors in this country, the ENRON trading floor, the Reliant
    Energy, Dynergy, and Duke Energy and these huge trading floors
    and yet it's not really possible for people to get good
    information. Not proprietary confidential issues but basic
    information in order to make these markets work better. I just
    would like to know whether you think that that is generally
    important for State regulators whether regulators now have
    access to all of the data that they need to assure that
    electric power systems are functioning properly and whether you
    think on balance, this is a constructive effort that Senator
    Burns and I are making?
        Commissioner Nugent. It is clearly a constructive effort
    that you and Senator Burns are making here, Senator. Let me--
    there's really two pieces to that. There are data out there
    that we do get but we're facing delays of 90 days to 6 months
    which are intended to protect market so the timely delivery of
    the data that has been typically available is of great concern
    to State regulators.
        The second question is we're learning on this, too, and
    doing investigation to find out just what it is that we have to
    learn to be able to give the public the judgment that the
    markets are operating fairly. So we're not even fully sure yet
    what the data are that we will ultimately need to be able to
    track it. It is absolutely critical I think to the extent that
    at least at the State level, that the schemes to go forward
    with retail power markets are based on wholesale markets, that
    the public have the assurance that the watchdogs that they
    employ on their behalf to scrutinize the operation of the
    market which of necessity requires access to the data have
    access to those data and be able to scrutinize them and respond
    to them.
        Senator Wyden. Are there any concerns--as you know my staff
    has been working very closely with your organization. Are there
    any concerns that you all have at this time about the direction
    Senator Burns and I have been going?
        Commissioner Nugent. I would probably take it yet a step
    further and that is I would also make some sensitive
    information, one that might be used on the part of someone if
    it was available in the full public domain to be able to gain
    the system. I would make that available to State commissions
    under protective order. I mean you gentlemen are lawyers. You
    know what restrictions there are on that. We have a long
    history of accepting sensitive information, protecting that
    information and utilizing it in the public interest. I think an
    appropriate addition to make those--that access available would
    be useful.
        Senator Wyden. Well, you've got to get a plane and Mr. Ward
    has been very helpful. I just think that this is exactly what
    is needed right now, given the direction that we're going in
    terms of the energy field. Energy is being commoditized. It is
    clearly being subject to a whole host of markets and if people
    really believe in fair competition, they've got to want to get
    this information out.
        And what we do in our legislation, Mr. Nugent, Senator
    Burns and I give FERC the authority to delay or withhold
    information release when immediate release could result in
    market manipulation but have taken the position that you
    reflected, that as a general rule there is no good reason to
    delay or withhold access to this information from regulators to
    the public as long as everybody gets access to it and that to
    me is what you need to make markets work.
        So I'll let you run to the plane and thank you very much
    for the cooperation you've shown us and Mr. Ward as well. Your
    organization has been very helpful and I thank you, Mr.
    Chairman.
        The Chairman. Thank you very much. Did you have other
    questions of any of the other witnesses?
        Senator Wyden. No, Mr. Chairman.
        The Chairman. Let me thank Commissioner Nugent but also all
    of the rest of you. I think the hearing's been good. The
    testimony is very useful to us and we will take it into account
    as we try to move forward with legislation.
        The hearing is adjourned.
        [Whereupon, at 12:15 p.m. the hearing was recessed, to be
    reconvened on July 26, 2001.]

                             NATIONAL ENERGY ISSUES

                                  ----------

                            THURSDAY, JULY 26, 2001

                                           U.S. Senate,
                     Committee on Energy and Natural Resources,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 9:48 a.m. in room
    SH-216, Hart Senate Office Building, Hon. Jeff Bingaman,
    chairman, presiding.

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

        The Chairman. Why don't we go ahead and start the hearing.
    This is the second day of hearing intended to prepare the
    committee to address the pressing needs we have seen clear
    evidence of in our electricity markets.
        If there's one thing we should learn from what happened in
    California and the west coast is--this past year--is that a
    functional wholesale market in electricity is important and
    necessary. Another thing we probably learned is that we do not
    have one, at least in the West. So as I indicated yesterday at
    our hearing, I believe the time for studying these issues is
    drawing to a close. It's time for the committee and the
    Congress to act to ensure that electricity markets work to
    provide dependable, affordable clean energy essential to the
    Nation and to our economy.
        We're happy that today we have two panels. The first is our
    Secretary of Energy, Minerals and Natural Resources from the
    State of New Mexico representing the Western Governors
    Association. Jennifer Salisbury made an effort to be here for
    the hearing yesterday and was not able to get here due to the
    plane difficulties. I wish the FERC would solve that problem
    for us as well.
        And then our second panel is made up of the FERC
    Commissioners. I look forward to hearing from all of them as to
    their views as to the legislative proposal that we have put
    forward in the form of a White Paper, whether that provides the
    necessary tools that they would need to adequately do their
    job. I've been encouraged by the direction of some of the
    recent orders that have come out of FERC, and we'll have a
    chance to ask about those orders as well.
        Let me ask Secretary Salisbury to come forward if she would
    right now and summarize your main points, we will include your
    full statement in the record, but if you could give us a short
    version of what you think it's essential that we know,
    particularly from the perspective of the Western Governors
    Association, that would be very useful. Thank you.
        Senator Craig. Mr. Chairman?
        The Chairman. Yes. Oh, excuse me, I forgot to have an
    opening statement. Go ahead.
        Senator Craig. That's all right. I have a brief one.
        The Chairman. Go right ahead.

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

        Senator Craig. I'm going to have to leave here at 10
    o'clock, and I apologize, because this is a most important
    hearing, and I'm glad to see a full force FERC here and in
    attendance.
        Let me say, Mr. Chairman, that on April 10 at the height of
    the problems in California and the Western Pacific Northwest
    region of our country, Senator Feinstein was working hard to
    find a solution. A Senator from Oregon was working hard--many
    of us were--to get ourselves through the summer and at the same
    time deal with what was a most dysfunctional market.
        On April 10, at that time, the FERC came to Boise and
    listened to the 11 Western States. New Mexico was there. And it
    was obvious to all of us who were in attendance and who stayed
    throughout that hearing that we did, in fact, have a broken
    market in the West at that point in time.
        California had failed to act in ways that they now have
    acted. FERC had not yet acted but was finding bases from which
    to act under the law to begin to help shape. And you've
    mentioned in your opening statements that, in fact, they have
    acted, and I agree with you. I think some of those decisions
    and orders that are out and effective or before us for comment
    have also helped shaped the market in a substantially improved
    way. What is a broken market is a market that is now appearing
    to function. Although certainly damaged, it is beginning to
    work in a much better basis.
        During that whole period, of course, what I was concerned
    about--I think what the Western States and Oregon and
    Washington and Idaho were concerned about--and Montana--was how
    we cope in this situation with a hydro-based system in a
    drought environment. Well, it looks like we may work our way
    through that this summer now thanks to everyone working
    together and thanks to the FERC looking at it, sensitizing
    themselves and moving in decisive ways.
        That doesn't mean that we have now solved the problems. It
    certainly doesn't, because there clearly is a supply situation
    out there and a transmission system that needs rapid
    improvement. All of those things are a part of what we will
    look at. I am pleased that you are holding this hearing today,
    and I think it's very important that we stay fully engaged with
    the FERC. They have substantial authority in these most
    important areas, and they are using it in many ways that I
    think are positive. In some ways I don't agree with, but at the
    same time, they're doing what we expected them to do and what
    the law requires them to do. Thank you.
        The Chairman. Thank you very much. I think rather than have
    opening statements by the other members, let me just--we'll add
    a couple of minutes onto each member's questioning time so that
    they can make any additional statements that they would like.
        Secretary Salisbury, why don't you go right ahead with your
    testimony.

    STATEMENT OF JENNIFER SALISBURY, SECRETARY OF ENERGY, MINERALS
     AND NATURAL RESOURCES, STATE OF NEW MEXICO, ON BEHALF OF THE
                     WESTERN GOVERNORS' ASSOCIATION

        Ms. Salisbury. Thank you very much, Mr. Chairman. As the
    chairman mentioned, I'm here on behalf of the Western
    Governors' Association. The Western Governors' Association is
    composed of the 18 Western States, including all the States
    represented here this morning, as well as the territories of
    Guam, the Commonwealth of the Mariannas, and American Samoa.
        The WGA, if you didn't already know, operates by consensus
    and through policy resolutions adopted at its meetings. So what
    I testify about today is directly related to a policy that has
    been formally adopted by the member governors.
        Before I address the three items discussed in the
    chairman's White Paper, I would like to reemphasize the
    uniqueness and separateness of the power grids serving North
    America. The one serving the West--the Western
    interconnection--fully integrates the Western States, Western
    Canada and Northwest Mexico.
        There are few ties currently between the Western
    interconnection and the other two interconnections. This means
    that what happens in the West--a power outage in New Mexico,
    for example--will not impact Connecticut.
        The grids have evolved differently as well. The Western
    grid is defined by long distances between load centers, whereas
    the Eastern grid more resembles a tight-knit network.
        Other differences are apparent. Unlike the East, as you all
    well know, in the West, vast tracts of land are owned by the
    Federal Government. This obviously creates different
    transmission siting issues. The point I'm trying to make is
    that we hope the legislation that this committee crafts will
    recognize these differences that already exist, because we
    don't believe one-size-fits-all legislation will work.
        Now let me turn to three specific issues raised in the
    White Paper and on which the Western governors have taken a
    specific position.
        First, the White Paper states that the FERC should have
    jurisdiction over all transmission, whether bundled or
    unbundled. To the extent this means the FERC would now have
    jurisdiction over all retail access questions, Western
    Governors would oppose.
        Western Governors have taken the position that such issues
    as to whether a State should go forward with retail access, not
    go forward, and the timing when certain classes of consumers
    are offered retail access, are best left to the States. In
    other words, these are State prerogatives.
        Second, Western Governors support a new approach to setting
    and enforcing reliability standards. This approach is embodied
    in the consensus legislation advanced by the North American
    Reliability Council or NERC. Governors recognize that voluntary
    compliance, which has worked so well in the past, will not
    continue to work well in the new environment we've entered.
        Yes, FERC must be given enforcement oversight, but that
    does not mean that it should have absolute authority in setting
    the standards. Instead, Western Governors have enunciated three
    principles that should guide reliability legislation.
        One, deference must be given to standards adopted within
    and for the Western interconnection. Two, implementation and
    enforcement of standards must be delegated to the West. Three,
    States must have a role. The NERC consensus legislation
    contains all three of these principles. Our bottom line, retain
    the central provisions of last year's bill that provides for
    deference, delegation and a State's role.
        Stated another way, we oppose proposals to centralize
    decisions at FERC. The agency lacks the time, the resources,
    expertise and first-hand knowledge of the conditions in the
    West to manage reliability of the Western power grid. Besides,
    the process that we're advocating we think will work with our
    international partners.
        As a footnote, Western Governors support efforts to ensure
    the availability of information on loads, facilities and
    generation. Better data should mean better reliability of the
    grid.
        The third issue that I'd like to discuss, Western Governors
    have been proactive in addressing transmission needs of the
    Western interconnection. They understand adequate transmission
    is critical to maintaining the reliability of the grid as well
    as enabling competitive wholesale electricity markets.
        The White Paper discusses the need for Federal eminent
    domain in order to build new transmission. Western Governors
    oppose giving FERC this authority. Siting has already been a
    State issue. In addition, we don't believe there's sufficient
    evidence to even support the need for centralization of land
    use type decisions. No Western State in our knowledge has ever
    denied a permit for interstate transmission lines.
        It's also important to note that the major challenge facing
    siting issues in the West rests with Federal land managing
    agencies. The Federal Government, as you all know, owns
    significant portions of land in Western States--45 percent in
    California, 83 percent in Nevada, and 34 percent in my own
    State of New Mexico.
        The President has issued an executive order directing
    Federal agencies to expedite energy related projects. We
    believe this could go a long way towards solving any problems
    that currently exist to site transmission on Federal lands.
        While Governors don't believe the case has been made for
    Federal jurisdiction, Western Governors still recognize there
    is a need for States to examine their own siting and permitting
    processes. Doing so should result in higher quality and more
    timely decisions on transmission line proposals.
        To reiterate, Governors firmly believe that granting FERC
    siting authority--even as a backstop--is not needed in the West
    and should not be part of the committee's legislation.
        In summary, we applaud the White Paper for highlighting the
    challenges of today's electricity markets. And to reiterate,
    first, Western Governors oppose giving FERC jurisdiction over
    bundled transmission. Second, support reliability legislation
    similar to that which passed the Senate last year. And third,
    Western Governors oppose granting FERC eminent domain authority
    for transmission lines.
        That concludes my testimony, Mr. Chairman. I would be happy
    to answer any questions.
        [The prepared statement of Ms. Salisbury follows:]
    Prepared Statement of Jennifer Salisbury, Secretary of Energy, Minerals
     and Natural Resources, State of New Mexico, on Behalf of the Western
                             Governors' Association
        Thank you Mr. Chairman. I am the Secretary of Energy, Minerals and
    Natural Resources of the State of New Mexico. I am representing the
    Western Governors' Association. I also sit on the Board of Directors of
    the Western Interstate Energy Board, the energy arm of the Western
    Governors' Association, and am a member of the Committee on Regional
    Electric Power Cooperation (CREPC) CREPC is unique in North American in
    that it includes all of the state and provincial agencies with electric
    power responsibilities within an entire interconnection.
        In crafting legislation, the Committee should keep in mind that
    North America is served by three essentially electrically-separate
    power grids. Within the Western Interconnection, the western states,
    western Canadian provinces and northwest Mexico are fully integrated.
    However, there are few ties between the Western Interconnection and the
    other interconnections. Generators are synchronized within
    interconnections but not between interconnections.
        The geography of the system is important, because it defines the
    practical maximum extent of the power markets and the impacts of power
    outages. An event in British Columbia cause blackouts in Arizona, but
    an outage in Arizona cannot impact states in the Eastern
    Interconnection.
        The Eastern and Western grids have developed different features.
    The western grid is defined by long distances between load centers and
    often between generation and load centers. The Eastern grid more
    resembles a tight-knit network of transmission. As a result, the
    maintenance of stable voltage in the system is often the constraining
    factor in the operation of the Western grid, while the thermal limits
    of lines is the typical constraining factor in the Eastern grid.
        As a result of these differences, institutions and practices \1\ to
    address electric power issues have evolved differently in the West than
    to the East.
    ---------------------------------------------------------------------------
        \1\ For example, the Western industry has relied on rating the
    capacity of transmission paths under different system conditions and
    limiting the use of paths to their rated capacities. Because paths are
    not similarly rated in the Eastern Interconnection, the industry relies
    on Transmission Loading Relief (TRLs) in the East to force users to cut
    back power transfers when reliability is threatened.
    ---------------------------------------------------------------------------
        Another reality differentiating the East and the West is the vast
    ownership of land in the West by federal agencies. This land ownership
    pattern creates different transmission facility siting challenges than
    in the East.
        We recommend that federal legislation recognize these electrical,
    geographic and institutional differences and resist the temptation to
    adopt federal government-centric, one-size-fits-all ``solutions.'' I
    think the experience in western power markets over the past year has
    illustrated the limits of policy made in Washington, D.C. for the West.
        Mr. Chairman, your ``White Paper on Electricity Legislation''
    provides a good overview of current public issues resulting from the
    new electricity markets. I will address two items in your white paper--
    reliability and regional planning and siting--and will cite the
    position of Western governors on other issues raised in the white
    paper. My comments are based on existing policy of the Western
    Governors' Association in Resolution 00.009 ``A Competitive and
    Reliable Western Electric Power System'' (see http://www.westgov.org/
    wga/policy/00/00009. htm) and the recommendations that emerged from an
    Energy Policy Roundtable the governors held in February (see http://
    www.westgov.org/wga/press/energy agree.htm0 and a Transmission
    Roundtable held in May (see http://www.westgo.org /wga/initiatives/
    energy/review draft transmission.htm).
                                  reliability
        The electric reliability system in the West has worked remarkably
    well over 30 years. The system of voluntary standards set by the
    Western Stations Coordinating Council, the only regional reliability
    council in the Western Interconnection, has been effective in keeping
    the lights on. This system has included investor-owned utilities,
    municipal utilities, rural cooperatives, public utility districts,
    federal power marketing administrations, as well as Canadian and
    Mexican utilities. State public utilities commissions have relied on
    these regional standards in their decisions. However, with the
    emergence of competitive electricity markets it is well recognized that
    we cannot rely on voluntary compliance with standards into the future.
    Since 1997, western governors have urged the enactment of federal
    reliability legislation to provide a legal underpinning for enforcing
    reliability standards. As a stop-gap measure, the West hat implemented
    a system of contracts to make standards enforceable. Most control areas
    in the West have executed the contracts, a few have not. However, such
    a contract enforcement system is not a long-term substitute for federal
    legislation.
        In 1997 and again last year, Western governors called for a new
    approach to setting and enforcing reliability standards that includes a
    public process for setting standards, review of standards by states,
    application of standards to all users of the grid, enforceable
    sanctions for non-compliance with the standards, mandatory membership
    by operators of the gild in regional reliability councils, and joint
    state/federal government oversight of the processes used to establish
    and enforce reliability standards. In 2000, the governors urged the
    ``organization of regional advisory bodies of affected states and
    Canadian provinces to advise regional and North American organizations
    and the Federal Energy Regulatory Commission (FERC) and appropriate
    Canadian and Mexican regulatory authorities . . . FERC should defer to
    the advice of such regional advisory bodies when advisory bodies cover
    an entire interconnection.''
        Through extensive on-going collaborative efforts between the
    Western states/provinces and the Western electric power industry, three
    principles have been developed that guide our views of federal
    reliability legislation.

              (1) Deference must be given to standards adopted within and
            for the Western Interconnection.
              (2) The implementation and enforcement of standards must be
            delegated to the West.
              (3) States must have a role in the process.

        On July 11, 2001, WGA Chairman Governor Kempthorne conveyed to the
    Committee the governors' views on federal reliability legislation. (See
    attached letter.) \2\
    ---------------------------------------------------------------------------
        \2\ The letter can be found in the appendix.
    ---------------------------------------------------------------------------
        The Western states, provinces and industry have worked over the
    past three years to streamline and consolidate existing industry grid
    management institutions into one new entity, the Western Electricity
    Coordinating Council. The governors have called for the expeditious
    establishment of the new institution. FERC is scheduled to act on the
    proposed WECC this week and, assigning FERC approval, WECC will be
    operational later this year. The new institution is designed to rapidly
    implement the provisions of federal reliability legislation.
        Through extensive work with the North American Electric Reliability
    Council (NERC), the central elements of what the West needs are
    included in the NERC consensus legislation that the Senate passed last
    year. The NERC language provides for deference to standards that cover
    an entire interconnection. It provides for delegation of implementation
    and enforcement functions to a regional entity, such as the WECC, that
    is much closer to the issues then a North American body or FERC. It
    provides for a state advisory role and enables FERC to defer to such
    advice when given on an interconnection-wide basis. This approach
    builds on substantial existing technical expertise in the industry and
    states and does not require the establishment of a large new federal
    bureaucracy.
        In WGA Resolution 00-009, the governors said: ``Federal agencies
    and federal legislation should facilitate effective decision-making by
    the states and empower the states, with the cooperation of other
    regional stakeholders, to create regional mechanisms, where
    appropriate. to address transmission, reliability, market power and
    other regional concerns. FFRC should be required to defer to the
    decisions of such bodies.'' The regional advisory body concept is a
    stop in this direction.
        We strongly urge this Committee to retain the central provisions of
    last year's bill that provide for deference, delegation and a state
    role.
        We oppose proposals to centralize decisions on reliability at FERC.
    The agency has neither the time, resources, expertise nor first-hand
    knowledge of conditions to the West to efficiently manage the
    reliability of the western power system.
                          regional planning and siting
        Western governors have been proactive in addressing the
    transmission needs of the Western Interconnection. They recognize that
    an adequate transmission system is necessary to maintain the
    reliability of the gird and enable competitive wholesale electricity
    markets. At their February 2, 2001 Energy Policy Roundtable, the
    governors highlighted the need for an adequate energy delivery
    infrastructure. On May 9, 2001 the governors held a transmission
    roundtable and focused on three questions:

              1. What transmission enhancements are needed in the West?
              2. How can needed transmission enhancements be financed?
              3. How can needed transmission enhancements be expeditiously
            permitted?

        The governors recognize that we cannot wait until Regional
    Transmission Organizations are in place and functioning before
    beginning to answer these questions. The uncertainty created by federal
    policies has led to a near-moratorium on transmission investment.
        As a step toward addressing the question of what transmission
    enhancements are needed, western governors established a work group
    headed by Jack Davis, CEO of Pinnacle West, and Commissioner Marsha
    Smith of the Idaho PUC, who also chairs the Committee on Regional
    Electric Power Cooperation, to develop a ``conceptual'' transmission
    plan. This plan is designed to begin to scope out the transmission
    needs of the region. It is the beginning, not the end of needed
    analysis. Such a global view is needed, given that most transmission
    work now being done is driven by narrow transmission requests made of
    utilities under Section 211 of the Federal Power Act. The conceptual
    plan should be completed in the next week and presented to Western
    governors at their meeting in August.
        There is much discussion in the Committee's white paper and
    elsewhere of the need for federal eminent domain in order to enable new
    transmission to be constructed. The record in the West provides no
    evidence supporting the need for new centralization of land use
    decisions that are more properly made in the West based on intelligent
    tradeoffs of needs and values. To our knowledge, no western state his
    ever denied a permit for an interstate transmission line. In the West
    at least, the idea of federal domain is a solution looking for a
    problem. As this Committee knows, federal primacy in natural gas
    pipeline siting and safety has not been a panacea for ensuring a well-
    functioning energy infrastructure.
        The major challenge of siting of transmission in the West rests
    with federal land management agencies. The federal government owns vast
    tracts of land to the West (e.g., the federal government owns 83% of
    the land in Nevada, 65% of Utah, 63% of Idaho, 53% of Oregon, 50% of
    Wyoming, 46% of Arizona, 45% or California, 36% of Colorado, 34% of New
    Mexico, 29% of Washington, and 28% of Montana.) Federal land management
    agencies operate under a myriad of laws.
        Because few new transmission lines have been proposed in the West
    over the past decade, siting add permit review processes have become
    rusty. The President's Executive Order 13212 directing federal agencies
    to expedite energy-related projects provides needed direction. However,
    the agencies also need adequate resources to execute their
    responsibilities.
        States also need to reexamine their siting and permitting processes
    to enable higher quality and more timely decisions on transmission line
    proposals. Such timely action is essential in the faster-moving
    competitive electricity market.
        The draft Conceptual Transmission Plan that the governors ere
    reviewing recommends that all siting review processes be streamlined
    and coordinated to enable timely construction of transmission. State
    review processes should address both local and Western Interconnection
    needs, and federal agency review processes should be coordinated
    internally as well as with State and Tribal authorities.
        To advance these goals, the Committee may want to:

              (1) Authorize the establishment of joint siting processes
            among states and federal land management agencies;
              (2) Direct federal agencies to participate in joint review
            process and ensure that states can, at their request, be
            cooperating agencies in all transmission project EISs; and
              (3) Fund these cooperative siting processes.

        Granting FERC siting authority, even as a backstop, is needed in
    the West and should not be part of the Committee's legislation.
                        other issues in the white paper
        The existing policies of the Western Governors' Association do not
    address all of the issues in the white paper. Following are the
    policies of Western governors that bear on the other issues raised in
    the white paper.
        Transmission Jurisdiction: The governors believe that all segments
    of the Western industry, including investor-owned utilities, public
    power, federal power marketing administrations, power marketers and
    brokers, and independent power producers, should participate in the
    competitive wholesale market (Resolution 00-009).
        Western Governors have urged the Western electric power industry,
    in cooperation with Western states and the federal government, to:
    support the formation of cost-effective Regional Transmission
    Organizations to maintain and enhance system reliability; examine and
    mitigate market power; and facilitate efficient power transactions in a
    restructured industry. (Resolution 00-009) Western states have made it
    a priority to work with the industry to resolve issues that arise at
    the boundaries of RTOs. However, as FERC was told at a meeting in March
    2001, western states do not believe that a FERC-mandated west-wide RTO
    is the most efficient means of achieving a seamless transmission system
    throughout the Western Interconnection.
        The governors have supported the elimination of release to
    distributed generation, including barriers to interconnection to the
    grid (February 2 recommendations from the Energy Policy Roundtable).
    Rates and Market Power
        Western governors have urged the federal government to work with
    states to develop effective approaches to mitigate market
    power.(Resolution 00-009). Western governors have called for sending
    consumers more accurate and timely price signals. Such price signals
    are an effective means of mitigating market power. (Recommendations
    from February 2 Energy Policy Roundtable). Closer collaboration between
    FERC and the western states in decisions on whether to authorize
    market-based rates and the degree to which western markets were
    competitive may have helped to mitigate the crisis over the past year.
    Member Transparency Rules
        Three of the recommendations from the governors' Energy Policy
    Roundtable addressed the urgent need to improve the quality of
    information for policy makers and market participants. The governors
    are encouraging the creation of a centralized Western interconnection-
    wide database that tracks prospective demand, and tracks generation and
    transmission facilities under construction, that are permitted, in the
    permitting process, or under consideration. They support efforts to
    ensure the availability on loads, transmission, and generation where
    necessary for ensuring the adequacy, efficiency and reliability of the
    grid. They have identified an immediate need to assess natural gas
    supplies and deliverability in the West.
        A federal government-only information system may not provide states
    or market participants sufficiently detailed or timely information to
    ensure efficient electricity markets.
    Additional Issues
        Consumer protection: Western governors have urged Western public
    utility commissions and Attorneys Generals to examine whether new
    measures are needed to protect electric consumers in a more competitive
    market and educate consumers on their rights and risks under a
    competitive electric system.
        Tax provisions: Western governors have written the Treasury
    Department urging that the tax-exempt status of public power entities
    not be jeopardized if such entities provide their existing transmission
    assets to an independent system operator.
                                   conclusion
        The Committee's white paper correctly highlights the challenges of
    the new realities of electricity markets. Congress needs to address
    these challenges. However, Congress needs to avoid imposing a federal-
    government-only approach to these challenges.
        Federal legislation must recognize the fundamental electrical
    realities of separate and international power grids. This is
    particularly critical in the West where the transmission system in
    western states, western Canada and northwest Mexico is highly
    integrated.
        Federal legislation must also recognize that the Federal Energy
    Regulatory Commission does not have the time, resources, expertise or
    local knowledge to single-handedly manage the western electric power
    system. The legislatively simple solution of ``give FERC more
    authority'' will not result in an electric power system that meets the
    needs of the West at lowest cost.
        We urge the Committee to:

       Approve federal reliability legislation similar to that
            which passed the Senate last year that provides for deference
            to decisions made in the Western Interconnection, delegation of
            implementation responsibilities to a Western reliability
            organization, and a role for states through the establishment
            of State Advisory Bodies.
       Not grant FERC eminent domain for transmission lines.

        The Chairman. Thank you very much for your testimony.
    Before I begin any questions, let me just see if Senator
    Murkowski had any opening statement he wished to make.
        Senator Murkowski. No, Mr. Chairman, I really don't. I
    believe this is pretty much a continuation of what we began
    yesterday, and I think it's very important. As I indicated
    previously, I believe pretty much in market competition, not
    more regulation and not shifting jurisdiction from the States
    to the FERC.
        I can't help but make another attempt to alert my
    colleagues and the general public. This is a clipping, Iraq
    missile nearly hits U.S. spy plane yesterday. U.S. U2 spy plane
    was attacked by the Iraqis, and the missile almost hit the
    aircraft--said that it exploded behind the pilot and was done
    without the sophistication of an on-target radar with this
    aircraft at 70,000 feet.
        My point is, Mr. Chairman, it's just a matter of time
    before Saddam Hussein is going to take down one of our
    aircraft. We've had over 230,000 sorties over Iraq supporting a
    no-fly zone. The irony of that is that we're now importing not
    750,000 barrels a day but a million barrels a day from Iraq. I
    find that unconscionable in relationship to what it's costing
    American taxpayers and the lives that we're putting at risk
    when we clearly have an opportunity next week in the House and
    later on in the committee to address the merits of reducing our
    dependence on imported oil by stimulating domestic production
    here in the United States and particularly in my State of
    Alaska. And there's absolutely no question--no question at
    all--that we don't have the scientific technical capability to
    do it safely. Thank you.
        The Chairman. Thank you. Let me ask a few questions on the
    basis of the testimony you've given us. On this issue of
    eminent domain, your position--the position of the Western
    Governors--is that there should be no eminent domain authority
    at FERC and also that there should be no eminent domain
    authority at any regional--in any regional organization. What
    is your thought as to whether or not States should be
    encouraged or directed in some way to abide by decisions of
    regional organizations as to transmission?
        Ms. Salisbury. Mr. Chairman, this is a little bit difficult
    for me this morning. I apologize, but I'm only reflecting what
    we've taken a stated positive position on. It's my
    understanding that the issue that you just raised will be
    addressed at the August meeting. We--it's an interesting idea.
    We just have not formally talked about it.
        I think, at least at this time, we don't believe there's
    been a case stated for giving--for jurisdiction--for changing
    the system so much. It would really be a huge change in the
    policies that we've all operated under for a long time.
        The Chairman. Let me ask about these bottlenecks that we
    here in the committee have been hearing about--bottlenecks in
    the Western transmission system. This notorious path 15 line,
    for example, some witnesses have mentioned as many as 43
    constraining points in the Northwest that constrain the ability
    to move power around adequately.
        If there's no need for any additional authority at either
    the Federal or regional level, what is preventing the
    resolution of these problems? I saw something in the news this
    morning about Secretary Abraham had come out and said that the
    Department of Energy was going to take the--had taken the
    initiative to try to get this line 15--path 15 line--fixed.
        You say there's no evidence that there is a need for
    putting additional authority at FERC or anywhere but at the
    State level, how do you explain these constraint points?
        Ms. Salisbury. Well, I think there are constraints, and I
    would say that the Western Governors would argue that we need
    to reexamine all of our process that we've developed to try to
    get at more coordination, better coordination, and work--and
    this may be what the chairman was talking about a little bit
    earlier, some sort of regional groups to get at this in a
    better way.
        What I was referring to, though, is that, at least at this
    point, the States have never denied a permit for an interstate
    transmission line--at least in the West they have not. And so
    to argue that the FERC now needs to be given jurisdiction over
    this issue doesn't seem to be appropriate.
        The Chairman. Do you think the fact that the States have
    not denied permit applications is clear evidence that there's
    no need for any more general planning or siting authority?
        Ms. Salisbury. Mr. Chairman, I think the Western Governors
    would say yes, there is no need for existing authority for
    eminent domain. Planning, I don't believe we've taken a
    position on that.
        The Chairman. Okay. Senator Murkowski.
        Senator Murkowski. I'd like to expand on that, because I
    want to make sure that we understand this for the record. In
    your statement, you state--and I quote--``The White Paper
    states''--and you're referring to the White Paper that majority
    has proposed--``The White Paper states that FERC should have
    jurisdiction over all transmission whether bundled or
    unbundled.'' And then you say, ``To the extent this means that
    FERC would now have jurisdiction over all retail access issues,
    Western Governors would oppose.'' And you expanded in your oral
    statements, and again, you address your justification that the
    systems work, and you've been able to accommodate the request.
    Is that the only reason or are there others that you would deem
    to oppose any effort to have FERC have jurisdiction over all
    transmission?
        Ms. Salisbury. Mr. Chairman, Senator Murkowski, the
    transmission--the bundled and unbundled--Western Governors have
    always taken the position that retail access issues, whether to
    grant retail access, the timing of retail access, is a decision
    that's better left to the States.
        So to the extent that turning over jurisdiction for
    transmission--this is different from the siting issue, the
    bundled and the unbundled--and it would back door retail access
    questions to FERC, Western Governors have taken a position
    opposing this.
        Some States in the West do not want retail access. Just as
    an example, my own State of New Mexico had passed a bill a year
    or so ago, and this past year, because of the situation in
    California and elsewhere in the West, delayed implementation of
    retail access for 5 years.
        Senator Murkowski. I want to point out simply that this, I
    think, is one of the fundamental differences that exist in the
    two bills that have been submitted as comprehensive bills by
    Senator Bingaman and myself, and we do appreciate the fact that
    I happen to agree with you starts the morning off all right for
    me. But nevertheless, we should point out our differences,
    because those are the areas that we're going to have to work
    towards compromise and a resolve.
        The Chairman. Thank you very much.
        Senator Wyden.
        Senator Wyden. Thank you, Mr. Chairman. Yesterday, Miss
    Salisbury, the president of the National Association of
    Regulatory Commissioners endorsed legislation that Senator
    Burns and I have introduced that would make it easier for the
    States to get key information about electric power production,
    transmission past schedules and flows that are so essential to
    making markets work.
        I think this legislation very much tracks the kind of
    comments that you've made, and it would just be helpful if we
    could get your thoughts on the idea on the need for more market
    transparency and more information on these issues.
        Ms. Salisbury. Mr. Chairman, Senator, the Western
    Governors, at a meeting that it had--a roundtable meeting that
    it had in February--as one of its--I guess the--what it
    released as far as additional steps that needed to be taken,
    did state affirmatively, and I will quote, ``that Western
    Governors support efforts to ensure the availability of
    information on loads, transmission and generation when
    necessary for ensuring the adequacy, efficiency and reliability
    of the grid.''
        We recognize, and I think the Senator's already stated he
    recognized that there is definitely a need for more, better,
    quicker data to make decisions. And I think the Western
    Governors would work with that and probably support
    legislation.
        Senator Wyden. We'll work closely with you. Mr. Chairman, I
    too have to go on to a hearing. I just wanted to make a brief
    statement about a matter that involves FERC. As our colleagues
    know, I put up on my web site various oil industry documents
    that describe some very troubling refinery practices that deal
    with this price manipulation issue.
        Today with FERC, we're going to be looking at whether
    electricity or natural gas supply was manipulated to inflate
    the price. FERC has asserted that there is no evidence now of
    price gouging.
        Given that, I'm troubled by the fact that the network news
    the other night reported on a secret FERC investigation that
    found that two companies were keeping powerplants out of
    service to raise electricity prices.
        It was also reported that FERC sealed the records and that
    the documents would not be released, and in fact, Commissioner
    Massey, who is here today, opposed sealing the documents. So I
    hope to get back, Mr. Chairman, but if I don't, I just want to
    be on record as saying that I hope that FERC will work with
    this committee to provide these documents that the network news
    is now saying provide tangible evidence of manipulation of
    supply and electricity prices. I think it's important for the
    committee to decide these matters themselves after we make
    arrangements to look at it in a way so that if there are
    propriety issues that those matters can be protected. And I
    can't stay this morning, but the reason Senator Burns and I
    have introduced this legislation is that we've got to prevent
    gaming, and getting more information out will help prevent
    gaming. But until that time, when you've got FERC sealing
    records and you've got people with credibility like
    Commissioner Massey saying that they're opposed to sealing the
    records, I think this committee's got an obligation to dig
    further. And I thank you, Mr. Chairman, for the extra time to
    make the point that normally I wouldn't have done on Miss
    Salisbury's watch.
        The Chairman. Thank you very much.
        Senator Thomas.
        Senator Thomas. Thank you, Mr. Chairman. Thank you, Miss
    Salisbury. I agree with you, certainly, on the bundled
    transmission oversight and those kinds of things. Is California
    part of this governors group?
        Ms. Salisbury. It certainly is, Mr. Chairman, Senator, and
    California's actively participated on these electricity issues.
        Senator Thomas. Was there an appeal to FERC and to the
    Federal Government to do things a little bit contradictory to
    what Governors have agreed to?
        Ms. Salisbury. Well, Mr. Chairman, Senator, I think we've
    tried really hard in the policy resolutions to reflect the
    positions on these issues that I've raised. There has--there is
    no policy resolution on the price cap issue, and I think that's
    where maybe the Senator's going is that there is a divergence
    of opinion on whether price caps are appropriate, and some
    Western Governors have said they are, and some have said they
    are not.
        Senator Thomas. Right, I understand. Well, the point,
    though, is if you know--if you want to keep the jurisdiction
    and the decision making locally, which I agree to, then you
    can't turn to somebody else when you have a problem to come in
    and resolve it. So I believe--what does the--do the Governors--
    have they talked some about strengthening the transmission
    within the RTO, within the Western area? Obviously transmission
    is one of the difficulties. We would like to ship more power
    from Wyoming outside of the State--transmission there. The
    Governors have any idea where they want to go? Do they have a
    plan? Do they have any vision of the future?
        Ms. Salisbury. Mr. Chairman, about, oh, I don't know, 2 or
    3 weeks ago--maybe it's been a little bit longer than that--
    Western Governors did meet on the transmission issue
    specifically. They're just about ready to release a report.
    It's not available yet, and that's why I don't feel free to
    discuss, because--and I apologize again that I'm constrained by
    what I testified to----
        Senator Thomas. I understand.
        Ms. Salisbury [continuing]. Yes, very concerned. It will be
    an issue that's addressed at the meeting--the annual meeting--
    that the Governors hold in August.
        Senator Thomas. Well, I'm just hopeful that not only do you
    have a report on what the situation, but more importantly, do
    we begin to have some vision as to what we think needs to be
    done and to begin to make recommendations as to how we do it.
        Would you think that generally a interstate national grid
    that would bring together the RTOs of the various regions and
    allow for the movement of merchant power to move nationwide?
    Would that be something the Western Governors would agree to?
        Ms. Salisbury. Mr. Chairman, Senator, I don't know at this
    time. I understand that it is enormously expensive to do that,
    because there are not many ties now between and among the three
    grids. And so I think what the Governors are trying to do, and
    it's reflected in the policies, is to deal with the reality as
    it exists today in our new markets.
        Senator Thomas. I'm sure that's true, and I'm getting to
    almost have a thing about this. But that's what we're doing is
    reflecting now on where we are. The reason for reflecting where
    we are is to try and determine where we need to go to solve the
    problem. And I guess that's what I'm really interested in us
    doing. And I'm going to have to go to another hearing too, so I
    hope the FERC folks will also, instead of just talking about
    where we are and what we do next week, what is it that we need
    to do over time to be able to deal with our obvious problem?
    And that is, we're changing the way we do electricity. We're
    changing from the idea that you used to generate almost
    entirely for your own service area. Now you're generating
    independently, and if that's going to work--and we think it
    is--they you have to be able to move the product and get it
    into the places where it goes. But I don't hear people talking
    about what's the resolution to that. And I wish--and I hope
    you'll take that back to the Governors and say look guys, we
    need--or ladies or whoever they are--we need a little bit of
    vision of where we're going. And thank you so much for being
    here. I appreciate it.
        The Chairman. Senator Feinstein.
        Senator Feinstein. Thanks very much, Mr. Chairman. If I
    may, I'd like to welcome you very much. Miss Salisbury, may I
    reserve my time for the FERC Commission?
        The Chairman. Sure.
        Senator Feinstein. Thank you very much.
        The Chairman. Senator Cantwell, did you have questions?
        Senator Cantwell. Likewise, Mr. Chairman.
        The Chairman. Senator Landrieu.
        Senator Landrieu. Likewise, Mr. Chairman.
        Senator Murkowski. You're getting off easy.
        The Chairman. Senator Murkowski.
        Senator Murkowski. I won't take much time.
        Unfortunately, Senator Wyden isn't here, and I didn't want
    to interrupt him, and then he had to go to a hearing. But I
    think it's important to keep these things in perspective. The
    allegations associated with consciously taking down plants and
    profiteering and so forth, we can be critical of one phase, but
    somebody's got to stand up for the other points that are
    relevant. And I'm looking at an article here that was forwarded
    to me, breaking news, and it says--reports--`State grid
    operator behind plant's output swings.'
        I don't know the facts here--maybe we can get into them
    when FERC comes in--but, you know, there's a general
    assumption, I think, that's left an impression that somehow the
    utilities are responsible for taking a plant down,
    profiteering--whatever the allegation might be. We don't get a
    chance to go in, and I don't think it's our job to point
    fingers.
        But nevertheless, I think it's important to point out that
    in this particular article, the operator of the State's power
    grid has acknowledged that it was responsible for swings in
    production at a powerplant that Governor Gray Davis held as an
    example of price gouging by out of State energy companies.
        Let's be fair, and let's make sure that the media--which
    has an obligation as an investigative agency--does balance on
    these things. Just to point out one way--and I'm a little
    frustrated here--we can spend a lot of time witch hunting
    around here, but we have a shortage of supply in this country,
    and doing this kind of witch hunting, I think is necessary for
    FERC and the appropriate agencies, but it's up to us to
    increase the supply of energy, and I think we should spend a
    little more energy doing that.
        I'm sorry that you had to hear my tirade. It has nothing to
    do with you, but I agree with your testimony and the Governors
    and certainly wish you a good day and thank you.
        Ms. Salisbury. Thank you.
        The Chairman. Well, thank you very much for testifying. We
    appreciate it.
        Ms. Salisbury. Thanks, Mr. Chairman and members of the
    committee. I'm happy that they were interested in hearing from
    the Western Governors.
        The Chairman. Thank you. Do the Eastern Governors have the
    same opinion, do we know?
        Ms. Salisbury. They could?
        The Chairman. Could you arrange it?
        Ms. Salisbury. I won't even attempt that one.
        The Chairman. Why don't we ask the second panel--the FERC
    Commissioners--to please come forward, and we will hear their
    testimony. If each of you could come up, we'd appreciate it.
        Senator Murkowski. Mr. Chairman, I'm going to have to
    excuse myself. I have to introduce a couple of nominees at the
    agriculture hearing this morning at 10:30, so I wanted to wish
    my friends from FERC hello. Although we're not real close
    friends, I want to make sure the records notes that. Got to be
    careful around here. And furthermore, I would hope that they
    would respond to the question by the Senator from Oregon, since
    I probably won't be here to ask it.
        The Chairman. All right, we will ask them to do that. Why
    don't we start out--I think probably the way to proceed is to
    start with Commissioner Hebert as the Chairman and hear his
    views. And if he could just--I think as always here in the
    committee, we will take all written statements you have and
    include them in the record, so if you could just summarize the
    main points you'd like to make. And then maybe after
    Commissioner Hebert, Commissioner Breathitt, Commissioner
    Massey, Commissioner Wood, Commissioner Brownell--why don't we
    do that? Go right ahead. Mr. Chairman, thank you for being
    here.

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

        Mr. Hebert. Thank you, Senator Bingaman, Mr. Chairman. I
    appreciate that. Members of the committee, Mr. Chairman, good
    morning and thank you for the opportunity to speak today on
    legislative proposals relating to restructuring of the electric
    utility industry.
        The guiding principle for restructuring legislation should
    be to provide a foundation for the development of robust
    wholesale competition in the electric industry. This would
    provide electric customers with supply sufficient to meet their
    energy needs at the lowest reasonable cost.
        The Commission remains committed to developing market-
    oriented policies that promote the addition of necessary
    transmission and generation and that allow for the detention
    and remedying of any anti-competitive behavior.
        Legislation should help ensure that transmission owners and
    operators have economic incentives to operate and expand the
    transmission grid to meet the needs of all consumers and other
    market participants.
        Order 2000 encourages the formation of regional
    transmission organizations--as we call them, RTOs. The industry
    has responded positively with innovative efforts to develop
    efficient and non-discriminatory RTOs, because they make
    economic sense, not because of a legal mandate.
        We need to rely on competition instead of traditional
    regulation wherever possible. Existing laws that hinder
    competition, such as PUHCA and PURPA, need to be modified or
    repealed. And I noticed that was mentioned in the White Paper,
    and I think that is absolutely on target.
        The Commission has no direct statutory authority to
    promulgate and enforce a set of mandatory reliability
    standards. Possible approaches to reliability include enforcing
    standards through identified performance-based measures or
    through voluntary contracts. Congress should understand,
    however, that mandatory reliability rules alone are not enough
    to ensure reliability of the grid.
        Finally, the problems experienced in California and the
    West were not caused by any inadequacies in the Federal Power
    Act regarding rates and power. Preventing such problems in the
    future is not dependent on adding to the Commission's authority
    or obligations.
        Consistent with existing statutory authority, the
    Commission has issued dozens of orders in recent months that
    have acted to transform the market institutions and rules that
    help produce higher prices and create reliability uncertainty.
        The Commission has made it clear that it will actively
    monitor the competitive operation of wholesale markets and that
    it will remedy any form of anti-competitive conduct that it
    detects. And the Commission has acted decisively to lower and
    stabilize electricity prices.
        Indeed, just yesterday the Commission sought to bring
    regulatory and investment certainty to Western markets by
    issuing an order on refunds for prior months. Specifically, the
    Commission adopted a price methodology for determining refunds
    or offsets based on its earlier price mitigation orders and a
    report from its Chief Administrative Law Judge and established
    separate evidentiary proceedings for spot market purchases in
    California and in the Pacific Northwest.
        Market participants need to understand that the cloud of
    refund uncertainty which has inhibited the type of investment
    in supply and deliver infrastructure that is essential to
    keeping rates low and ensuring competitive options in the long
    term, will lift at some point.
        It is important to recognize the primary source of recent
    problems in Western energy markets. Demand kept growing, but
    supply did not, Mr. Chairman. The long-term solution to these
    problems is to have the balancing of supply and demand done by
    the marketplace--not by the Federal Government.
        I am happy to support legislative initiatives that serve to
    develop truly competitive markets that will serve the interests
    of all market participants. Thank you for your time, and I look
    forward to your questions.
        [The prepared statement of Mr. Hebert follows:]
       Prepared Statement of Curt Hebert, Jr., Chairman, Federal Energy
                             Regulatory Commission
                                  I. Overview
        Mr. Chairman and Members of the Committee, good morning. Thank you
    for the opportunity to speak today on legislative proposals relating to
    restructuring of the electric utility industry.
        Our fundamental electric utility laws were enacted during the Great
    Depression. These laws made sense in their time, when competition in
    the industry was more a theory than a reality. These laws were meant to
    provide a regulatory substitute for competition. Today, however, these
    laws often have the ironic effect of preventing the development of
    competition, harming the very consumers they were supposed to protect.
        I believe the guiding principle for restructuring legislation
    should be to provide a foundation for the development of a robust
    wholesale competition in the industry, thereby providing electric
    customers with supply sufficient to meet their energy needs at the
    lowest reasonable cost. This principle requires different approaches in
    the transmission and generation parts of the industry.
        Transmission will have to remain regulated for the foreseeable
    future. However, transmission must become a stand-alone business and
    respond to the market. Legislation should help ensure that transmission
    owners and operators have economic incentives to design, build,
    operate, and expand the transmission grid to meet the needs of all
    consumers and other market participants.
        In contrast, in the wholesale power sector, we need to rely on
    competition instead of traditional regulation wherever possible.
    Existing laws that hinder competition need to be modified or repealed.
    While the Commission stands ready to intervene in power markets when
    market rules or other factors lead to unjust and unreasonable prices,
    legislation reducing the existing barriers to entry will minimize the
    need for such efforts in the future.
                         ii. transmission jurisdiction
        In 1996, the Commission adopted Order No. 888, requiring all public
    utilities to offer nondiscriminatory, open access transmission service
    over facilities they own, control or operate. This service has been a
    major factor in the growth of wholesale competition in the past few
    years. Most wholesale buyers and sellers now have many more trading
    options than they had in the past.
        In late 1999, the Commission adopted Order No. 2000, encouraging
    the formation of regional transmission organizations (RTOs). The
    industry generally responded positively, with innovative efforts to
    develop large, efficient and nondiscriminatory RTOs. The Commission,
    too, has worked hard to give the industry timely and constructive
    guidance on the development of RTOs. If properly constituted and truly
    independent, RTOs can help address and eliminate remaining obstacles to
    competition and make the markets more efficient, for the benefit of
    electricity consumers in all states. Indeed, RTOs support wholesale
    competition and, where states choose to pursue it, retail competition.
    But even in the absence of retail competition, consumers will benefit
    from increased competition in wholesale markets. For example, RTOs can
    be structured to eliminate ``pancaking'' of transmission rates, better
    manage transmission congestion, and facilitate transmission planning
    across a multi-state region. There is still a lot of work to do, but I
    remain confident that we will reach our RTO goals.
        I see no need for enactment of legislation allowing FERC to mandate
    the formation of RTOs. The industry is already forming RTOs because
    they make economic sense, not because of a legal mandate. If RTOs did
    not make economic sense, then nothing would be gained by requiring
    their formation. I am particularly pleased to see that transmission
    owners, with the urging of (rather than a directive from) the
    Commission, increasingly are reaching the conclusion that a particular
    type of RTO a stand-alone, truly independent transmission company will
    best serve the interests of consumers and the market as a whole.
        Some argue that the Commission's jurisdiction should be expanded to
    include all transmission by non-public utilities. However, proposed
    RTOs in various parts of the country are making efforts to include the
    facilities of non-public utilities. If the industry succeeds in
    including the facilities of non-public utilities in RTOs, there may be
    no need for legislation broadening Commission jurisdiction over non-
    public utilities. The priority for Congress now should be to reduce or
    remove any legislative barriers to RTO participation by non-public
    utilities.
        I also do not see a need for legislation requiring FERC to adopt
    uniform rules on interconnections. The development and implementation
    of broad RTOs will, in turn, promote the development of standardized
    and non-discriminatory interconnection procedures. A truly independent
    RTO has every incentive to maximize throughput and no incentive to
    hinder the interconnection of new generation.
                                iii. reliability
        The recent changes in the electric power industry have increased
    the incentive for, and frequency of, violations of reliability rules
    adopted by the North American Electric Reliability Council (NERC).
    Unfortunately, NERC lacks authority to enforce its rules. As a result,
    the issue confronting the industry is whether federal action on
    reliability is necessary.
        The Commission has no direct statutory authority to promulgate and
    enforce a set of mandatory reliability standards. While reliability
    issues sometimes fall within the Commission's ratemaking jurisdiction,
    the Commission in those cases does not decide whether the reliability
    of service is acceptable per se. Rather the Commission decides whether
    the rates, terms and conditions of service are just, reasonable and not
    unduly discriminatory or preferential from a commercial perspective.
        The lack of federal authority to address reliability issues, and
    increasing concern about the shortcomings of the traditional voluntary
    approach to reliability issues, have led some in the industry to seek
    other approaches. One approach to enhance reliability and promoting
    customer accountability is to give energy providers an incentive to
    provide reliable, efficient service. Conventional pricing methods do
    not provide adequate incentives. It is my preference to afford
    utilities some type of performance-based measure of accountability to
    their customers and their regulators. Consistent with its existing
    authority, the Commission could tie earnings and profits to
    reliability-based and performance-based criteria.
        Another approach that has been pursued is enforcing reliability
    standards through contracts. Public utilities may voluntarily include
    reliability-related provisions in contracts or tariffs filed with the
    Commission because they affect or relate to the rates, terms and
    conditions of jurisdictional service. If reliability provisions in
    Commission-jurisdictional contracts are accepted and on file with the
    Commission, the Commission can enforce the reliability-related
    provisions against public utility parties to the contracts.
        A system of such contractual arrangements has been established by
    utilities in the Western Systems Coordinating Council (WSCC), the
    regional reliability council for the Western United States. The
    effectiveness of the WSCC arrangement and the Commission's ability to
    enforce it have not been fully tested. But, a voluntary contractual
    regime is not the simplest or most effective means of establishing and
    adequately enforcing reliability standards. It depends solely on the
    willingness of public utilities to make voluntary filings and, even
    then, it may not capture the electric facilities of non-public
    utilities. Reliability is at risk to the extent that not all market
    participants are covered by the same requirements.
        Another approach to ensuring reliability is enacting federal
    legislation. This year, on May 17, the Administration released its
    National Energy Policy Report. The Report recommends that the President
    direct the Secretary of Energy to work with the Commission to improve
    the reliability of the interstate transmission system and to develop
    legislation providing for enforcement by a self-regulatory organization
    subject to the Commission's oversight.
        I believe a legislative approach may be preferable to the
    contractual approach discussed above. I take no position, however, on
    whether the legislation should be based on the proposal supported by
    NERC or any other version of reliability legislation.
        Congress should understand, however, that mandatory reliability
    rules alone are not enough to ensure the reliability of the grid. In
    its Order No. 2000 on RTOs, the Commission set out at length the need
    for an RTO to ensure reliability in each region. In particular, RTOs
    must have the authority to ensure the short-term reliability of the
    regional grid and must be responsible for planning, and for directing
    or arranging, necessary transmission expansion and upgrades that will
    enable it to provide efficient and reliable transmission service.
        As discussed below, we also need to find ways to encourage and
    facilitate the construction of new transmission facilities. And, of
    course, we must have adequate generating resources. The Commission is
    continually reassessing its existing regulations and policies to
    promote market entry and the removal of regulatory barriers to enhanced
    competition in the wholesale supply and interstate delivery of energy
    products and services. For example, on March 14, 2001 and May 16, 2001,
    the Commission issued orders removing regulatory obstacles and
    providing incentives to increased energy supply and reduced demand in
    California and the rest of the West.
                     iv. power sales rates and market power
        While not the focal point of today's hearing, the problems recently
    in the electricity markets in California and the Western United States
    are an inescapable background to some of the legislative proposals now
    being considered. Those problems have led many to argue that the
    Commission needs additional statutory authority or obligations to
    ensure that wholesale prices remain just and reasonable.
        I disagree. Since I became Chairman in January of this year, the
    Commission has used its existing authority firmly and effectively to
    mitigate prices in Western markets. The Commission has issued dozens of
    orders this year involving wholesale markets in California and the
    West. As a result of those orders and other factors, prices in those
    markets are continuing to decline substantially.
        The problems in California were not caused by any inadequacies in
    the Federal Power Act regarding rates and market power, and preventing
    such problems in the future is not dependent on adding to the
    Commission's authority or obligations. Instead, such arguments merely
    distract us from the primary source of the problems: demand kept
    growing, but supply did not.
        The long-term solution to these problems is to have the balancing
    of supply and demand done by the marketplace, not the government. While
    the Commission has acknowledged and addressed the need for short-term,
    market-oriented price mitigation in California and the West, these
    measures must not become permanent crutches. We must find market-driven
    ways to promote new sources of supply and transmission, and encourage
    appropriate conservation by consumers. Price mitigation should continue
    no longer than absolutely necessary, and should be replaced as soon as
    possible by full reliance on market-based outcomes.
                  v. regional transmission planning and siting
        Since the Commission adopted its open access requirements in 1996,
    the use of the interstate transmission grid has grown dramatically.
    Also, wholesale markets have become much more regional than local,
    encompassing large multi-state areas. Unfortunately, however, the grid
    has not been expanded commensurately. Thus, the grid increasingly is
    pushed to its operational limits, and transmission constraints
    frequently prevent the most efficient use of generation facilities. The
    institutional structures for planning and expanding the grid are not
    meeting our needs.
        In planning grid expansions, we need to move toward a more regional
    approach. I believe RTOs can fulfill this role. By definition, RTOs
    will encompass large trading areas. An RTO-based planning process will
    allow all market participants within these areas to express their needs
    and concerns. Since RTOs must be independent of market participants,
    all participants will be assured of a nondiscriminatory planning
    process. RTOs that are based on the model of a stand-alone, for-profit
    transmission company will be particularly motivated to expand the grid
    when appropriate to maximize transmission throughput, and thus,
    transmission revenue.
        The authorization and siting of grid expansions has generally been
    performed under state law. While some argue that state authorities are
    too parochial to perform this responsibility well in today's regional,
    multi-state markets, I am not so persuaded. However, a federal backstop
    role may be appropriate in certain circumstances. For example, Congress
    could reasonably decide to establish a federal siting process, subject
    to certain limitations, if an RTO is unable to obtain siting
    authorization from a State within a specified time.
                         vi. market transparency rules
        In the past, utilities had little or no reason to keep their costs
    and transactions confidential. Utility prices were fully regulated on a
    cost-plus model, and competition was generally insubstantial. In
    today's competitive markets, however, confidentiality of price and
    customer information can be critical to a utility's success.
        The Commission has seen increasing struggles among industry
    participants on how to reconcile the need for confidential information
    in competitive markets with a statutory and regulatory framework
    premised on full disclosure of cost and price information. It is not
    yet clear to me how best to reconcile these tensions. One approach the
    Commission has used is to require disclosure of bids in centralized
    trading markets, but only after a lag of several months. Other
    approaches may be feasible, too, so long as they reasonably balance the
    needs of competitors to preserve commercially-sensitive information
    with the needs of regulators and the public for information to ensure
    that jurisdictional rates remain just, reasonable and not unduly
    discriminatory or preferential.
                             vii. other provisions
    A. PUHCA
        The Public Utility Holding Company Act (PUHCA) requires registered
    holding companies to submit to extensive regulation by the Securities
    and Exchange Commission. PUHCA also generally requires holding
    companies to operate an ``integrated'' and contiguous system. As a
    result, PUHCA encourages concentrations of generation ownership and
    control in local markets that are inconsistent with competition and
    discourages asset combinations that could be pro-competitive. PUHCA may
    also provide a significant disincentive for investment in independent
    transmission companies that would qualify as RTOs. Under PUHCA, any
    entity that owns or controls facilities used for the transmission of
    electric energy--such as an RTO--falls within the definition of a
    public utility company, and any owner of ten percent or more of such a
    company would be a holding company and potentially could be required to
    become a registered holding company. This could serve as a significant
    disincentive for investments in independent transmission companies that
    qualify as RTOs.
        PUHCA was enacted primarily to undo harms caused by byzantine
    holding company structures that no longer exist. In the decades since
    PUHCA was enacted, utility regulation has increased substantially,
    under the Federal Power Act, federal securities laws and state laws.
    PUHCA has outlived its usefulness, and now does more harm than good.
    PUHCA should be repealed.
    B. PURPA
        The Public Utility Regulatory Policies Act (PURPA) was enacted in
    the late-1970s, in the aftermath of that decade's energy crises. The
    legislation's goal was to remove impediments to the use of cogeneration
    and renewable-based generation, and promote their use by allowing such
    generators to require utilities to buy their power at the utilities'
    avoided costs.
        Today, the impediments addressed in PURPA are gone (although other
    impediments may exist, such as the need for grid expansion). Also,
    PURPA's ``forced sale'' requirements are no longer necessary, in light
    of the availability of open access transmission, to promote the
    development of competition, and more often serve to distort competitive
    outcomes. Congress should repeal PURPA, while ``grandfathering''
    existing PURPA contracts.
                                viii. conclusion
        We need less, not more, regulation in the generation business.
    However, we will continue to regulate transmission for the foreseeable
    future, while encouraging transmission to become a stand-alone business
    and respond to the market. Congress must focus on removing impediments
    to the competitive restructuring that is taking place. Outdated laws,
    such as PUHCA and PURPA, are hindering effective restructuring. The
    best way for Congress to help electricity consumers is to promote
    wholesale competition through the legislative changes described above.

        The Chairman. Thank you very much for your testimony.
        Commissioner Breathitt, why don't you go ahead.

      STATEMENT OF LINDA BREATHITT, COMMISSIONER, FEDERAL ENERGY
                         REGULATORY COMMISSION

        Ms. Breathitt. Mr. Chairman and members of the committee,
    thank you for inviting me to appear before you this morning to
    discuss the need for Federal electricity restructuring
    legislation, and in particular, the committee's White Paper on
    electricity legislation.
        The committee is to be commended for advancing the
    discussions on how best to achieve the restructuring that is
    needed in the U.S. electric industry in order to arrive at
    competitive and efficient wholesale and retail electricity
    markets.
        I believe that Federal electricity restructuring
    legislation is needed to address important and unresolved
    issues in the electric industry and to enable the FERC to
    advance its goals of achieving fair, open and competitive bulk
    power markets.
        In order to achieve these overarching goals, Federal
    legislation must address several specific policy areas. The
    White Paper correctly identifies many of these key elements.
        Regarding transmission jurisdiction, I agree with the
    conclusion in the White Paper that the Commission's
    jurisdiction to require open access should be extended to
    public, cooperative and Federal utilities. I have said that
    before in this committee in April, 2000.
        I also agree with the White Paper's premise that
    legislation would be needed to affirm the Commission's
    authority to order utilities to join RTOs. If the Commission
    determines that it must resort to mandatory RTO participation,
    such legislation would allow the Commission and the industry to
    avoid costly and time-consuming litigation of our authority in
    this area.
        Regarding reliability, I believe that legislation is needed
    to replace the current voluntary system with one in which a
    self-regulated independent reliability organization with
    oversight by the Commission establishes and enforces mandatory
    reliability rules.
        Such a change is necessary to ensure a reliable and
    competitive bulk power market in the evolving electric power
    grid and the ever-increasing transactions going over it.
        On the issue of transmission siting, I would go further
    than the white paper goes. I agree with the basic premise that
    the goal of a national transmission grid may be unattainable
    absent a new approach. I believe legislation is needed to grant
    the Commission eminent domain authority over the siting of
    electric transmission facilities similar to the authority the
    Commission exercises with respect to the siting of interstate
    gas pipelines.
        I'm not advocating that we have siting authority for
    electric distribution lines or powerplants. The States are best
    suited to that. My written testimony goes further into my
    rationale for not exactly agreeing with the regulatory compact
    approach.
        Finally, I agree with the White Paper's conclusion that
    current tax code restrictions will prevent public power
    entities from engaging in certain restructuring efforts, and I
    believe the tax code's private use restrictions on the
    transmission facilities of public power entities financed by
    tax-exempt bonds may prevent the transfer of operational
    control over these facilities to a for-profit transmission
    company.
        So I believe it's crucial that public power entities
    participate fully in RTOs, and new legislation should help
    eliminate these tax restrictions.
        In conclusion, Mr. Chairman and members, I urge Congress to
    focus its attention over the coming months on these and related
    policy areas in order to achieve competitive and properly
    functioning electric markets that will ultimately provide real
    benefits to American consumers. Thank you for inviting me this
    morning.
        [The prepared statement of Ms. Breathitt follows:]
      Prepared Statement of Linda Breathitt, Commissioner, Federal Energy
                             Regulatory Commission
        Mr. Chairman and Members of the Committee, I appreciate this
    opportunity to appear before you today to discuss proposals relating to
    comprehensive electricity legislation. Today's hearing is timely
    because there is a real need for Federal legislation to address
    important and unresolved issues in the electric industry, such as
    reliability, jurisdiction, transmission siting, and tax restrictions.
    In addition, legislation is needed to ensure that the Federal Energy
    Regulatory Commission has sufficient authority to continue its efforts
    to establish fair, open and competitive bulk power markets.
        The ``White Paper on Electricity Legislation'' prepared by Chairman
    Bingaman provides a good starting point for a discussion of these
    legislative needs and objectives. I believe the White Paper correctly
    identifies many of the key elements that federal legislation should
    address, including: (1) transmission jurisdiction; (2) reliability; (3)
    transmission siting; (4) market rules; (5) PUHCA and PURPA issues; and
    (6) tax code restrictions. Congress must focus its attention on these
    and related policy areas in order to achieve competitive and properly
    functioning electric markets that will ultimately provide real benefits
    to American consumers.
                           transmission jurisdiction
        The White Paper suggests that the Commission should have
    jurisdiction over all transmission, whether bundled or unbundled, and
    that the Commission's jurisdiction should be extended to public,
    cooperative and federal utilities. This is an essential element for any
    proposed energy legislation.
        Full, non-discriminatory open access to transmission services is a
    necessary condition for the development of competitive wholesale bulk
    power markets. However, certain impediments to full open access remain.
    One such impediment is that a significant portion of the nation's
    transmission grid is owned and operated by utilities not subject to
    FERC's open access requirements. I would support legislation that
    extends the Commission's open access regulatory authority to non-public
    utilities that own, operate, or control transmission facilities,
    including Federal Power Marketing Administrations, the Tennessee Valley
    Authority, municipal utilities, and cooperatively-owned utilities. I
    note that S. 1273, introduced in the 106th Congress by Senator
    Bingaman, would extend Commission authority in this manner. I have
    previously stated this sentiment in testimony before this Committee on
    April 27, 2000.
        The Committee's White Paper also calls for legislation affirming
    the Commission's authority to order utilities to join regional
    transmission organizations (RTOs). In the Commission's Order No. 2000,
    issued on December 20, 1999, we concluded that the Commission has
    sufficient authority, pursuant to the Federal Power Act, to order a
    public utility, on a case-by-case basis, to participate in an RTO upon
    finding, and where supported by the record, that the public utility is
    engaging in unjust, unreasonable, unduly discriminatory or
    anticompetitive practices, and that participation in an RTO is a
    reasonable remedy for such behavior. However, the FPA is not express
    with regard to the Commission's authority to order utilities to
    participate in RTOs. Therefore, I agree with the premise in the White
    Paper that legislation is needed to affirm the Commission's authority.
    If the Commission determines that it must resort to mandatory RTO
    participation, such legislation would allow the Commission and the
    industry to avoid costly and time-consuming litigation of the
    Commission's authority.
        Finally, the White Paper states that interconnection rules should
    be clarified in order to ensure that new sources of generation are able
    to interconnect to the transmission system. I agree with the contention
    that interconnection-related issues need to be addressed. In recent
    orders we have stated our intent to evaluate in the near future the
    importance of standardizing interconnection policies and procedures.
                                  reliability
        The White Paper contends that legislation should authorize a system
    for assuring the reliability of the grid that: (1) is mandatory, (2)
    requires sanctions and penalties for failure to comply with reliability
    rules, and (3) is subject to federal oversight. I believe that the
    voluntary reliability system, which has been in place for over three
    decades, should be replaced with one in which a self-regulated
    independent reliability organization, with oversight by the Commission,
    establishes and enforces mandatory reliability standards. I believe
    such a change in the manner in which the reliability of the
    interconnected grid is overseen and managed is required in order to
    ensure a competitive bulk power market. S. 2071, a stand-alone measure
    to promote the reliability of the nation's transmission system which
    was approved by the Senate during the 106th Congress, established such
    a self-regulated independent reliability organization, with oversight
    by the Commission. S. 388 and S. 597, introduced in the current
    Congress, include similar provisions. I wholeheartedly support these
    provisions.
                              transmission siting
        I agree with the basic premise articulated in the White Paper that
    the goal of a national grid may be unattainable absent a new approach
    to transmission planning, expansion, and siting. Currently, under the
    Federal Power Act, the Commission has no role in the permitting and
    siting of new transmission facilities. I believe that shortages of
    transmission are no longer just single state issues; instead, these
    shortages have become interstate commerce issues that must be addressed
    by the federal government.
        The White Paper proposes to use federal eminent domain as a
    backstop to a cooperative, regionally-based approach to transmission
    and siting issues. In essence, the proposed legislation would grant
    FERC eminent domain authority, which we, in turn, would be allowed to
    cede to regional regulatory compacts. My primary concern with this
    approach is that it could result in costly and inefficient duplication
    of processes, records, and efforts by the various decisional
    authorities involved in transmission siting. As we have seen with the
    Commission's hydro power licensing program, for example, it is very
    difficult to build speed into a process over which several entities
    exercise jurisdiction. While the Commission has made great progress in
    streamlining cumbersome processes in this regard, I would caution the
    Committee about initiating a new regime for transmission siting that
    could easily be mired in bureaucratic wrangling.
        My recommendation would be for FERC to be granted Federal eminent
    domain authority similar to the authority the Commission exercises with
    respect to the siting of interstate natural gas pipelines under the
    Natural Gas Act. The Commission could build into its implementation of
    such legislation procedures to ensure cooperation and regional input. I
    believe this more centralized approach is necessary from an efficiency
    standpoint, and will result in less bureaucracy, more timely decisions,
    and lower costs for transmission providers and consumers. Furthermore,
    I am not advocating that the Commission should have siting authority
    for electric distribution lines or power plants. I believe the states
    are best suited to make those determinations.
                           market transparency rules
        The White Paper asserts that FERC and the Energy Information
    Administration should be granted clear authority to collect and publish
    appropriate transactional data, while protecting proprietary
    information. I strongly believe that transparency acts as an effective
    deterrent to market power by allowing regulators and the public to
    monitor the marketplace for abuses. The lack of accurate, timely, and
    easily accessed pricing information can impede competition and
    liquidity; and for that reason, I have supported many FERC initiatives
    aimed at expanding the range of publicly available transactional
    information. I am pleased that the Committee recognizes the
    relationship between strong market transparency rules and effective
    regulation.
                             puhca and purpa issues
        The White Paper proposes the conditional repeal of both the Public
    Utility Holding Company Act (PUHCA) and the mandatory purchase
    requirements of the Public Utilities Regulatory Policy Act (PURPA). The
    repeal of PUHCA would be subject to the Commission being given enhanced
    authority to address market power problems, and both the Commission and
    the states being given greater access to the books and records of
    holding companies. The repeal of PURPA's mandatory purchase requirement
    would be subject to new provisions that would remove disincentives for
    renewable generation sources. I support the prospective repeal of PUHCA
    on the condition that the Commission and state authorities have
    sufficient access to books and records of all companies in a holding
    company system. I also support an unconditional prospective repeal of
    the mandatory purchase requirement in Section 210 of PURPA.
                             tax code restrictions
        Current tax laws impede certain public power and cooperatively-
    owned utilities from fully participating in the development of regional
    transmission organizations. One such example is the Internal Revenue
    Service Code's ``private use'' restrictions on the transmission
    facilities of public power entities financed by tax-exempt bonds. Such
    restrictions may prevent the transfer of operational control of
    existing transmission facilities financed by tax-exempt bonds to a for-
    profit transmission company. I believe it is crucial that public power
    and cooperative entities, which constitute such an important part of
    the nation's electric system, participate fully in RTOs. In fact, in
    Order No. 2000, the Commission stated explicitly that a properly formed
    RTO should include all transmission owners in a specific region,
    including municipals, cooperatives, Federal Power Marketing Agencies,
    Tennessee Valley Authority and other state and local entities.
    Participation by these entities will enhance the reliability and
    economic benefits of RTOs.
        The Committee's White Paper notes that tax code restrictions will
    prevent public power entities from engaging in certain structural
    changes and states that these provisions should be repealed. I agree
    with this finding and urge Congress to take the necessary steps to
    eliminate these and other impediments to the formation of fully
    functioning RTOs and electric markets.
                                   conclusion
        Comprehensive federal electric legislation is needed to address
    important and unresolved issues in the restructuring of the electric
    industry. The Commission must have sufficient authority to advance its
    goals of achieving fair, open and competitive bulk power markets.
    Current impediments to the development of such markets must be removed
    as quickly as possible so that the intended benefits of restructuring
    for the American consumer ultimately may be realized.

        The Chairman. Thank you very much.
        Commissioner Massey, why don't you go ahead?

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

        Mr. Massey. Thank you, Mr. Chairman and members of the
    committee. It's my pleasure to appear before you this morning.
    Thank you for the invitation.
        I found the White Paper to be exceptionally well done, Mr.
    Chairman. I thought it provided a very persuasive rationale for
    a number of legislative changes. I'm tempted to say I endorse
    it word for word and just shut up, with one exception. I would
    grant siting authority to FERC similar to what we have with
    respect to natural gas pipelines.
        Over the past 5 years, we've sited about 12,000 miles of
    new interstate pipelines that will serve the market well. No
    similar expansion of the transmission grid on the electric side
    has occurred, and it's in many States extraordinarily difficult
    to site transmission.
        Until this problem is solved, we're simply not going to
    have well-functioning markets that benefit consumers. But let
    me mention a few issues that are highlighted by the White Paper
    that I strongly agree with.
        We need one set of rules for all interstate transmission.
    Thirty percent of the facilities are exempt under existing law
    because they're TVA facilities, muni facilities and so forth.
    That creates a patchwork that does not support a competitive
    market.
        No. 2, all transmission, whether bundled or unbundled,
    should be subject to FERC jurisdiction. That does not mean that
    we have to have the decision-making authority over retail
    access. Simply giving us jurisdiction over all transmission
    does not mean that a State has to move to retail choice, nor
    does it mean that FERC can order a retail choice.
        We need clear authority to form and shape RTOs. We're
    making a lot of progress in this area. I think if the industry
    got a strong, clear message from Congress that the formation of
    large RTOs is in the public interest, it would be
    extraordinarily helpful in getting this done quickly.
        Likewise, I believe Congress should send a clear message
    that we need nationwide standardized generation interconnection
    policies and practices. Interconnection legerdemain is anti-
    competitive and makes it difficult for generators to get sited.
    I think this is a difficulty for generation in many areas of
    the country. It's a particularly difficult problem for
    distributed generation as well. So I support the White Paper in
    this respect.
        I agree with my colleagues that Congress should create a
    framework for mandatory reliability standards in the industry.
    I makes no sense in this competitive era to have an industry
    that is governed by voluntary standards for reliability. I
    think that is a big problem.
        In the area of rates and market power, I would amend
    section 206 to give the Commission clear authority to order
    refunds whenever it finds that rates charged were unjust and
    unreasonable. As you could see in yesterday's order, section
    206 means that we cannot go back to June, July, August, or
    September of 2000 and order refunds even though it was very
    clear that prices during those months were unjust and
    unreasonable. The restrictions of section 206 prohibit us from
    doing so.
        The Commission needs civil penalty authority if we're going
    to be the tough cop on the beat. We have some civil penalty
    authority with respect to the natural gas industry. We need it
    for the electric power industry. In the merger area, we need
    authority over generation mergers, over holding company
    mergers, and over all vertical mergers regardless of how they
    are structured.
        I would give the Commission direct authority to mitigate
    market power. Right now our authority is generally a
    conditioning authority, and it's a substantial authority. Part
    of the problem is political will. It's not legal constraints.
    But it would be helpful if the Commission had direct authority
    to mitigate market power.
        It would be helpful if the Congress expressed its interest
    promoting in markets that have a high degree of demand
    responsiveness. I do not believe that we're ever going to deal
    with the issue of market power effectively or high prices
    effectively until there is a robust demand response when prices
    get high. Congress should recognize this fact and direct FERC
    and the States to work together to solve this problem.
        I've given you my thoughts on transmission siting. I know
    that's a very contentious issue, and it is the one issue on
    which I have some disagreement with the White Paper. Otherwise,
    I agree with what the White Paper says about PUHCA and PURPA
    repeal, its comments on renewable resources, providing
    information to consumers, and the repeal of tax provisions that
    inhibit structural changes in the market. Thank you, Mr.
    Chairman.
        [The prepared statement of Mr. Massey follows:]
     Prepared Statement of William L. Massey, Commissioner, Federal Energy
                             Regulatory Commission
        Mr. Chairman and Members of the Committee on Energy and Natural
    Resources, thank you for the opportunity to testify on comprehensive
    electricity restructuring legislation. Let me state at the outset that
    I have reviewed Chairman Bingaman's excellent White Paper and agree
    with all of its recommendations, save one: I would recommend that
    Congress transfer jurisdiction over the siting of interstate
    transmission to the Commission, an agency with explicit interstate
    responsibilities.
        With notable exceptions such as PURPA and EPACT, the legal
    framework that governs the electricity industry is now more than sixty
    five years old and assumed an old fashioned cost of service regime.
    Simply stated, the Commission does not have all of the tools it needs
    both to promote large regional markets and to protect the public
    interest. I would like to underscore a number of legislative changes
    that are critical to achieving the goal of well functioning competitive
    markets that yield substantial consumer benefits.
                           transmission jurisdiction
    A. One Set of Rules
        Congress should place all interstate transmission under one set of
    open access rules. That means subjecting the transmission facilities of
    municipal electric agencies, rural cooperatives, the Tennessee Valley
    Authority, and the Power Marketing Administrations to the Commission's
    open access rules. These entities control 30% of the nation's
    electricity transmission grid. Their current non-jurisdictional status
    has resulted in a patchwork of rules that hinder seamless electricity
    markets. Markets require an open non-discriminatory transmission
    network in order to flourish.
        In addition, all transmission, whether it underlies an unbundled
    wholesale, unbundled retail, or bundled retail transaction, should be
    subject to one set of fair and non-discriminatory interstate rules
    administered by the Commission. This will give market participants
    confidence in the integrity and fairness of the delivery system, and
    will facilitate robust trade by eliminating the current balkanized
    state-by-state rules on essential interstate facilities.
    B. Regional Transmission Organizations
        While the Commission has made substantial progress in forming the
    Regional Transmission Organizations that are critical to the
    competitive market place, our hand would be strengthened by a clear
    declaration by the Congress that these institutions are in the public
    interest and should be formed. One appropriate action would be to give
    the Commission clear authority to order the formation of such
    institutions in compliance with Commission standards. I firmly believe
    that large RTOs consistent with FERC's vision in Order No. 2000 are
    absolutely essential for the smooth functioning of electricity markets.
    RTOs will eliminate the conflicting incentives vertically integrated
    firms still have in providing access. RTOs will streamline
    interconnection standards and help get new generation into the market.
    RTOs will improve transmission pricing, regional planning, congestion
    management, and produce consistent market rules. We know for a fact
    that resources will trade into the market that is most favorable to
    them. Trade should be based on true economics, not the idiosyncracies
    of differing market rules across the region. A clear message from
    Congress would certainly speed the formation of these critical
    institutions.
    C. Generation Interconnection
        I would recommend that Congress direct the Commission to adopt
    uniform nationwide standards that streamline the process of
    interconnecting generators to the grid. The Commission has taken some
    steps in this direction by encouraging utilities to file their
    interconnection rules, but more must be done. Generation siting
    decisions should not depend on how easy it is to hook up in a
    particular region or with a certain transmission provider. Standardized
    and uniform rules promulgated by the Commission are necessary.
                                  reliability
        We need mandatory reliability standards. Vibrant markets must be
    based upon a reliable trading platform. Yet, under existing law there
    are no legally enforceable reliability standards. The North American
    Electric Reliability Council (NERC) does an excellent job preserving
    reliability, but compliance with its rules is voluntary. A voluntary
    system is likely to break down in a competitive electricity industry.
        I strongly recommend federal legislation that would lead to the
    promulgation of mandatory reliability standards. A private standards
    organization (perhaps a restructured NERC) with an independent board of
    directors could promulgate mandatory reliability standards applicable
    to all market participants. These rules would be reviewed by the
    Commission to ensure that they are fair and not unduly discriminatory.
    The mandatory rules would then be applied by RTOs, the entities that
    will be responsible for maintaining short-term reliability in the
    marketplace. Mandatory reliability rules are critical to evolving
    competitive markets, and I urge Congress to enact legislation to
    accomplish this objective.
                             rates and market power
    A. Refunds
        I believe the Commission needs additional authority to properly
    address the issue of refunds for unjust and unreasonable wholesale
    electricity prices. Section 206 of the Federal Power Act limits a
    refund effective date to not earlier than 60 days after a complaint is
    filed or an investigation is started. Whether the Commission can order
    refunds retroactively from the refund effective date is an issue that
    is still before the Commission. I note, however, that in an order
    issued November 1, 2000, the Commission observed that the Federal Power
    Act and the weight of court precedent strongly suggest that retroactive
    refunds are impermissible. I recommend clear statutory language that
    would allow the Commission to order refunds for past periods if the
    rates charged are determined to be unjust and unreasonable. Limitations
    on how far back in time the Commission can order refunds may be
    appropriate.
    B. Civil Penalties
        I recommend that the Commission be given authority to assess civil
    penalties against participants that engage in prohibited behavior in
    electricity markets, such as anticompetitive acts and violations of
    tariff terms and conditions. If the Commission is to be the ``cop on
    the beat'' of competitive markets, we must have the tools needed to
    ensure good behavior. Refunds alone are not a sufficient deterrent
    against bad behavior. Simply giving the money back if you are caught is
    not enough. The consequences of engaging in prohibited behavior must be
    severe enough to act as a deterrent.
    C. Mergers and Consolidations
        To ensure that mergers do not undercut our competitive goals, the
    Commission's authority over mergers involving participants in
    electricity markets must be strengthened in a number of ways.
    Consolidations of market participants can have adverse consequences to
    the functioning of electricity markets. The Commission's detailed
    experience with electricity markets and its unique technical expertise
    can provide critical insights into a merger's competitive effects. The
    Commission's authority to review mergers should be strengthened to
    ensure that all significant mergers involving electricity market
    participants are reviewed.
        I recommend that the Commission be given direct authority to review
    mergers that involve generation facilities. The Commission has
    interpreted the FPA as excluding generation facilities per se from our
    direct authority, although that interpretation is currently before the
    courts. It is important that all significant consolidations in
    electricity markets be subject to Commission review. For the same
    reason, the Commission should be given direct authority to review
    consolidations involving holding companies.
        I am also concerned that significant vertical mergers can be
    outside of our merger review authority. Under the current section 203
    of the FPA, our merger jurisdiction is triggered if there is a change
    in control of jurisdictional assets, such as transmission facilities.
    Consequently, consolidations can lie outside of the Commission's
    jurisdiction depending on the way they are structured. For example, a
    merger of a large fuel supplier and a public utility would not be
    subject to Commission review if the utility acquires the fuel supplier
    because there would be no change in control of the jurisdictional
    assets of the utility. If the merger transaction were structured the
    other way, i.e., the fuel supplier acquiring the utility, it would be
    subject to Commission review. Such vertical consolidations can have
    significant anticompetitive effects on electricity markets. Those
    potential adverse effects do not depend on how merger transactions are
    structured, and thus our jurisdiction over those transactions should
    not depend on how they are structured. Therefore, I recommend that the
    Commission be given authority to review all consolidations involving
    electricity market participants.
    D. Market Power Mitigation
        Market power still exists in the electricity industry. The FERC,
    with its broad interstate view, must have adequate authority to ensure
    that market power does not squelch the very competition we are
    attempting to facilitate. However, the Commission now has only indirect
    conditioning authority to remedy market power. This is clearly
    inadequate. Therefore, I recommend legislation that would give the
    Commission the direct authority to remedy market power in wholesale
    markets, and also in retail markets if asked by a state commission that
    lacks adequate authority. For example, such authority would allow the
    Commission to order structural remedies directly, such as divestiture,
    needed to mitigate market power.
    E. Demand Responsiveness
        Markets need demand responsiveness to price. This is a standard
    means of moderating prices in well-functioning markets, but it is
    generally absent from electricity markets. When prices for other
    commodities get high, consumers can usually respond by buying less,
    thereby acting as a brake on price run-ups. If the price, say, for a
    head of cabbage spikes to $50, consumers simply do not purchase it.
    Without the ability of end use consumers to respond to price, there is
    virtually no limit on the price suppliers can fetch in shortage
    conditions. Consumers see the exorbitant bill only after the fact. This
    does not make for a well functioning market.
        Instilling demand responsiveness into electricity markets requires
    two conditions: first, significant numbers of customers must be able to
    see prices before they consume, and second, they must have reasonable
    means to adjust consumption in response to those prices. Accomplishing
    both of these on a widespread scale will require technical innovation.
    A modest demand response, however, can make a significant difference in
    moderating price where the supply curve is steep.
        Once there is a significant degree of demand responsiveness in a
    market, demand should be allowed to bid demand reductions, or so called
    ``negawatts,'' into organized markets along with the megawatts of the
    traditional suppliers. This direct bidding would be the most efficient
    way to include the demand side in the market. But however it is
    accomplished, the important point is that market design simply cannot
    ignore the demand half of the market without suffering painful
    consequences, especially during shortage periods. There was virtually
    no demand responsiveness in the California market. Customers had no
    effective means to reduce demand when prices soared.
        It would be helpful for Congress to send a message that instilling
    a significant measure of demand responsiveness into electricity markets
    is in the public interest. I would recommend that legislation strongly
    encourage FERC and state commissions to cooperate in designing markets
    that include demand responsiveness. This would help to ensure just and
    reasonable wholesale prices and would be an effective market power
    mitigation measure.
                              transmission siting
        I would recommend that Congress transfer to the Commission the
    authority to site new interstate electric transmission facilities. The
    transmission grid is the critical superhighway for electricity
    commerce, but it is becoming congested due to the increased demands of
    a strong economy and to new uses for which it was not designed.
    Transmission expansion has not kept pace with these changes in the
    interstate electricity marketplace.
        Although the Commission is responsible for well functioning
    electricity markets, it has no authority to site the electric
    transmission facilities that are necessary for such markets to thrive
    and product consumer benefits. Existing law leaves siting to state
    authorities. This contrasts sharply with section 7 of the Natural Gas
    Act, which authorizes the Commission to site and grant eminent domain
    for the construction of interstate gas pipeline facilities. Exercising
    that authority, the Commission balances local concerns with the need
    for new pipeline capacity to support evolving markets. We have
    certificated well over 12,000 miles of new pipeline capacity during the
    last six years. No comparable expansion of the electric grid has
    occurred.
        I recommend legislation that would transfer siting authority to the
    Commission. Such authority would make it more likely that transmission
    facilities necessary to reliably support emerging regional interstate
    markets would be sited and constructed. A strong argument can be made
    that the certification of facilities necessary for interstate commerce
    to thrive should be carried out by a federal agency.
                           market transparency rules
        I agree with the White Paper's recommendations in this area.
                            miscellaneous provisions
        I agree with the remainder of the White Paper's recommendations
    with respect to the repeal of PUHCA and PURPA, and with respect to
    renewable resources, information to customers, a Public Benefits Fund,
    and the repeal of tax provisions that inhibit structural changes in the
    market.
                                   conclusion
        I stand ready to answer questions and to assist the Committee in
    any way. Thank you for this opportunity to testify.

        The Chairman. Thank you, very much.
        Commissioner Wood, why don't you go ahead.

      STATEMENT OF PATRICK WOOD III, COMMISSIONER, FEDERAL ENERGY
                         REGULATORY COMMISSION

        Mr. Wood. Thank you, Mr. Chairman, Senator Feinstein. I
    think in reading the White Paper, it just occurs to me that
    anywhere you plant the flag is going to be a battleground, so
    you might as well go ahead and plunge deep in the pro-
    competition, pro-customer territory and plant it deep. And
    that's where they'll start nibbling.
        I think issues like transmission siting, FERC's
    jurisdiction over bundled rates, reliability--all these are
    going to be fought, so we might as well plant the flag deeply
    where it ought to end up for the good of the public. And I
    applaud this paper and am heartened when I read it, and I read
    it after I read the President's energy strategy and look at a
    bi-partisan, almost seamless web of how to get from the battle
    raging around your feet to a vision of the future that is
    sustainable and makes this a country that we're proud of.
        I was young FERC staffer here in 1992 when the President's
    father signed the Energy Policy Act, and there weren't a whole
    lot of electric provisions in that act, but there were a few.
    And those were pretty clear in my mind. I think they're clear
    as I read them now, nine years later, about the vision of
    Congress at that point to get to a competitive power market
    from coast to coast.
        We've got a long way to go to get there. I think the
    legislation authority--and my colleague Bill Massey just said
    this--the legal authority is there. The reaffirmation of that
    by the current Congress would certainly strengthen the
    Commission's hand in doing the difficult tasks of converting
    the vision into reality. And so in that regard, while I do
    believe the Commission has relatively broad power to enact the
    vision of a competitive market that works for the benefit of
    both investment and of the customer, any affirmation of that by
    this Congress would certainly help.
        The specific issue of an RTO--I guess I've thought about it
    in a little bit different framework than some of the debate has
    gone, and so I want to just throw that into the discussion. An
    RTO--Regional Transmission Organization--of which--as this
    Commission laid out 2 weeks ago--there would be five in this
    country--the four FERC jurisdictional and the one in Texas--
    that they would have really four principal goals. And they
    would fall under one roof, which I think is the distinction
    between some of the talk on reliability being over here and
    siting authority here.
        I think the Regional Transmission Organization is a
    recognition of the realities of physics reflecting the
    interstate nature of most of the power grids in this continent
    and the political sensitivities to not federalize every problem
    but to look instead at an in-between step, which is an
    empowered regional organization, as our prior witness talked
    about, which dealt with the issues unique to that region of the
    country.
        So the four things I would see these RTOs doing--which are
    largely captured by the Commission's order last year in Order
    2000--are first of all, implementation of the NERC type
    reliability functions, not as a stand-alone group but as part
    of what an RTO does. It looks at the day-to-day reliability of
    the grid to make sure that lines don't get overloaded, that
    sufficient voltage support is existing around the entire grid.
    Secondly, that competitive open access of the 1992 act is part
    of the reality there.
        Those two things sometimes come in conflict. The
    reliability needs and the competitive open access needs some
    time are in tension. And I think those need to be dealt with
    under the same roof so that those balances and trade offs and
    analyses can be made together.
        Thirdly and importantly as we've seen particularly out in
    the West, a goal of the RTO should be resource adequacy. We're
    not just talking about whether there are enough power plants.
    That's certainly a big part. But also; are there sufficient
    natural gas pipelines? Is there sufficient access to coal
    resources or to renewable resources? Is there--as we've talked
    about many times before this committee and at the Commission--
    is there sufficient demand side participation in the market.
    Bill just mentioned that in his comments as well.
        The fourth goal of the RTO should be transmission planning.
    Is the grid robust enough? At that point, I guess I would vary
    a little bit from both the white paper and my colleagues to say
    that the RTO really is the one in charge of making sure the
    grid works. So if the RTO thinks there needs to be a
    transmission line from this part of Montana to that part of
    Idaho, theirs should be the dispositive voice. It has to go
    through regulatory approval at the State level--or the FERC as
    a backstop I'm relatively indifferent to--but if the RTO is the
    one directing where transmission planning goes for the
    foreseeable future, that is the appropriate body that balances
    the right interest.
        So putting these all under one roof makes a lot of
    difference, I think. In diagnosing the California problem, one
    of the things that hasn't been talked about was the multi-
    headed master. You have the PUC here, the Energy Commission
    here, siting authorities here. You have a couple of FERC
    jurisdictional entities--the ISO and the PX--over here. You
    have a reliability council, the Western Systems Coordinating
    Council. A bunch of independent organizations that no matter
    how many times you tell them to work together, they really have
    their own institutional kind of inertia and don't work together
    well.
        I think the ``it's their problem'' approach has been really
    just been frustrating, and we're part of the problem, I will
    confess. But I do think that a vision of the world that puts
    these under one body to which both you and we can hold them
    accountable for the fulfillment of a broad panoply of market
    goals is a very important vision. And I applaud my colleagues
    for the vision that we took two weeks ago to really set that
    future up. It's going to need some backstopping from Congress
    without question.
        I just think if a dozen countries in Europe can pull
    together, overcome language and cultural differences to put
    together an international grid, we certainly ought to be able
    to do this. And I look forward to working with you all to get
    there.
        [The prepared statement of Mr. Wood follows:]
     Prepared Statement of Patrick Wood, III, Commissioner, Federal Energy
                             Regulatory Commission
        Mr. Chairman and Members of the Committee, thank you for the
    invitation to appear this morning. I share the view that the nation
    needs a robust, affordable, reliable electricity sector. Almost ten
    years after Congress laid out a vision of competitive power markets in
    the 1992 Energy Policy Act, the goal is largely unfulfilled. There are
    some well-functioning competitive power markets in the nation, but most
    of the nation's customers are not in them.
        I believe the FERC has sufficient statutory authority to do much to
    fulfill Congress' vision already, but, based on personal experience as
    a state regulator in Texas, a ringing legislative reaffirmation of this
    goal, either through clarifications or changes in the law, or more
    informally, through hearing such as this one, will speed the advent of
    coast-to-coast competitive power markets.
        To address the points in the Chairman's recent White Paper.
                          1. transmission jurisdiction
        It would simplify and clarify FERC's ability to create truly open,
    competitive electric markets if FERC has clear authority over all
    interstate transmission. Unless every transmission owner participates
    in Regional Transmission Organizations (RTOs) of some sort, there will
    remain barriers of legality, cost, and time that will slow the entry of
    new generators and increase the wholesale and retail costs of
    electricity. This should not be viewed as a raid on state jurisdiction,
    but a necessary step to provide some needed certainty for investment in
    this crucial industry. Transmission is a critical component of the
    electric power industry, but on average, it only makes up about 5-7
    percent of the total retail cost of electricity. Having one agency
    making the calls on cost recovery and nondiscriminatory treatment of
    customers makes a lot of sense.
        I wholeheartedly agree that interconnection rules and procedures
    should be standardized, to minimize the cost and barriers for new
    generation. A related issue is how costs of new interconnection should
    be borne my colleagues and I have already agreed to address both of
    these issues more globally in the near future. I also believe the FERC
    has a leadership role to play in establishing interconnection rules and
    procedures for small-scale, distributed generation as well.
                                 2. reliability
        Maintaining grid reliability is a basic duty of utilities. Over the
    years, industry members have devised a number of standards that govern
    reliable operation of the grid. More often, in recent years, pure
    reliability standards have come under some tension with the needs of a
    robustly competitive marketplace. Combining the responsibility for
    balancing reliability and competitive open access in the regional
    transmission organizations makes a lot of sense. FERC should be given
    clearer authority to enforce (either through the RTOs, or directly, if
    necessary) all rules against any party who fails to adhere to the
    standards.
                           3. rates and market power
        Without question, FERC should promote competitive markets; I doubt
    an additional legislative mandate is required. Workable competition in
    a market is a prerequisite for deregulation of an electricity market,
    and adequate infrastructure and balanced market rules are the defining
    characteristics of workable competition. FERC has a number of tools
    already to ensure that these events occur in the correct sequence, but
    one additional tool might be helpful: the ability to assess
    administrative penalties for violations of the law or Commission rules.
    (This would also encompass reliability infractions mentioned above).
        Vigilance is the price of liberty. FERC must watch over these
    markets as the cop on the beat walks through neighborhoods to keep them
    safe. In recent weeks, the FERC has made notable strides toward meeting
    this challenge but more work will be required. We must have ongoing,
    aggressive, sophisticated market surveillance together with RTOs and
    state regulators. We must couple this with the understanding of how to
    know when a market is working properly, how to diagnose when and how
    markets go awry, and how to intervene in ways that are effective
    without destabilizing future investment in the sector.
        Markets work far better when all buyers and sellers see accurate
    price signals. Because this necessarily involves both state and federal
    regulators, coordination is necessary to pursue a host of customer-
    focused goals: demand-side resource participation in power markets;
    combined heat and power and classic energy conservation measures;
    access to advanced technologies such as real-time and demand-metering,
    distributed generation, and energy storage; and other measures that
    give customers more control and options over their energy use and its
    costs.
                        4. regional planning and siting
        Transmission investment is more than just who sites the facility;
    it involves a full and engaged process of planning, consultation and
    execution. Placing the responsibility for regional transmission
    planning in the hands of RTOs makes a lot of sense as RTOs will have
    the clearest view of what new transmission is needed to facilitate
    competition and enhance reliability. A proper balance of state and
    federal responsibility might go something like this: the regional RTO
    makes a pure engineering determination that a specific need exists for
    certain amounts of transmission in certain portions of the grid. Either
    a competitive process or a direct designation is used to determine who
    will build such a facility. Then the relevant state or states focus on
    line routing and environmental issues, ideally through a multi-state
    regional regulatory process. Given the urgent need for many new
    transmission lines to relieve reliability constraints or economic
    constraints in the national grid, some time limit for action could be
    placed upon these state-specific approvals--for instance, if a state or
    regional transmission authority has not acted upon a transmission
    project within one year of the filing date, then the case should be
    sent up to FERC for formal review.
                          5. market transparency rules
        Workable markets rest on a foundation of good, accessible and
    timely information. If there is too little information available to
    market participants, players' decisions may be poorly founded and risks
    and their costs increase as they leave money on the table. Other
    information crosses the line into strategic, business-critical data
    that helps individual competitors more than it helps the market as a
    whole. Overall, we need to create market rules and authority that
    assure the collection and fair dissemination of market-supporting data
    on market transactions. But we should rethink which data we need and
    how we collect, process and use these data it does no good if we
    collect the wrong information, or collect it so late and hold it for so
    long that it has no value to market participants. I do not have any
    specific recommendations at this time, but I will be working with my
    fellow commissioners and staff at FERC to better understand what we
    need to do to improve market information and transparency.
                               6. tax provisions
        It is important that tax laws are not used as excuses by certain
    market players to not move aggressively toward competitive power
    markets. In that regard, proposals to address public power and
    cooperatives' private use restrictions and investor-owned utilities'
    current disincentives to transfer transmission assets to RTOs should be
    addressed in legislation.
                                    7. other
        I have been of several minds about the best location of customer
    protection duties such as customer information labeling and slamming/
    cramming prevention. Rather than house these duties at the Federal
    Trade Commission, I think they might fit better at the FERC. This would
    be good not only for the issue, but for the FERC. As state commissions
    do, FERC would benefit from being closer to the people directly
    impacted by our regulation. It also makes ``good government'' sense to
    have one federal agency overseeing electric matters, not several. A
    regulator that has all aspects of an industry under its umbrella can
    generally be more effective and efficient in balancing the many
    interests involved.

        The Chairman. Thank you very much.
        Commissioner Brownell.

     STATEMENT OF NORA MEAD BROWNELL, COMMISSIONER, FEDERAL ENERGY
                         REGULATORY COMMISSION

        Ms. Brownell. Thank you, Mr. Chairman. The good news about
    responding to such a well thought out paper is that it's easy
    to agree. You've made our job easier, and being last in a list
    of smart colleagues makes it that much easier.
        I just want to comment on a couple of things. The first is
    why we must change. I really applaud the efforts of the
    committee to grapple with the issues of transforming energy
    markets. Balancing competing agendas and leading the charge is
    neither easy nor neat.
        Many people have asked you and raised with us why we have
    to change at all. And I think we have to remind ourselves that
    this country has enjoyed a standard of living that is
    unparalleled precisely because it has been willing to take
    risks, embrace change and leverage its intellectual assets.
        It would be a tragedy to let jurisdictional differences,
    regional differences, get in the way of a vision that would
    make us miss the opportunities created by the advances in
    technology that have transformed so many other industries.
    Without a coherent integrated national energy policy and its
    associated legislative and administrative changes, we will
    disadvantage our industries, our environment, and our
    constituents.
        I want to quote from the New York Times yesterday from a
    professor commenting on the changes in New York. 'Every process
    of change reaches a point where it all comes together and
    accelerates exponentially, and we've reached that point with
    electricity. In 5 years we won't even recognize the landscape.'
        Frankly, if you do your job and we do our job, I hope we
    don't recognize the landscape next year. Let me comment on just
    a couple of the high points of your White Paper and a couple of
    additions.
        As my colleagues have said, and I think Pat articulated
    extremely well, the critical nature of RTOs to a variety of
    issues--planning, reliability, long-term vision, and in fact,
    building out an infrastructure, which is so critical in
    creating the certainty that will attract the investment to do
    that.
        We may debate on what they should look like and how they
    should work, but we must get to those, because you can
    understand that they are fundamental to any transformation of
    the market. And we can structure regulatory oversight
    committees. We can have regulatory compacts. But we must
    empower the FERC, by reaffirming its power to create these RTOs
    and the rules that regulate them.
        Part of the change that we are seeing and certainly
    recommending such as the repeal of PURPA and PUHCA, will also
    require us to strengthen our market monitoring. And I would
    like to suggest that, in fact, we will need additional tools,
    and we may come to you and ask for those tools. We do need
    civil penalties. We need to have the ability to cause pain, and
    we need to stop whatever abuses may be happening in the market
    as quickly and as efficiently as possible.
        Part of that is also empowering us to get additional
    information from all the entities playing in the market. I
    think--I have not seen the legislation that's been introduced,
    but transparency is important, is critical, and everyone must
    be willing to share those documents.
        I would also add that one of the regional opportunities for
    cooperation is for us to develop market monitoring systems and
    share them with both the States and the regions. States are
    really resource poor and may not be able to develop the tools
    that they need to look at what's happening in their own market.
    So I think there are lots of opportunities for us to work
    together there.
        We've talked about standardized interconnections and
    uniform business rules. The market doesn't work unless everyone
    has to play by the same rules, and we are truly disadvantaging
    the introduction of new technologies by the lack of
    interconnection standards. So I would--we have certainly all as
    a group I think committed to moving forward with those
    principles--but I think it's important that you speak on those
    principles.
        I appreciate the concerns that some of the regions have
    expresses and certainly some of your members have expressed
    about he cost benefit analysis of RTOs. And it may be that the
    committee wants to empower DOE or some other entity to support
    an independent evaluation of cost benefit analysis among the
    regions.
        We need to get comfortable. We are comfortable that those
    benefits are there and benefits that we have not yet seen. But
    it's certainly important that everyone understand what these
    benefits may bring over time. And it may take time. I
    understand we're asking people to change their way of thinking
    and change their way of doing business. We know why we have to
    do it. Let's perhaps provide people with better information
    about what the costs really will be. Thank you.
        [The prepared statement of Ms. Brownell follows:]
    Prepared Statement of Nora Mead Brownell, Commissioner, Federal Energy
                             Regulatory Commission
        Mr. Chairman and Members of the Committee, good morning. Thank you
    for opportunity to testify before you today on the various energy
    restructuring legislation pending before your Committee. I strongly
    believe that the goals of any new legislation involving energy
    restructuring should be to facilitate the development of competitive
    regional energy markets and the removal of any barriers, regulatory or
    otherwise, to the development of such markets, while allowing the
    Commission to perform effective market monitoring. We must also create
    a regulatory environment which ensures reliability and investment in
    infrastructure.
        I want to applaud the efforts of this Committee to grapple with the
    issues of transforming energy markets. Balancing competing agendas and
    leading the charge for change is neither easy nor neat. Many people
    wonder why we have to change at all, particularly after events of the
    past year. We must remind ourselves that this country has enjoyed a
    standard of living that is unparalleled precisely because it has been
    willing to take risk, embrace change, and leverage its intellectual
    assets. It would be a tragedy to ignore the opportunities created by
    the advances in technology that have transformed so many other
    industries like communications and transportation. Without a coherent,
    integrated national energy policy and its associated legislative and
    administrative changes, we will disadvantage our industries, our
    environment and our constituents. I urge us all to share a sense of
    urgency to do what needs to be done to move forward. There are many
    ways to address the issues of transforming markets. I will address some
    of the most important.
        The Public Utility Holding Company Act (PUHCA), enacted during the
    Depression, and the Public Utility Regulatory Policies Act (PURPA),
    enacted during the Carter Administration, are impediments to
    restructuring that, in my opinion, should be repealed. Among other
    things, PUHCA requires that utility holding companies that are required
    to register (because they do not meet any one of the exemptions
    enumerated in the statute) submit to heavy-handed regulation by the
    Securities and Exchange Commission, including seeking permission for
    many activities that companies engage in during the ordinary course of
    their business. PUHCA also subjects holding companies to requirements
    that they operate an ``integrated'' and contiguous system and does not
    adequately address the relatively new phenomenon of ``convergence''
    mergers between gas and electric utilities. While PUHCA was a necessary
    reaction to abuses that existed a half-century ago, it has outgrown its
    purposes, and equally important, no longer reflects the utility
    industry of today, including the rapid rise of non-vertically
    integrated energy companies.
        As just one example of PUHCA's perverse effects, because of the
    provisions for foreign utilities, the statute causes foreign companies
    to buy here and U.S. companies to invest overseas. Investment decisions
    should flow from economics, not from an outdated statute.
        PURPA also needs repeal. PURPA requires utilities to buy from
    alternate energy sources at what are frequently quite high prices.
    PURPA was enacted in response to a perceived need to reduce dependence
    on oil for electric generation, and it was thought that this kind of
    subsidy would help accomplish that result. Now, 22 years later, when a
    gas-fired generator can be on-line in less than two years, and many
    advances are being made in distributed generation, PURPA's subsidies
    for certain types of generation no longer is rational.
        Having stated that I believe that PUHCA and PURPA should be
    repealed, I also believe that we should listen to the concerns of
    those, like the rural CO-OPs, who are asking us to replace the
    safeguards, however flawed, that these statutes were intended to
    provide. It is a change in approach that I have in mind. Instead of
    relying on heavy regulation, safeguards should be a product of a market
    oriented approach. We must do everything possible to encourage advances
    in technologies, particularly renewables, and investment in
    infrastructure in order to bring them to market as quickly and
    efficiently as possible. We must also do everything possible to promote
    transparency and uniform business rules in order to guard against
    manipulation. We must do everything possible to enhance our market
    monitoring and enforcement capabilities in order to react and remedy
    any market abuse. Responses must swift and certain.
        There are a number of ways to accomplish this changed approach. I
    strongly support legislation affirming the Commission's authority to
    require the formation of RTOs and to shape their configuration
    according to the characteristics outlined in Order No. 2000. Large,
    regional, independent RTOs can improve grid reliability by facilitating
    transmission planning across a multi-state region, create better
    pricing mechanisms such as eliminating ``pancaking'', improve
    efficiency through better congestion management, and attract investment
    in infrastructure by facilitating regional consensus on the need for
    construction. RTOs play an important role in assuring reliability. I
    recognize that markets do have different characteristics and I do not
    dismiss those differences. We must work collaboratively with the
    stakeholders to determine where those differences are real and where
    they are merely the basis for barriers to entry. Ultimately, however,
    large regional RTOs must be formed in a timely manner.
        I also strongly endorse creating standardized interconnection rules
    and uniform business rules. Where rules are standardized, there is less
    room for manipulation. I believe that all interstate transmission
    facilities should be under one set of open access rules, including the
    facilities owned and/or operated by municipals, cooperatives, the
    Tennessee Valley Authority, and the federal power market
    administrations. These entities, which together control approximately
    1/3 of the nation's transmission grid, currently enjoy non-
    jurisdictional status. Placing all facilities under the same set of
    rules will eliminate disparities in treatment that operate as
    disincentives to open access, and better ensure seamless electricity
    markets.
        I must emphasize that it is imperative that we place all
    transmission, whether related to unbundled wholesale, unbundled retail,
    or bundled retail transactions, under one set of non-discriminatory
    open access rules. Our experience since the issuance of Order No. 888
    indicates that it is no longer necessary to segregate the transmission
    for native load. Having all transmission under one set of rules will
    eliminate a patchwork of state rules regulating ``retail transmission''
    and better ensure a properly functioning and transparent transmission
    grid. We must ensure, however, that we do not interfere with state
    oversight of retail and consumer responsibilities.
        I believe that the Commission must be given ultimate authority over
    the siting of transmission facilities. At the time that the Federal
    Power Act was enacted, it was appropriate to defer to the individual
    states for siting transmission facilities within their borders. Times
    have changed, however, and today, there have been major technological
    advances in transmission that have created interstate superhighways.
    State-by-state siting of such transmission superhighways is an
    anachronism that impedes transmission investment and slows transmission
    construction. It is possible for one state to veto a desperately needed
    transmission project. The best solution to this dilemma is through an
    interstate regional compact or properly functioning RTO, with
    significant input of the states, to be the first stop for siting
    approval. However, at some point, it may be necessary for the
    Commission to make the final determination. Therefore, I would suggest
    that the Commission act as a backstop. In other words, grant the
    Commission siting authority over interstate transmission comparable to
    the interstate natural gas pipeline siting authority in Section 7 of
    the Natural Gas Act after we have determined ``need'' on the basis of
    an evidentiary record. This is one way in which interstate transmission
    expansion can keep pace with generation.
        A final piece to the puzzle is the market monitoring and
    enforcement capabilities. The Commission's ``tool kit'' must be
    strengthened to facilitate the Commission's expanded role in monitoring
    for, and mitigating, market power abuse. I believe that the Commission
    needs to develop and expand its market monitoring expertise. The
    Commission can tap the existing expertise of other federal agencies,
    and perhaps even private organizations, that are experienced in market
    monitoring. It can also seek consultants with expertise in electronic
    trading and market simulation. In either case, it comes down to
    funding. As the markets we regulate change, we must be prepared to
    change our regulatory tools. The Commission should be given sufficient
    funding to ensure that it can hire, train, and retain personnel skilled
    in market monitoring and market power mitigation or buy expertise on a
    short-term basis as needed. Legislative solutions must be coupled with
    the Commission's ability to acquire the necessary talent that can
    implement its new responsibilities.
        I am also of the opinion that market monitoring should not solely
    be the Commission's responsibility. We should involve the states in a
    serious discussion of whether combined state and federal action is
    necessary when market power abuses are occurring in both retail and
    wholesale markets. It should involve the RTOs. I intend to explore such
    creative approaches as the development of regional oversight
    committees, which work with existing regional coordination councils or
    other similar entities, including state regulators, to better assist
    the development of workably competitive markets. We should explore the
    development a coordinated system whereby we share standardized
    information thereby reducing both the administrative and cost burden on
    the respective agencies and stakeholders. We must leverage our
    resources in concert with the states, particularly with regard to
    information sharing. Further, we must be certain we are asking the
    right questions. We must clear about what constitutes market power. We
    must understand the changing nature of the transactions (e.g., on-line
    trading). We must use the information effectively.
        I believe that the Commission must have timely and reliable data
    and information to have an effective market monitoring program. There
    are many different players in the energy markets, many that have not
    traditionally been subject to our jurisdiction. A significant amount of
    relevant information about the operation of markets is in the
    possession of these entities. At times, there has been a reluctance to
    cooperate and provide the necessary information. It may be appropriate
    to clarify that the Commission has the authority to seek the
    information necessary to perform its statutory responsibilities from
    either jurisdictional or non-jurisdictional sources. Transparency is
    impossible without the involvement of all market participants.
        Naturally, the necessary companion to market monitoring is
    enforcement. There has historically been a reluctance to apply
    traditional antitrust doctrine, including penalties, to electric and
    gas markets, since they were not competitive markets, but were subject
    to pervasive regulation and sanctioned monopoly structures. That should
    no longer be the case as we move further and further down the path to
    de-regulation and restructuring. The enabling statutes the Securities
    and Exchange Commission and the Federal Communications Commission
    provide for a range of enforcement measures, such as civil penalties,
    which I believe may be appropriate for the Commission. I would suggest
    consideration of a significant civil penalty to indicate to market
    participants that we take violations of the Federal Power Act and
    Natural Gas Act seriously, and are prepared to remedy such violations
    above and beyond our refund authority, which is statutorily limited. We
    must also act swiftly and with certainty to respond to market abuses.
    Markets are fragile and prolonged problems will destroy the market and
    the confidence of consumers.
        The work that you have done is quite extensive and I could probably
    expound forever, but I believe these are some of the most important.
    Thank you for asking for my input on these critical issues. I stand
    ready to assist your Committee in your deliberative process. I again
    thank the Committee for this opportunity to testify.

        The Chairman. Thank you. Thank you all very much for the
    excellent testimony. One thing I wanted to inquire about is the
    statement that Secretary Salisbury, who was just ahead of you
    as a witness here, testified to saying that the Governors--the
    Western Governors--were opposed, as I understood her testimony,
    to any siting authority being provided at FERC and one of the
    reasons she gave was that there are no applications, as far as
    they can tell, no instance where an application to build
    transmission lines has been turned down. Is that your view of
    things, or is this--and is that--is that really an adequate
    indicator of whether or not the job of getting an adequate
    transmission system in place is being carried out? Is the fact
    that State commissions have not turned down applications a
    determinative on that issue? Commissioner Hebert, do you have a
    view on that?
        Mr. Hebert. Mr. Chairman, with all due respect, I will be
    glad to comment on what you told me. I was not here to hear her
    testimony. I did read her testimony before I came here.
        I don't think whether something has been done or not done
    is ever determinative on why something beyond that should be
    done or not done. Whether or not we move forward with siting
    authority, I don't know. This year, I guess I've testified
    before this committee a half a dozen times, and I have
    repeatedly said, it is my thought that as we move forward with
    regional transmission organizations, that those organizations
    would have some input and would certainly be, I think, in the
    best position to decide what has to be done when it comes to
    interstate siting of transmission. FERC can always be the
    backstop, but it is very important as we deal with State
    commissioners, which mean, in the end, that we deal with State
    Governors as well, that we at least give some deferential
    period to them and allow them to act.
        If there have been no applications that have been denied
    for transmission, it at least means that the ones that have
    been applied for have been dealt with, hopefully,
    appropriately.
        What it does not suggest or, better, what it does not
    answer, is whether or not the proper incentives and
    opportunities are out there to promote such filings for
    certificates of eminent domain and moving forward with siting.
        I don't think we have appropriately done that at FERC. I
    don't know that the States have done that, but we certainly
    have to do a better job ourselves at FERC to try to make people
    understand that what is best for America is as much of a
    seamless grid as possible that physics and economics will
    allow, and you've got to build out the transmission system to
    do that. We need investment in those systems. But just because
    the Federal Government gets siting of electric transmission
    does not necessarily mean it will be done right.
        The Chairman. Commissioner Breathitt.
        Ms. Breathitt. Mr. Chairman, I have one comment to add to
    this discussion. When I was chairman in Kentucky at the PSC, we
    had several instances where applications were withdrawn, so the
    Commission never ended up acting, and I haven't done any
    research on my own to see how many applications have gone
    forward in the States for transmission siting, but I do know
    anecdotally that they take a long time, but I also don't know
    how many applications never make it to the decisional stage and
    are withdrawn because of siting difficulties and problems.
        The Chairman. Okay. Anybody else want to comment on that?
        Mr. Hebert. Mr. Chairman, if I may, I would be glad to get
    the staff to look into whether or not what Commissioner
    Breathitt has just spoken to has happened and give you some
    information on that.
        The Chairman. Yes. Anything you could tell us. I guess my
    sense is that what we're talking about in terms of having an
    adequate national transmission system, we may not be able to
    say that we have an adequate national transmission system as
    long as nobody files an application to improve it. I mean, it
    may be that there is a responsibility beyond just sitting back
    and waiting for a permit to be requested.
        Mr. Massey. May I comment, Mr. Chairman?
        The Chairman. Yes. Go ahead.
        Mr. Massey. It may be that applicants are discouraged and
    frustrated and feel like it's so difficult to get transmissions
    sited in many, many parts of the country that it's not worth
    filing the application. I think there's a great sense of
    frustration in the industry out there that it's very difficult
    to get transmission facilities sited, and there are examples in
    various parts of the country of how difficult it is for a State
    to grapple with a proposed transmission project necessary for
    the interstate market, but that may not provide direct benefits
    to that particular State. It seems to me, that is the
    fundamental difficulty here. We're moving to regional markets.
    We need at least regional solutions, as your bill proposes, and
    I would take it a step further and say there ought to be
    Federal siting. There ought to at least be some way to break
    the logjam. If facilities are necessary for regional markets to
    thrive, then it seems to me that is precisely what your White
    Paper is all about. If those facilities are necessary, there's
    got to be a way to break the logjam and to get them sited.
    Maybe a Federal backstop role.
        The Chairman. Mr. Wood.
        Mr. Wood. The problem that hasn't been addressed is, who's
    doing the applying for? Today it's regulated utilities who
    really are going through a tremendous gauntlet to do something
    that they probably won't get direct corporate benefit from, as
    in days of old, but they're helping build an international or
    an interregional grid, basically tying from their utility to
    another utility, so that a competitor, somebody they don't even
    care about or really like, can benefit from it. So, I mean,
    there's not a tremendous incentive in the first place. Now,
    some utilities actually are trying to look broadly and think,
    ``I don't want to impede anybody,'' but it's not in their
    natural corporate interest to do anything to beef up the grid
    kind of around the edges. They just want to make sure it's good
    in downtown Houston, around the edges, but not really tying the
    whole grid. It's the problem we had back in the ERCOT region,
    with our utilities--it's hard to go through landowners. It's
    hard to take the PR hit for new wire construction. These guys
    are all trying to get into the retail market, so they don't
    want to have their corporation have a bad image with
    landowners. There are a lot of incentives to just not filing in
    the first place, which is where Linda was going with her
    response.
        Mr. Hebert. Mr. Chairman, if I might add one thing to that,
    and I think Commissioner Wood pointed out something that is
    really extremely important to talk about as you move forward
    here. The complexity of the issue has changed. For instance,
    ERCOT is a great example. When you take a transmission line and
    you run it from Austin to Houston, Texas knows they're going to
    benefit from that line. When you take it and you run it from
    Idaho to Montana, the question arises as to who benefits, how
    much, and what is the cost of such benefit? So, the complexity
    of the issue as to the siting of that transmission has changed,
    which is going to make it more difficult.
        Ms. Brownell. I would add Mr. Chairman, that it speaks to
    the need, then, for a new approach, and as controversial and
    difficult as this is, it's pretty clear to me that when the
    market has identified, as it clearly has, that there is need
    for additional transmission in a number of places, and no one
    is stepping forward to build that, that there are lots of
    signals out there that suggest, ``do not apply.''
        The Chairman. Okay.
        Senator Feinstein.
        Senator Feinstein. Thanks very much, Mr. Chairman, and I'm
    very pleased to see all the Commissioners here. I want to thank
    them because I wrote to them a letter awhile ago and asked for
    any suggestions they might have with respect to improving FERC,
    giving it additional authority.
        I want to just speak bottom line for a minute. My
    observation of FERC is that it has been a toothless tiger. I
    would oppose any increased jurisdiction until FERC really had
    the regulatory authority that's adequate and effective to do
    its job, and that means, Senator Wyden referred to the CBS
    Report. I spoke about the Williams A.E.S. issue on the floor
    some months ago. I find it unconscionable that the public will
    never really know, because all the evidence is sealed in that
    case, that a company that has admitted to telling operators at
    a plant owned by A.E.S. that Williams could provide a financial
    incentive to extend the outage. That's unconscionable. It's
    unconscionable that all this stuff is sealed, and I believe
    that you can never do the job you're meant to do unless you
    have the real disincentive to abusive behavior on the part of
    the companies, and I--well, to make a long story short, I'm
    very grateful Mr. Wood, Mrs. Brownell came in yesterday and we
    spent some time. Commissioner Massey, you took some time and
    really very thoughtfully addressed my concern. I'd like to
    enter into this record a copy of your letter to me dated July
    13, and I think your letter really gets to the heart of the
    issue in terms of the things that I'm interested in, which is
    giving the FERC the teeth it needs to deal with what has been a
    swashbuckling industry with very little real customer loyalty
    we have found in California, and I want to work with the
    chairman and other members of this committee to include some of
    Commissioner Massey's concepts wherever we can.
        I'm very heartened to hear that three Commissioners have
    now said that they would support civil penalties to insure that
    there is an adequate penalty for bad behavior, and I hope that
    that will be part of our energy bill, and that the FERC will
    move expeditiously in that direction.
        Secondly, the natural gas market. FERC has very little
    authority to oversee natural gas markets. Virtually everybody
    in California's bill has gone up two-thirds over the natural
    gas issue. The natural gas issue has actually caused
    refinancing of companies, has caused employees to lose their
    jobs, has caused companies to go in for refinancing. I pointed
    out at an earlier hearing, C&H Sugar, whose average gas bill
    was $450,000 a month, at one point was paying $2 million a
    month. They had to let employees go. They had to shut down.
    They had to go in for bridge financing. That shouldn't happen,
    and FERC ought to have the authority to move like this and see
    that it doesn't happen, and they do not today.
        So, I want to see that there is transparency in these
    markets among the various players in multiple States.
        Thirdly, I think FERC should be given oversight over online
    trading of natural gas and electricity. In many cases, it's the
    only trading entity that knows the prices sellers are willing
    to bid and buyers are willing to pay for a given energy
    commodity, and I've heard many allegations that these
    transactions drove up the price of natural gas at the
    California border and elsewhere this past winter.
        Fourth, as Commissioner Massey's letter points out, FERC
    needs direct authority to mitigate market power. FERC doesn't
    have the tools to prevent excessive power costs, and it's my
    hope that FERC will reevaluate the criteria it uses to permit
    market rates in the wholesale marketplace, and also in retail
    markets, if asked by a State commission. The aim of this
    clearly is to prevent manipulation and to encourage responsible
    competition.
        Fifth, FERC doesn't have sufficient authority to review
    mergers. I agree with Commissioner Massey that involve
    generation firms. Significant mergers dependent upon how they
    are structured, Commissioner Massey points out, are outside of
    FERC jurisdiction. That's just an invitation to structure your
    merger this way and get out of FERC jurisdiction.
        Additionally, I am very concerned that FERC does not have
    the needed authority to regulate transactions and agreements
    among holding companies and their subsidiaries or between
    affiliated companies. I think if the Congress is to repeal both
    PUHCA--well, particularly PUHCA, FERC should be given the
    authority to deal with these complex interactions. I'm very
    pleased three Commissioners have also talked about and agreed
    on the transparency of data, as well as changing FERC's refund
    authority for electricity rates, which I think is
    extraordinarily important.
        The San Diego marketplace went through, you know, a six
    time increase in rates. It was incredible what happened. Rates
    were way up. The wholesale rates were way up at 3 a.m. in the
    morning, and yet the present rule doesn't allow you to go back
    to include your refunds to that entire regional area. That's a
    mistake. We ought to change it.
        Now, California's present position is that it will fight
    any inclusion in an RTO, and the reason is, because it feels
    it's been a victim and it doesn't have recourse for remediation
    of abuse. Until FERC can provide this recourse--or can provide
    remediation of abuse, I can do nothing but support California
    in this regard. You know, if you can solve that problem, then I
    think California will change its mind and perhaps join a
    regional transmission system.
        I'd like to ask this question, particularly as it relates
    to the secrecy of the settlement agreements, that as long as
    they're secret, serve as no disincentive to any other company
    to go out and try the same thing. I mean, they're going to
    profit much more than they're going to have to settle. I'd like
    to ask this question of the Commission: Do you believe that the
    results of investigations and the evidence should be made
    public in this regard? Let's start with the Chairman. Mr.
    Hebert.
        Mr. Hebert. I think we should follow the practice of
    settlements, which is, follow the stipulation of the
    settlement. As an attorney, I will tell you that there is much
    to be gained from settlement processes, especially when it
    comes to expediting putting things behind us. As you know,
    we've become a litigious society, so anything we can do to move
    us forward in that regard I think is beneficial.
        I do, however, understand your concern in wanting to know
    what the information was behind that. Do let me say this,
    though: I actually see AES Williams as something very positive
    that I think you should all know about, and that is this.
    There's been much in regard to FERC's inability to do things
    outside of the 60-day period. I have testified time and again
    that, in fact, this Commission has tools in regard to behavior
    that it deems to be illegal through anti-competitive behavior,
    contractually against the contract, filed tariffs, filed rates,
    anything in that regard. As you know, the AES Williams
    settlement was one that dates back previous to the 60-day
    period. It was in the summer of 2000, so I understand your
    concern. I understand wanting to see the information. Senator,
    you and I have met several times and I truly believe the
    settlement process does bring benefits, and I do think it is a
    good indication that FERC is, was, and will continue to be,
    vigilant even 24/7 outside of that 60-day period.
        Senator Feinstein. The problem is, all we've got is, we
    have to take your word for it.
        Mr. Hebert. I understand.
        Senator Feinstein. There's no way to examine what happened,
    and, you know, I'm not saying I doubt your word, but I'm
    saying, it isn't good enough in this kind of situation.
        Mr. Hebert. I understand that.
        Senator Feinstein. So, I wonder if I could just hear
    quickly from other Commissioners. I just want to know, ``yes''
    or ``no''----
        Mr. Hebert. Well, that's fine.
        Senator Feinstein [continuing]. Do you think this
    information should be made public? Mrs. Brownell, let's begin
    and go right down the line.
        Ms. Brownell. Okay. Senator, I agree with the Chairman that
    the settlement process is important and critical. I wish all
    the California participants would get back there and try and
    settle what we've been trying to help them with, but the
    reality is, you're right. The environment is, at this point, so
    poisoned, and the credibility of many of the participants is so
    damaged that, for me, I believe it is important that the
    appropriate enforcement actions with the appropriate record
    built, need to be made public so that we can, frankly, build
    back our own credibility and that of the market participants,
    because everybody is not guilty.
        Senator Feinstein. Commissioner Massey.
        Mr. Massey. Senator, in the California debate, I have
    always felt that the question of withholding was a core
    question. We had before us a live case with very interesting
    evidence, and I think the public interest would have been well
    served by having that record made public.
        Senator Feinstein. Ms. Breathitt.
        Ms. Breathitt. Yes. Senator, I wanted to add that--this
    particular case--had the Commission chosen to open the
    settlement to the public could have caused the parties to
    renege on the settlement which resulted in about $8 million and
    could have gone to trial, and when we go to trial, withholding
    cases are very, very difficult to prove. So, this was much more
    complicated than saying, ``Yes, let the information out,''
    because it could have ended up going to trial, and then we
    could have ended up with--we could have ended up losing,
    because withholding cases are so hard to prove.
        We have a tough enforcement chief at the Commission. I
    would like for you to meet her sometime. She made a very
    compelling argument for upholding the confines of this
    settlement. I spent a lot of time on this case.
        Senator Feinstein. All right. I had an answer to Mr.
    Hebert.
        Mr. Wood.
        Mr. Wood. I would tell him it's better to lose, and I don't
    know if this was one of those cases, because I wasn't here
    looking as close as Linda, and Curt, and Bill did at the
    evidence, but the--sometimes the evidence says more than even a
    judge can conclude, and I think that's where you're going. A
    few heads on the stakes around the campfire make all the
    animals behave a lot better in the forest, and I think this may
    well be, certainly in the front end of the transition of the
    competition. Maybe in the more mature market you would do
    private settlements.
        Senator Feinstein. All right. I appreciate that. We don't
    quite have three Commissioners, but if it were in legislation,
    perhaps we might get it done, so I will press for that because
    I strongly believe that the lesson learned is as important as
    the penalty in this case, and you can't learn the lesson unless
    everybody knows clearly what it is that you did.
        The other point I'd like to make to you, Mr. Chairman, is,
    I have real concerns right now about extending FERC
    jurisdiction over all transmission rate making and access
    issues, wholesale and retail. I don't want to get into a war
    right now with the co-ops and the munis, and as you know, we
    have--we'll have their very strong opposition. I know when we
    tried to put together our cost-based rates legislation, I think
    it could end up defeating anything that we might be able to do,
    so my emphasis is on giving this Commission teeth, bringing
    sunshine to the debate, seeing that they have civil penalties,
    seeing that they can give the refunds way back, seeing that
    they can move expeditiously. I don't want to see another time
    when the Chairman of the Commission has to bring in 16 boxes
    and put them before us and say, ``This is why we can't do
    something.'' And I'd just like to respectfully suggest that we
    direct our policy to that end. Let's get them so that they can
    function in what has been a swashbuckling marketplace in an
    effective and appropriate manner.
        I thank you very much.
        The Chairman. Let me just clarify. I don't think that in
    our legislation, our White Paper, we're not suggesting that
    we're trying to get FERC into the business of retail rate
    making and distribution. We're trying to give them authority so
    that the transmission system works, and anybody who is involved
    in the transmission of power we think should be subject to
    their jurisdiction.
        Senator Feinstein. Now, that's a fine point that we need to
    talk about a little bit.
        The Chairman. I agree.
        Senator Feinstein. Thank you.
        The Chairman. Senator Landrieu.

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

        Senator Landrieu. Mr. Chairman, I appreciate it. I'm sorry
    I had to step out for a meeting with constituents, but I've
    been following both these hearings, yesterday and today, with
    great interest and have read and reviewed a lot of the
    testimony, and I guess it's appropriate to follow up on the
    Senator from California's comments and the Chair, to say that I
    am prepared and will be dropping legislation on this Electric
    Transmission Improvement Act. The Electricity Transmission
    Improvement Act is what we're calling it, a clear, straight-
    forward name. We tried to think of something a little more
    creative, but--but we've been so busy, but I want to thank you
    all for your testimony today, and in writing, about the
    importance of trying to develop in this Nation, despite the
    obvious pockets of objection and push-back that will come, the
    need to open up this transition grid. Based on the very good, I
    think, white paper that our chairman has produced about the
    history of the way our electricity system was developed in this
    Nation and how it was, not regional but very parochial, and
    while it served this Nation in a great and terrific manner for
    so many decades, clearly it is apparent, and through the
    testimony that you have given, you've helped make it even more
    apparent that we need a new regime, and so this bill attempts.
    It doesn't go as far as some people want us to go, Mr.
    Chairman, and it doesn't go far enough in other people's mind.
    But just to summarize that this open access issue is addressed
    by giving States and the RTO's the opportunity to do what they
    need to do and, if not, it's sort of a backdrop for FERC to
    step in and to provide the transmission grid that this Nation
    desperately needs as a foundation of our economic growth in the
    future.
        There is some strong language on siting. We would give FERC
    clear jurisdiction to be a backdrop. If siting States and
    regions can't do their siting within 180 days, the bill says
    that FERC can then step in and try to put down rules and
    regulations for siting of the power lines. It also establishes
    incentives for the transmission grid to be increased. Our
    demand has grown four fold and the capacity for transmission
    has only been a very small percentage. I mean, it's outstripped
    it four to one. This bill attempts to address incentives for
    the transmission grid, and then the interconnection standards.
    We have a patchwork. It's a process now. It will give FERC the
    opportunity to make more standard those provisions.
        So, I look forward to--I'm going to probably drop this bill
    in looking for co-sponsors, and based on some of the testimony
    I've heard today, I think we can build a consensus around a
    piece of legislation on the transmission grid which, Mr.
    Chairman, I hope will serve as a key component of our whole
    energy policy, because in hearing, after hearing, after
    hearing, there is enough testimony on the record to indicate
    that we just have got to move a little--a lot further than we
    are today.
        So, I commend this for my colleagues and look forward,
    Senator Feinstein, to working with you. I know that munis and
    co-ops have some reservations, of course, because their
    interest has been very parochial, and for good reason. That's
    the way the system was designed, but we need to create an
    interstate highway system just like the highway system that our
    automobiles and trucks and business people, large and small,
    can bring their products to market, can move goods, can create
    the kind of economy, and our electricity system is no less
    needy of that kind of system, and we have developed over the
    century a very good partnership between States and local
    governments and the Federal Government to create this
    interstate system for our, you know, transit. We need to have
    the same sort of cooperative effort in designing this system
    for our electricity and the flow of power. Whether it is
    produced from clean coal, nuclear, oil, gas, or alternatives,
    whatever this committee decides and Congress decides is the mix
    of supply, you still need an open transmission grid to get it
    from the source to the consumer, and I think it's a very
    important component, and I just encourage us all to--I'm going
    to lay this bill down as, hopefully, some sort of--hopefully--a
    compromise to build on some common ground, and I'm going to
    ask, not today, but for each of you all to submit in writing
    your thoughts about what is in here, what is not in here, and I
    look forward to working with you all to provide you the legal
    authority you need to help us to do that.
        With respect to all the regions and to all the States, and
    to the munis and the co-ops, we have just got to make this
    highway work for our country.
        Thank you, Mr. Chairman.
        The Chairman. Thank you very much.
        Senator Cantwell.
        Senator Cantwell. Thank you, Mr. Chairman.
        Let me begin by commending FERC's decision yesterday to
    establish a special evidentiary hearing into what have been
    skyrocketing electricity prices that have plagued the Northwest
    for the last year. As you are well aware by now, Washington
    State has been hard hit by the Western energy crisis, which has
    really taken an enormous toll on our consumers and businesses,
    and a variety of sector of our State economy.
        I believe that this new evidentiary proceeding will confirm
    what has seemed to be obvious to many residents in my State, as
    they've seen as much as a 50 percent increase in their utility
    bills, that there have been, in fact, unjust and unreasonable
    rates.
        In addition, I am pleased that the Commission has at least
    taken notice of the structural differences between the
    Northwest and California energy markets. While we, in the
    Northwest, rely on bilateral forward contracts rather than a
    centralized ISO, our prices have moved in lock step with those
    charged in the California spot markets.
        Now that we, in the Northwest, have been given the
    opportunity to plead our case, I hope that the customers of our
    hardest hit utilities will ultimately see refunds for those
    unjust and unreasonable rates, whether through FERC or through
    a settlement process that might play out here in the next
    several weeks.
        The truly daunting reality for the pacific Northwest is
    that we have not yet seen the worst of this issue, given that
    Bonneville Power Administration has a 46 percent rate increase
    to take place later this fall, and that our peak energy usage
    in the Northwest doesn't really occur until the winter heating
    season, so it is my hope that refunds for our region can either
    alleviate some of the pain our residents have already felt, or
    prevent them from having more pain inflicted upon them.
        Along those lines, I hope that FERC will also take into
    account that fact that many northwest utilities, especially
    BPA, have gone to extraordinary lengths in helping with the
    California crisis, even, at times, to the detriment of the
    reliability within our own region, and some of those have not
    been repaid by the sales to the California entities.
        I'm very appreciative of the steps that FERC has taken in
    showing a commitment to help right the wrongs visited upon the
    Northwest by last year's--by the last year's runaway prices,
    and I'm pleased today that the Commissioners have, I think,
    finally acted to highlight the need to restructure our
    electricity system so that energy suppliers will never be able
    to create the sort of dysfunctional atmosphere in which we have
    all been so impacted by.
        I would like to, if I could, ask the Commissioners, Mr.
    Chairman, about a couple of things specific to the order, and
    then some broader questions as it relates to our hearing this
    morning, but first I noticed in the hearing--the order document
    from yesterday, on page 38, regarding the Pacific Northwest
    proceedings, that the proceeding is--and I'm reading from the
    document--``The proceeding is intended to facilitate the
    development of factual record on whether there have been unjust
    and unreasonable charges for spot market bilateral sales in the
    northwest for the period beginning December 25, 2000 through
    June 20, 2001.''
        So, if members of the Commission could comment on that, I'm
    assuming in that recognition that there is, in fact, a
    different market functionality in the Northwest, that spot
    market bilateral sales in the Northwest basically include some
    of the longer term contracts, or depending on how you wanted to
    find them, shorter contracts that were sales made during this
    time period that are different than how you have been viewing
    the California situation and California refunds.
        Mr. Hebert. Well, the problem that you get into with the
    Pacific Northwest is, they don't have a 24-hour spot trading
    market, as does California, and you pointed that out, and
    that's correct. This Commission has been very focused on trying
    to make certain that at the most opportune times for market
    manipulation, that FERC intervenes. That is exactly what the
    price mitigation was all about. I continue to believe that that
    24-hour period is what this Commission should be focused on.
        Now, not having a 24-hour spot product that you trade in
    the Pacific Northwest presents some difficulty in establishing
    facts when it comes to establishing what the refund criteria,
    if any, would be, so that is what that language is in there
    for. I think you will find, as you talk to the other
    Commissioners, there is some agreement and there is some
    disagreement as to what direction we should go in there, so I
    think it would be fair to let them answer, as well.
        Ms. Brownell. Senator, I think if you also look at the
    footnote on page 43, it acknowledges that, in fact, there are
    differences, and it is our hope that what those differences are
    may be clearer from the evidentiary proceeding, and the
    Chairman is right, there is still discussion and debate going
    on, but it was clear to me--I can speak for myself--that there
    are differences and we need to look at that in a different way.
    Where that evidence takes us, however, remains to be seen, so
    we implore the parties to get it all out and make their case.
        Mr. Massey. Senator, it seems to me that the dysfunctional
    California markets had a huge impact on the Pacific Northwest
    that played out through bilateral contracts, and our order says
    explicitly that what is a spot market sale in the Pacific
    Northwest may be different. We may define it differently, and
    we tell the judge to accept evidence on that question.
        My own view is that contracts in the range of a month or
    even longer would qualify as spot sales in the Pacific
    Northwest, and I said that yesterday. For the record, our order
    intends to open this issue up, but it is somewhat ambiguous
    about what a spot market sale is. In the Pacific Northwest,
    we're counting on a record to be developed.
        Senator Cantwell. Commissioner Wood or----
        Ms. Breathitt. Senator, I would just like to read one
    sentence from the order that says, ``We direct all parties to
    the Puget Sound Complaint proceeding to participate in the
    proceeding and to focus on settling past accounts related to
    spot market sales in the Pacific Northwest.'' We tried to be as
    precise as we could about what that means to the Northwest. I
    am confident that the proceeding will at least give parties if
    not the perfect result that they wanted, will give them the
    forum in which to settle these past accounts which is due
    process and it should be fair.
        Mr. Wood. Your specific question about what is spot
    market----
        Senator Cantwell. Well, my specific concern is that the
    Northwest utilities and Northwest consumers who have seen
    prices go from $26 a megawatt during this time period to $500 a
    megawatt are not penalized on coming up with a solution simply
    because they don't run an ISO like California, and because--and
    I guess I think it speaks somewhat to the potential limitations
    or concerns about FERC moving forward if we can't make
    decisions that recognize the differences between these markets
    when unjust and unreasonable rates have occurred. So, I'm
    taking your order as to mean that you are--that the judge has
    discretion to determine that there are longer term contracts
    that could attract the spot market and that these contracts,
    just because they didn't operate under an ISO functionality are
    unjust and unreasonable during this time period.
        Mr. Wood. I think clearly the intent of the footnote 74
    that I believe Nora referenced a moment ago, which reads,
    ``What is a spot market sale for bilateral transactions in the
    Pacific Northwest may differ from what is a spot market sale in
    the California ISO and PX organized spot markets'' was really
    an indication that there's plenty of room to look at this a bit
    differently in the Northwest proceeding.
        Senator Cantwell. Thank you. If I could, following up on
    this issue, as we look at the larger restructuring issue, part
    of the challenge for us in the Northwest being 78 percent hydro
    dependent and the fact that we have the worst, or second worst,
    drought on record, part of this is planning for the future,
    having--then going out to the spot market, which was seeing
    exorbitant prices obviously made it a very complex year for us.
    How, in looking at these issues on restructuring, what are some
    of the Commissioners' ideas on further safeguards, whether
    through FERC or whether through different entities, to make
    sure that the planning process, given a hard environmental
    hydro years, would be a way, or for anybody who may not be
    hydro related, but are forced to go out on the spot market and
    higher peak times.
        Mr. Massey. Senator, let me say--and this may be
    politically unpopular in the Pacific Northwest and in the
    West--but I think the ultimate solution is a single RTO for the
    Western interconnection that plans for the entire Western
    interconnection. This is the way to solve that problem.
        Senator Cantwell. And what functionality would--I mean, we
    obviously are hearing a lot about an RTO and I think if you
    said today to people in the Northwest, ``Hitch your wagon to
    the California ISO and let's create a regional situation,'' I
    don't think people would be very comfortable with that. I'm not
    even sure California would be comfortable with that.
        The issue is, what can we do to require utilities to have
    more predictability for hard economic times? And, of course, we
    want to assume that there's a stable market operating and, yes,
    that's a larger question about how we--what are the safeguards
    or the empowerment as we've heard discussed from our colleagues
    today, everything from transparency to the transmission grid,
    but what is that certainty on backup plans? I equated to FDIC
    insurance that banks have, and when there's a run on a bank,
    they have a backup plan on how they're going to deal with it so
    that consumers are protected. So, what is our equivalent in
    this situation?
        Mr. Wood. Traditionally in the regulated environment, there
    is a requirement on every utility to have 15 percent, or some
    percent, more under contract or under ownership of generation
    than it needed for the hottest or coldest, whichever the
    climate is, day of the year, so that it always had that
    insurance policy on top of what it needed.
        In the more competitive markets, those regulatory mandates
    have taken more the format of a tradeable right that a
    generator can sell for the obligation to deliver power 3 years
    from now for that 15 percent, or whatever it may be, and that's
    sold to a retail provider today. California did not have such a
    requirement at all. Looking back, I think everybody is kicking
    themselves that there wasn't a build-ahead requirement, but in
    the Eastern markets, in fact, we were dealing with orders just
    this week, looking at what they call installed capacity, ICAP,
    it has various other names, but they are probably not the
    perfect mechanism out there yet, but it's one of those probably
    critical lists of five things we've got to do to put into
    regional planning across the country to make up for what
    happened out there.
        Hydro is unique because it can go away pretty fast, unlike
    natural gas. Three years ago, we had--with the merger of
    railroads, we had some coal dislocations. Gosh, who would have
    thought coal would have become undependable for awhile, but
    we've probably got to factor in the probability of
    unavailability for each one of these resources when we're
    figuring out that 115 percent. In hydro this year, at 46
    percent of what it was two years ago, looks--it's pretty
    variable and I think in future planning, we've got to account
    for that.
        Ms. Breathitt. Senator, what I would add to what my
    colleagues have just said is--and you're probably doing this in
    the Pacific Northwest because you are 76 percent dependent on
    hydro which is so--which succumbs so to weather, and snow, and
    rainfall, that the Pacific Northwest look at diversifying its
    energy portfolio so you, over time, reduce the dependency on
    perhaps hydroelectricity to include perhaps more natural gas,
    more clean coal, more renewables, coupled with demand reduction
    and conservation. That would be--and then picking up on Pat
    Wood's comment of a reserve margin, which I'm sure--I think you
    have in the Northwest with the WSCC.
        Senator Cantwell. Yes, but a 15 percent reserve, which most
    of these people had, didn't last them very long.
        Mr. Hebert. Let me get a couple of things that I think
    are--you should definitely know about. I do think the single
    RTO for the West is critically important. What we have all
    learned from this--understanding Senator Feinstein's concerns
    about how we do that--I am certainly sympathetic to that, but
    it's important that we do all learn from this. I mean, it's one
    thing to listen; it's another to learn, and let's learn, and
    what we have learned is, in fact, that the Northwest and
    California help and hurt one another, depending upon their
    actions.
        Having said that, if you have an RTO that is set up so as
    to plan in such a way that it will have as much free-flowing
    transmission as possible, it will have the installed capacity
    that is necessary to get it through the bad years, I think
    that's very important, but it also brings up a couple of other
    things, and Commissioner Breathitt touched on it.
        The fact that you are so dependent on one single source
    leads you down that path a little bit. I will tell you that due
    to the dependence on hydro and the fact that hydro is such a
    cheap, in the end, or less expensive form of energy, not to
    mention all the very positive things when it comes to
    emissions, but it has made it very tough for gas and pipelines
    to come out there and compete. When you have very good hydro
    years, the pipeline companies don't do very well, so you might
    want to think about, and certainly it's something that I
    continue to talk about, incentives for the pipes so that we're
    not so dependent. Now, that is not to say that you can do with
    less hydro, because I think quite the opposite. I think you
    need as much hydro as you've got, and I think you need to
    squeeze every megawatt possible out of that hydro, but I think
    you also need some gas and maybe some clean coal technologies,
    anything that is going to bring you additional capacity.
        Having said that, you're in a period where the relicensing
    of those hydro facilities is critically important. It is also
    critically important that that be expedited and it not be
    weighed down and it not be stopped through a regulatory
    framework. We are committed to that. We will continue to do
    that, and, hopefully, we will help the Northwest get on their
    feet. I think you do know and understand that we are committed
    to that.
        Senator Cantwell. I don't think that we've ever missed an
    opportunity, when the Secretary of Energy was here, to
    encourage him in his dialogues and discussion with Canada,
    British Columbia and Alberta about the large reserves of
    natural gas that they have there that could be an aid to the
    West.
        Commissioner Brownell, do you want to comment on that?
        Ms. Brownell. Senator, I do. I certainly think that my
    colleagues have covered the gamut of opportunities to address
    the issues in the Northwest, but I want to comment on the
    concerns that you have expressed, Senator Feinstein have
    expressed, about a Western RTO.
        We recognize that there are dramatic dysfunctionalities in
    the markets, and we recognize that we need to fix those
    incrementally before we suggest that a westwide RTO would be
    perfectly suited to addressing these problems. So, we also need
    to understand that there are different levels of maturity in
    different markets that require different responses. The
    Northeast, being that much more mature, is probably more ready
    for an RTO on a larger scope than the West is. But I do think
    it's important because we're looking at a planning function
    that is very clearly more critical than we ever knew of, as we
    begin to move forward in thinking in terms of regional planning
    and how we might get there, both in the short term and the
    longer term. So, we can't let today's problems make us--force
    us into decisions that, for the long term, are not good, and
    therefore that planning function at the RTO level, I think, is
    critical.
        Senator Cantwell. Well, and I just want to note that within
    the region that the reciprocal agreements that we have with
    Washington--the Northwest has with California now on power that
    have worked well for many years, but the issue is creating a--
    making sure there's a functional market and what the unique
    impacts are within each region.
        Thank you, Mr. Chairman.
        The Chairman. Thank you very much.
        Senator Feinstein, I know you had a matter you wanted to
    follow up on. Why don't you go ahead and do that.
        Senator Feinstein. Thanks very much, Mr. Chairman.
        I may have misspoke by saying that we didn't have three
    votes on the Commission to make investigative data public. My
    staff informs me that I missed something, Ms. Brownell, that
    you said you would support it.
        Ms. Brownell. I would. I mean, retroactively, I could not
    undo a settlement, but going forward, I absolutely would
    support it.
        Senator Feinstein. That's good. Then we have three votes
    for that, as well. So, I would like to, if I understand it, as
    the Commission this question. There are three votes, as I
    understand it, on additional authority with respect to--well,
    making--moving up, the Rule 206 rule on refund authority to the
    date of filing the complaint. Is that a correct assessment?
        Ms. Breathitt. I think that's what I said in my letter to
    you.
        Senator Feinstein. Yes, right, and I think others--
    Commissioner Massey, you suggested that----
        Mr. Massey. I would go further back than that. I think FERC
    ought to have the refund authority any time it determines that
    prices are unjust and unreasonable, going back retroactively
    with some reasonable limitation, of course.
        Senator Feinstein. All right.
        And Commissioner Wood.
        Mr. Wood. I have not spoken on it, but I would agree with
    what Commissioner Breathitt just said, that certainly on the
    date of filing, from that day forward is a pretty clear signal
    to the person you're filing against that their behavior is
    under potential refund obligation.
        Senator Feinstein. Now, I haven't asked this question, but
    how about making it retroactive?
        Mr. Wood. Prior to the date of the complaint? We had this
    discussion yesterday at the Commission meeting with a bright
    woman on our staff talking about what do we have today? If they
    had violated a tariff, and from this point forward, I think all
    the market based pricing certificates that we've granted that I
    think some of you have not been real happy that we've granted
    on the market basis, could have a conditional amendment that
    would provide a sort of a hook, that, in fact, you have
    violated a preexisting tariff. That's a little different and
    that would give you the ability to go--if you broke something
    that you promised you wouldn't break 10 years ago and you broke
    it eight months ago, when you file a complaint really doesn't
    matter. If it's a new issue, like what we saw with the San
    Diego Gas and Electric filing last August, then that becomes
    subject to a specific new complaint, so the bottom line is, we
    do have more authority to go back currently than we had
    expressed in the section 206 complaint, but it has not been
    found, and I think we looked for a way to look for it to go
    back before August of last year. Going forward, we can
    condition certificates so that there is an earlier-in-time-
    bright-line point.
        Senator Feinstein. Obviously the reason I'm raising this is
    that the San Diego situation just sort of stands out there like
    a----
        Mr. Wood. Right.
        Senator Feinstein. It's almost unfair.
        Mr. Wood. I agree with the----
        Senator Feinstein. I'm trying to see if the Commission can
    take any action in that regard,
        Mr. Massey. I agree with you. Any time prices are
    determined to be unjust and unreasonable, there ought to be
    refunds available. It's unconscionable that we cannot go back
    to last June--June of 2000--and order refunds for prices that
    were clearly out of control and unjust and unreasonable, and
    that is an issue that needs to be addressed. I think the first
    complaint was probably filed in late June or early July. By the
    time we got around to addressing it with the 60-day buffer
    zone, it was October 2, but that's a good 4 months of out of
    control prices with no remedy, that's number one.
        No. 2, the Commission allowed sales at market based prices
    with virtually no conditions attached to that certificate.
    There was a condition against affiliate abuse. There was no
    condition in those tariffs against withholding a generation.
    That seems unbelievable to me, but there was absolutely no
    condition.
        Mr. Hebert. We have since changed that.
        Mr. Massey. We have since changed it for the Western
    interconnection as of April 26, 2001, but there ought to be a
    national standard, and as the Commission updates its market
    based pricing standards, and there's probably a majority of the
    Commission that's willing to do that, we ought to include the
    conditions that are necessary to protect the public interest.
        Senator Feinstein. Well, I'd like to ask you to do so. I
    think that would remedy a major inequity if this could go back
    into the year 2000 which, after all, it was in the early point
    there where some of the biggest spikes were, you know, where
    some of the most egregious happenings took place, and nothing
    is going to happen, so it's sort of like the old adage of
    closing the barn door after the horse is out and I'd like to
    make the request that the Commission--and we will do so in
    writing, as well--take a look at that.
        If anyone would like to respond, please.
        Mr. Hebert. Yes. I have actually a response and a couple of
    questions, one to something you mentioned a little while ago on
    market power, and the other on your question as to the
    settlement, and I want to make sure I understand your question
    properly and the direction that you believe the majority of the
    Commission may be taking.
        Is it your understanding, then, that the majority of this
    Commission will not accept settlements that do not disclose the
    reason for those settlements and the facts of that case?
        Senator Feinstein. Of course, now, you're putting it in the
    negative.
        Mr. Hebert. No. I'm just asking.
        Senator Feinstein. What I'm saying is, that the--this is a
    public Commission that the evidence on which you base decisions
    should be made public so that everyone can look at it. I mean,
    this is not something that's operating in the private sector.
    This is a public sector effort, and as such--see, there's no--
    part of what I'm aiming at is to create a disincentive for bad
    behavior, and the disincentive is, everybody is going to know
    about it, the credibility and integrity of the company is
    affected. I think that's appropriate in this kind of case.
        Mr. Hebert. I want you to know, I do not disagree with
    anything you're saying as to the importance of people seeing
    things, but I will tell you, for someone who has committed many
    hours of--every day in the last 6 months to try to turn this
    thing around, that every now and then the opportunity to trade
    certainty for uncertainty versus protracted litigation is so
    strong that I think this Commission must do that, and I think
    we will see that again in the future, and it is my hope that
    this Commission will not turn its back on accepting settlements
    to give certainty to this industry to try to turn things
    around. That is my only thought.
        The other thing--I guess you can come back to it, because
    it doesn't have anything to do with this--has everything to do
    with market power that you brought up, and I'd like to comment
    on that.
        Senator Feinstein. Fine. Fine.
        Ms. Breathitt.
        Ms. Breathitt. Senator, I was just sitting here listening
    and thinking. The question in my mind is, is the embarrassment
    factor going to achieve our goal of stopping withholding? Is
    that going to be more effective than going to trial?
        Senator Feinstein. May I answer that?
        Ms. Breathitt. Yes, because I don't know the answer to
    that, and I think that's what you're asking.
        Senator Feinstein. The answer, I think--all right. I think
    Mr. Wood answered that question. It may be worth going to
    trial, even if you lose, to let all of this be out there.
        Ms. Breathitt. I was just trying to think through whether
    the embarrassment factor gets us where we want to go as opposed
    to proving actual instances and having a legal predicate upon
    which to move forward.
        Senator Feinstein. I can tell you, over and over in the
    California situation. As you know, ENRON had to be subpoenaed
    and resisted providing data, and I gather they're now going to
    do it, and everything is a fight. Everybody on the other side
    says, ``Oh, there's no smoking gun. We did nothing wrong.''
    Well, look, in my heart of hearts, I know plenty was done that
    I would consider wrong, but you can't get to it unless you've
    got somebody that--unless a whistle blower comes forward.
        Now, you can't have this kind of situation that, for
    justice, the only hope is a whistle blower, which is, today,
    the situation in California. There has to be the ability of the
    regulatory authority to make these things public, and currently
    there is not, and that's why I think we had such egregious
    behavior on the part of the generators, because it was no lose
    for them, and if you combine this with the lack of
    transparency, when it's the--when the online dealing takes
    place and the natural gas at the border--I mean, you've got a
    very complicated and an impossible situation for anybody really
    to sort out.
        Mr. Hebert. It is perplexing, because I guess somehow I
    haven't heard what I thought I've heard, because I have been
    thinking over the last couple of months that, with all
    deliberate speed and almost at all cost, we should put the
    California and the Northwestern matter behind us, try to get
    that settled, and I guess now what I'm confronted with is, if
    tomorrow this Commission is presented with a settlement with
    all parties in California and the Northwest, and all those
    parties agree that they want to settle as to the amount, but
    they do not want to disclose why that amount was there and what
    the activities behind that were, you're saying you would rather
    this Commission say no to that, that we want the ALJ to hear
    the case, perhaps a hearing before the Commission, and
    inevitably, surely, before the full Circuit----
        Senator Feinstein. No.
        Mr. Hebert [continuing]. Which is a much longer duration. I
    mean, that's the trade-off.
        Senator Feinstein. It is also costly for the companies. I'm
    not sure that this really is the trade-off. I'm not sure. I
    understand it in the private sector when there's a lawsuit and
    the parties come together and they have a settlement and that
    settlement is a secret settlement, but this isn't the private
    sector.
        Mr. Hebert. I don't disagree with that.
        Senator Feinstein. I have a real problem because of what
    has been going on with the State legislature has been trying to
    do, and the difficulty in being able to do it. Now there's
    someone you can go to all in secret, you can work out your
    deal, nobody ever knows what really happened. That's wrong, Mr.
    Hebert. It's wrong, particularly, when you have companies
    laying off people because they can't afford the rates. I mean,
    I remember talking to the Sempra people about what was
    happening at 3 a.m. in the morning.
        Mr. Hebert. I'm not disagreeing the right and the wrong of
    that with you. What I'm disagreeing with you about is the
    opportunity for this Commission to provide certainty and get
    settlements and issues behind it and move forward. That is all
    I'm disagreeing with you about.
        Mr. Massey. May I comment, please? It seems to me that the
    difficulty this Commission faced over the whole past year is
    our credibility. Were we actually doing what needed to be done?
    Were we tough-minded enough? Were we serious enough to solve
    this problem? And in that context, a big case involving
    withholding, with very interesting evidence, comes before us
    and we bury the evidence and it hurts our credibility and makes
    it look like we're conspiring with the industry. Your comment
    is dead on. We would have been better off to spread that
    evidence on the record through litigation. That would have been
    much more valuable than the $8 million that we got.
        Senator Feinstein. My time is up. I want to thank the
    Commission.
        The Chairman. I'm going to have to terminate the hearing. I
    want to thank all Commissioners. I think it's been very useful
    testimony. I think you've brought out some very useful points
    and we want to stay in close touch with the Commission to work
    with them in developing legislation that is in the best
    interest of the country.
        Thank you all very much.
        [Whereupon, at 11:52 p.m. the hearing was adjourned.]
                                   APPENDIXES

                                  ----------

                                   Appendix I

                       Responses to Additional Questions

                                  ----------

                             Portland General Electric Company,
                                         Portland, OR, August 31, 2001.
    Hon. Jeff Bingaman,
    Committee on Energy and Natural Resources, Democratic Staff, U.S.
            Senate, Washington, DC.
        Dear Chairman Bingaman: In response to your letter of August 20,
    2001, I am enclosing my responses to the questions submitted by the
    office of Senator Larry Craig.
        Thank you for the opportunity to provide additional information.
                Very truly yours,
                                                    Julie Keil,
                                             Director, Hydro Licensing.
            Responses of Julie Keil to Questions From Senator Craig
        Question 1. Ms. Keil, I have read some testimony containing
    anecdotal evidence reflecting the apparent Department of the Interior
    belief that since no licensee has refused to accept or surrender a
    license immediately after issuance, these licensees must have economic
    value.
        When your Company, or any utility company considers refusing to
    accept a new license for an existing project don't you have to factor
    in the costs of tearing down that project and is it fair to say that
    licensees are often confronted with simply choosing the lesser of two
    economic disasters?
        Answer. When confronted with a license that it believes to be
    uneconomical, a licensee faces an impossible choice. It can either
    continue to produce electricity at the site, a losing proposition. Or
    it can surrender the license, also a losing proposition. The cost to
    surrender a license and remove a project can be enormous. In addition,
    agencies frequently demand additional mitigation for the removal
    itself, adding to the burden. In today's regulatory environment, there
    is little assurance that surrender and removal costs can be recovered
    in a utility's rates.
        Question 2. In reviewing all of the 246 relicense proceedings in
    which a license was issued or declined between October, 1986 and
    January of this year, FERC, in its 603 report, found an average annual
    generation loss of 4.3%. Some may claim that this figure is
    insignificant. I disagree. In today's megawatt-thirsty climate, that is
    a significant amount of power that is being lost. However, as a
    licensee, you are familiar with other factors that impact a project's
    economic viability. Can you describe what peaking power is, and how the
    loss of that flexibility affects revenues and the stability of the
    electric grid?
        Answer. Electrical systems must exactly match generation and demand
    on an instantaneous basis. Needless to say, demand is variable. It
    varies throughout the day; in most service areas there is a morning
    peak and an early evening peak in usage. In addition, demand varies
    seasonally. Historically, for example, the Pacific Northwest has been
    considered to be a ``winter peaking'' system, due to low use of air
    conditioning and the relatively high use of electric space heat.
        Peaking power, then, is the ability of the grid to respond to these
    peaks in use, both daily and seasonally. Hydro, with its ability to
    store electricity in the form of water in reservoirs is the most
    flexible and economic way to meet peak loads. Units at hydroelectric
    projects can be stopped and started more quickly than thermal units and
    with less damage to the machinery.
        If operational flexibility is lost at hydroelectric projects, it
    must be replaced with other resources. Often this replacement
    generation is gas fired, which is a much more expensive way of meeting
    this system need.
        If the flexibility of hydro projects is lost to the system and is
    not replaced, the result is that the system can no longer meet peak
    loads, which can result in blackouts.
        Question 3. Some within the environmental community have criticized
    the hydro industry as ``a solution looking for a problem.'' From your
    perspective, having invested millions of dollars in your own
    relicensing efforts, how do you respond to that statement? Are you
    searching for a problem?
        Answer. PGE has invested many thousands of dollars and hours of my
    time to seek reform of the system under which we currently license and
    relicense hydroelectric projects. It serves no one well. It costs too
    much, raising the cost of a critical service to our customers, and it
    takes too long, increasing uncertainty and delaying important
    environmental protection and enhancement measures. While we believe
    that the process should permit every interest to be represented, at the
    end of the day, someone has to make a decision.
        Question 4. I wonder if you could talk a little about the role that
    hydropower plays in the Western electricity grid and, specifically, how
    the current hydro licensing process currently hinders, or might hinder,
    your abilities to provide consumers with a reliable, reasonably priced,
    supply of electricity?
        Answer. As I discussed above, hydropower is critical to a reliable,
    reasonably priced electricity system. It provides 70% of the capacity
    in the Pacific Northwest and accounts for approximately 24% of
    California's total electrical generation capacity. Flexibility and
    capacity are often victims of the relicensing process. The benefits are
    hard to quantify and almost impossible to see in surveys of licensing
    outcomes. The seemingly innocuous demand for ``natural'' river systems
    and hydrographs threatens to strip the system of this valuable
    component.
        I think it is worthwhile pointing out that the flexibility of hydro
    power projects is important to the viability of other renewable
    resources. Wind power, for instance, requires back up from the hydro
    portions of the grid in order to make a useful contribution to
    electricity supply.
        Question 5. American Rivers claims that hydro licensing improvement
    would ``upset the delicate balance between hydroelectric generation and
    wildlife habitat and river front economies.'' In your opinion, does
    this ``delicate balance'' exist?
        Answer. No, I do not believe that a delicate balance exists. It is
    perhaps true that when projects were originally constructed, the focus
    was on providing electricity rather than environmental protection. Now,
    however, the pendulum has swung too far in the other direction. The
    relicensing process is driven by agencies with mandatory conditioning
    authority who have no ability, under their existing statutory
    authorities, to consider the cost of their demands to the electric
    system to residential customers or to businesses. Licensing decisions
    should be made in the public interest, in its broadest sense.
        Question 6. In recent press releases, American Rivers has stated
    that ``our rivers are already giving us all the electricity they can.''
    Do you agree with that statement?
        Answer. No, I do not agree. There are many opportunities for
    project improvements and additions that would have little or no
    environmental impact. In addition, there are many dams that are not
    currently equipped with generation capability. The uncertainty and
    expense of the licensing process is a major factor in our failure to
    capture these opportunities.
                                     ______

                          Federal Energy Regulatory Commission,
                                    Washington, DC, September 10, 2001.
    Hon. Jeff Bingaman,
    Chairman, Committee on Energy and Natural Resources, U.S. Senate,
            Washington, DC.
        Dear Mr. Chairman: Thank you for your August 20, 2001 letter
    forwarding questions from Senator Ron Wyden, for the record of your
    Committee's July 19, 2001 hearing on proposals relating to the
    Commission's hydro relicensing procedures. My answers to those
    questions are enclosed.
        I hope that my responses are helpful. If you need additional
    information, please do not hesitate to let me know.
                Sincerely,
                                              J. Mark Robinson,
                                   Director, Office of Energy Projects.
    [Enclosure.]
         Responses of J. Mark Robinson to Questions From Senator Wyden
        Question 1. The Idaho National Engineering Laboratory released a
    study finding there are potentially thousands of megawatts of untapped
    hydropower at existing hydro facilities. This untapped power could
    become available by installing additional turbines or more efficient
    turbines. Given the relatively minimal environmental impacts of these
    improvements and the need for alternatives to gas-fired plants,
    streamlining the process for licensing improvements to existing hydro
    facilities is one of the greener alternatives available to help meet
    the region's needs. What, if anything, is the Commission doing to
    streamline the process for installing additional turbines or more
    efficient turbines at existing dam sites?
        Answer. The Commission is taking steps to ensure that this occurs.
    In 1991, the Commission initiated a program for capacity and efficiency
    upgrades at existing projects through streamlining its procedures and
    minimizing pre-filing requirements, with the objectives of promoting
    domestic energy production, encouraging utilities to evaluate
    investment in energy efficiency and making more efficient use of the
    nation's existing hydroelectric resources. The Commission ultimately
    revised its regulations (18 C.F.R. Sec. 4.201(b)), so that many
    capacity upgrades are considered routine maintenance that do not
    require Commission approval. Many licensees have already taken
    advantage of this opportunity, and continue to do so when it is
    economically practical.
        On March 14, 2001, the Commission issued its Removing Obstacles To
    Increased Electric Generation And Natural Gas Supply In The Western
    United States Order (Docket No. ELO1-47-001). One key component of the
    order was increasing generation at existing Commission-licensed
    hydropower projects, consistent with protecting environmental
    resources. The Commission stated that installation of additional
    turbine generators was one way of providing additional generation at
    existing hydropower projects. The Commission also called for
    conferences to be held in the Western Systems Coordinating Council
    region focused on improving the energy situation in the Western states.
        Commission staff held conferences in Portland, Oregon, and
    Sacramento, California. As a result of the conferences, the Commission
    received four applications to amend licenses by adding small
    hydroelectric turbine-generator units to existing facilities. The
    Commission has authorized two of these amendment proposals, a 70-
    kilowatt (kW) turbine-generator unit at the Pelton-Round Butte Project
    No. 2030 and a 437-kilowatt turbine-generator unit at the LaGrande
    development of the Nisqually Hydroelectric Project No. 1862. Two
    additional proposals to install small hydroelectric units at the Rock
    Island Project No. 943 (700 kW) and the Rocky Reach Project No. 2145
    (800 kW), both located on the Columbia River, are currently pending at
    the Commission.
        Question 2. The Commission's report to Congress under Section 603
    of the Energy Act of 2001 recommends that the Clean Water Act be
    amended to limit water quality certification to a subset of water
    quality parameters. Does FERC believe that it knows better than the
    states as to how to protect and restore water quality for a state?
        Answer. FERC believes the states are properly the leaders in
    setting water quality standards such as the physical and chemical
    composition of water. However, to the extent that the Federal Power Act
    requires the Commission, in issuing hydropower licenses, to balance the
    various beneficial public uses of waterways, including power and
    development and environmental uses, the Commission continues to work in
    partnership with the states, as well as with other federal agencies,
    Indian tribes, non-governmental organizations, and other stakeholders.
    Commission staff believes that all of these parties have valuable
    contributions to make to the licensing process.
        Pursuant to the Clean Water Act, the states play an important role
    in establishing objective standards for the physical and chemical
    composition of water (dissolved oxygen content, pollutant-levels,
    temperature, etc.). Commission staff is concerned that, to the extent
    that states utilize their authority under the Clean Water Act to
    require conditions beyond the physical and chemical composition of
    water, such as those dealing with recreation and fish and wildlife
    requirements, it makes it difficult, if not impossible, for the
    Commission to perform the balancing required by the Federal Power Act.
        Question 3. The report suggests that states be prohibited from
    requiring ``instream flows.'' Does FERC believe that good water quality
    can be achieved without water quantity? How do you achieve water
    quality standards for temperature without increasing flows?
        Answer. Clearly water quality and quantity are related, however,
    the determination of flow requirements can be an issue that does not
    have water quality impacts. Water quality is generally addressed with
    numeric temperature and dissolved oxygen criteria in certifications.
    Water quantity requirements often bear no relationship to these water
    quality standards, but rather are designed to address particular uses
    of the waterway, such as fish habitat or boating.
        In fact, there are a number of ways to meet water quality standards
    without imposing water quantity requirements. For example, many
    reservoirs stratify thermally, particularly during the summer when high
    river water temperatures are of concern. In such cases, cooler summer
    water in the rivers downstream may be achieved through selective
    withdrawal of cold, deep reservoir water, rather than necessarily
    increased flows. This method may allow for a smaller amount of water to
    be released to meet water temperature standards, and result in water
    being available for other purposes, such as filling a reservoir for
    summer recreation use or peak generation. Similarly, if project works
    are integral with the dam (i.e., there is no bypassed reach), selective
    withdrawal into the turbines may eliminate the need to require spillage
    to meet water quality standards. Likewise, myriad aeration techniques,
    such as turbine venting, can be used to meet dissolved oxygen standards
    downstream, without requiring additional flows.
        It is nevertheless true that providing sufficient quantities of
    water for beneficial public uses is extremely important, and balancing
    the use of water is studied carefully by Commission staff in all
    hydropower licensing proceedings. Indeed, the Commission includes
    minimum flow conditions for purposes such as fish and wildlife,
    recreation, and aesthetics in virtually every license it issues.
                                  Appendix II

                  Additional Material Submitted for the Record

                                  ----------

                                Western Governors' Association,
                                         Washington, DC, July 11, 2001.
    Hon. Jeff Bingaman,
    Chairman, Senate Committee on Energy and Natural Resources, Dirksen
            Senate Office Building, Washington, DC.
    Hon. Frank Murkowski,
    Ranking Minority Member, Senate Committee on Energy and Natural
            Resources, Dirksen Senate Office Building, Washington, DC.
        Dear Senators Bingaman and Murkowski: We urge the Congress to
    support the rapid enactment of federal electricity reliability
    legislation that provides for delegation and deference to decisions
    made within an electrical interconnection and authorizes the
    establishment of state advisory bodies. Such provisions are embodied in
    the consensus legislation prepared by the North American Electric
    Reliability Council. This legislation has bi-partisan support. The
    provisions passed the Senate last year and are included in numerous
    bills in this Congress. Western governors expressed our support for
    such legislation a year ago in the attached resolution. We reiterated
    our position in the recommendations from the February 2, 2001 Western
    Governors' Association Energy Policy Roundtable and again during a
    Western Governors' Association Transmission Roundtable on May 9, 2001.
        The enactment of federal reliability provisions that reflect the
    position of Western governors is vital to assuring reliability in the
    Western Interconnection. We urge you to support rapid action to enact
    such legislation.
                Sincerely,
                                               Dirk Kempthorne,
                              Chairman, Western Governors' Association.
    [Enclosure.]

                            POLICY RESOLUTION 00-009

            A Competitive and Reliable Western Electric Power System
                             Approved June 13, 2000
    SPONSORS: Governors Johnson and Geringer
                                 a. background
        1. The Western electric power system is experiencing fundamental
    change driven by customer demands for choice, lower cost generation,
    and state and federal regulatory reforms to enhance the competitive
    wholesale Western electricity market.
        2. The Western electric power industry is central to the region's
    economy. As the regional power outages of July 23, and August 10, 1996
    highlight, the Western economy is dependent upon a reliable supply of
    electricity. Annual expenditures for electric power in the West are
    over $700 per capita or $63 billion. This is more than the gross output
    of the agriculture, forestry, and fisheries sectors combined.
        3. The Western region has the second highest regional average
    electricity rates in the nation. But retail rates vary greatly from
    state to state. The Western region contains states with the lowest
    retail rates in the nation, as well as states with rates significantly
    higher than the national average.
        4. The Western electric power industry is very diverse. Investor-
    owned utilities, publicly-owned utilities, and federal power marketing
    administrations all play major roles in supplying electricity and
    providing transmission in the region. Seventy investor-owned utilities
    provide nearly 70 percent of the West's electric supply. Nearly 1,000
    publicly owned systems, including public power districts, rural
    electric cooperatives, municipals, and regional, and federal systems,
    provide about 30 percent of the West's electricity. Non-utility power
    suppliers, power marketers and brokers, and load aggregators are adding
    to the diversity of the electric power industry.
        5. Past Western state utility policies have been instrumental in
    (a) cutting the cost of energy services through cost-effective
    conservation investment, (b) expanding the production of electricity
    from abundant Western renewable resources such as wind, geothermal and
    solar, (c) fostering industry-sponsored research and development, and
    (d) helping low-income consumers pay their electricity bills. However,
    the methods by which these policies promoting social objectives have
    been implemented may not be sustainable in a competitive industry. New
    approaches will be required.
        6. The federal government has acted to open access to the high
    voltage transmission system, a necessary step in promoting wholesale
    competition. In 2000, Congress is expected to consider legislation that
    could expand competition in the wholesale electric power industry.
        7. Nearly every Western state is evaluating or has acted on
    regulatory or legislative proposals that would change the existing
    structure of the electric power industry.
        8. The Western electric power system is increasingly challenged by
    load growth and expanding power sales across the transmission system.
    Recent analyses show an increasing probability of power outages in the
    next few years.
                         b. governors' policy statement
        1. Western Governors support expanded competition among electricity
    generators to lower electricity costs to Western consumers. Impediments
    to increased competition among generators need to be removed. The
    Governors believe that all segments of the Western industry, including
    investor-owned utilities, public power, federal power marketing
    administrations, power marketers and brokers, and independent power
    producers, should participate in the competitive market, at least at
    the wholesale level. The decision whether to require or allow
    participation in a retail competition program, and the form and timing
    of participation in retail competition should depend upon
    determinations made at the state and local levels. Western Governors
    also support further implementation of access to the Western
    transmission grid on a non-discriminatory basis.
        2. Western Governors recognize that the Western electric power
    system is a highly integrated interstate grid. In order to maintain or
    enhance reliability, this ``interstate highway of electrons,'' which
    moves at the speed of light, requires a high level of coordination
    among those using the grid, as well as the cooperation of those in each
    state and in the federal government charged with the responsibility for
    oversight of the various elements of the system.
        3. The transition to a more competitive market must ensure
    continued reliability and safety in the provision of electric power
    service. Western Governors encourage private sector solutions that
    promote system reliability. New approaches to establishing and
    enforcing regional reliability criteria need to be adopted. These new
    approaches should include federal legislation that, consistent with the
    Governors' policy statement 10 below, provides for:

              a. Use of a public process for setting reliability criteria.
              b. Review of proposed reliability criteria by states.
              c. Application of reliability criteria to all users of the
            grid.
              d. Enforceable sanctions for non-compliance with reliability
            criteria.
              e. Mandatory membership by operators and users of the
            transmission grid in regional reliability organizations.
              f. Deference by a North American electric reliability
            organization to interconnection wide standards and practices
            developed in the West.
              g. The organization of regional advisory bodies of affected
            states and Canadian provinces to advise regional and North
            American reliability organizations, the Federal Energy
            Regulatory Commission (FERC) and appropriate Canadian and
            Mexican regulatory authorities on the governance of a regional
            reliability organization, proposed reliability standards and
            their enforcement, and fees to support system reliability
            activities. FERC should defer to the advice of such regional
            advisory bodies when the advisory bodies cover an entire
            interconnection.

        4. To protect reliability in a competitive market, Western
    Governors urge the expeditious establishment of a single Western
    Interconnection Organization that promotes efficient electricity
    markets, ensures reliability, increases the effectiveness of the
    institutional support structure, eliminates overlap or duplication of
    effort among grid management organizations and provides for a clear
    determination of authority and responsibility. States should be members
    of the Board of Directors of the organization.
        5. Western Governors also support the development of new market
    mechanisms to enable retail consumers to receive appropriate price
    signals so that they can effectively participate in the power market
    and thereby help ensure system reliability at the lowest reasonable
    cost possible. The Western Governors also recognize that exporting
    efficient, low-cost generation will enhance reliability.
        6. Western Governors urge the Western electric power industry, in
    cooperation with Western states and the federal government, to support
    the formation of cost-effective Regional Transmission Organizations to
    maintain and enhance system reliability, examine and mitigate market
    power, and facilitate efficient power transactions in a restructured
    industry.
        7. Western Governors support the adoption of ``system benefit''
    charges to continue appropriate support of social purposes, including
    acquisition of cost-effective energy conservation, research and
    development, expanded use of renewable energy resources, and low-income
    assistance.
        8. Western Governors urge the federal government to work with the
    states to develop effective approaches to mitigate market power.
        9. Western Governors urge Western state public utility commissions
    and Attorneys General to examine whether new measures are needed to
    protect electricity consumers in a more competitive market and educate
    consumers of their rights and risks under a competitive electric
    system.
        10. Western Governors urge the federal government to refrain from
    adopting preemptive legislation that would impose a ``one-size-fits-
    all'' approach to the restructuring of the electric power industry that
    fails to recognize the unique characteristics of the Western electric
    power industry. No action by Congress or FERC should abridge the
    existing powers and authorities of state and local governments. Any
    action taken by Congress should enable states to restructure the
    electric industry, but not impose a mandate on states to do so.
    Congress should ensure that federal institutions, such as the power
    marketing administrations, participate in regional actions to promote
    competition, such as the creation of Regional Transmission
    Organizations system operators. Additionally, any federal legislation
    must retroactively include state actions to establish retail
    competition.
        11. Federal agencies and federal legislation should facilitate
    effective decision-making by the states and empower the states, with
    the cooperation of other regional stakeholders, to create regional
    mechanisms, where appropriate, to address transmission, reliability,
    market power and other regional concerns. FERC should be required to
    defer to the decisions of such bodies.
                       c. governors' management directive
        1. The Committee on Regional Electric Power Cooperation (CREPC), a
    joint working committee of the Western Interstate Energy Board and the
    Western Conference of Public Service Commissioners, is directed to work
    with the Western industry and the federal government to achieve the
    policies set forth herein. CREPC is to report on the progress in
    implementing these policies.
                                     ______

                                      Nuclear Energy Institute,
                                         Washington, DC, July 18, 2001.
    Hon. Frank H. Murkowski,
    U.S. Senate, Hart Senate Office Building, Washington, DC.
        Dear Senator Murkowski: This month, the United States will continue
    to negotiate an appropriate global response to the issue of climate
    change at the Sixth Conference of the Parties in Bonn, Germany. Nuclear
    energy is the most effective technology to reduce greenhouse gas
    emissions in the industry sector. I enclose for your consideration a
    letter from the international nuclear energy industry asking that you
    support nuclear energy as part of the solution to reducing greenhouse
    gases and other air pollutants.
        Each year, the use of emission-free nuclear electricity around the
    world avoids billions of tons of carbon dioxide, the most prevalent
    greenhouse gas. Nuclear energy technology reduces more carbon dioxide
    emissions than any other method in the U.S. voluntary program to reduce
    this greenhouse gas. In the United States alone, nuclear energy
    accounts for nearly 70 percent of all emission-free electricity
    production. Overall, nuclear energy is a source of electricity
    production for one out of every five homes and businesses in the United
    States.
        On behalf of my colleagues in the global energy industry who have
    signed the enclosed letter, I encourage you to support a global
    recognition of the need for expanded nuclear energy production to avoid
    greenhouse gas emissions. Nuclear energy is part of the solution for
    any regime that seeks to improve our air quality.
                Sincerely,
                                                 Joe F. Colvin,
                                                     President and CEO.
    [Enclosure.]

                 An Open Letter to Governments Around the World

                                  11 July 2001

        World demand for electricity will continue to increase as
    population grows and countries develop and expand their industrial
    base. All methods of electricity generation have some impact on the
    environment. As representatives of the international business
    community, we recognize our global challenge is to minimize this impact
    while satisfying the electricity needs of all peoples of the world.
        Nuclear power plays an important part in meeting this challenge
    because it provides much needed electricity, protects the environment,
    and supports sustainable development. Prevention and management
    technology needed to protect all affected environmental media is either
    in use or available. And nuclear electricity generation avoids the
    emission of greenhouse gases, thus playing a key role in limiting
    potential climate change, particularly in the developed world where
    significant emissions reductions are sought.
        Continued safe, effective use of nuclear electricity and further
    development of advanced nuclear power plant technology are an integral
    part of the international effort to manage risk from global warming. We
    encourage you to support policies that give every country engaged in
    greenhouse gas control programs the right to access all technologies as
    needed, including nuclear electricity.
        Nuclear is a necessary and uniquely effective part of the solution.
    Parties to the UN Framework Convention on Climate Change should
    acknowledge nuclear electricity as an acceptable energy and
    environmental resource that successfully avoids greenhouse gas
    emissions. This will ensure that global-emission control programs are
    flexible and preserve the right of individual countries to make their
    own energy and development choices.
        [Note: This letter has been signed by 93 CEOs and leaders of the
    nuclear industry world-wide].
                                     ______

                                         Forest Stewards Guild,
                                           Sante Fe, NM, July 27, 2001.
    Senator Jeff Bingaman,
    Hart Office Building, Washington, DC.
        Dear Senator Bingaman: On behalf of the Forest Stewards Guild, I
    would like to submit comments regarding the Forest Resources for the
    Environment and the Economy Act (S. 820) for consideration by the
    Senate Energy and Natural Resources Committee. The Guild is an
    organization of practicing foresters and other resource management
    professionals. The mission of the Guild is to promote ecologically
    responsible resource management that sustains the entire forest across
    the landscape.
        Carbon sequestration is increasingly recognized as a critical goal
    of forest management, and we applaud the Senate's initiative to promote
    this goal and institute effective steps for monitoring success. S. 820
    has a number of merits that constitute critical steps in developing a
    productive national approach to carbon sequestration. However, the bill
    also proposes a number of features that can potentially subvert truly
    effective carbon storage efforts and/or sidetrack and impair national
    policy on carbon storage.
        In particular, we would call your attention to the following:
        Section 2 contains problematic language and definitions. In
    particular, ``Forest Land'' is defined in such a way as to enable the
    classification of virtually any land in the country as forest land.
    This definition should establish a time frame for the presence of
    forest land within at most several decades in order to more effectively
    focus efforts.
        In Section 4, in the Definitions proposed in the language for the
    new Sec. 1600 of Title XVI of the Energy Policy Act of 1992, in items 2
    and 3, forest products are included as potential carbon stores. While
    some forest products may be appropriately classified as carbon stores,
    this classification requires much more explicit guidelines and
    standards for ``durability,'' or the length of time that carbon would
    be stored. For instance, there is a considerable gulf between how long
    carbon will effectively be stored in a paper bag or even a sheet of
    plywood as opposed to a framing timber. Moreover, standing timber is
    generally easy to keep track of, while forest products can be highly
    mobile--how can we effectively monitor the durability of many forest
    products that may undergo accelerated decay due to fire, demolition,
    rot and many other processes?
        In Section 4, item 5(b), there is a proposed requirement that the
    Secretary of Agriculture report within a year on the amount of carbon
    in the National Forest system, potential benefits to water and wildlife
    as well as the global carbon budget, and an assessment of impacts of
    forest management factions on a comprehensive range of forest
    management objectives. Given the inadequacies of current national
    timber inventories and federal monitoring performance, these reporting
    requirements seem unreasonable at best. A rough estimate of amount of
    carbon being stored on the national forests would be a tall order on
    its own, but would at least provide a clearer focus.
        Section 5, item (c)(1), on eligible carbon activities lacks a
    definition of ``sustainable management activities.'' There is a wide
    diversity of perspective on this issue within the nation and the
    professional forestry community--this term provides little guidance for
    prioritizing loan monies. The lack of rigorous standards, definitions,
    and guidelines for actual forest management practices in the bill
    leaves the door open for a wide range of activities whose inputs may
    actually increase carbon outputs rather than storage. Reliance on
    chemical herbicides, pesticides, fertilizers, heavy machinery, and so
    forth carry a carbon ``cost'' of their own. These costs are typically
    heaviest in short-rotation tree plantation systems. Such costs are
    substantially minimized or eliminated through approaches to forest
    management that rely on significantly less industrial inputs.
    Interestingly, the argument in favor of short-rotation tree plantation
    systems as opposed to long-rotation natural forest management is
    typically an economic one--yet this bill seems to target the former
    system as opposed to the latter as if in need of government subsidy. If
    the short rotation systems are not paying off economically, perhaps
    they should be eschewed, in as much as they are largely devoid of
    ecological value as well.
        Section 5 also emphasizes under-producing or understocked forest
    lands, while it lacks any mention of forest lands being managed with
    activities that maximize carbon storage for the longest possible time.
    This is a very important point, given that late successional forest
    stands and old growth store considerably more carbon than tree
    plantations, but often carry additional costs to land owners who manage
    for them that tree plantations do not. Moreover, the current emphasis
    of the bill seems to reward past poor management, while overlooking the
    investment of time and energy by landowners who have developed and are
    maintaining well-stocked, mature timber stands through good management.
        A fundamental decision needs to be made as to whether the objective
    of this bill is to store carbon or support pre-commercial timber
    harvest activity that may or may not result in significant benefits for
    carbon storage. Because the focus of the bill is ostensibly carbon
    storage, we would urge the Senate to clearly set priorities for the
    nation on this issue. By emphasizing short-rotation tree crops as the
    answer-to-carbon sequestration, this bill in its current state would
    set an inappropriate trajectory for carbon storage efforts--one that
    has already met with significant global resistance. The Guild believes
    that the best all-around way to store carbon and provide ecological and
    long-term economic benefits is to manage forest stands on a long
    rotation basis, using site-appropriate species mixes. The bill should
    be revised to directly address, prioritize, and offset the costs
    carried by landowners managing for long rotations and maximum carbon
    storage. Support to forest management approaches that result in less
    carbon storage, such as short-rotation industrial tree plantation
    management, and the mass production of forest products of limited
    durability, should be de-emphasized. If economics are driving decisions
    to pursue short rotation forest management systems, then they should
    pay for themselves without taxpayer subsidy.
                Sincerely,
                                                  Mary Chapman,
                                                              Director.
                                     ______

                                       State of Oregon,
                                        Office of the Governor,
                                              Salem, OR, July 30, 2001.
    Hon. Jeff Bingaman,
    Chairman, Committee on Energy and Natural Resources, Washington, DC.
    Re: Written testimony on S. 71, subtitle C of title VII of S. 388, and
    title VII of     S. 597

        Dear Mr. Chairman: Thank you for the opportunity to comment on
    three bills related to the licensing of hydroelectric projects. I
    regret that Oregon was unable to testify in person at the July 19, 2001
    Subcommittee hearing, but offer this letter and its attachment as
    written testimony for the record.
        The bills and respective titles on which you requested comment
    include: S. 71, The Hydroelectric Licensing Process Improvement Act of
    2001, introduced by Senator Craig; subtitle C of title VII of S. 388,
    The National Energy Security Act of 2001, introduced by Senator
    Murkowski; and title VII of S. 597, the Comprehensive and Balanced
    Energy Policy Act of 2001, introduced by Senator Bingaman.
        Of the three bills, I believe that S. 597 holds the most promise
    for improving the licensing process. S. 597 makes two process changes
    whose merits are clear, and requires further study of ways to improve
    the licensing process. The process changes should enhance the quantity
    and efficiency of power production and promote the health of rural
    economies without adversely affecting natural resource protection. The
    study requirement is consistent with GAO findings that existing
    information is inadequate to determine the best way to improve the
    licensing process. Further comments on this bill are included in the
    attachment to this letter.
        The provisions of S. 71 and subtitle C of title VII of S. 388 are
    substantially the same. Although these two bills may prevent some loss
    of power production and reduce some costs to power producers, I believe
    they will do so at a cost to taxpayer's and natural resources that is
    not in the public interest. My concerns are explained further in the
    attached statement.
        I hope you find these comments useful, and encourage future
    collaborative approaches to improving the licensing process.
                Sincerely,
                                       John A. Kitzhaber, M.D.,
                                                              Governor.
    [Enclosure.]
         Statement of Hon. John A. Kitzhaber, M.D., Governor of Oregon
        Content of this Statement: This document details some of the
    reasons that I do not believe S. 71, The Hydroelectric Licensing
    Process Improvement Act of 2001 and subtitle C of title VII of S. 388,
    the National Energy Security Act of 2001 are in the public interest.
    The statement also explains my support for the two process changes
    proposed by S. 597, the Comprehensive and Balanced Energy Policy Act of
    2001, and proposes some modifications to the study provision of that
    bill.
        Importance to Oregon: Hydroelectric licensing is important to
    Oregon because the outcome of relicensings over the next ten years will
    have important implications not only for consumers, but also for the
    State's land, air, and water resources. In the next ten years, more
    than ten hydropower projects within the state will be involved in the
    relicensing process. Although these relicensings should not
    significantly affect the short-term scarcity of energy faced by many
    Western states, we recognize the importance of hydroelectric power in
    the state's energy portfolio. Hydropower is important as a source of
    renewable energy that can track demand.
        Just as the energy produced by hydropower is important to the
    state, the quality of the natural resources that are impacted by
    hydroelectric projects is also important. The quality of natural
    resources is fundamental to both the State's economy and our identity
    as Oregonians. A 1995 consensus report by more than 20 Northwest
    economists found that protection of the natural environment is critical
    for maintaining the economies of the northwest states. They found that
    businesses are drawn to the Northwest because employees want to move
    there, and that people want to move there because of the quality of the
    natural environment.
        Most of the projects with expiring licenses in Oregon were
    constructed in an era when economic development was given priority over
    protection of natural resources. These projects do not meet modern
    environmental standards. Some examples of the impacts caused by these
    projects include: dams form impoundments that can dramatically impact
    the river system by precluding movement of fish, changing water
    temperature, and trapping and altering sediment transport; penstocks or
    power canals on many projects divert water out of the natural channel,
    bypassing miles of river that receive very little water; and turbines
    kill some of the fish passing through them.
        The Public Interest: Oregonians are interested in developing and
    maintaining a diverse economy, while protecting the natural resources
    that traditionally served as the base for both our economy and our
    quality of life. We necessarily view hydropower in a context that
    includes economic and social values beyond just those related to power
    production. We believe that the Federal Power Act (FPA), as modified by
    the Electric Consumers Protection Act (ECPA) also recognizes this need
    to accommodate diverse values.
        The FPA gives FERC responsibility to balance power-related
    interests, but limits its ability to ``balance away'' certain resource
    protection requirements that are best evaluated in contexts broader
    than just power production. Under the FPA, resource agencies with
    mandatory conditioning authority set a ``floor'' of natural resource
    protection, above which FERC is free to make economic tradeoffs to
    ensure an efficient and plentiful power supply. The agencies who
    provide the floor for the energy sector are the same ones who provide
    the floor for other economic activities such as agriculture, forestry,
    and urban development. This promotes a level playing field across
    sectors. To encourage local involvement and decision-making, these
    authorities are vested in federal and state agencies according to their
    respective expertise and geographic scope.
        In Oregon, State and Federal agencies have used their respective
    authorities in a collaborative and productive manner. While we haven't
    always agreed on every issue, better outcomes have resulted from our
    discussions. Oregon state agencies have relied on specific expertise
    that the federal agencies bring to the licensing table, such as fish
    passage design and geomorphologic process evaluation, to assist us in
    making better recommendations for protection and mitigation measures at
    a project. FPA Section 18 fishway authority has been a critical federal
    tool for helping meet state goals, and Section 4(e) authorities can
    serve to backstop state recommendations under FPA Sections 10(a) or
    10(j). For this reason, the three bills under discussion are of
    particular interest with respect to protection of Oregon's fish and
    wildlife resources.
        Specific Concerns with S. 71 and subtitle C of title VII of S. 388:
    Although the goals of these two bills are laudable, I believe the
    provisions of the bills will create inefficient use of government
    resources and will result in undesirable reductions in natural resource
    protection.
        As an example of the inefficiency the bills will produce, one
    section requires that agencies such as NMFS and USFWS consider diverse
    factors such as economic values, air quality, irrigation, and drinking
    water supply when writing license conditions. Unfortunately, these
    agencies have neither the expertise, nor the information required to
    evaluate such factors. There are other agencies who already have
    responsibility and expertise to evaluate and condition for those
    factors. For example, the Oregon Department of Environmental Quality
    has obtained federal delegation under both the Clean Air and Clean
    Water Acts to protect air and water quality. It is neither practical or
    useful for other agencies to make their own independent determinations
    concerning these issues during licensing.
        As another example of inefficiency, another requirement of these
    bills is that consulting agencies must take into account the mandatory
    conditions of other agencies. While this seems reasonable, the bills
    later add a process requirement that conditions be submitted to the
    applicant 90 days prior to the filing of a license application. At this
    point in the process agencies cannot know how the applicant proposes to
    operate the project under the new license, nor how it should best be
    conditioned. Agencies don't have enough information to determine their
    own conditions--much less to conform them to other agencies' mandatory
    conditions. The likely outcome is that conditions would have to be
    written and fully justified twice, creating extra work with little
    payoff.
        In addition to the above-mentioned problems, the two bills will
    result in inadequate protection of natural resources. By requiring
    federal resource agencies to meet untenable process standards and to
    base their conditions on a balance of factors outside their expertise
    and traditional jurisdiction, the bills will greatly diminish those
    agencies' ability to write defensible conditions. Defensible conditions
    are important for a number of reasons, including the fact that the
    bills provide that these conditions may be contested by the applicant
    to an outside reviewer. The difficulty is compounded by a stipulation
    in the bills that if the outside reviewer does not act within 180 days,
    the conditions lose their mandatory character and may be regarded as
    discretionary by FERC. Because the resource agencies have no ability to
    ensure timely action on the part of the external reviewer, this is a
    serious loophole.
        When the process requirements of S. 71 and S. 388 are combined with
    their focus on economics, the bills effectively remove the natural
    resource protection floor provided by ECPA, and reduce the ability of
    agencies to balance the burden of resource protection across sectors,
    leaving others to repair damage caused by the hydropower industry.
    Where this damage can't be repaired, it may deprive future generations
    of the opportunities and quality of life that is their proper heritage.
        S. 71 and subtitle C of title VII of S. 388 have other troubling
    provisions. This document doesn't address them all, but presents two
    science issues as further examples: 1) the bills require that agencies
    base their conditions on ``current empirical data or field-tested
    data.'' This limitation precludes use of historical data and
    statistically modeled projections and is therefore inconsistent with
    good science. Good science makes use of all accurate data and available
    statistical tools. 2) The requirement that conditions be subjected to
    peer review is unrealistic and unnecessary. ``Peer review'' normally
    refers to the process a scientific article goes through before being
    published in a scientific journal. In order to meet this requirement, a
    whole new consulting industry would be needed. Such review would be
    costly and would delay issuance of licenses. The review is not needed,
    because review is already provided within agencies and among the
    parties to licensing processes.
        Comments on S. 597, The Comprehensive and Balanced Energy Policy
    Act of 2001: The two process changes made by this bill should minimize
    generation and revenue losses, help agencies better perform their jobs,
    and give a boost to some rural economies.
        The provision that allows applicants to contest a condition that
    they believe is inefficient to the agency that prescribed the condition
    has several merits. It retains authority in the agency where the
    expertise and responsibility resides, provides an avenue to ensure that
    project improvements are made as inexpensively and efficiently as
    possible, and ensures that improvements are adequate to meet resource
    protection standards. However, I would like to propose one slight
    amendment: In order to provide the prescribing agencies with the
    information they need to make scientifically sound decisions on
    alternative measures, such as alternative fishways, I recommend that S.
    597 be amended to include the language in H. 2587, which requires the
    applicant to provide supporting evidence to the prescribing agency when
    an alternative is proposed: Additionally, I recommend that this section
    clarify that supporting information should be provided during the pre-
    filing consultation process currently in place under FERC rules. These
    changes are consistent with the Federal Power Act, in that applicants
    are required to conduct studies necessary for determining appropriate
    mitigation for project impacts at licensing.
        The provision that directs fees paid to FERC away from the general
    Treasury, and to the agencies that work on the projects should increase
    the ability of agencies to participate early and adequately in
    licensing processes. The authority granted to spend some of the funds
    on job training, and for rural community and project-environment
    improvements should further the effectiveness of dollars spent on
    mitigation.
        The provision that requires FERC to gather more information should
    prove useful. However, I suggest that the data for collection include
    characterization of the reason for delays associated with Clean Water
    Act compliance. FERC's 603 Report identified issuance of Clean Water
    Act Section 401 Certificates as a major source of delay in the
    licensing process. Apparently, FERC did not investigate the reason for
    the reported delays, but attributed them to state requests that
    applicants withdraw and refile their applications.
        In fact, the idea that applicants withdraw their Clean Water Act
    certifications to give states more time to act is both
    counterintuitive, and contrary to our experience. In a comment letter
    to FERC during the development of the report, the Oregon Department of
    Environmental Quality expressed frustration with the fact that the
    State has no recourse when applicants withdraw and refile their
    applications for certification. The letter also mentioned that of the
    [then] five applications for 401 Certification received by the State in
    the current relicensing class, all have been incomplete. Two were
    withdrawn at the applicant's initiative to serve the applicant's
    purposes, and two were denied because of incompleteness. One
    application has been withdrawn and resubmitted twice. The (third) draft
    of that application was acknowledged by the applicant to be incomplete
    upon submittal.
        There is a need to determine whether delayed issuance of 401
    Certifications is due to applicant failure to provide necessary
    information in a timely manner, or whether states are the cause of the
    delay. Once this information is known, further analysis will be needed
    to determine the reasons for the delays, regardless of the degree to
    which various parties are responsible.
        Finally, I'd like to note that asking FERC to identify and solve
    problems with the licensing process when FERC is a key player in that
    process is less than desirable. I believe that the task would be better
    assigned to an outside agency with expertise in program evaluation such
    as the General Accounting Office, and that the timeframe for the study
    should be increased to one year to allow for a more thorough analysis.
    The study would be even further enhanced if state agencies were listed
    among those to be consulted during study development.
                                     ______

     Statement of Dr. William T. Hogarth, Acting Director, National Marine
      Fisheries Service, National Oceanic and Atmospheric Administration,
                             Department of Commerce
        This Statement provides the views of the National Oceanic and
    Atmospheric Administration (NOAA) on S. 71, the Hydropower Licensing
    Process Improvement Act of 2001, and S. 597, the Comprehensive and
    Balanced Energy Policy Act of 2001. It also provides recommendations
    for legislation to improve the hydroelectric relicensing process.
     role of the national oceanic and atmospheric administration (noaa) in
                             hydropower relicensing
        The National Oceanic and Atmospheric Administration, via the
    National Marine Fisheries Service (NOAA Fisheries), is responsible for
    conserving and managing anadromous and marine fish resources and their
    habitats, in accordance with several statutes, as discussed briefly
    below.
        The Federal Power Act (FPA) provides the Secretaries of the
    Interior and Commerce with the authority to prescribe fishways at
    hydropower projects licensed by the Federal Energy Regulatory
    Commission (FERC), and provides NOAA Fisheries, FWS, and state resource
    agencies with the authority to submit recommendations for fish and
    wildlife habitat protection. The Magnuson-Stevens Fishery Conservation
    and Management Act requires Federal agencies to consult with NOAA
    Fisheries if their actions may adversely affect essential fish habitat.
    The Fish and Wildlife Coordination Act requires Federal agencies to
    consult with NOAA Fisheries and FWS if their action modifies a water
    body. The National Environmental Policy Act provides a mechanism that
    enables NOAA Fisheries, other resource agencies, and other stakeholders
    to provide comments on Environmental Assessments and Environmental
    Impact Statements prepared for hydropower project licensing decisions.
    Finally, the Endangered Species Act requires Federal agencies to
    consult with NOAA Fisheries or FWS if their action may affect listed
    species or their habitats.
               hydropower effects on fish and associated habitat
        Although hydropower is cleaner than fossil fuel and nuclear power,
    it is not free from adverse environmental effects, and can have
    significant impacts on anadromous fish and their habitats. Pacific and
    Atlantic salmon, shortnose sturgeon, American shad, and many other fish
    species depend on access to upriver habitat to complete their
    lifecycles. Habitat alteration, impeded fish passage, degraded water
    quality, and compromised flows are significant adverse effects of dams
    on river systems.
        Many dams were constructed before their effects on river systems
    were fully understood, and before key environmental laws were in place.
    Many lack adequate fish passage and other environmental protection
    measures, and will have to come into compliance with current
    environmental laws and FPA mandates upon relicensing. Fortunately,
    these impacts can-be greatly reduced by including state-of-the-art fish
    passage facilities and other measures to ensure adequate resource
    protection. Given the large number of license expirations in the next
    decade, there is an unparalleled opportunity to modernize projects and
    provide fish and habitat protection measures.
                             national energy policy
        The new National Energy Policy provides recommendations to the
    White House and Congress to improve hydropower licensing, and addresses
    issues that relate to NOAA Fisheries' role in the licensing process.
    The Department agrees that the process can be improved, and has worked
    to develop administrative reforms and legislative recommendations to
    achieve a better, more efficient licensing process. These reforms are
    discussed below.
                         recent administrative reforms
        NOAA Fisheries has been working with FERC, other Federal resource
    agencies, and stakeholders to streamline and improve the hydropower
    relicensing process. These efforts include participating in the
    Interagency Task Force to Improve Hydropower Licensing Processes (ITF),
    developing a proposed interagency policy on section 18 Fishway
    prescriptions, and participating in the National Review Group (NRG) of
    the Electric Power Research Institute (EPRI). Through these cooperative
    efforts, we have made considerable changes to the process that will
    improve hydropower relicensing.
    Interagency Task Force to Improve Hydropower Licensing Processes
        The ITF was formed in October 1998 to develop practical ways to
    improve the licensing process. It was a coordinated effort between
    FERC; the Departments of Commerce, the Interior, Agriculture, and
    Energy; the Environmental Protection Agency; and the Council on
    Environmental Quality. Seven ITF reports recommend substantial
    administrative measures to make hydropower licensing more efficient.
    The Department of Commerce (Department) has committed to implementing
    these reforms, as have the other member agencies. Federal agencies held
    a series of implementation workshops throughout the country, and
    continue to ensure that the reforms are administered agency-wide.
    Section 18 Fishway Interagency Initiative
        On December 22, 2000, The Departments of Commerce and the Interior
    published a proposed Interagency Policy on section 18 fishway
    prescriptions. NOAA Fisheries and the Fish and Wildlife Service are
    continuing to work on this document which will provide clearer guidance
    for the prescription process and improve consistency between the
    Departments of Interior and Commerce.
    Electric Power Research Institute National Review Group (NRG)
        The NRG is a working group consisting of representatives from the
    hydropower industry, environmental interests, states, FERC, and four
    Federal agencies (NOAA, EPA, USDA, and DOI). During 1999 and 2000, this
    group met regularly and developed a report, ``Hydro Relicensing Forum:
    Relicensing Strategies,'' that provided a set of voluntary best
    practices for all stakeholders in hydropower relicensing. The NRG is
    proceeding with a new phase of meetings to pursue further collaborative
    means of improving the licensing process.
                       noaa comments on s. 71 and s. 597
        S. 71 and S. 597 contain several provisions that would affect the
    way NOAA Fisheries takes part in licensing and relicensing by FERC of
    non-federal hydropower projects. Some provisions are already addressed
    by administrative reforms, some represent positive steps toward an
    improved relicensing process, and others would add delay to the
    process. Listed below are common themes in the bills.
    Alternative Fishways
        Section 701 of S. 597 allows licensees to propose an alternative
    fishway prescription, and directs the Secretary of the appropriate
    Federal agency and FERC to accept the alternative, if the Secretary
    determines that it provides equal or greater fish passage, is based on
    sound science, and will either cost less to implement or result in less
    loss of generating capacity than the fishway prescription deemed
    necessary by the Secretary. The Department recommends that the licensee
    proposing the alternative fishway be required to provide substantial
    evidence supporting the alternative fishway. Supporting evidence is
    necessary to allow the Secretary to make a reasoned decision. In
    addition, the Department recommends that the licensee be required to
    submit alternative prescriptions early in the pre-filing stage, and no
    later than 60 days following submission of preliminary prescriptions.
    This would prevent a situation in which the Department, the licensee,
    FERC, and other parties spend years developing a fishway prescription
    only to have that work negated by an alternative presented late in the
    process. Further, the bill text should be changed to indicate that it
    would be an applicant, not necessarily a licensee, submitting the
    alternative fishway. The Department also notes that the ITF
    administrative reforms already commit NOAA Fisheries to considering the
    least cost alternative, if it provides adequate fish passage.
    Deadlines
        S. 71 imposes deadlines and penalties that may have detrimental
    effects on NOAA trust resources. Section 4 removes NOAA Fisheries'
    authority to prescribe fish passage if NOAA Fisheries misses a deadline
    for submitting final conditions. Although a lack of reasonable
    deadlines often leads to delay in the licensing process, NOAA Fisheries
    believes that this severe penalty is not productive to the process and
    ultimately compromises the health of fish and habitat resources. The
    Department has nothing to gain by missing deadlines and, in fact, the
    longer a licensing proceeding takes, the longer the fish and associated
    habitats are without protections.
    Relicensing Study
        Section 703 of S. 597 requires FERC to conduct a study of all new
    licenses issued for existing projects since January 1, 1994. NOAA
    Fisheries supports this provision but suggests that the data gathering
    should continue beyond one year to ensure accurate and useful data
    reporting. We also suggest that FERC develop the study methodology in
    consultation with the Federal resource agencies. This data could be
    used in the future as a basis for modifying the licensing process to
    increase efficiency and decrease cost. The General Accounting office
    noted that FERC's record keeping and reporting mechanisms are
    inadequate, and section 703 could greatly improve the current system of
    maintaining records.
    Coordinated Environmental Review Process
        Section 33 of S. 71 establishes a single National Environmental
    Policy Act (NEPA) process, to be conducted by FERC, and bars consulting
    agencies from performing individual NEPA reviews. NOAA Fisheries
    supports a single, consolidated NEPA review, and already relies on
    FERC's NEPA analysis that includes our recommendations and fishway
    prescriptions. The Department would like to have the option of being a
    cooperating agency with FERC. However, FERC's interpretation of its ex
    parte communication requirements concludes that by becoming a
    cooperator in the NEPA process, an agency forfeits its right to appeal
    a license decision. NOAA Fisheries believes that FERC should be
    provided with a legislative exemption from ex parte communication
    prohibitions, for the specific case of allowing agencies to become NEPA
    cooperators without losing their right to appeal licensing decisions.
    This would improve the entire licensing process by allowing a
    collaborative approach.
                    noaa fisheries proposals for legislation
        NOAA Fisheries submits the following recommendations for
    legislation to improve the licensing process. As stated previously,
    NOAA Fisheries has already implemented several administrative reforms
    that make a better, more efficient licensing process, and recommends
    the following legislative measures to further improve the process and
    encourage more efficient utilization of our natural resources.
    1. NEPA cooperator/intervenor status
        Participation of the resource agencies as cooperators in NEPA
    development would improve the relicensing process by 1) allowing FERC
    and other resource agencies to work together on resource protection
    issues, 2) decreasing the likelihood of future intervention and/or
    appeal by cooperating agencies, and 3) making the relicensing process
    more efficient.
        FERC interprets its ex parte rules such that Federal agencies
    cooperating on developing NEPA documents are precluded from intervening
    in the proceeding for which the NEPA document is developed. To preserve
    the right to subsequent appeal, Federal agencies currently choose to
    not participate in the NEPA process as a cooperating agency.
    Recommendation
        NOAA Fisheries recommends amending the Federal Power Act section
    797(c) by adding the following to the end of the paragraph, ``Any work
    with the executive departments and agencies of the federal government
    as cooperating agencies on an environmental assessment or environmental
    impact statement in the NEPA process, developed pursuant to the
    National Environmental Policy Act, is exempt from ex parte
    communication prohibitions. Executive departments and agencies of the
    federal government may become NEPA cooperators without losing their
    right to intervene and appeal licensing decisions.''
    2. Deadlines
        FERC's regulations implementing the Federal Power Act provide a
    number of deadlines for participants in the licensing process. However,
    FERC itself has no deadlines, which often causes delay in the process.
    The National Energy Policy specifically encourages FERC to adopt
    internal deadlines. Particular areas of concern for resource agencies
    include lack of a deadline for completion of the final environmental
    analysis or environmental impact statement, and lack of a deadline for
    FERC to complete its analysis of requests for rehearing.
    Recommendation
        NOAA Fisheries recommends that Congress require FERC to promulgate
    regulations that provide deadlines for itself.
    3. Annual licenses
        FERC's ability to easily issue annual licenses contributes to delay
    because there is little incentive for an applicant to complete the
    licensing process by the time the old license expires. These annual
    licenses have no new conditions for resource protection and are merely
    extensions of the expired license. Delays may postpone the costs of
    implementing new resource protection measures, but harm fish and
    associated habitat, and increase uncertainty for all involved.
    Recommendation
        NOAA Fisheries recommends that Congress require FERC to amend its
    regulations to place strict limits on the issuance of annual licenses.
    Specifically, FERC should develop guidelines to determine situations in
    which there is a demonstrated need to grant an annual license. These
    situations could include new information becoming available, a need to
    provide a supplemental environmental analysis or environmental impact
    statement, or other circumstances beyond the control of the applicant.
    In addition, NOAA Fisheries recommends that Congress provide the
    appropriate resource agencies authority to provide interim mandatory
    conditions in annual licenses, for resource protection purposes. These
    interim conditions should be measures that require minimal capital
    expenditures, such as minimum stream flows, or other measures to
    protect fish and associated habitat.
    4. Studies
        Disagreements between NOAA and applicants about studies are a major
    source of delay. NOAA has committed, via the ITF documents, to provide
    a clear link between study requests, project impacts, and resource
    management goals and objectives; and to take cost into consideration.
    Recommendation
        NOAA recommends that Congress require FERC to amend its prefiling
    regulations to require applicants to conduct requested studies in a
    timely fashion, if NOAA Fisheries and other agencies submit study
    requests that provide a clear nexus between studies, project impacts,
    and resource management goals and objectives.
                                   conclusion
        The hydropower licensing process is complicated, and can take years
    to complete. An abundance of license expirations in the next several
    years demands that the process become efficient and effective for all
    stakeholders. Administrative and appropriate legislative reforms such
    as those outlined above can create an efficient and effective process.
    Additionally, incentives to replace older power generating units with
    new energy efficient ones should help increase power production with no
    harm to the environment.
        Thank you for the opportunity to provide testimony on these
    important issues.
                                     ______

     Statement of Donald Sampson, Executive Director, Columbia River Inter-
                      Tribal Fish Commission, Portland, OR
        Thank you for the opportunity to offer testimony regarding Senator
    Bingaman's hydroelectric relicensing bill, S. 597, and Senator Craig's
    hydroelectric relicensing bill, S. 71. My name is Donald Sampson; I am
    the Executive Director of the Columbia River Inter-Tribal Fish
    Commission (CRITFC) in Portland, Oregon. I believe we share common
    desires to find solutions to our national energy problems that are
    affordable and environmentally sound. The CRITFC tribes are developing
    a tribal energy vision and have the expertise and the resources
    available in the Northwest to alleviate the region's energy shortages.
    Additionally, tribes and tribal lands across the nation hold vast
    resources and stand ready to offer solutions to the nation's energy
    problems. At the same time, the tribes are prepared to be good stewards
    of the land and plan for the long-term sustainability of the national
    economy through wise energy planning.
        Formed by resolution of the Nez Perce Tribe, the Confederated
    Tribes of the Umatilla Indian Reservation, the Confederated Tribes of
    the Warm Springs Reservation of Oregon, and the Confederated Tribes and
    Bands of the Yakama Nation, the Columbia River Inter-Tribal Fish
    Commission provides coordination and technical assistance to ensure
    that the resolution of outstanding treaty fishing rights issues
    guarantees the continuation and restoration of our tribal fisheries
    into perpetuity. Since 1979, CRITFC has contracted with the BIA under
    the Indian Self-Determination Act (Public Law 93-638) to provide this
    technical support. The tribes' technical experts have identified where
    federal and state resource managers have fallen short in protecting and
    restoring the habitat and production of all salmon stocks. Wy-Kan-Ush-
    Mi Wa-Kish-Wit, the Spirit of the Salmon, the tribes' restoration plan,
    the only gravel-to-gravel salmon restoration plan in the Columbia
    Basin, identifies threats to salmon, proposes hypotheses based upon
    adaptive management principles to address those threats, and provides
    specific recommendations and practices that must be adopted by natural
    resource managers to meet treaty obligations. Wy-Kan-Ush-Mi Wa-Kish-Wit
    can be viewed at www.critfc.org. These four tribes have rights reserved
    by treaty with the United States of America \1\ to take fish destined
    to pass the tribes' usual and accustomed fishing places. This right
    covers fish originating in the Columbia River Basin. Protection and
    enhancement of those streams that provide spawning and rearing habitat
    and migration corridors for these fish are of critical importance to
    the tribes and the region. The CRITFC provides technical and legal
    support to the tribes to carry out those goals.
    ---------------------------------------------------------------------------
        \1\ Treaty with the Yakama Tribe, June 9, 1855, 12 Stat. 951;
    Treaty with the Tribes of Middle Oregon, June 25, 1855, 12 Stat. 963;
    Treaty with the Umatilla Tribe, June 9, 1855, 12 Stat. 945; Treaty with
    the Nez Perce Tribe, June 11, 1855, 12 Stat. 957.
    ---------------------------------------------------------------------------
        In 1855, the United States entered into treaties with the Nez Perce
    Tribe, the Confederated Tribes of the Umatilla Indian Reservation, the
    Confederated Tribes of the Warm Springs Reservation of Oregon, and the
    Confederated Tribes and Bands of the Yakama Nation to ensure the mutual
    peace and security of our peoples. For the four tribes' cession of
    millions of acres of land, the United States promised to protect and
    honor the rights and resources the tribes reserved to themselves under
    those treaties. Those resources, among them our most treasured
    resource, the salmon, are being destroyed largely by hydroelectric
    projects on the Columbia and Snake Rivers. The salmon are also
    imperiled by relicensing processes at those dams that seek to delay
    necessary environmental analysis and changes to hydro structures and
    operations under the Federal Power Act. Existing license holders, who
    use process and delay to shortchange environmental protections
    necessary to insure the continued existence of salmon, are trampling
    upon our rights, our culture and our religious beliefs that are tied to
    the salmon.
        The Treaty Tribes grow weary when our expertise to protect our
    treaty resource is ignored, when our input in public processes is
    ignored, when our negotiations lead to settlements and those
    settlements are ignored, when our good faith efforts to cooperate and
    participate in decision-making forums are ignored, and when the
    treaties signed by the U.S. Government are ignored in order to protect
    the unreasonable economic interests of dam owner/operators. The
    Columbia River Treaty Tribes will strongly oppose any effort to
    expedite the dam relicensing process that will lessen environmental
    analysis and protection of salmon at hydro projects as well as any
    effort to diminish tribal and public input during relicensing. The
    Columbia River Treaty Tribes will oppose any effort to cripple the
    jurisdiction of the federal agencies that have the trust responsibility
    to protect reservation lands and fish and wildlife through mandatory
    license conditions. Any compromise of the Department of Interior's
    authority under Section 4(e) of the Federal Power Act to protect
    reservation lands and treaty resources will obstruct the obligation of
    the United States to ``secure'' our treaty rights. Any compromise of
    fish and wildlife agencies' authority under Section 18 of the Federal
    Power Act to prescribe fishways to protect treaty resources will also
    be seen as an attempt to interfere with our treaty rights. Reducing
    cost and time in relicensing at the expense of the public, the natural
    resource or the federal agencies with jurisdiction will be seen as an
    abrogation of duty and the treaties entered into between the tribes and
    the United States government.
        With that being said, the CRITFC tribes are developing a Northwest
    Tribal Energy Vision that will simultaneously provide the region with
    affordable energy solutions while taking energy policy and development
    off the backs of salmon and off the Columbia and Snake Rivers. Our
    energy solutions complement the national recommendations of the Inter-
    Tribal Energy Network. Tribes currently have twenty percent of the
    Nation's energy resources on their lands. However, on average, tribal
    citizens spend more of their income on energy, have the highest
    percentage of homes without electricity, have the least control over
    quality of service, and are experiencing two to three times the
    national population growth. Northwest Treaty Tribes, along with the
    aforementioned impacts, are losing their treaty-reserved salmon
    resources to poor energy planning and policy.
        Through the national Inter-Tribal Energy Network, draft legislation
    has been introduced that will help the nation address its energy
    shortages through development of tribal energy resources that are cost
    effective and offer opportunities for joint partnerships; will help
    tribes serve tribal members with reliable energy; will foster economic
    development on tribal lands and promote sovereignty and self
    sufficiency. The draft legislation envisions establishing an Office of
    Indian Energy in the Department of Energy. Critical to this
    recommendation is significant funding made available to the Office of
    Indian Energy for tribes to ascertain their energy resources and the
    best way to develop those resources. Also vital is the ability to bring
    resources on-line in an expedited fashion using interagency cooperation
    while protecting environmental quality.
        The Northwest Tribal Energy Vision is premised on the idea of
    promotion of energy development that will serve Northwest energy needs
    while protecting the tribes' treaty-reserved resources. It allows for
    faster siting of projects with enhanced value on tribal lands; allows
    for distributed generation opportunities to meet rural loads; allows
    for opportunities for transmission siting on tribal lands; and
    addresses key fundamental concepts to protect the tribes' treaty
    rights. Energy policy and development must not continue to diminish the
    tribes' treaty-reserved resources. Energy policy and development must
    get off the Columbia and Snake rivers. Energy policy must get off the
    backs of salmon. Our treaty-reserved resources continue to be
    sacrificed for the sake of bad energy planning.
        The current energy problem exists because of poor planning. Poor
    planning has pushed salmon to the brink of extinction and will cause
    further environmental degradation. Salmon's rapid decline has been
    known for decades and yet new energy development to meet demand has
    lagged. Substantial generation in California has been curtailed in
    order to drive up prices, but it could alleviate immediate pressures to
    run the Columbia River without regard to salmon if that generation was
    made available at a reasonable price. The lack of adequate
    precipitation is always a potential limiting factor and contingencies
    have not been developed to adequately mitigate for that risk. As
    American Rivers has so aptly pointed out in their testimony, the facts
    simply don't support FERC's claims that there is either an energy
    crisis or a hydroelectric relicensing crisis. We must not lose the
    protections built into our system of laws to care for our public
    resources. The current hydroelectric relicensing bills would cast aside
    the public resource protections that have served us well for decades.
        The tribes are concerned that the hydroelectric power industry is
    not availing itself of the opportunities during relicensing to make
    their projects more responsive to the public interest. There are
    innovations that will both protect our waterways and deliver power, but
    the industry seems more intent on maximizing their profits at the
    expense of the public resource. Congress must take into account the
    needs of the public waterways to remain healthy, to protect the public
    trust, to respond to the nation's need for a diverse energy plan and
    the federal government's responsibility to honor its treaties to the
    Columbia River Treaty Tribes. Congress must not maximize the profits of
    the hydro license holders at the expense of our nation's public
    waterways; must not maximize the profits of an industry that has made
    billions of dollars while paying no fee for the use of the public
    resource.
        The current hydro relicensing bills tend to focus on the resource
    agencies for costs and delays in the relicensing process. The bills
    tend to consolidate authority with FERC. FERC's claimed ability to
    assume the authorities of the resource agencies is unsupported by
    recent analysis by the GAO and counter to the reasoning for mandatory
    conditioning authority set forth in the Federal Power Act (FPA). It
    also abolishes the system of checks and balances necessary within our
    system of government to protect the public interest and consolidates
    the authority within an agency that often takes little notice of
    petitions, complaints, comments, analyses and dialogue. The FERC does
    not have the expertise of the resource agencies to determine conditions
    for hydro licenses.
        While we often talk specifically about salmon and the Northwest,
    our input can be generalized to the entire nation; the future direction
    of hydropower raises fundamental questions concerning the health of our
    public waterways. We must make extremely careful decisions today, as
    they will affect us for the next 50 years and beyond. We risk losing
    important species as a result of our decisions. We risk losing our
    heritage as a result of decisions made today. We are asking for vision,
    for forward-looking farsightedness. We are rushing headlong into public
    resource over-appropriation in the guise of so-called wise economic
    use. This over-appropriation only serves to set up frustration among
    competing users, leads to depletion and exhaustion of the public
    resource, causes environmental degradation for which mitigation
    measures are inadequate, and denies significant benefits to future
    generations.
        In our treaties--signed by the United States and ratified by this
    body, the Congress--our tribes were promised the right to fish for
    salmon now and forever into the future. Yet we are currently faced with
    amendments to the FPA which give unreasonable influence to those that
    can afford to stack the record for decsionmaking in their favor by
    using exorbitant financial resources and self-interested lobbying
    efforts. This does not protect the public resource or our treaties. The
    current bills offered by Senators Bingaman, Craig and Murkowski provide
    for less protection of public resources while hamstringing the federal
    agencies that are charged with protecting those public resources.
        States and federal agencies are in the field where the dams are and
    have the expertise necessary to protect the public resources in their
    charge. These agencies should be better funded to provide the input
    necessary under the law. Their responsibilities are outside of FERC's
    area of expertise. Shifting their authorities to FERC would concentrate
    decisionmaking in Washington, D.C., instead of in the states where the
    dams exist, and it would preclude open and honest discussions in local
    communities. If anything, the FPA should be amended to allow for more
    balanced competition for hydro licenses. Competition for licenses
    should award the entity that is the most able and willing to protect
    the public's resources in the long run while providing cost-effective,
    reliable power.
                               specific comments
    Senator Craig's Bill, S. 71
        Despite continued voluntary fishery closures and reductions by the
    tribes, and significant reductions in the other ocean and in-river
    fisheries, anadromous fish stocks continue to decline. Recent analysis
    by the National Marine Fisheries Service indicates the Mid-Columbia
    River stocks are declining at a rate similar to the Snake River stocks.
    Snake River stocks are projected to be functionally extinct by 2016.
    That is only three or four life-cycles away. Many of the stocks in the
    Columbia River Basin are listed under the Endangered Species Act as
    threatened or endangered. Many more stocks are on their way to being
    listed under the ESA. A number of stocks have already gone extinct.
    Dams on the Columbia and Snake Rivers and tributaries have been and
    continue to be the major factor in this decline. While hydropower has
    brought energy benefits to the country, there was very little foresight
    as to the environmental consequences when the dams were built. Dams
    cause significant damage to aquatic and riparian environments by
    altering the physical, chemical and biological processes of river
    systems. We have learned much since these dams were first licensed. And
    now that dams are in the relicensing cycle, we must apply what we have
    learned to make the dams more suitable to what we now understand. S. 71
    will make it more difficult, if not impossible, for federal and state
    agencies to ensure that the operators of hydroelectric power facilities
    adequately mitigate for or minimize their impacts.
    Section (b). Factors to be considered
        S. 71 attempts to redefine the public interest standard articulated
    in the Federal Power Act and by the Supreme Court \2\ in Sections
    (b)(1) A, B, and C. These sections fall short of the recognized public
    interest standard, mentioning only that the consulting agency must
    consider the impacts of the condition on economic and power values,
    electric generation capacity and system reliability, air quality
    (including consideration of the impacts on greenhouse gas emissions),
    and drinking, flood control, irrigation, navigation, or recreation
    water supply. Conspicuously missing from this list are many of the
    resources for which the resource agencies are required to protect by
    law. Project applicants are not required to report economic information
    about their projects. How will a resource agency measure economic
    impacts of their conditions without economic project information? The
    answer is that the analysis will be meaningless. S. 71 does not mention
    the original purposes of Sections 4(e) and 18 of the FPA; to protect
    and utilize reserved lands and to ensure that fish can pass and survive
    hydroelectric projects. These proposed amendments would require the
    resource agencies to ignore the resource they are required to protect
    while obliging the agency to look more closely at the factors in
    Sections (b)(1) A, B, and C. The consulting agencies would be required
    to do more process in areas where they do not necessarily have
    expertise. This would expend precious financial resources in a time
    when agencies are already underfunded.
    ---------------------------------------------------------------------------
        \2\ Udall v. Federal Power Commission, 387 U.S. 428 (1967). ``The
    test is whether the project will be in the public interest. And that
    determination can be made only after an exploration of all issues
    relevant to the `public interest,' including future power demand and
    supply, alternate sources of power, the public interest in preserving
    reaches of wild rivers and wilderness areas, the preservation of
    anadromous fish for commercial and recreational purposes, and the
    protection of wildlife.'' Udall, at 450.
    ---------------------------------------------------------------------------
        Then S. 71 would require the FERC to do the same analysis if
    requested by the applicant under Section (h)(1). The public interest
    standard would be based on (b)(1) Sections A, B, and C and not on the
    original meaning of the public interest standard as defined by the
    Supreme Court. This would result in duplication of effort, waste of
    resources, and a fundamental shift from protecting natural resources to
    protecting the hydropower owner's financial opportunities.
        It would also undermine the purpose of Section 100) of the FPA. S.
    71 would require FERC to balance recommendations made by state and
    federal fish and wildlife agencies under 100) to protect, mitigate and
    enhance fish and wildlife and their habitat using the new public
    interest standard as described in sections (b)(1) A, B, and C. This is
    unacceptable.
        These provisions in S. 71 and similar bills in the House and Senate
    would change the FPA substantially so that the resource agencies could
    no longer protect the resource needs or trust responsibilities to the
    tribes and the public. The underlying resources must be protected and
    the FPA recognizes this. This bill would require undue procedural
    burdens on the resource agencies that would subordinate their statutory
    obligations under the FPA.
    Section (b)(2). Documentation
        This section requires the consulting agency to create written
    documentation outlining how it has complied with Section (b) above.
    Courts have long held that mandatory conditions must be supported by
    substantial evidence in the FERC record. This renders Section (b)(2)
    unnecessary and duplicative. The Columbia River Treaty Tribes oppose
    this section.
    Section (c). Scientific Review
        This section requires each mandatory condition to be based on
    current empirical data or field-tested and to be subjected to peer
    review. The addition of scientific review would produce further delays
    in an already lengthy process. It is also duplicative because the
    federal agencies presently consider results of peer reviews and base
    their decisions on the best available science. Additional review would
    be costly and time consuming. The federal agencies already directly
    involve applicants when developing fishway prescriptions. Applicants
    can provide their own scientific analysis and peer reviews and the
    federal agency gives that information appropriate consideration in
    final decisions. S. 71 would lengthen the process unnecessarily. The
    Columbia River Treaty Tribes oppose this section.
    Section (e). Administrative Review
        This section would require the resource agency to submit their
    mandatory conditions to the applicant at least 90 days before the
    applicant has filed its application for a new license. This begs the
    question, how can agencies write license conditions for a project that
    has no application and how can the agency know when 90 days will run?
    Without an application on file, FERC will not have begun to scope their
    environmental analysis. This makes it unreasonable to require agencies
    to submit conditions at this stage of the process.
        The section also allows the applicant to obtain review by an
    Administrative Law Judge (ALJ) or other independent review panel to
    determine the reasonableness of a condition or whether the condition
    complies with the new public interest standard set forth in Section
    (b)(1) A, B, and C. The use of an ALJ or other independent reviewing
    body to determine the reasonableness of a proposed condition is
    inappropriate because they will not have the resource agencies'
    expertise nor the mandated authority to protect the resources under the
    FPA. Furthermore, it is infeasible for resource agencies to provide
    conditions 90 days before the applicant files for a license because the
    agency will not have the necessary information to make the proper
    conditioning decision. Of course, this would also mean the ALJ or
    reviewing body would not have information available on economic or
    energy values for the project as required in this section.
        Additionally, under this section, if the ALJ or reviewing body
    takes longer than 180 days to make a decision, this section states that
    FERC can treat the condition as a recommendation. This invites
    manipulation of the process by the applicant to overturn the resource
    agencies' mandatory conditioning authority. Fish passage measures would
    be frustrated in clear contradiction to the purpose of the Sections
    4(e) and 18 of the FPA as well as the public interest standard as
    recognized by the Supreme Court. The Columbia River Treaty Tribes
    oppose this section.
    Section (f). Submission of Final Condition
        This section sets a deadline of up to one year for submission of
    mandatory conditions after FERC gives notice the license application is
    ready for environmental review. The deadlines imposed by this section
    do not take into account FERC's own NEPA analysis timelines. The result
    of FERC missing the deadline would affect the fishery resources
    negatively. A mandatory condition could not be finalized if FERC had
    not completed a draft NEPA analysis within the one year deadline and
    FERC's analysis is often delayed more than a year. Now, the resource
    agencies have the opportunity to modify prescriptions based on
    information developed during FERC's NEPA analysis. The deadlines
    imposed by this section would change this capability.
        Furthermore, the default option in (f)(3) would deny the consulting
    agency the ability to make mandatory conditions if the deadline is not
    met. Fishery resources could suffer considerably if deadlines beyond
    the control of the resource agency are not met. Again, this measure
    puts the burden on the resource and particularly fish and wildlife.
    This would encourage applicants to delay providing information to the
    resource agencies and increase the possibility of missing deadlines and
    causing default. The Columbia River Treaty Tribes oppose this section.
    Section (g). Analysis by the Commission
        This section would require FERC to conduct economic analysis of
    each mandatory prescription to determine whether it would make the
    project uneconomic as well as require FERC under (g)(2) to measure all
    10(j) recommendations against the new public interest standard list
    proposed in (b) A, B, and C and the new scientific review in (c). This
    would require the resource agencies to duplicate analysis covered in
    FERC's NEPA analysis. While it is appropriate for the resource agencies
    to base their recommendations and conditions on their expertise, the
    resource agencies do not have access to the types of information that
    FERC applies to balancing. To require the resource agencies to comply
    with this section will deplete their already limited resources,
    duplicate effort, and require the agencies to go outside their area of
    expertise. The new public interest standard set forth in S. 71 does not
    comport with established Supreme Court law or with the FPA. The
    Columbia River Treaty Tribes oppose this section.
    Section (h). Commission Determination of Effect of Conditions
        This section again contravenes the public interest standard as set
    forth in the FPA and by the Supreme Court. The ability of an applicant
    to request a determination that a mandatory condition meets the new
    public interest standard set forth in (b)(1) renders the broader public
    interest subservient to the needs of the owner. This is unreasonable
    and a threat to the resources the federal agencies are obligated to
    protect. The Columbia River Treaty Tribes oppose this section.
    Section on Conforming and Technical Amendments
        This section amends Sections 4(e) and 18 of the FPA. This section
    is unnecessary because Sections 4(e) and 18 of the FPA should not be
    revised. To do so under S. 71 would be to reverse needed environmental
    regulation of hydropower projects and cripple the resource agencies'
    ability to protect the resources they are obligated to protect by law.
    The Columbia River Treaty Tribes oppose this section.
    Coordinated Environmental Review Process
        This section mandates that FERC shall conduct a single consolidated
    environmental review and that the resource agencies shall not perform
    any environmental review performed by FERC. Resource agencies must
    conduct environmental analysis to determine the nature and
    applicability of the conditions they may impose. It is inappropriate to
    prohibit the resource agencies from performing any environmental review
    of the conditions they may require. The Columbia River Treaty Tribes
    oppose this section.
        This section also grants FERC the ability to set deadlines for
    submission of comments on the environmental documents. This section is
    unnecessary because the Council on Environmental Quality already
    provides deadlines for comments on NEPA documents.
    Study of Small Hydroelectric Projects
        The FERC already has a procedure for streamlined review of small
    hydro projects. Where this section diminishes the role of the resource
    agencies it is unsupportable. Small hydro can have huge impacts on fish
    and wildlife and this section should not impair the resource agencies'
    ability to protect the natural resources within their responsibility.
                        senator bingaman's bill, s. 597
    Section 701, Alternative Conditions
        The tribes are very concerned whenever jurisdiction is taken away
    from the federal agencies with mandatory conditioning authority or
    whenever more process is required of these federal agencies without the
    necessary funding or expertise to carry out the mandate. This provision
    would create excessive strain on the federal agencies to determine
    which alternative condition was best. This could produce significant
    delays in the relicensing process. It also creates the opportunity for
    entities with unlimited funds to manipulate the process with multiple
    alternative conditions that the federal agency would then have to,
    corroborate. This creates a situation of the haves overpowering the
    have nots. This would not protect the public resource or the public
    interest, only those that have the deepest pockets. The sound science
    provision would lead to confusion and litigation. The substantial
    evidence standard should be retained in all provisions of this law. In
    general, the tribes oppose this section.
    Section 703, Resource Studies
        Determinations on which studies and information are necessary to
    make decisions under Sections 4(e) and 18 of the Federal Power Act
    should remain with the resource agencies empowered to protect the
    resource. These determinations should not be given to the FERC. The
    resource agencies have the expertise to protect the resources in their
    charge and the trust responsibility to protect tribal lands and
    resources.
    Section 704, Joint Agency Procedures, Relicensing Study
        The tribes do not oppose this section per se. However, this study
    should not be used to change the nature and extent of the mandatory
    conditioning authority of the resource agencies. Current hydroelectric
    licensees have used the public waterways for decades and have reaped
    great financial benefit. Now that relicensing is taking place, it is
    time for evaluation of the public resource. Additional protective
    measures are necessary. The treaty resources of the CRITFC tribes need
    the protections promised under the Federal Power Act as carried out by
    their trustees, the federal resource agencies. Attempts to change this
    recognized duty is tantamount to abrogation of the tribes' treaty
    rights. As we have seen the tribes' and the public's resources
    decimated by hydroelectric projects, it is time we thought about
    shorter license duration with more flexible license conditions in order
    to protect the tribes' treaties and the public interest. It is time to
    change our heavy reliance on hydroelectric power and develop a more
    sensible, more diverse electric energy future that does not overburden
    our nation's waterways. The tribes are committed to planning for that
    future and have developed a Northwest Tribal Energy Vision for the
    Columbia River that can restore the health of our rivers while
    maintaining a reliable and affordable electric energy system. This kind
    of forward planning is possible in all regions of the nation. We would
    be glad to share this vision and planning with the Committee.
                                   conclusion
        There is an existing statutory framework for hydroelectric dam
    relicensing that is sound and workable. S. 71 and S. 597 propose many
    ``reforms'' that either do not make sense, elicit delay as a tactic by
    the applicant, create delay within the framework of the bill, create
    new unneeded procedural hoops, and take away authority and expertise
    from federal agencies. For these reasons, the Columbia River Treaty
    Tribes oppose S. 71 and S. 597. Wherever shortcomings may exist in the
    current process, solutions should be crafted administratively and with
    substantial public input. The federal government must protect the
    public resource of our waterways. Further degradation is unacceptable
    and will be vigorously opposed by the Treaty Tribes. Again, thank you
    for this opportunity to provide the views of the Columbia River Treaty
    Tribes on this proposed legislation; please contact me, staff at the
    CRITFC, or staff at one of CRITFC's member tribes for additional
    comments.
                                     ______

                 Statement of the American Petroleum Institute
        The American Petroleum Institute is a national trade association
    representing 400 companies engaged in all aspects of the oil and
    natural gas industry. Our members have a unique perspective on the
    issue of potential climate change because of the unique role we play in
    society. First, we have been heavily involved in efforts to improve the
    energy efficiency of our operations and these efforts contribute to
    avoiding greenhouse gas emissions. Second, our members have significant
    experience at decision-making in highly uncertain environments with
    relatively long-time frames--not unlike the climate change issue. And
    third, our members are technological innovators and are actively
    involved in research and development on many new technologies that
    result in new efficiencies.
        Two central elements of the climate change issue are complexity and
    uncertainty. These elements are echoed in the recent report of the
    National Academy of Sciences, Climate Change Science: An Analysis of
    Some Key Questions. While this insightful report addressed a large
    number of specific aspects of the issue, a key finding for those with
    the difficult task of developing policy and legislation is the
    following:

              Because there is considerable uncertainty in current
            understanding of how the climate system varies naturally and
            reacts to emissions of greenhouse gases and aerosols, current
            estimates of the magnitude of future warming should be regarded
            as tentative and subject to future adjustments (either upwards
            or downwards).

        The National Academy of Sciences also sought to ``articulate more
    clearly the level of confidence that can be ascribed to those
    assessments [of climate change] and the caveats that need to be
    attached to them. This articulation may be helpful to policy makers as
    they consider a variety of options for mitigation and/or adaptation.''
        Based on API's unique perspective and the cautions suggested by the
    National Academy of Sciences, we recommend these principles for a sound
    approach to the long-term issue of potential climate change:
       Advance scientific understanding of potential global climate
            change in order to calibrate and adapt future policies
            accordingly;
       Promote advanced, energy-efficient technologies and
            sequestration options as part of a long-term, low-cost
            strategy, without government selection of ``winners and
            losers'';
       Remove regulatory impediments to the rapid adoption of
            energy-efficient technologies and capital stock turnover;
       Identify and expand cost-effective, near-term voluntary
            actions to mitigate greenhouse gas emissions;
       Avoid damage to economic growth posed by mandatory policies
            involving unrealistic near-term emissions targets and
            timetables or energy consumption taxes;
       Export advanced, energy-efficient technologies to the
            developing world through financing incentives and reduced
            export barriers, while protecting property rights;
       Promote global participation to address this challenge most
            cost-effectively.
        Following these principles, common sense efforts should be able to
    identify a wide range of near- and long-term opportunities that address
    cost-effective methods to mitigate emissions, improve our understanding
    of climate science, and accelerate the research, development and
    dissemination of advanced energy technologies on a global basis.
        API and its members are already undertaking actions reflecting
    these principles. For example, in early 1999, in response to findings
    that there were wide variations in the ways that API member companies
    estimated greenhouse gas emissions data, API established a Greenhouse
    Gas Estimations Methodology Working Group to develop a consistent
    industry methodology.
        This extensive effort reached a milestone earlier this year when
    API published a new Compendium of Greenhouse Gas Emissions Estimation
    Methodologies for the Oil and Gas Industry. The Compendium was the
    result of intensive work by API and it member companies and documents
    calculation techniques and emission factors available for developing
    greenhouse gas emission inventories for carbon dioxide and methane. The
    estimation techniques cover the full range of oil and gas industry
    operations--from exploration and production through refining to product
    marketing--including emissions from transportation of crude oil,
    natural gas and petroleum products.
        This Compendium:
       Provides examples of the types of greenhouse gas emission
            sources that should be considered in developing an inventory;
       Describes the segments of the oil and gas industry that
            should be involved in developing an inventory and provides an
            expansive list of potential emission sources for each industry
            segment;
       Describes in general terms the calculation techniques that
            can be used in developing an inventory and the technical
            considerations pertaining to standard conditions and common
            unit conversions;
       Presents specific methodologies that can be used for
            developing an inventory, with extensive exhibits to demonstrate
            preferred and alternative calculation methods; and
       Provides case studies, using the methodologies provided to
            develop illustrative inventories for typical oil and gas
            industry facilities.
        A copy of the Compendium is attached * to this submission and
    demonstrates the scope and complexity of the oil and gas industry
    efforts to estimate emissions at the facility and company level. The
    Compendium is available in paper and CD-ROM versions and is currently
    in a one-year test phase. Based on the results of that test phase, the
    Compendium may be revised if necessary. To our knowledge, this is the
    first industry-wide, detailed effort of its kind.
    ---------------------------------------------------------------------------
        * Retained in committee files.
    ---------------------------------------------------------------------------
        API member companies are also undertaking a wide variety of actions
    to address potential climate change issues. Among the many actions our
    members are undertaking are the following:
       Participation in a variety of government programs such as
            Natural Gas STAR for operational efficiencies, Vision 21 for
            ultra-clean integrated energy plants, and Energy Star Buildings
            program to improve commercial building efficiency.
       Research options for handling quantities of associated
            natural gas that is produced where there is no market for the
            gas. Alternatives to venting and flaring include conversion to
            liquids as well as reinjection.
       Expanding corporate energy management programs and
            institutionalizing efficiency efforts company-wide.
       Undertaking co-generation technologies at refineries and
            similar facilities to generate electricity and process heat/
            steam simultaneously for substantial increases in efficiency.
       Research and testing of geologic sequestration of carbon
            dioxide to verify under what circumstances carbon dioxide
            storage is safe and reliable.
       Capturing carbon dioxide from the production of synthetic
            natural gas from lignite and using it for reinjection to
            enhance oil recovery while reducing carbon emissions.
       Supporting projects that use forests to sequester carbon
            dioxide and simultaneously provide a wide range of other
            environmental and ecological benefits.
       Providing funding for expansion of fundamental research on
            climate change.
       Undertaking research and development projects for more
            efficient capture of carbon dioxide from turbine exhaust, plus
            sequestration options for carbon dioxide.
       Undertaking basic research on fuel cells to significantly
            increase automotive efficiency and reduce greenhouse gas
            emissions.
       Supporting research on other automotive technologies such as
            direct-injection diesel.
       Undertaking research, development and marketing of renewable
            technologies like solar power and geothermal power.
        We note that API's recommended principles for climate policy and
    the many actions being taken by API and its members include
    similarities to provisions of the proposed legislation being addressed
    by this Committee. For example, one provision seeks federal agency
    review of regulations and standards to determine if they act as
    barriers to market entry for emerging energy-efficient technologies
    such as fuel cells, combined heat and power, or distributed generation.
    Another provision supports research and development efforts to improve
    the efficiency and safety of natural gas transportation and
    distribution, and for distributed energy resources. Another looks
    closely at forest resources and carbon sequestration, including the
    methodologies for reporting, monitoring and verifying voluntary carbon
    storage activities. Finally, another would seek better information and
    understanding of the costs of different options to mitigate U.S.
    greenhouse gas emissions, particularly those that are cost-effective,
    voluntary and technologically feasible.
        Climate change is an issue of extreme complexity and uncertainty.
    It involves our evolving understanding of natural climate and man's
    potential impact on climate, and unknowables about population levels,
    standards of living, technologies and energy supplies, not just in the
    U.S. but globally--and not just in the next 10 or 20 years, but 100 or
    more years into the future. Finding an approach that promotes a
    flexible and creative global path, without locking-in excessive short-
    term costs, is a tremendous challenge. We support your efforts to find
    that path.
                                     ______

                  Statement of Hancock Natural Resource Group
        The Hancock Natural Resource Group (HNRG) is a wholly owned
    subsidiary of John Hancock Financial Services. HNRG has been in
    business for 15 years and is the world's largest forestry investment
    management organization. It currently manages about 3 million acres of
    forest land, valued at $2.7 billion in the United States, Canada and
    Australia.
        HNRG has been active in the area of carbon sequestration for the
    past year. In June of 2000 we announced the establishment of a new
    carbon program to design financial products related to carbon
    sequestration by forests for business and institutional investors. Our
    program is now in operation and currently offering two financial
    products, one in the United States and one in Australia. These
    investments are based on pooling equity by private investors and
    establishing a portfolio of reforestation projects on areas of marginal
    agriculture land across the United States and Australia, respectively.
        We believe strongly that forests provide an important range of
    environmental services to society, including water quantity and quality
    regulation, wildlife habitat and conservation, and carbon
    sequestration. We are encouraged at the growing trend for these
    environmental services to be linked with emerging commercial
    environmental markets. In particular the emphasis on utilizing the
    power of the marketplace to find low cost solutions to reducing net
    greenhouse gas emissions will significantly enhance the attractiveness
    of forest investment.
        In bill S. 820, there are really three key elements. The first is
    to improve our ability to account for the carbon sequestration
    occurring in U.S. National Forests. The recent reductions in timber
    harvesting from those forests will likely lead to an extension of
    carbon storage, and it is important that the U.S. government be able to
    monitor those changes.
        The second area relates to the establishment of an Advisory Council
    to oversee the development and implementation of guidelines for carbon
    accounting in forests. A body such as this is critically important to
    creating consistency in the measurement and verification of carbon
    stock changes in forests.
        Finally the bill establishes the basis for cooperative agreements
    and Federal-State loan programs to non-industrial private landowners to
    encourage reforestation and improved forest management practices. This
    should have the effect of assisting with the cost of reforestation or
    improved management by small private landowners who otherwise would not
    have the resources to undertake these important activities.
        In general, HNRG is supportive of the aims and mechanisms included
    in bill S. 820, although our primary recommendation would be for a
    strengthened role for the private sector in funding and managing the
    emerging business of carbon sequestration. Much of the basis of future
    efforts to address climate change will rely on the ability of private
    capital to invest in new technologies and methods of carbon
    sequestration. Emissions trading markets will stimulate this
    investment, as the value of carbon emissions and sequestration will
    become transparent. Thus capital investment will be able to factor in
    additional revenue from carbon trading.
        While enhanced carbon sequestration in U.S. National Forests will
    contribute substantially to national efforts to reduce net greenhouse
    gas emissions, it is unlikely to play a role in a future emissions
    trading regime. Unless the government intends to auction carbon credits
    from national forests, actions by private sector investors will be
    needed to generate sufficient carbon offsets to create market liquidity
    and to reduce the price of traded emissions reductions.
        Governments can stimulate early private investment in this area by
    establishing standards for carbon accounting, by establishing legal
    registries for carbon credits, and by recognizing that any credits
    registered will be usable in future emissions trading regimes. In most
    cases the single most important constraint to the investment of private
    capital in carbon sequestration is the uncertainty of what will count
    against a future regulatory or trading regime.
        Government loans to private landowners should also be designed to
    stimulate the private production of carbon credits for use in future
    emissions trading regimes or against future carbon dioxide emission
    regulation. In most cases, we expect that the carbon stocks being built
    up through enhanced reforestation or forest management activities will
    be pooled by financial intermediaries. This pooling approach will help
    to address risk factors in regards to fire, insect and disease damage,
    or climatic events.
        In carbon pooling however, the participants will need to have
    ownership of the rights to the carbon sequestration in their forests.
    Where a government lien encumbers those rights it will make it
    difficult for intermediaries to register the carbon sequestration
    credits and sell them on the market. Another key point for a robust
    emissions trading regime is the need for the sellers of carbon
    sequestration credits to be financially strong. Markets recognize this
    through financial ratings. In many cases the financial rating of a
    financial intermediary will have a bearing on the price paid for the
    carbon sequestration credits by the market. Carbon pooling entities
    that reduce risk factors and underwrite the long term guarantee of the
    permanence of the credit will lead to a higher price being paid for
    credits.
        In summary, we believe that the government can stimulate greater
    private investment in carbon sequestration by creating standards for
    carbon accounting and creating early certainty of the future value of
    carbon sequestration credits. As with many areas of private investment,
    the reduction of risk and uncertainty is paramount to creating investor
    confidence.
        Thank you for the opportunity to provide these comments.
    [Attachment.]
     Key Principles for Carbon Sequestration Component of a U.S. National
                     Climate Change Action Registry Design
                               a. general points
        1. The registry should create confidence in the business community
    that any legally registered credits will apply against any subsequent
    national regulation of carbon dioxide emissions
        2. The registry should create a standardized definition and
    measures for ensuring that all tons of carbon dioxide whether from
    sequestration, certified reductions or other offsets are treating as
    equal and exchangeable.
        3. The registry should be voluntary, but should create limits on
    what types offsets and credits will be included in the registry.
        4. For carbon sequestration, the concepts of additionality,
    permanence and leakage should be addressed.
                               b. specific points
        1. Modular design, with standards established for each module. For
    Sinks the modules could be:

              i. Reforestation
              ii. Agricultural soil sequestration
              iii. Extending carbon sequestration in existing forests
              iv. Conservation of forests with documented threats of
            deforestation

        2. Each form of offset should have sufficient rigor in its
    definition, baseline, measurement accuracy, inventory control, and
    verification to be fungible. In other words a tonne of any form of
    sequestration must meet a threshold which makes it the same as any
    other ton.
        3. Addresses permanence by linkage of credits to pools or entities
    that can demonstrate the rights or ownership of carbon in the areas
    having been used as the basis for registration. This means that an
    entity who wishes to produce carbon credits from forests, must have
    some demonstration of unique ownership, and carries the ongoing
    responsibility for those credits. While the total stock of carbon can
    vary from place to place the sum of the carbon stocks, minus any
    baseline stocks, must be protected or offsets purchased.
        4. Addresses sustainable development by having the endorsement of
    the government in the country where the project is located.
        5. Addresses additionality as follows:

              i. For reforestation, must provide air photos to demonstrate
            that the area was cleared land, under non-forest land use
            before reforestation.
              ii. For agricultural soil sequestration, must demonstrate
            statistically the soil carbon content to a depth of 1 m.
            Credits are provided only for statistically demonstrated
            increases.
              iii. For existing forests, must identify the land area
            concerned and present a statistically robust estimate of carbon
            stocks.
              iv. For conserving forests threatened by deforestation, this
            must be substantially documented, independently reviewed on a
            case by case basis, endorsed by the national and/or sub-
            national government authorities and then protected. In these
            areas, the issue of leakage must be specifically addressed. If
            ever in future the forests are cleared or otherwise impacted
            these credits must be fully bought out of the system. These
            forests are the most difficult to integrate into the system, as
            they are based on some intangible decisions. These forests must
            also address the issue of leakage, where protecting one area
            simply leads to accelerated deforestation elsewhere.

        6. Baseline year: This should be 1990, or point of project
    commencement. Where land use change is occurring, the year 1990 should
    be used to prevent clearing and reforesting of forest being eligible
    for crediting.
        7. Definition of product. A standard based on an Environmental
    Management System or Total Quality Management System can be used for
    each form of sequestration credit. These systems require documentation
    of policies, planning, inventory, modelling, continuous improvement
    systems, etc. They can be the basis of verification and auditing of
    carbon stocks.
        8. The product is a ton of sequestration, vintaged by the year in
    which it is activated, and serialized. The tons are certified by the
    registry based on independent verification of the estimates by
    accredited third parties.
        9. The registry must list serial numbers of tons, by vintage years,
    and additionally indicate the land base associated with those tons. It
    should encourage pooling, by also ensure that the linkage between which
    tons link to which land pool is clear. It should also provide for
    extinguishment of the tons in emissions trading, ``green product''
    promotions, or other purposes.
        10. The governance of the system should be based on a steering
    committee of government, business, academics and conservation movement
    specialists in this area. The steering committee would endorse the
    standards for each module, would accredit verifiers, would accredit
    carbon pool managers, would oversee registry operations, would resolve
    disputes, and would approve policies for ongoing auditing of the carbon
    stocks in the registry. The steering committee could be appointed by
    the Secretary of Commerce or another government figure.
        11. Ultimately the register should include both emissions and all
    forms of offsets in a fully fungible system that would underpin
    regulation and/or trading.
        12. Entities placing offsets into the registry, must also be
    accredited by the steering committee. The key criteria would be
    expertise, systems, financial solvency, and good character.
        13. In the event that a carbon pool manager became bankrupt, the
    registry would immediately take control of the carbon rights associated
    with the pool.
        14. The ultimate accountability for the carbon stocks and the
    credits is with the carbon pool manager. Any decision by the steering
    committee, subject to appeal, can require the carbon pool manager to
    make good on carbon stock shortfalls, or provide additional
    documentation or reverification of the carbon stocks at any time.
        15. The steering committee, subject to government approval, may
    also enter into bi-lateral arrangements with carbon pools in other
    countries or with international carbon pools, assuming accounting,
    verification, documentation and third party government endorsement.
        16. In the event that the government changes rules or standards in
    a way that impacts negatively on the carbon pool managers, compensation
    will be payable.
        17. The operation of the registry will be funded by government for
    a five year trial period, and then the registry will fund its own
    operations by a fee for registration of new credits.
                                     ______

       Statement of Sharon Kneiss, Vice President for Regulator Affairs,
                      American Forest & Paper Association
        The American Forest & Paper Association appreciates the opportunity
    to provide testimony to today's meeting of the Subcommittee on Energy
    and Air Quality.
        The American Forest & Paper Association represents more than 240
    member companies and related associations that engage in or represent
    the manufacturers of pulp, paper, paperboard and wood products.
    America's forest and paper industry ranges from state-of-the-art paper
    mills to small, family-owned sawmills and some nine million individual
    woodlot owners.
        The U.S. forest products industry is vital to our Nation's economy.
    We employ 1.5 million people and rank among the top ten manufacturing
    employers in 42 states, with an estimated payroll of $51 billion. Sales
    of U.S. forest and paper products top $250 billion annually in the
    United States and export markets. Products from America's forest and
    paper industry represent more than eight percent of our country's
    manufacturing output.
                           s. 820 and forestry issues
        AF&PA has been engaged in the issue on the role of forests and
    global climate for more than a decade. We have sponsored research
    through the technical research arm of the industry, supported efforts
    of the U.S. Forest Service and cooperated with many agencies on
    programs to improve the understanding of forests and their role in
    mitigating carbon dioxide buildup.
        Senate bill 820 introduced by Senator Wyden (D-Or) and co-sponsored
    by Senator Craig (R-ID) represents a good first step in bringing the
    issue of forest carbon sequestration to the forefront of America's
    potential response to programs that will reduce the build-up of carbon
    dioxide concentrations in the atmosphere. Forests provide enormous
    benefits. Only recently has carbon dioxide removal by forests been
    recognized as a major co-benefit to the environment in addition to
    wildlife habitat, water quality, recreation, aesthetics and other
    resource amenities. As Congress proceeds to create forest carbon
    sequestration economic and environmental opportunities, the AF&PA
    membership believes that forest management must be a driving force in
    improving forestland health and productivity. Incentives that encourage
    forest stewardship, improve land management practices and prevent the
    further conversion of forestland to other uses will provide multiple
    benefits including carbon storage. It is important to not lose sight of
    the contribution that existing managed forests make in the global
    carbon cycle. They contribute mightily to the global carbon balance and
    should not be taken for granted or dismissed. I will come back to these
    concepts at the end of this section. However, I would like to take the
    opportunity to comment more directly on the concepts contained in S.
    820.
        S. 820 is much broader than assessing ``opportunities to increase
    carbon storage on national forests derived from the public domain.'' It
    includes recommendations on amending the Department of Energy's 1605(b)
    reporting guidelines, incorporates opportunities for non-industrial
    private forest landowners to take advantage of loan programs,
    establishes an advisory board to provide recommendations to the
    Secretary of Agriculture on carbon storage from management actions,
    defines terms and concepts and emphasizes the development of project-
    based accounting systems.
        The provisions that would amend the carbon monitoring and
    verification guidelines under Title XVI of the Energy Policy Act of
    1992 should examine and compare existing project-based guidelines to
    determine which methods are most accurate, cost-effective, transparent
    and verifiable. Because carbon may become a market commodity to buy and
    sell, it is important that the trading system be based on sound
    technical footing. A ton of carbon in one part of the country or the
    world must be equivalent to a ton of carbon measured in another region
    of the country or the world.
        Monitoring and verification of carbon on a project specific basis
    is essential. The private sector needs certainty when investing in
    carbon sequestration projects. Certainty in this case includes
    verification of the carbon offset credits, value of the carbon credits
    and a proper accounting system to ensure valid carbon transactions.
        AF&PA notes that a national accounting system is critically
    important but is not addressed in the legislation. Presently, the U.S.
    Forest Service (USFS) provides estimates of carbon sequestration on all
    managed forestlands in the United States, including public and private.
    These estimates are based on forest inventory data collected through
    the Forest Inventory & Analysis Program of the USFS. Carbon projections
    are estimated by using a combination of sophisticated timber supply,
    area projection, wood use and carbon content models. These estimates
    must provide a reliable prediction of current and future carbon
    sequestration in the forest strata including soils, understory,
    overstory, and trees. The models are the basis for estimating the long-
    term storage of carbon in wood and paper products and in landfills.
    This is extremely important information particularly when there is a
    lack of reliable published research estimates. The failure to account
    for the long-term storage of carbon overestimates worldwide carbon
    dioxide emissions by ten percent.
        Understanding the existing forest base can shed important light on
    how to improve existing forest management practices for the retention
    of carbon and what opportunities exist to enhance the existing forest
    land base to store more carbon. AF&PA suggests increasing funding
    levels to the Forest Inventory & Analysis (FIA) Program contained
    within the USFS Research program as specified in USFS/National
    Association of State Foresters Memorandum of Agreement and endorsed by
    the Second Blue Ribbon Panel on FIA. This data collection and analysis
    program, recently amended in the 1998 Farm bill by Congress, called for
    annual data collection with a completed cycle in each state every five
    years. We strongly support this effort. It provides the underlying data
    not only for carbon sequestration but also provides the core
    information on forest resource trends. It is not possible to separate
    site-specific project level accounting from the implications of what
    occurs outside of a project boundary. Altering forest management
    practices, reducing harvest levels or preserving forest acreage in a
    specific location could have an impact on forestlands outside the
    project boundaries. This is known as leakage. AF&PA agrees that
    harvesting and regeneration will be displaced to other locations. A
    comprehensive national model such as the one developed by the USFS must
    be well funded to monitor trends in forest sequestration and carbon
    storage reservoirs to understand the impacts this will have on
    atmospheric carbon dioxide levels and carbon storage in forests. We
    urge that the USFS Research program be adequately funded to conduct
    regular updates of forest carbon sequestration and develop the
    appropriate software and model links to improve the accuracy and
    technical elements. The model, known as FORCARB, was the basis for the
    U.S. State Department's submission to The Hague at the Conference of
    the Parties negotiations in November 2000 on the Kyoto Protocol.
        While S. 820 does begin a process for establishing project specific
    guidelines to determine carbon sequestration, the development of a
    carbon market trading system, issuance of carbon credit certificates
    and other carbon credit banking systems need to be considered. For the
    private sector to make these types of investments there needs to be
    certainty on the regulatory rules, financial market rules and
    transferability of credits must be known. We have to ensure the
    government does not subsidize activities that could undermine private
    investments. The payback periods are long and extend beyond the normal
    three to five year return period for most private capital investments.
    It is important that a free market system develop with appropriate
    verification procedures that ensure the credibility of the carbon
    financial instruments.
        There are a couple of other considerations AF&PA believe are
    important for your subcommittee and the Senate to consider as domestic
    and international policies are developed to determine what market
    opportunities forests will have in reducing atmospheric concentrations
    of carbon dioxide. The role of this nation's existing forests has been
    dismissed because of an assumption that they are removing carbon
    dioxide from the atmosphere ``anyway.'' Given the dramatic changes in
    forest ownership, stewardship, population increase and urban and
    suburban growth and development over the past decade makes the
    continuity of forest land use less than a certainty. According to
    figures developed by the USFS, existing forests currently remove
    seventeen percent of total U.S. greenhouse gas emissions per year. We
    believe that with active and sustainable forest management of the
    existing forest base, these figures can increase and assist the nation
    in a balanced approach to stabilizing or reducing atmospheric carbon
    dioxide buildup. The committee should seriously consider how the
    forests of today can be more actively managed to increase carbon
    sequestration and prevent emissions through and improved productivity.
    To this end, we would urge the Committee to increase funding for forest
    productivity research in tree physiology, biotechnology and soil
    productivity as outlined in a compact with the Department of Energy in
    the Agenda 2020 industry partnership program.
        It is also important to briefly mention the significant inequities,
    lack of incentives and scientific misunderstanding of how the Kyoto
    Protocol (KP) undervalues and creates significant distortions for
    existing forests and what it could mean for the United States. Under
    the terms and conditions of the Protocol, only new forests established
    after 1990 on lands not in previous cover would be eligible for carbon
    credits. However, the carbon credits accrued would only be for the tree
    growth between 2008 and 2012. If you established a ``new'' forest today
    the only carbon credits potentially awarded would be for the
    incremental growth during that time period. While the nation would not
    receive any carbon credit for existing forests to achieve the KP
    targets the U.S. would be obligated to maintain the same level of
    carbon stock as in 1990 or further reduce emissions to meet the agreed
    upon international targets. There is no possibility to receive credit
    to absorb carbon dioxide from the atmosphere but significant
    liabilities and disincentives. This is neither a fair or balanced
    carbon accounting system. In addition, the KP ignores the scientific
    validity and positive contribution that existing forests have on
    atmospheric carbon dioxide levels. The other misunderstanding and
    scientific misconception of the KP is the role of avoiding tropical
    deforestation. Under the KP, ``avoidance of deforestation'' is
    considered a carbon sequestration activity. AF&PA and the forest
    research scientific community would consider these activities to be an
    avoidance of emissions, not sequestration. Most of these tropical
    ecosystems are in highly mature states and older age class structures.
    They are more likely to leak carbon as these stands breakdown. Under
    the rules being considered for the KP, these existing systems would be
    awarded carbon credits for avoiding deforestation. Again, from a
    scientific viewpoint a growing and sustainably managed forest can
    remove significantly more carbon dioxide from the atmosphere than the
    mature systems although we recognize these forests as repositories of
    huge quantities of carbon. The inequities in awarding credits for
    ``new'' forests or for ``avoidance of deforestation'' will have adverse
    consequences and spill over effects for the existing forest base and we
    think this should receive considerable thought.
        We have more specific comments on the bill regarding the make-up of
    the advisory council membership, loan programs, financial incentives to
    grow carbon and land. We would be willing to sit down with you and
    members of the committee to discuss these at your convenience.
                                     ______

        Statement of Dr. Aaron Rappaport, Forests and Climate Campaign
                      Coordinator, American Lands Alliance
        Mr. Chairman and Members of the Committee, the American Lands
    Alliance is grateful for the opportunity to submit testimony for the
    record of your July 24 hearing on issues and legislation connected with
    the problem of global warming. We are also grateful for interest on the
    part of the Committee in the issue of forest carbon sequestration and
    commend Senator Wyden and Senator Craig for their efforts to develop
    legislation to encourage such activities.
        I would like to note at the outset that some of the most difficult
    and contentious environmental issues in the United States today involve
    the protection of habitat for threatened and endangered species on
    private land. American Lands believes carbon sequestration offers a
    partial escape from the current gridlock around these habitat issues.
    Both the protection of natural ecosystems and long rotation forestry
    reduce emissions of carbon dioxide (CO2). If these benefits
    were officially recognized by American climate policy then voluntary
    landowner conservation activities would be eligible for the financial
    rewards that are generally proposed to encourage a decrease in our
    nation's CO2 output.
        Such a mechanism for encouraging badly needed conservation
    activities has the added benefit of potentially involving little or no
    net cost to the federal treasury. In most climate policy proposals,
    over-emitters of CO2 provide the funds to encourage others
    to under-emit, through mechanisms such as balanced tax incentives and
    disincentives.
        In this context I will confine the rest of my testimony to comments
    on the legislation that Senator Wyden and Senator Craig have developed,
    S. 820 or the ``Forest Resources for the Environment and the Economy
    Act''. Since the July 24 hearing date, this bill has been combined
    virtually unchanged with Senator Brownback's ``Carbon Conservation
    Incentive Act'', S. 785, into S. 1255, the ``Carbon Sequestration and
    Reporting Act''. Thus, comments on S. 820 remain applicable to S. 1255.
                          specific comments on s. 820
        In general S. 820 as currently written appears to not focus on
    creating the incentives for voluntary landowner conservation activities
    that carbon sequestration is capable of providing. Indeed, the bill
    appears to go so far as to exclude the creation of reserve areas, such
    as riparian buffers to protect salmon streams, from eligibility for its
    revolving loan program. Even if such habitat protection is eligible,
    the bill's emphasis is clearly strongly in favor of reforestation
    rather than the creation of fish and wildlife reserve areas and the
    promotion of long rotation forestry.
        To more fully achieve the conservation potential of carbon
    sequestration policy, we suggest the following changes:
        1. The Purposes section should emphasize the protection of habitat
    for species listed under state and federal endangered species acts.
    Similarly, the definition of a Forestry Carbon Activity in the bill
    should require that these have a positive impact on habitat for listed
    species.
        2. The list of governmental entities involved in the revolving loan
    fund should broaden beyond the Secretary of Agriculture and State
    Foresters to include the U.S. Fish and Wildlife Service, the National
    Marine Fisheries Service, and their state equivalents.
        3. A broader set of stakeholders should have representation on the
    Forest Carbon Advisory Council that S. 820 establishes. As currently
    construed the Council fails to include representatives from such
    stakeholders as the commercial and recreational angling industries, the
    tourism industry, and municipal water boards. On the governmental side
    of the Council, we believe it wise to include representatives from the
    National Oceanographic and Atmospheric Agency, U.S. Fish and Wildlife
    Service, the National Marine Fisheries Service, and their stateside
    counterparts. As an alternative, the Council could be redesigned to be
    a technical advisory panel made up of independent academic scientists.
        4. The bill should establish a legal standard to prevent both its
    loan fund and guidelines from encouraging environmentally destructive
    silvicultural methods. These include the heavy application of
    fertilizers, pesticides, and herbicides, and the use of monoculture
    plantations and genetically engineered trees.
        5. Sections of S. 820 that appear to directly exclude the creation
    of forest reserves from the bill's revolving loan program should be
    changed. Currently, loan funds may only cover costs associated with
    planting trees (Section 5 (c)(8)) and only projects that allow ``a
    variety of sustainable management alternatives'' (Section 5 (c)(1)(C))
    qualify for loans. Thus, the single activity of reserve-creation
    appears to be ruled out.
        6. More weight should be given to forest protection in the bill's
    basis for establishing a formula to govern the distribution of loan
    funds. As currently written this basis appears strongly weighted
    towards tree planting rather than forest protection. (See Section 5
    (b)(8)(B)(ii).)
        7. Loan funds should be fully available for states that lack large
    areas of federal forest. Indeed, the need for forest conservation is
    even more acute in these states than in those containing abundant
    federal land. As currently written, the bill virtually excludes states
    with little federal forest from eligibility for loan funds by awarding
    these preferentially to states that have experienced significant
    declines in timber industry employment due to decreases in logging on
    federal lands. (See Section 5 (b)(8)(B)(iii).)
        8. The bill should call for forest greenhouse gas accounting
    standards that include all greenhouse gasses, rather than just
    C0CO2. This would ensure that NOCOx emissions
    from the use of fertilizers are properly accounted for.
        9. The bill should raise its standard for canceling loans in return
    for permanent conservation. We commend Senators Wyden and Craig for
    this section of the bill but urge that the current standard, which is
    protection ``at a level above what is required under applicable
    federal, state, and local law'', be raised considerably to better
    achieve the double win for landowners and the environment that carbon
    sequestration could provide.
        10. The bill should recognize that immediate emissions reductions
    are more valuable than future ones. This is recognized by, for
    instance, ton-year carbon accounting methods.
        In conclusion, I would like to thank the Committee Members once
    again for this opportunity to testify and for their interest in forest
    carbon sequestration.
                                     ______

     Statement of David Silverstein, on Behalf of the Southern Appalachian
                      Biodiversity Project, Asheville, NC
        I am writing on behalf of the Southern Appalachian Biodiversity
    Project to urge the U.S. to not replace old growth stands of forest
    with young Kyoto stands, and oppose the construction of more dams, as
    part of the Clean Development Mechanism designed to meet the goals of
    the Kyoto Protocol.
        A myriad of scientific studies now indicate that old growth forests
    are far more efficient at sequestering carbon than younger, monoculture
    tree farms. See, for example, Ernst-Detlef Schulze, Christian Wirth and
    Martin Heimann in the 22 Sep 2000 issue of Science, at pp. 2058-2059.
    Schulze et al., found that ``the accumulation of carbon in a permanent
    pool increases exponentially with stand age.'' This will ``continue to
    contribute to a stable part of soil organic carbon unless disturbed by
    harvest or fire.'' Thus, ``replacing unmanaged old-growth forest by
    young Kyoto stands, as well as the harvesting of previously unmanaged
    old-growth forest stands as part of forest, management, will lead to
    massive carbon losses to the atmosphere mainly by replacing a large
    pool with a minute pool of regrowth and by reducing the flux into a
    permanent pool of soil organic matter. Hannon et al. have demonstrated
    that cutting of old growth forests will release carbon sequestered over
    the course of 200 years in some cases. M.E. Hannon, W.K. Ferrell, J.F.
    Franklin, Science, Vol. 247, pp. 699-702. In that study, Hannon et al.
    determined that nearly 70% of the carbon accumulated in a tree from
    sequestration is emitted into the atmosphere within 10 years after the
    tree is cut down. Even if old growth stands are cut down and replaced
    by young Kyoto stands, it can take decades before enough carbon is
    absorbed by the new stand to equal the pulse of carbon re-released into
    the atmosphere when larger, older trees are cut. In fact, Schulze et
    al. demonstrated that, with increasing life-span of the stand,
    proportionally more carbon can be transferred into a permanent pool of
    soil carbon (passive soil organic matter or black carbon). Since ``time
    without disturbance is required to channel carbon through its cycle
    into a nonactive pool of soil organic carbon and the production of
    black carbon depends on biomass'', old growth forests play an
    invaluable role in the sequestration of carbon.
        Also, the best scientific information available indicates that dams
    cause as much or more greenhouse gas emission as burning fossil fuels.
    The June 1st edition of New Scientist magazine reported that much of
    the greenhouse gas is generated by organic matter washed into a
    reservoir and from the decay of submerged forests. Since ``stagnant
    water produces the worst emissions because the decaying vegetation'',
    the reservoirs release carbon dioxide and methane. According to that
    study, a reservoir will produce more methane than the river did before
    the dam was built. ``Greenhouse gases are emitted for decades from all
    dam reservoirs in the boreal and tropical regions for which
    measurements have been made. This is in contrast to the widespread
    assumption that such emissions are zero,'' the Commission added.
        Thus, the promotion of management practices that replace old growth
    stands with fast growing tree farms, and the building of new dams, we
    will actually contravene the anticipated aim of the Kyoto Protocol. In
    general, over-emphasizing carbon sinks will not adequately address the
    global warming problem. According to Professor John Shepherd, director
    of Britain's Tyndall Centre for Climate Research, shifting the emphasis
    to carbon sinks is diverting the talks from the main issue of cutting
    emissions. Carbon sinks only partially compensate for fossil fuel
    emissions; it has been estimated that sometime within the next century
    our forests will serve as a net carbon source rather than a net sink.
    According to Shepherd, the maximum that could be absorbed by carbon
    sinks would only be equivalent to a quarter of that needed by 2050 to
    prevent major rises in global temperature. If the anthropogenic
    production of greenhouse gasses continues to increase at current rates,
    then it will be inevitable that we will saturate and overwhelm our
    carbon sinks and will be powerless to stop or reverse global warming.
    Rather than creating more loopholes for polluting industries, SABP
    demands-that the U.S. argue forcefully for the reduction of carbon
    emissions from fossil fuel consumption, preserve all of our old growth
    forests, and allow the younger, less developed forests to achieve old-
    growth status.