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



                                                       S. Hrg. 107- 215


   THE CALIFORNIA ENERGY CRISIS AND USE OF THE DEFENSE PRODUCTION ACT

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

  REVIEW OF THE DEFENSE PRODUCTION ACT IN RELATION TO THE CALIFORNIA 
                             ENERGY CRISIS

                               __________

                            FEBRUARY 9, 2001

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
76-811                     WASHINGTON : 2002

____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
ROBERT F. BENNETT, Utah              CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                ZELL MILLER, Georgia
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN ENSIGN, Nevada                  DEBBIE STABENOW, Michigan
                                     JON S. CORZINE, New Jersey

                   Wayne A. Abernathy, Staff Director

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                      Linda L. Lord, Chief Counsel

               Michael J. Solon, Senior Financial Advisor

             Martin J. Gruenberg, Democratic Senior Counsel

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        FRIDAY, FEBRUARY 9, 2001

                                                                   Page

Opening statement of Chairman Gramm..............................     1

Opening statements, comments, or prepared statements of:
    Senator Enzi.................................................     3
        Prepared statement.......................................    22

                                WITNESS

Eric J. Fygi, Acting General Counsel, The Department of Energy; 
  and Paul F. Carrier, Director, Office of Energy Emergencies 
  U.S. Department of Energy......................................     4
    Prepared statement...........................................    23
    Response to written questions of Senator Gramm...............    27

              Additional Material Supplied for the Record

Prepared statement of Eli D. Bebout, Former Speaker of the 
  Wyoming House of Representatives, Past Chairman of the Energy 
  Council........................................................    36
Letter and Attachments from Eric J. Fygi, Acting General Counsel, 
  U.S. Department of Energy, dated January 22, 2001..............    38
Letter from Senator Spencer Abraham, Secretary of Energy, dated
  January 23, 2001...............................................    43
Declaration from Kent M. Harvey, Senior Vice President, 
  Treasurer, and
  Chief Financial Officer, Pacific Gas & Electric Co., dated
  January 12, 2001...............................................    44
Letter and Attachments from Gray Davis, Governor of California, 
  to President William J. Clinton, dated January 13, 2001........    50
Letter and Attachments from Bill Richardson, Secretary of Energy, 
  U.S. Department of Energy, dated January 19, 2001..............    62
Letter from Erik N. Saltmarsh, Chief Counsel, California 
  Electricity Oversight Board, to Richard Glick, Senior Policy 
  Advisor to the Secretary, U.S. Department of Energy, dated 
  January 17, 2001...............................................    67
Letter from Gordon R. Smith, President and Chief Executive 
  Officer, Pacific
  Gas & Electric Co., to President William J. Clinton, dated
  January 12, 2001                                                   69
Letter from Gordon R. Smith, President and Chief Executive 
  Officer, Pacific
  Gas & Electric Co., to Gray Davis, Governor of California, 
  dated
  January 12, 2001...............................................    73
Letter from Gordon R. Smith, President and Chief Executive 
  Officer, Pacific
  Gas & Electric Co., to Gray Davis, Governor of California, 
  dated
  January 9, 2001................................................    76

                                 (iii)

 
   THE CALIFORNIA ENERGY CRISIS AND USE OF THE DEFENSE PRODUCTION ACT

                              ----------                              


                        FRIDAY, FEBRUARY 9, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10 a.m., in room SD-538 of the Dirksen 
Senate Office Building, Senator Phil Gramm, (Chairman of the 
Committee) presiding.

            OPENING STATEMENT OF CHAIRMAN PHIL GRAMM

    Chairman Gramm. Let me call the Committee to order.
    I want to thank our witnesses for coming today. Normally, 
this early in the session, we do not have hearings on a Friday.
    But I wanted to hold this hearing today because this 
Committee is also the Economics Committee, and we have 
jurisdiction over the Defense Production Act.
    We have an opportunity today--in light of the use of the 
Defense Production Act in the California energy crisis--to look 
at this act as we begin the process this year of rewriting the 
Defense Pro-
duction Act, rewriting it in an era when Ivan is not at the 
gate, 
when the world is very different than it was in 1950--when 
Harry 
Truman signed this bill into law and Ivan was very much at the 
gate and we were beginning a life and death struggle with the 
Soviet Union.
    The Defense Production Act is the most powerful and 
potentially dangerous American law, in my opinion.
    It is a law--whether used correctly or not, I think we can 
judge that--that was meant to give through legislation an 
embodiment of the President's powers under Article 2, Section 2 
of the Constitution, which names the President, Commander in 
Chief.
    In this extraordinary use of the Defense Production Act, 
the President delegated authority to the Energy Secretary who, 
under the authority of the Defense Production Act, forced 
suppliers to sell to parties that they would not have supplied 
in the absence of the use of the police power of the Federal 
Government.
    The Federal Government issued an order that a sale be made 
under conditions which the seller would never have agreed to in 
the absence of the Federal Government's order. The sale was at 
a price that the seller would never have accepted under any 
ordinary circumstances, and where there was no guarantee that 
the product--in this case, natural gas--would be paid for.
    I am not aware that the natural gas has in fact been paid 
for. And it seems to me that an issue that we have to look at 
in the context of the Defense Production Act, if this natural 
gas should not be paid for--and the Federal Government has 
ordered that it be supplied under the provisions of the Fifth 
Amendment's takings provision--is whether the Federal 
Government, the Federal taxpayer, is obligated to make these 
payments?
    In addition, I think there is a real question whether or 
not Section 101(a) and Section 101(c), that were cited by the 
President and by the Secretary of Energy, actually apply to the 
circumstances in California.
    This is a very important issue. The Defense Production Act 
was adopted during the Truman Administration, giving the 
President tremendous economic powers. It was clear in looking 
at the context of that debate, and the subsequent use of those 
powers, that Congress intended that those powers be used only 
in the case of emergencies that had clear national security 
implications. I deal in looking at the whole history of the 
Defense Production Act since its 
inception in 1950, it has been used principally for defense 
purposes.
    There have been two major exceptions, however.
    One was Richard Nixon's use of the Defense Production Act 
to impose wage and price controls, after which Congress wisely 
repealed that provision of the law.
    The second variance was its recent use in the last few 
weeks to mandate the sale of natural gas against the business 
judgment of the private sellers. That is what we are here to 
look at today.
    I want to say publicly to our two distinguished witnesses 
what I said privately. And that is, I am not here trying to 
exhume the remains of the Clinton Administration.
    What I am trying to do is to understand exactly how this 
powerful instrument was used, and potentially misused, as we 
look to rewrite this bill in the 107th Congress. And it is my 
intention that we have an extensive rewrite of the Defense 
Production Act. I don't ever intend to see the act extended 
again without substantial revision and reexamination.
    The world has simply changed too much to allow the Act to 
be extended in its present form. What we want from our two 
witnesses, and what I am interested in here, is we take a long, 
hard, dispassionate look at this decision, how it was 
implemented, what the implications were, how it was used or 
misused and what that says to us about rewriting this law.
    That is the purpose of this hearing today. I want to thank 
our two witnesses for coming, and I want to give our two 
colleagues who have come on Friday, when the Senate is not in 
session, an opportunity to speak and to thank them for being 
here.
    I am especially grateful to our new colleague from New 
Jersey. And let me ask Senator Corzine if he wants to make any 
opening statement.
    Senator Corzine. Well, as I said the other day, I am a 
newcomer to this and I will wait. But I think that this topic 
is one very well worthwhile, making sure that we identify the 
proper application of this law going forward.
    And so I think this hearing provides that forum to discover 
those and I look forward to working with the Chairman.
    Thank you.
    Chairman Gramm. Well, thank you. And again, let me thank 
you for coming.
    Senator Enzi.

              STATEMENT OF SENATOR MICHAEL B. ENZI

    Senator Enzi. Thank you, Mr. Chairman. I am so pleased that 
you are holding this hearing.
    I have a statement that I would like to be in the record. 
But I have a few comments that I want to make besides that.
    Chairman Gramm. If I can, let me just ask, I do not think 
anybody else is coming.
    Senator Corzine, why don't you come sit here, and when you 
finish your statement, Senator Enzi, why don't you move up 
here.
    But go ahead.
    Senator Enzi. This hearing gives us an opportunity to look 
at the impact that the Defense Production Act has on the 
Nation's energy market.
    Now, I am from Wyoming, and Wyoming is upstream from 
California. And with some of the other laws, we kind of feel 
like there is this giant straw sucking the water out of 
Wyoming.
    This act has the same potential for doing that with the 
energy of Wyoming.
    When California suffers, Wyoming has to panic. It is a very 
real fear, especially in light of the way that the Defense 
Production Act places a superior priority on California energy 
delivery. It scares us up our way.
    I talked to my daughter in Laramie this morning. The 
temperature there is a minus 30 degrees, and they are using 
some energy right now. They recognize that California needs 
energy, but we see a pretty desperate need in Wyoming as well.
    I cannot help but think that the real issue underlying this 
crisis is that we have failed to develop a national energy 
policy.
    Somehow, we have placed an idea that we could utilize 
technology and that would provide conservation, and we would 
not need additional power.
    I cannot understand why we do not think that same ingenuity 
that produces technology that leads to conservation cannot lead 
to clean energy as well.
    This country is going to have to have some increasing 
levels of energy if it is going to have the kind of continued 
growth that provides the jobs that the people in this country 
have come to rely on, and the kind of increases in the economy 
that we depend on. So we need to get to that national energy 
policy. We have to stop focusing on the symptoms and start 
dealing directly with the disease and the short-term economic 
band-aids and artificially controlled prices make the situation 
worse.
    Our goals of establishing stability and prices that are 
truly market-based can only be reached by acting on a plan that 
allows us to meet our own energy demands.
    We have to work within the structure that has some rules 
with it. So I am grateful that we are holding this hearing and 
hope that we can save California and Wyoming.
    Chairman Gramm. Great. Let me welcome our two witnesses 
today--Mr. Eric J. Fygi, who is Acting General Counsel of the 
Department of Energy, and Paul F. Carrier, who is Director of 
the Office of Energy Emergencies at the Department of Energy.

    First, have I pronounced both your names correctly?

    Mr. Fygi. Mr. Chairman, you did a remarkably accurate job, 
much better than my contracts professor did in law school.

    [Laughter.]

    Chairman Gramm. I appreciate that. I always ask people 
because there is nothing worse than mispronouncing somebody's 
name.

    Let me first say that we are very happy that you are here 
today. We want to give you an opportunity to present us with 
this case study of what happened, when and how. And then we 
want to call on your expertise to pose questions, again, with 
the goal of understanding what happened and deciding in 
rewriting this very powerful law, do we want to make changes in 
it?

    Mr. Fygi, why don't you start?

       STATEMENT OF ERIC J. FYGI, ACTING GENERAL COUNSEL

            ACCOMPANIED BY PAUL F. CARRIER, DIRECTOR

                  OFFICE OF ENERGY EMERGENCIES

                   U.S. DEPARTMENT OF ENERGY

    Mr. Fygi. Mr. Chairman, with the Committee's permission, I 
would summarize briefly the major elements of our prepared 
statement and request that the entire prepared statement be 
included in the record.

    Chairman Gramm. They will be printed in the record as if 
given.

    Mr. Fygi. It is well to understand, in examining this 
subject in the context of this case of the use of the Defense 
Production Act, the circumstances in California that gave rise 
to developing the case itself. And those circumstances, briefly 
stated, involved the workings of the California electricity 
rate structure, in light of increased demand experienced by 
California utilities through the last 5 years in particular, a 
comparative shortfall in new capacity that was less than a 
fifth of the increase in demand between 1996 through 1999, a 
rate cap in which the investor-owned utilities under State law 
could not charge consumers more than approximately 7 cents a 
kilowatt, but an evolution of the unregulated wholesale market, 
such that peak prices in that market were 30 cents, a kilowatt. 
That put the investor-owned utilities in a position of selling 
at a loss. It put the investor-owned utilities ultimately in a 
position where their very financial integrity continued to 
erode throughout the late fall and early winter of last year.

    That was the circumstance that first prompted alarm by the 
California Independent System Operator and through which all 
electricity virtually is made available to California 
consumers, when generators became reluctant to sell to the ISO 
because of the eroded financial posture of the ultimate purchasing 
utilities.

    That is what prompted the issuance in December of emergency 
orders under the Federal Power Act to maintain continuity of 
electric service in California and to avoid, if at all 
possible, a complete degradation of the continuity of that 
electric service.

    Beginning in January of this year, even though PG&E, the 
major combined gas and electricity utility in northern 
California, was not hamstrung in this rate structure governing 
its natural gas sales, such that it, PG&E, could recover fully 
increased costs in the wholesale natural gas that it purchased. 
Nonetheless, its financial affairs were commingled with its 
electricity sales. It was a single utility. And the degradation 
of its financial posture stemming from the electric rate 
imbalance, coupled with the financial community's adverse 
reaction to the January 4, 2001, California Public Utilities 
Commission action on PG&E's emergency rate request, led to a 
downgrading of PG&E's credit rating by the major credit rating 
agencies, like Moody's and S&P.
    Such that, eventually, PG&E's debt was downgraded to low 
junk status, according to the Reuter's news account at the 
time, which was the 16 of January.
    By January 12, the senior management of PG&E had come to 
realize that it was confronted with a serious threat that as 
much as 40 percent of its gas volumes would be interrupted 
because the vendors of those gas volumes were made apprehensive 
by PG&E's deteriorating financial situation, and they were 
positioning themselves either to terminate their deliveries to 
PG&E altogether, or to demand financial rearrangements such as 
prepayments or third-party guarantees, that PG&E's financial 
posture simply would not permit it to grant.
    PG&E's financial posture was such by that time that it 
could not acquire third-party guarantees, nor, in terms of 
management of its cashflow, even though, ultimately, it would 
be compensated through the tariffs from consumer revenues, it 
simply could not afford either to prepay or guarantee for all 
the volumes of gas that it needed.
    In light of these circumstances, on January 12, the 
chairman of PG&E formally requested the President to invoke 
Federal emergency authorities to assure continuity to gas 
service through the entirety of PG&E's service area. That 
request was accompanied by a detailed affidavit that set forth 
in particularity the circumstances PG&E had experienced, which 
affidavit was sworn and executed by PG&E's chief financial 
officer.
    The next day, Governor Davis formally requested President 
Clinton to invoke Federal emergency authorities in order to 
secure continuity of gas service in PG&E's service territory. 
Governor Davis represented in his letter that his own 
investigation of the circumstances had persuaded him that the 
threat was imminent of such an interruption of service.
    It was these circumstances that the department was 
confronted with in early- to mid-January.
    As our formal testimony indicates, senior departmental 
officials from the last Administration, led by the Deputy 
Secretary, conducted several inquiries directly of PG&E 
management and operating personnel, better to understand the 
nature and immediacy of the emergency.
    The tenor of those inquiries often was skeptical. It was 
not one that exhibited an eagerness on the part of the last 
Administration to become embroiled directly in this further 
aspect of the whole California matter so soon before it would 
be ending its term of office. Nonetheless, in the event, the 
policy judgment was made that the circumstances required action 
with respect to PG&E's continuity of gas supply, similar in 
effect to what previously had been done in December for the 
electricity supply throughout the State.
    As you observed, Mr. Chairman, in your opening remarks, one 
of the elements of that sort of regulatory approach, and it 
certainly is a regulatory approach, involves the capacity to 
mandate sales by vendors to a recipient entity.
    The first legal authority that we examined when confronted 
with the likelihood that some action would be necessary was the 
Natural Gas Policy Act, which contains several emergency 
provisions that were patterned after the Emergency Natural Gas 
Act of 1977. Those emergency provisions, we concluded, were 
helpful. In fact, they were of key importance. Yet, they did 
not provide the complete remedy that seemed to be called for--
the ability to compel the sale by a vendor to the recipient--
here, PG&E. That was the element that was afforded by our 
resort to the Defense Production Act.
    The Defense Production Act, even though relatively 
infrequently employed in a prominent setting, has been an 
element of the inventory of energy agency authorities for a 
very long time--at least back as far as the 1973-1974 Arab oil 
embargo, in which the Federal Energy Office and the Federal 
Energy Administration likewise were delegated authorities under 
the Defense Production Act.
    Moreover, the department's predecessor, the Atomic Energy 
Commission, and, indeed, the department itself in the conduct 
of our weapons program, had from time to time routinely used 
the Defense Production Act system of priority orders in the 
conduct of our national security activities.
    Moreover, the Defense Production Act, as it was amended in 
1975 by the Energy Policy and Conservation Act, had a new 
dimension added to it specifically--that is the 101(c) 
authority--designed to encourage--maximize, I think is the 
word--domestic energy production. So that contour of the 
Defense Production Act was relatively familiar to us. And given 
that in 1980, the Defense Production Act was further amended to 
have its basic statement of policy expressly indicate that 
there was a direct link, generically, a direct link between 
national defense and adequate energy supplies for national 
defense activities, the structure of the Defense Production 
Act, when weighed against the facts that we were confronted 
with, seemed handily to fit.
    I say handily to fit because one of the important concerns 
we had about continuity of natural gas supplies through PG&E's 
system involved the relationship between those natural gas 
supplies, that flowing gas, and continuity of electricity 
generation by independent electrical generators who happen to 
use PG&E's transportation network in order to feed their 
electric generators.
    I am sure the Committee is aware, most electric generation, 
and all new thermal fossil-fired electric generation in 
California, is natural gas-fired.
    The reason this was an added concern is that, under 
California law, if PG&E were confronted with a physical 
shortfall of available natural gas volumes, such that PG&E 
could no longer service its so-called core customers under 
California law--which means private individuals and small 
businesses, home heating, that sort of thing--then, under 
PG&E's tariff, it could, and probably would have to, capture 
volumes of natural gas owned by others, not by PG&E, but owned 
by others, that were then flowing through PG&E's pipes to the 
privately-owned electrical generation facilities.
    In PG&E's view, were that event to actually materialize, it 
would take approximately 2 days before the owners of those 
volumes of natural gas curtailed shipment through PG&E's system 
and sold those volumes of natural gas elsewhere, rather than 
having them conscripted by PG&E under the California regime.
    That scenario would have had an additional outage of 
potentially significant electric generating capacity stemming 
directly from the degradation of the volumes of natural gas 
available to PG&E to carry out its normal servicing of its core 
customers. So there was an interrelationship here.
    The need for continuity of natural gas supplies to sustain 
electric generation in PG&E's service territory directly 
implicated, in our view, the element of 101(c) of the Defense 
Production Act, which authorizes resort to orders of priority 
performance of delivery of goods to maximize energy production.
    Moreover, the circumstances that obtained in PG&E's service 
territory revealed that a number of military and other 
installations, including NASA installations, are physically 
situated in PG&E's service territory. Mr. Chairman, as I am 
sure you are aware, the word defense, as used with respect to 
Section 101(a) of the Defense Production Act, is a defined term 
of art in the Defense Production Act, which includes not only 
atomic energy activities, as well as military activities, but 
also includes space activities. That is to say, NASA functions.
    We also felt that there was an apparent factual basis that 
rendered application of the Defense Production Act in this 
circumstance to be correct and appropriate as a matter of law.
    I do not want to speak for the policy, but solely for our 
legal analysis. And therefore, we formulated our legal approach 
as one that combined the elements both of the Defense 
Production Act regime and the emergency natural gas authority's 
regime under the Natural Gas Policy Act.
    In fact, President Clinton's Memorandum that made the 
necessary emergency finding called for by the emergency 
provisions of the Natural Gas Policy Act, likewise directed the 
energy secretary also to employ the authorities of the Defense 
Production Act in order to craft an appropriate regulatory 
near-term solution to this emergency situation.
    Mr. Chairman, I think that this summarizes the prepared 
statement that we have submitted, which, nonetheless, I hope 
the Committee will find useful as a resource document as it 
embarks upon its review of the Defense Production Act.
    I think it also is useful to recognize that our case study, 
so to speak, deals with a profound and discrete emergency 
prompted by the hitherto unexperienced circumstance where 
electric utilities were actually suffering from negative 
operating cashflow. All utility bankruptcies in recent years 
have involved embedded debt, historical matters. But as a 
matter of current operations, they were not operating in a 
negative fashion.
    This was truly an extraordinary circumstance prompted by a 
combination of factors that we alluded to, together with how 
the California regulatory structure worked in light of those 
factors that necessitated resort to these emergency 
authorities.
    And should the Committee have any questions, I will be 
pleased to respond to them, or, if necessary, seek the 
assistance from my colleague, Mr. Carrier, in doing so.
    Thank you very much.
    Chairman Gramm. Well, Mr. Fygi, thank you very much for a 
very good summary of what happened and the thinking that was 
embodied in the use of the laws.
    Mr. Carrier, would you like to add anything to what Mr. 
Fygi has said?
    Mr. Carrier. No, Mr. Chairman. My comments have been 
included in the testimony filed by Mr. Fygi.
    Chairman Gramm. Well, let me, if I may, first of all, I 
want to welcome our colleague from Michigan who has joined us.
    Let me begin by asking a few questions.
    First of all, let me make it clear that I am an economist 
and not a lawyer.
    We did have a rule--in the old days in Texas--that if you 
were elected to the legislature and served, for a period of 
time, you could apply and get a law degree.
    I sometimes wonder, as long as I have been here, whether I 
ought to apply and have the Supreme Court declare me a lawyer.
    But I do know enough not to get into arguments with the 
real thing. People generally don't know enough not to get into 
economic arguments with real economists.
    But in any case----
    [Laughter.]
    What I want to do is understand how the law works, not in 
some dusty old law book, but in practical application because 
that is what we are dealing with.
    I want to go through Section 101(a) and 101(c) of the 
Defense Production Act and at least raise questions about 
applicability, and then I would like to give both of you an 
opportunity to respond.
    First of all, let me go back to the context of 1950 and the 
Defense Production Act.
    For those who have forgotten, in 1950, we were engaged in a 
very desperate struggle in Korea. The North Koreans had invaded 
the South. We had been driven back to the Cho San Peninsula. It 
was very questionable whether we were going to be driven off 
the peninsula.
    We were very much in the midst of a conflict in a country 
that was war-weary from World War II. And Congress, I think it 
is fair to say, was frightened. And so, one of the 
manifestations of our concern and, really, our commitment to 
engage in this 45-year struggle with the Soviet Union, was the 
Defense Production Act.
    But while Congress meant to give the President tremendous 
powers--no doubt about that--they also realized that this was a 
free society and therefore, they wanted to place some real 
limits. And so, let me begin with Section 101(a), and then pose 
a few questions to you, if I may.
    Section 101(a) authorizes the President to require priority 
performance of contracts or orders other than contracts of 
employment, by any person only if necessary to promote national 
defense, the person required to perform the contract is capable 
of doing so.
    Throughout, the language of 101(a), obviously, refers to 
the promotion of national defense. Then it comes down to a 
section that seeks to set limits. One of the limits is that 
101(a)'s authority should be used, ``only where necessary or 
appropriate to promote national defense.'' It should not be 
used to accomplish purposes, however meritorious, which bear no 
relation to national defense.
    Now, obviously, one of the things about the military 
industrial complex is that anything affecting any area of the 
country almost by definition affects something related to 
national defense.
    But let me ask: Did the Department of Energy ever do any 
kind of study of what the natural gas that was being ordered to 
be sold would be used for, where it would be allocated, was any 
list ever comprised of defense installations that would clearly 
be affected?
    Mr. Fygi. We did receive a list of defense installations, 
including, as I recall, a NASA facility.
    Again, defense is a term of art in the DPA. It is a lot 
broader than----
    Chairman Gramm. I would count NASA in there.
    Mr. Fygi. Yes. So we did receive a list of those facilities 
that were within PG&E's service area.
    Chairman Gramm. But did that accompany any analysis of 
where this natural gas would be used?
    It seems to me the relevant question is not whether PG&E 
serviced an area that had defense establishments in it, but 
were these natural gas supplies that were being ordered to be 
supplied under conditions the supplier did not agree to, at 
prices they did not agree to, with no guarantee of payment, was 
there ever any study as to how that natural gas itself would be 
used in a way that would supply critical energy to these 
defenses?
    Mr. Fygi. The answer is no because that kind of analysis 
would only have been called for under the structure of the 
Defense Production Act, had we resorted to the allocation 
authority rather than the priority performance of existing 
contracts or new orders.
    Chairman Gramm. Well, let me raise the following question.
    I have here a letter that was sent by PG&E to Governor 
Gray. And my guess is that this is the letter that really 
triggered this request that came from the Governor to the 
President. On page 2 of that letter, in the bottom paragraph, 
Gordon R. Smith--is he the president of the company?
    Mr. Fygi. He is the CEO of PG&E, which is the utility that 
we are talking about.
    Chairman Gramm. Well, he says in this letter, on page 2, in 
the bottom paragraph--This is a credit-based shortage, not a 
physical supply shortage. There are sufficient gas supplies for 
delivery to California as of today.
    If we can believe the president of the company that wrote 
to the governor, who relayed that request to the President--
that there was no shortage of natural gas, but, in fact, a 
credit-based shortage--I do not find anywhere in Section 101(a) 
any reference to credit shortages, but, instead, only shortages 
of material supplies.
    Let me first ask, do you agree with the president of the 
company that credit is the real shortage?
    And second, would you say that a credit shortage would 
qualify under the Defense Production Act?
    Mr. Fygi. I would agree with the characterization that the 
shortage of natural gas through PG&E's system that it 
confronted was induced by a credit crunch experienced by PG&E.
    But in terms of the question whether, nonetheless, the 
emergency authority of the Natural Gas Policy Act and the 
authority of the Defense Production Act are available to deal 
with the shortage, to my mind, it makes no difference whether 
the shortage gets prompted by a credit crunch or whether it is 
prompted by a strike or other extrinsic factors such as 
transportation infrastructure breakdowns and the like.
    Chairman Gramm. Let me read also from Section 101(c)--both 
these sections were cited in triggering the Defense Production 
Act.
    I think you said, but let me see whether you agree, that 
the problem found by the President is that one NGPA, the 
Natural Gas Policy Act, would allow the President to set the 
terms of a contract, but it did not give the President the 
power to mandate that the gas be sold or that the pipelines 
deliver it or that a price be accepted.
    Those extraordinary powers, we do not have any dispute 
about the fact that they came from the Defense Production Act.
    Mr. Fygi. Correct.
    Chairman Gramm. Okay. Now, Section 101(c) authorizes the 
President to require the allocation of or priority performance 
of contracts or orders related to the supply of materials and 
equipment in order to maximize domestic energy production.
    This authority cannot be used unless the President finds 
the following. That such supplies are scarce, critical and 
essential to maintain exploration, production, refining, 
transportation, or conservation of energy supplies, or the 
construction and maintenance of energy facilities.
    And in going back and looking at legislative history on 
this, we went back to Senate Report No. 26, which was issued in 
1975. And it says the following:
    This provision was included in the title in an attempt to 
remedy critical shortages and misallocations of pipe, pumps, 
drilling rigs, roof bolts, which are currently plaguing energy 
production.
    I do not see in Section 101(c), at least as the Senate 
tried to define what it was trying to do in Section 101(c), any 
reference to natural gas. And I certainly don't see any 
reference to a credit-based shortage.
    Could I get your response to that?
    Mr. Fygi. Of course. My first thought is that I am from the 
Justice Scalia school of thought. I look at the statute. And 
the legislative history is interesting, but it is not 
dispositive.
    Second, I do not dispute at all the characterization and 
the likelihood that in 1975, among the things that were of 
concern to the Senate and, indeed, the whole Congress, involved 
bottlenecking and shortages of tubular goods.
    There was another hearing during which then-Deputy 
Administrator Sawhill of the Federal Energy Office was 
testifying on this point, attesting to the need to resolve 
bottlenecks in the availability of tubular goods and drilling 
rigs.
    Okay?
    The answer, it seems to me, is a matter of statutory 
construction, is that, certainly, the application of this 
authority to roof bolts or tubular goods is not exclusive. And as 
a matter of statutory construction, the more likely and plausible 
and defensible construction, is that the use of the word ``materials'' 
in 101(c) is intended to have the same reach of the use of the word 
``materials'' in Section 101(a).
    And it is the case that the original legislative history of 
the 1950 act indicated that in 101(a), the word ``materials'' 
included, for example, ``petroleum'' explicitly.
    Petroleum is a lot closer to natural gas than roof bolts. 
And I think that we would parse the statute in a fashion that 
corresponds to my description here.
    Chairman Gramm. Let me ask you the following question, and 
I am not trying to trivialize this or in any way suggest what 
your decision should have been.
    But it seems to me that the danger of stepping over 
physical shortage, and going back to this credit-based 
shortage, is that if you take the approach that the inability 
of a purchaser to pay--even though, as the president of the 
company said, there was not a physical shortage of natural 
gas--by that construction, then under this law as it is 
currently interpreted, in any circumstance where there was no 
shortage of a product, but a major purchaser of it on a 
regional basis--in this case, California--the President would 
have the power under the Defense Production Act with no 
physical shortage to come in and mandate supply simply because 
the buyer was not credit-worthy.
    I would like to get your reaction to this concern.
    Mr. Fygi. I think my reaction to the concern is, first, at 
risk of using a legal term, this was a Sui Generis situation.
    Chairman Gramm. Say again?
    Mr. Fygi. Sui Generis. This is something truly unique.
    We had hitherto never experienced a public utility that 
could not match its operating expenses from the revenues that 
it was permitted to charge its rate-payers.
    That was something new.
    There have been utility bankruptcies before, but they did 
not involve this kind of problem.
    Nonetheless, the nature of the function of the electric 
utility in the portion of the State that comprises its service 
territory involves clear public health and safety, as well as 
national security and national defense preparedness issues of 
the type that we previously have addressed. And therefore, I 
think what the department and what both Administrations now 
have been confronted by is a sobering prospect where the 
economics of the situation have created a shortage. And where 
some intervention was necessary to avoid what I think of as a 
run on the bank.
    That is the kind of situation we had here, in my judgment, 
and it is one that I believe that prompted earnest attention by 
people at senior levels in both the last Administration and 
this Administration. I think that we are well on the way to 
resolving this whole circumstance because the State of 
California is now grappling with these larger questions that 
have prompted the difficulties.
    And the utility, while still experiencing some difficulty, 
is able now better to assure creditworthiness because the 
utility has used the time that was afforded it by this 2-week 
period of an emergency intervention to secure California Public 
Utilities Commission approval of something called 
securitization of its revenue stream for natural gas sales. So 
that, on an objective standard, for natural gas sales, one 
probably could conclude that the financial crisis for the 
natural gas segment should be well under control.
    If the question that you are putting to me is, do I think 
that somehow this particular set of events standing alone is 
instructive that there is a clear pathway toward potential 
abuse or extraordinary and unwarranted regulatory action, I 
think each person has to make his own judgment of that 
question.
    I can say that the facts here do not reveal in my judgment 
any intention to cross that line.
    Chairman Gramm. I know my colleagues have questions, so let 
me just pose a couple more questions and then I will yield.
    Obviously, there was a real question about the ability of 
PG&E to pay, which was the reason that the suppliers were 
unwilling to supply absent the government mandate.
    I am not aware that the payment has been made. Do you know?
    Mr. Fygi. I can address that. The payment schedule that was 
mandated by the order was what PG&E had traditionally employed 
in all of its supply contracts by which it bought natural gas 
from vendors, which was payment in full on the 25th day of the 
month for the next prior month's full month of deliveries. PG&E 
did pay all its vendors on January 25 of this year for all of 
the deliveries made in December.
    December deliveries antedated the effectiveness of the 
order, but, nonetheless, it seemed to me that the ability of 
PG&E then to make that payment on schedule was instructive and 
was a good omen of the likelihood that PG&E similarly will be 
able to adhere to that payment schedule.
    Chairman Gramm. I am correct in saying, since we hadn't 
gotten to the 25th, they have not paid for this gas.
    Mr. Fygi. Nor have they defaulted.
    Chairman Gramm. Okay. Now, let me ask you the question I 
wanted to ask.
    If they should default, given that the Federal Government 
mandated that the sale be made, would it be your legal opinion 
that the Federal Government has a legal liability to pay for 
this gas?
    Mr. Fygi. That is a much more complex question, I have 
found from such review of it that I have done during this 
winter.
    The Supreme Court case law indicates that each of these 
inquiries, whether there has been a regulatory taking, is an 
intently fact-bound one. And so, I do not know that we could 
discern until after all the facts are in whether even some sort 
of default would have yielded a compensable regulatory taking 
or whether it simply would have fallen into the category of 
regulatory burdens that nonetheless fall short of a compensable 
taking.
    Chairman Gramm. So you think it would be--it would be your 
legal opinion if pressed right now, that it would be an open 
question as to whether the Federal Government and the taxpayer 
would be liable.
    Mr. Fygi. A fact-bound one. But it would be a legitimate 
issue.
    Chairman Gramm. You all have been very cooperative and I 
want to thank you because, again, other committees may, through 
their jurisdiction, want to talk about who screwed this up and 
who's to blame.
    What we are trying to do in rewriting this law, is look at 
how the law is functioning.
    As you know, the President in 1994 set out a procedure for 
invoking these emergency powers--basically, a system of checks 
and balances and findings. He then, in essence, waived those 
procedures using the same executive power.
    And what we want to know is, what findings were made that 
would comply with the original executive order or any 
requirements of the law?
    Mr. Fygi. The thought that occurs to me in responding to 
that question involves an introductory comment on one way you 
have characterized the Defense Production Act, as one that is 
an emergency measure.
    In fact, the Department of Justice, in its 1982 
comprehensive examination of all emergency authorities 
available to the President to deal with petroleum emergencies, 
indicated quite clearly at page 20 of that study that the 
Defense Production Act really is not an emergency measure. It 
surely is available in emergencies. But the normal application 
of the Defense Production Act involves, let's say, a 
stereotype.
    I am the Acme Machine Tool Manufacturing Company and 
General Dynamics has a contract with the Air Force to build F-
16's. My Acme machine tools are in high demand because Detroit 
is retooling. So General Dynamics issues me an order for my 
machine tool and I say, sorry, General Dynamics. You are going 
to have to wait till next year.
    Get in the queue.
    Well, the normal functioning of the Defense Production Act 
would entail a procedure within the claiming agency, the 
Defense Department here, and the Department of Commerce to make 
a judgment whether to issue an order that would compel Acme to 
service General Dynamics' request before any other request. And 
those events occur from time to time in the ordinary business 
of government and the contracting for materials deemed 
necessary in the defense effort. They also occur from time to 
time in major energy projects.
    We had used, we found, this authority from 101(c) on 
several occasions to aid in construction of the Alaska pipeline and 
on other occasions to aid in securing equipment necessary to 
upgrade the department's strategic petroleum reserve storage 
facilities in Louisiana and Texas.
    So that, normally, the procedural constraints that tend to 
mitigate overbroad, perhaps even, arguably, abusive, employment 
of the Defense Production Act, have this built-in bureaucratic 
process that you have touched upon.
    Here we were, in contrast, dealing with a true emergency 
where time was of the essence.
    And therefore, the President chose a different course in 
the mode of delegating the Defense Production Act authorities 
in this case for this purpose at this time.
    Chairman Gramm. Let me yield to my colleagues and I will 
want to come back and just touch on a couple of things.
    Senator Corzine.
    Senator Corzine. Thank you.
    Chairman Gramm. Again, let me thank everybody. There were 
just some key principles that I felt we needed to get out and 
that is why I ran over time.
    Senator Corzine. Thank you, Mr. Chairman. I thought the 
enlightenment of these 101(c) and 101(a) were terrific.
    I would like to ask the question in the context of the DPA. 
It seems like the fact connection to the defense and national 
security interests are the key element to apply 101(a).
    And it was not clear to me from the response to the 
Chairman's question whether that was more an anecdotal kind of 
connection that drove the application of this particular act, 
or whether it was specifics within the context of actual 
commercial transactions that did not occur.
    How did you all arrive at that?
    Mr. Fygi. It was neither anecdotal nor retrospective. It 
was predictive and judgmental because the kind of factual 
findings we are talking about here in the statute, they are, by 
necessity, ones that are bound up in policy judgments.
    In that sense, they are what we lawyers would call more 
like legislative facts than adjudicative facts. The case law 
seems pretty 
instructive in that the President's factual findings of this 
sort are 
entitled to great deference by the courts.
    In particular, the Justice Department's 1982 Memorandum 
cited the Supreme Court's decision in the Algonquin SNG case, 
under which the President's findings that volumes of imported 
crude oil were of such an amount and were being imported in 
such circumstances, as to threaten to impair the national 
security, was in effect a judgmental one that the President was 
entitled to make and the courts were not going to set it aside. 
And similarly, the judgment that in a given instance, the 
interest of national defense or the interest of maximizing 
domestic energy production require resort to these authorities 
is a judgmental one.
    Senator Corzine. Okay. The other question I had is, I am 
presuming that Secretary Abraham, looking at these same set of 
facts, drew the same conclusions that Secretary Richardson did.
    Mr. Fygi. Secretary Abraham, with two full days of the new 
job under his belt, instructed me to extend the existing 
orders.
    The factual findings that I think we were speaking about a 
moment ago were those that were contained in President 
Clinton's Memorandum, executed on January 19. The duration of 
President Clinton's memorandum in terms of the yardstick of how 
long such a declaration of emergency remaining in effect under 
the natural gas authorities was 120 days.
    Clearly, the President Clinton Memorandum still was legally 
in effect if the new Administration wished to act pursuant to 
it.
    Secretary Abraham did so and instructed me to see to it 
that the order was extended for the duration that we have 
described.
    Senator Corzine. Acknowledging the 2 day timeframe, the 
acknowledgement of the circumstances were generally the same.
    Mr. Fygi. Correct.
    Senator Corzine. Though from one judgment to the next.
    Mr. Fygi. Correct.
    Senator Corzine. Thank you, Mr. Chairman.
    Chairman Gramm. Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    I am actually going to ask three questions and ask them all 
at the same time, so that if you do not have time within my 
timeframe to answer them----
    Chairman Gramm. Whatever timeframe you need to get them 
answered, take it.
    Senator Enzi. Thank you, because there are three distinct 
things that have come to mind partly as I have heard the 
testimony.
    I mentioned in my opening statement that what we are 
treating are the symptoms and we have to get back to treating 
the problem.
    Symptoms might take care of things in the short-run, but I 
want to suggest that they are going to escalate things in the 
short-run.
    Most of the natural gas produced in this country is not 
produced by big companies. It is produced by very small 
companies, almost individuals that own companies.
    They take the revenue that they get from the gas and they 
pay for the cost of producing it, and at the same time, they 
begin the production on another well. If something happens in 
that cashflow, they go out of business, and I think probably 
the big companies wind up with the gas.
    They are not very comforted by the fact that, yes, they 
probably will be paid, that maybe the February 25 date will be 
met, or that maybe the Federal Government owes them money. If 
they are forced to sell the gas and they are then faced with a 
long, drawn-out battle to get the payment, they do not wind up 
being in business any more. And that collapses part of the 
economy in other parts of the country. That is a great concern 
I have. I am interested in whether there are any plans by the 
Department of Energy to make sure that these little bitty 
companies can continue to produce the gas that this country 
needs, or if we are just turning it over to the large 
companies?
    Mr. Fygi. Well, I think you have raised a very, very good 
question. And I can assure you that, from my perspective, the 
last thing in the world we wanted these orders to induce was 
any longer-term diminution in the supply-side of the equation, 
including the viability of the small and independent producers 
that your question particularly was directed to.
    Those kinds of issues, I think--that is, the issues 
embedded in your question--are legitimate and of central 
importance in framing a larger energy policy because I agree 
with you in that nothing that was done in what we are 
testifying about today was a long-term cure for anything. Nor 
did it masquerade as such.
    So I agree with you completely.
    Senator Enzi. Thank you. And they are expecting somebody to 
watch out for them, probably the people that are putting the 
pressure on it.
    Maybe it will only force 10 percent of the people out of 
the gas business, but if you happen to be that person, it is 
100 percent of your business and it is of tremendous concern to 
them.
    The second thing that I am concerned about is getting some 
more power plants. All of the power plant discussion that I am 
hearing, particularly from California, is to do natural gas 
power plants.
    I would hope that we are planning some kind of a process 
where there is clean coal in the country now. That clean coal 
can be made even cleaner. So there is some possibilities for 
producing with that.
    In Wyoming, we are building power plants to take care of 
California and other States. I am not sure that Wyoming can do 
it by itself. But I am concerned about this emphasis on using 
natural gas for power plants.
    I remember a town near us called Rapid City, South Dakota--
it is a big city in South Dakota. Their power company was 
looking at providing peaking power for winter power--a lot more 
furnaces, fans operating, that sort of thing--to use natural 
gas to get heat spread through the homes.
    They were looking at winter peaking power.
    The city did away with their plans to use natural gas 
because they found that the peaking power--not the total power 
requirement, just the peaking power requirement--would require 
as much natural gas as it took to heat Rapid City in winter 
with natural gas. They did not consider that to be a good use 
of natural gas.
    We are already seeing the price of natural gas in this 
country go from about $2.20 to somewhere up around $8. I 
suspect if we start putting all of that gas into power plants, 
next year we will be looking at $16. I hear some comment that 
$16 is an unrealistic price, if everything is going to natural 
gas, it is going to put a bigger strain on the system than we 
have now and drive up the prices.
    Is that the way you see it with power plants?
    Mr. Fygi. Again, I think that the question you have posed 
should be a central one in a coherent formulation and 
consideration of national energy policy debates.
    I would observe, however, that just earlier this week, the 
department announced a clean coal cost-sharing project under 
previously enacted legislative authority, so that the 
department is quite engaged in pursuit of seemingly promising 
clean coal initiatives that might yield significantly 
widespread additional resort to coal as an electric-generating 
fuel.
    So that is the thought that occurs to me from your 
question.
    Whether natural gas or some other fuel should be used for 
generating electricity, the way you put it, has an implication 
of a potential regulatory question lurking in the background. I 
think economists might debate whether a regulatory solution is 
the best way to decide the highest and best use of natural gas 
volumes instead of the marketplace.
    Senator Enzi. With the potential for the use of this 
defense act, it is a question the Nation better be looking at 
because I can see ripples heading across the whole pond that 
will affect other parts of the country and direct some of the 
same short-term solutions as we are seeing here.
    To bring it back more to the short-term solution, the 
relationship with this gas and power being needed for national 
defense. And again, you can probably put this off on another agency 
because I know that Defense is going through a process now of doing 
a readiness evaluation, but it seems to me that it is pretty 
critical that our defense facilities have some back-up. I was under 
the impression that they had back-up energy supplies so that 
defense installations were not put out of business by some kind of 
national terrorism.
    Where the act requires it to be for defense, wouldn't their 
ability to use their power back-up kind of preclude the action 
that was taken?
    Mr. Fygi. Well, here, again, we are speaking of volumes of 
natural gas, not electric power, which lends itself more 
readily to things like diesel generators for use in emergencies 
and the like.
    So that, I am not aware of any defense installations that 
have ready substitutes for the conventional natural gas 
service.
    Senator Enzi. Okay. It was my understanding that some of 
that natural gas was going to generate electricity.
    Mr. Fygi. That is correct.
    Chairman Gramm. Would the Senator yield?
    The issue, it seems to me, is as follows. We claim national 
defense implications because of the electric service area of 
PG&E.
    We then allocate gas, which may or may not have been used 
to generate electricity.
    It is my understanding that the gas allocations for PG&E, 
obviously the G being gas in PG&E, are primarily to small users 
and that the vast majority of defense installations and defense 
contractors would be buying gas directly and not through PG&E.
    Did anybody ever look to see what national defense or NASA 
installations bought gas from PG&E?
    Mr. Fygi. We were provided information on that subject.
    Chairman Gramm. You were or weren't?
    Mr. Fygi. We were. I am sorry. Yet, I do not parse the 
national defense element of the legal equation in quite the 
same fashion as your question seems to indicate. We considered 
it sufficient that the presence of these installations in 
PG&E's gas and electricity service area directly implicated 
continuity of national defense functions that were dependent on 
continuity of service by PG&E as a physically viable entity to 
deliver both gas and electricity.
    Chairman Gramm. Well, I would just like to note for the 
record that Beall Air Force Base does have back-up power 
generation. 
As far as we can determine, they do not buy gas from PG&E, 
but it is delivered through their pipelines, which would not 
have 
been affected.
    Mr. Fygi. Actually, they would. Under our scenario, under 
our high-apprehension scenario, if PG&E had not been able to 
receive enough volumes of purchased gas to serve its so-called 
core customers--you know, the residences and the small 
businesses--then PG&E would have to capture those volumes of 
gas that were independently being provided through PG&E's 
system to the Beall Air Force bases and 3M and other 
manufacturing facilities of the world.
    Chairman Gramm. But----
    Mr. Fygi. And that would have disrupted those industrial 
activities and would also have had the effect of eliminating 
electric generation capacity that was operating.
    So it is all inter-woven to a very significant degree.
    Chairman Gramm. I guess it seems to me that--and we all 
have a different view of this--if we were concerned about these 
facilities and their war-making capacity, then we would have 
simply prevented PG&E from seizing gas that was not PG&E's, 
but, instead, was simply being transmitted through their 
pipelines.
    Mr. Fygi. I think one can conclude safely that that was not 
the entirety of the objective.
    Senator Enzi. That is all my questions.
    Chairman Gramm. Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman. I appreciate the 
testimony this morning on a very serious topic.
    I know that in Michigan, we are at the early stages of 
deregulation and watching very closely what is happened in 
California to learn from the situation.
    I also, Mr. Chairman, did want to indicate, noting that 
coming in just a moment late to the Committee, that the only 
member that I have more seniority over, Senator Corzine, jumped 
me in seniority this morning.
    I am going to watch him extremely closely at every other 
meeting to determine how he is using the fact that he has no 
seniority on this Committee.
    [Laughter.]
    Senator Corzine. Why, thank you.
    [Laughter.]
    Chairman Gramm. Well, you do have to watch people.
    [Laughter.]
    Senator Stabenow. I am watching and I am learning, Mr. 
Chairman very quickly.
    [Laughter.]
    Chairman Gramm. I was way down there and I got all the way 
up here.
    [Laughter.]
    Senator Stabenow. I noticed that.
    Chairman Gramm. Over dead bodies and----
    Senator Stabenow. And I am watching very closely.
    [Laughter.]
    Which is a topic of another hearing, I think.
    [Laughter.]
    Let me ask, though, if you might follow up more from the 
Chairman's questions as it relates to the specifics.
    I had similar questions as it relates to contractors that 
you had talked about and the contractors' installations and how 
this action would affect their missions and daily activities.
    I think this is a very important question as we look at the 
impact and the actions that were taken. And let me also say 
that I think it is important to note for us on the Committee 
that this in fact was an action by both Administrations, the 
first which Secretary Richardson initiated on January 19, and 
then followed up by Secretary Abraham, who indicated the 
circumstances that led to the issuance of the order continued 
to exist.
    We have both administrations appearing to view, at least on 
the surface, this issue in the same way.
    But I do share the Chairman's questions and concerns about 
the specifics of how this relates to contractors and 
installations and their ability to carry out their mission and 
their daily activities.
    If you could expand a bit on that.
    Mr. Fygi. When you say contractors, I assume you do not 
mean the contractors who are the vendors of natural gas to 
PG&E.
    Senator Stabenow. I am talking about defense contractors, 
the installations.
    If you could talk about your view of how this would impact 
their mission, their daily activities.
    Mr. Fygi. Well, I think my response would be that, were the 
situation to have deteriorated as it appeared it might, to the 
point where PG&E, to keep homes heated, had to siphon off 
volumes of natural gas to industrial customers, including 
military and other Federal installations, that event would have 
had an enormously disruptive effect on the continuity and the 
operational capability of the Federal activities at those 
defense installations.
    Senator Stabenow. So, in other words, rather than a direct 
impact, you are looking at the broader impact of what was 
happening in California.
    Mr. Fygi. The broader impact and the consequential impacts, 
were the sequence of events that was predictable under 
California law, to have unfolded in that worst possible way. 
And the object of the order was to prevent that sequence from 
occurring.
    Senator Stabenow. Okay. Thank you, Mr. Chairman.
    Chairman Gramm. Thank you. Let me just try to summarize 
some concerns.
    I think we really came very close to getting down to the 
question that this Committee is going to have to examine when 
you answered my question about the situation of defense 
facilities with back-up electric generation.
    They are not buying gas from PG&E, but PG&E is delivering 
the gas in many cases, not all cases, but in many of the cases. 
And PG&E, under a State mandate, puts the retail consumer, the 
homeowner, at the top of the cue.
    I was not here when this bill was drafted. But I had one of 
my trusty staff members go out and look at the photos of our 
chairmen. If you want to get some humility, all you have to do 
is look at those photos. I am embarrassed to say that I do not 
know Burnet Maybank, who was chairman of this Committee from 
1949 to 1952, when this bill was written.
    But it seems to me that what the Committee must have had in 
mind when they wrote the law was exactly the situation you are 
talking about, to the following extent. And that is, you have 
these defense installations and a policy of preempting gas 
shippage, even though the utility doesn't own the gas, which is 
a legal question in and of itself in my mind--that you would 
preempt the gas even though PG&E does not own it for civilian 
use.
    My guess is that Senator Maybank probably thought, well, we 
are talking about a period where we have some conflict going on 
in the world or where something critical is happening.
    And second, my guess is that he envisioned, and the 
Congress envisioned, that the use of the Defense Production Act 
would be to say to PG&E, you cannot preempt this gas for 
civilian use. It has to flow through to these military 
installations.
    I am sorry that Senator Maybank is not here to answer our 
question; I am sure he is, too.
    [Laughter.]
    But what we have now decided--and your answer, I think, was 
very instructive--is that military need that was not our only 
objective here. We could have easily resolved the defense 
problem. But our objective was beyond that, to affect the 
civilian situation there.
    And at least it seems to me, and I know you can argue these 
things endlessly from a legal point of view, but when the law 
says in Section 101(a) that the President is authorized to use 
this provision only where necessary or appropriate to promote 
national defense, then it should not be used to accomplish 
purposes, however meritorious, which bear no relation to 
national defense.
    It seems to me that very real example is where we call into 
question of where it is appropriate to use this law and where 
it is not.
    Mr. Fygi. Mr. Chairman, as to strictly a question of law, 
the statute in 101(a) does not use the word only. Perhaps you 
are reading from an element of the legislative history.
    Chairman Gramm. It has a quotation mark around it. But it 
could be.
    I am not trying to get into a legal argument.
    It seems to me the question that we have to ask ourselves 
in the year 2001, is whether there ought to be a higher 
standard for taking people's property and allocating resources 
and dictating price, and whether any President should be 
delegated such powerful responsibilities. In the middle of a 
war, where decisions have to be made every day, I think you can 
understand that.
    But in peacetime, I think one of the questions that we are 
going to have to ask ourselves is not a question of whether the 
law applied to this situation. I would say that there is a 
question of whether the law applied to the circumstance.
    A legal argument could be made if we were arguing in front 
of the Supreme Court, and I think I could make a strong 
argument.
    But given how the law has been used in the past, my guess 
is you might win that case. But we are in the business of 
making law, and not debating how it should be interpreted.
    Mr. Fygi. Justice Scalia has said as much in his concurring 

opinion.
    Chairman Gramm. And it seems to me that this is something 
that we need to look at.
    I want to thank both of you for coming today. This has been 
a very good hearing. I would have to say that this is a 
complicated issue, not one we deal with every day.
    The Congress has routinely extended the Defense Production 
Act without taking a comprehensive look at it, except to add 
some tangential energy powers during the energy crisis of the 
1970's. And I think that one thing that this example makes very 
clear is that this is something that we should not do in the 
future.
    We are not going to extend the Defense Production Act as it 
is now written. It is either going to die or it is going to be 
dramatically rewritten because whether a President can appeal 
to precedent or not, in a free society, in the midst of 
peacetime, it ought to be an extraordinary action, in my 
opinion, for the government to be taking people's property and 
dictating prices.
    There ought to be comprehensive, detailed findings. It 
should be a decision made by the President under the strictest 
constraints. And again, you took the law as it was, precedents 
as they were. You made a decision. We can debate about its 
being right or wrong. You make a strong case for your side. But 
what we have to decide is how do we want it to be in the 
future.
    I want to thank you for your testimony. It is been very 
helpful and very instructive. And in listening to you, it 
reminds me of something we often forget. And that is, there are 
a lot of people in the Federal Government that have 
extraordinary ability and while we generally do not know their 
names, they provide great service to this country.
    I want to thank both of you for coming today because I 
think this has been, for what we are trying to do--not to affix 
blame, not to say, this was a Democratic Administration or 
Republican Administration--basically to take a long, hard, 
dispassionate look at this old law written in a very different 
world, whether we want this law to continue to operate, not as 
Burnet Maybank may have written it or envisioned it, but as it 
has been applied.
    This is the decision we have to make. And your testimony 
has been very, very beneficial, and I want to thank you.
    The Committee stands adjourned.
    [Whereupon, at 11:29 a.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT SENATOR MICHAEL B. ENZI
    I would like to thank the Chairman and the Committee for holding 
this hearing today. This hearing provides the Senate an opportunity to 
look at, and learn more about, the impact that the implementation of 
one our Nation's Federal defense powers, the Defense Production Act, 
has had on private individuals in each of our respective States. To fully 
understand what is going on in the West and the way the decision to use 
this act to bail out California's energy market is perceived in 
Wyoming, one must first realize the large shadow California already 
casts on its neighboring States.
    In the West water is king. As the snows melt along the Rocky 
Mountains and flow into the Colorado River, then out to the Pacific 
Ocean, each State along the Colorado River Basin has certain legislated 
water rights that are carefully laid out in a specific order of 
hierarchy. Over the years, many of these rights have existed on a 
purely speculative level. Even though the full capacity of those rights 
have not been developed, the rights, nonetheless, have been maintained 
with the understanding that someday these States will eventually use 
their full share of the water. Southern California, however, developed 
its water rights early and often.
    While the rest of the area has been slower to develop, California 
experienced an early rapid economic growth and a large population 
influx that often resulted in the State's demands for Colorado River 
water to exceed its allocated rights. As California has never been 
bashful about going after water to feed its ever-growing economy, 
Western States perceive California as a huge straw that sucks the water 
out of the other Western States.
    The question that must be asked about the California energy crisis, 
is ``Is this another California straw?'' Will the rest of the West now 
be forced to provide for all of California's energy needs just as we 
provide for the State's water?
    This is a very real fear, especially in light of the fact that by 
invoking the Defense Production Act that ordered energy contractors to 
deliver energy to California residents, the Federal Government not only 
required contractors to put aside their regular free market remedies 
for customers who can't pay their bills, but the Defense Production Act 
makes the duty to deliver those goods and services a superior priority 
to all other contracts. Had a conflict arisen between providing energy 
for California and any of the companies' other contracts, such as for 
the States of Oregon, Nevada, Idaho, Arizona, New Mexico, or Wyoming, 
then the Defense Production Act would have required the contractors to 
fill California's demands first. Only after California is adequately 
provided for could any energy left over be used to fill the needs of 
other States.
    The questions presented by this Committee as it reviews the 
implementation of the Defense Production Act are whether or not the Act 
was used properly, and what the possibilities of using this Act are in 
the future. While I am certain that these are appropriate questions, I 
can't help but recognize that the real issue underlying the California 
Energy Crisis has more to do with a failure to develop a national energy 
policy than it does with the short-term efforts employed to fend off 
economic disaster.
    California's version of deregulation shows the same inherent 
weakness that exists in the direction that our Nation is currently 
heading toward when it comes to the development of domestic energy 
supplies. The California system prohibited any new power plant 
construction for many years and encouraged companies to take existing 
plants off line. This occurred even though experts accurately predicted 
that California's energy and electricity needs would continue to grow 
and outpace supply.
    The comparison between California and the rest of the Nation is 
almost frightening. For the past several years the national trend has 
been to shut down efficient and steady coal-fired power plants, thereby 
decreasing our Nation's base load of electricity supply, and to replace 
those plants with the now popular natural gas plants. The result has 
been that no new coal fired plants are scheduled for construction, and 
the natural gas plants that were supposed to be our saving grace, are 
now being priced out of the market because of the astronomical leap in 
the cost of natural gas. When you couple this decline in power 
production with a projected nationwide increase in demand for 
electricity to fuel our new high-tech economy, you begin to realize 
that there is vast potential for the current California emergency to 
spread to the rest of the United States.
    We have got to stop focusing on the symptoms and start dealing 
directly with the disease. Short-term economic band aids and 
artificially controlled prices will only make the situation worse. Our 
goals of establishing stability and prices that are truly market based 
can only be reached by acting on a plan that allows us to better meet 
our own energy demands.
    Mr. Chairman, I am again grateful to you and the Committee for 
holding this hearing. I hope that we can use this opportunity as a 
starting point for restoring stability to our Nation's energy market.

                               ----------

                   PREPARED STATEMENT OF ERIC J. FYGI
                         Acting General Counsel

                       U.S. Department of Energy

                            February 9, 2001

    Mr. Chairman and Members of the Committee: I am pleased to appear 
before the Committee in response to its request for testimony by the 
Department as to the circumstances and analyses that prompted the 
Department to employ the Defense Production Act of 1950 in responding 
to actual and threatened interruptions of natural gas supplies in 
northern and central California in January of this year. I am 
accompanied by Paul F. Carrier, the Director of the Office of Energy 
Emergencies in the Department's Office of Policy.
    The circumstances that gave rise to the interruption of natural gas 
supplies in northern and central California actually began with the 
cumulative effects of electricity sales within the State under 
California's 1996 electricity restructuring legislation. Under that 
structure State-regulated electric utilities were required to sell 
electricity to their customers at frozen rates that could not be 
adjusted upward to reflect increased acquisition costs of wholesale 
electric power. At the same time, the State required PG&E and other 
State-regulated electric utilities to purchase their electricity 
supplies in the day-ahead or real time spot market (in contrast to 
long-term contracting, which permits hedging), provided for partial 
divestiture of the utilities' fossil generation assets, and required 
utilities to sell their electricity into the Power Exchange rather than 
use it to serve their customers. In addition, growth in electricity 
demand far outpaced growth in electricity supply. Between 1996 and 
1999, demand in California rose 5,500 MW, while supply rose only 670 
MW. This combination of factors--and the constraints on hydropower 
throughout the Northwest--put the utilities in the position of buying 
wholesale power for as much as 30 cents per kilowatt-hour, while only 
being allowed to sell it for 7 cents.
    Beginning in May 2000, State-regulated electric utilities began to 
accumulate huge debts in the form of unrecovered wholesale, power costs 
as a result of the rate freeze. These unrecovered wholesale power costs 
significantly weakened the financial health of the utilities and, in 
many cases, the utilities approached insolvency. PG&E's debts alone 
totaled $6.6 billion.
    The reluctance of electricity generators and marketers to sell to 
PG&E and Southern California Edison, the other major State-regulated 
electric utility that accumulated large unrecovered wholesale power 
costs, deepened as the financial condition of the utilities worsened. 
In order to prevent loss of electricity supplies to the customers of 
the utilities, then-Secretary of Energy Richardson issued an emergency 
order under the Federal Power Act on December 14, 2000 directing 
certain electricity generators and marketers to continue to sell 
electricity upon request by the California Independent System Operator, 
a nonprofit corporation established by the 1996 California electricity 
restructuring law charged with operation of the transmission system and 
assuring system reliability in California. This emergency order was 
extended to 3 a.m. EST on February 7, 2001.
    The poor financial condition of PG&E also led some natural gas 
suppliers to terminate sales to the utility, out of concern that the 
losses the utility was incurring in its electricity operations would 
lead to insolvency, notwithstanding the fact that PG&E's gas operations 
themselves could recover costs under its tariff. Unlike Southern 
California Edison, PG&E is both a gas and electric utility.
    On January 9, 2001, one supplier, which supplied approximately 14 
percent of PG&E's core gas supplies, terminated sales to PG&E. Other 
gas suppliers soon followed suit, still others threatened to stop 
deliveries absent prepayments or credit 
guarantees. About 25 percent of PG&E's January baseload supply of 
natural gas was terminated and substantial additional volumes were 
threatened.
    PG&E serves 3.9 million ``core'' gas customers in California, both 
residential consumers and small businesses. PG&E also transports 
natural gas to about 5,000 ``noncore'' customers, including industrial 
consumers and electricity generators. Electricity generation accounts 
for roughly two-thirds of noncore gas consumption. If PG&E experienced 
a shortage in gas deliveries, it would have to increase withdrawals 
from gas already in storage and divert gas from noncore customers. 
Diversion from noncore customers would exacerbate the California 
electricity shortage, since two-thirds of PG&E's noncore gas is used 
for electricity generation.
    PG&E and Southern California Edison first sought redress at the 
State level by applying to the California Public Utilities Commission 
for retail electricity rate increases. On January 4, 2001, the 
California Public Utilities Commission increased retail electricity 
rates by a surcharge of one cent a kilowatt-hour among its classes of 
customers. It did so for a period of 90 days, and did not otherwise 
alter the rate freeze under which PG&E and Southern California Edison 
were operating. PG&E also sought action from the State to prevent a 
loss of gas supplies. PG&E asked the California Public Utilities 
Commission for emergency authorization to draw on the gas supplies of 
the other major gas utility in the State. As of February 7, 2001, the 
California Public Utilities Commission had not acted on this request.
    On January 10, 2001 PG&E and its parent filed a Form 8-K with the 
Securities and Exchange Commission in which they announced suspension 
of dividend payments and postponement of release of financial results 
for the fourth quarter of 2000. The stated reason for postponing 
release of financial results was that the outcome of then on-going 
State and Federal efforts involving the California electricity market 
could result in measures that ``significantly and adversely affect'' 
PG&E Corporation's financial results.
    Beginning the first week in January, the Department was advised by 
PG&E's General Counsel that debt rating agencies had reacted negatively 
to the California Public Utilities Commission's January 4 Order, and 
that if PG&E's outstanding debt were reduced to junk status that event 
would constitute a default under PG&E's various natural gas supply 
contracts. Were that event to occur it would accelerate the payment 
obligation of all of PG&E's natural gas supply contracts. While we 
understand that at the time PG&E had acquiesced in pre-paying some of 
its natural gas suppliers, the normal payment schedule of PG&E was that 
its contracts required payment in full on the 25th day of each month 
for the entire prior month's deliveries of natural gas to PG&E for sale 
to its gas customers. While PG&E's tariff with the California Public 
Utilities Commission enabled it to recover the full amount of increased 
acquisition costs for natural gas resold by PG&E (unlike the case for 
electricity), because of PG&E's precarious operating revenue posture 
stemming from the electricity market, PG&E indicated that it could not 
continue to purchase the needed volumes of natural gas if it were 
required to pre-pay for them.
    At about the same time, beginning January 9, 2001, then-Treasury 
Secretary Summers and then-Energy Secretary Richardson participated in 
extensive meetings that included the Governor of California, California 
legislative leaders and the President of the California Public 
Utilities Commission, the CEO's or Presidents of the major California 
electricity suppliers, and the CEO's of the California investor-owned 
utilities or their parents. While the objective of these meetings was 
to assist the State of California in formulating a solution to the 
evolving situation, no such solution was announced.
    On January 12, 2001 the CEO of PG&E formally requested President 
Clinton to invoke emergency authorities in order to assure continuity 
of natural gas supplies through PG&E to its service territory in 
northern and central California. That letter was accompanied by an 
affidavit executed the same day by the Chief Financial Officer, 
Treasurer and Senior Vice President of PG&E that described in detail 
the circumstances giving rise to the threatened interruption of natural 
gas supply through PG&E to northern and central California. On January 
13, 2001 Governor Davis sent a letter to President Clinton in which the 
Governor described his inquiry into the circumstances, his finding that 
there was an ``imminent likelihood that natural gas supplies in 
northern and central California will be interrupted,'' and requested 
the assistance of the President and the Secretary of Energy on an 
urgent basis.
    On January 15, 2001 then-Deputy Energy Secretary Glauthier 
conducted a telephone conference that included operational executives 
of PG&E in order to ascertain further the logistical and operational 
circumstances that necessitated immediate action at the Federal level. 
On January 16, 2001 Reuters reported that Standard & Poor's had 
downgraded PG&E's debt to ``low junk'' status. President Clinton's 
instructions to the Secretary of Energy, and the Secretary of Energy's 
accompanying Order to PG&E and its natural gas suppliers, were issued 
on January 19, 2001. As the text of each document indicates, their 
issuance was based not only on the emergency provisions of the Natural 
Gas Policy Act of 1978, but also on the Defense Production Act of 1950. 
I now turn to the reasons that prompted the Department to formulate 
this approach.
    When it appeared in early January that it might prove necessary to 
formulate emergency orders for continued delivery of natural gas 
through PG&E, we first examined the emergency provisions of the Natural 
Gas Policy Act of 1978, 15 U.S.C. 3361-3364. Those provisions appeared 
useful in that they authorized designation of continued use of natural 
gas for electricity generation as a ``high-priority use'' in 
an emergency, and authorized specification by the Federal Government of 
the ``terms and conditions'' including ``fair and equitable prices'' for 
natural gas delivered under an order. The ability to determine that 
continued use of natural gas was a ``high-priority use'' under the Natural 
Gas Policy Act was quite important because, without such Federal action, 
under California law, any reduction in gas volumes available to PG&E as 
merchant impairing its ability to serve its ``core customers'' 
(residences and small businesses) would result in mandated redirection 
of gas volumes delivered through PG&E (but not owned by it) destined for 
noncore customers, including most significantly electricity generators. 
Were such redirection to occur it would have further reduced the 
volumes of natural gas available for electricity, generation in 
California.
    Despite the technical utility of Section 302 of the Natural Gas 
Policy Act, 15 U.S.C. 3362, in these respects, we remained concerned 
that it only would ``authorize'' purchase, rather than also to require 
deliveries, of natural gas to enable PG&E to continue to distribute 
sufficient volumes of natural gas. During January PG&E advanced 
arguments asserting that the allusion to an ``order'' in Section 302 
suggested that it embraced an ability to impose a supply mandate. Based 
on textual analysis of the Natural Gas Policy Act we remained 
unpersuaded on this point. In forming our view of this question we also 
consulted with an attorney of the Federal Energy Regulatory Commission 
who had been designated by the Commission's General Counsel to aid us 
in our examination of this question. Our textual analysis coupled with 
that of the Federal Energy Regulatory Commission attorney, together 
with our understanding of the provenance of Section 302 as having had 
the original objective simply of permitting emergency sales into 
interstate commerce by nonjurisdictional gas producers without becoming 
thereby subject to then-existing wellhead price controls, prompted us 
to conclude that the Natural Gas Policy Act's emergency provisions, 
standing alone, would not suffice if the Federal Government were to 
mandate continuity of natural gas deliveries through PG&E to all of its 
service territory in northern and central California.
    We then considered whether the Defense Production Act provided the 
authority to complement the emergency provisions of the Natural Gas 
Policy Act such that the entities (largely resellers and not 
producers), had recently provided PG&E with natural gas could be 
directed to continue to make similar volumes available to PG&E. We 
concluded that the Defense Production Act would provide this authority.
    Title I of the Defense Production Act authorizes the President to 
require the priority performance of contracts or orders in certain 
circumstances. Under Section 101(a), 50 U.S.C. App. 2071(a), the 
President may require performance on a priority basis of contracts or 
orders that he deems ``necessary or appropriate to promote the national 
defense.'' In determining what the national defense requires, it is 
clear the President may consider the potential impact of shortages of 
energy supplies. In the Energy Security Act Congress specifically 
designated energy as a ``strategic and critical material'' within the 
meaning of the Defense Production Act and also added language to its 
Declaration of Policy that establishes a link between assuring the 
availability of energy supplies and maintaining defense preparedness. 
The Defense Production Act's Declaration of Policy, 50 U.S.C. App. 
2062(a)(7), states:

          [I]n order to ensure national defense preparedness, which is 
        essential to national security, it is necessary and appropriate 
        to assure the availability of domestic energy supplies for 
        national defense needs.

    PG&E's customer base in northern and central California includes a 
number of defense (including ``space,'' as the term ``defense'' is 
defined in the Defense Production Act) installations and defense 
contractors that use natural gas and electricity and that clearly would 
be adversely impacted by interruption of natural gas service. 
Continuity of supply to these facilities was threatened in the same 
fashion as other industrial natural gas consumers in PG&E's service 
territory.
    Section 101(c) of the Defense Production Act, 50 U.S.C. App. 
2071(c), authorizes the President to require priority performance of 
contracts or orders for goods to maximize domestic energy supplies if 
he makes certain findings, including that the good is scarce and 
critical and essential to maximizing domestic energy supplies. In the 
situation existing in California in mid January, natural gas supplies 
would have become acutely scarce had the withholding by PG&E's 
suppliers continued and expanded to more suppliers than those that 
already had terminated deliveries. Moreover, continuity of natural gas 
supply is critical and essential in PG&E's service area to electric 
energy generation, petroleum refining, and maintaining energy 
facilities. These factors seemed directly to bear on the terms of 
Section 101(c) of the Defense Production Act relating to continuity of 
energy production.
    Accordingly, we structured the emergency natural gas order to 
include the supply obligation authorized by the Defense Production Act. 
Our understanding of the Defense Production Act regime was that it is 
broad enough to embrace mandates for priority performance of new orders 
to vendors, as well as priority performance of existing contracts. Thus 
this authority fit well in a transactional sense in which some vendors' 
contracts to supply gas might have expired by their terms just before 
the order.
    This aspect of the Defense Production Act regime permitted the 
Department to impose a temporary supply assurance for natural gas to 
northern and central California comparable to that done with the 
electricity orders for the area of the State served by the California 
Independent System Operator by the Department's prior orders under 
Section 202(c) of the Federal Power Act. The Department's emergency 
natural gas order was directed just to the group of suppliers that had 
provided PG&E natural gas on commercial terms during the 30-day period 
prior to issuance of the order. This approach was chosen as the least 
intrusive means that would achieve the public health and safety and 
defense preparedness objectives of continuing for the near term natural 
gas supplies into PG&E's service area. The order is best understood as 
an emergency, temporary action designed to afford California the 
opportunity to abate the emergency by its necessary further actions.
    This concludes my prepared statement. Mr. Carrier and I will be 
pleased to respond to any questions the Committee may have.

  RESPONSE TO WRITTEN QUESTIONS OF SENATOR GRAMM FROM ERIC J. 
                              FYGI

Q.1. In the Federal Order issued by former Energy Secretary 
Richardson on January 19, 2001, and extended by Secretary 
Abraham on January 23, 2001, the authorities under both the 
Natural Gas Policy Act of 1978 and the Defense Production Act 
of 1950 were used. The Order listed four items: (1) Authorized 
Pacific Gas & Electric to purchase emergency natural gas 
supplies; (2) required suppliers that had contracted with 
Pacific Gas & Electric within 30 days of the Order to supply 
natural gas to Pacific Gas & Electric under terms consistent 
with those previous contracts, with the exception of terms 
requiring accelerated payments, prepayments, or other 
``extraordinary payment terms;'' (3) required that the natural 
gas purchased by Pacific Gas & Electric be used only for sale 
by Pacific Gas & Electric for ``high priority'' uses; (4) 
required Pacific Gas & Electric and their suppliers to submit a 
weekly report listing the volumes and prices of the natural gas 
delivered, transported, or contracted under the order to the 
Department of Energy. Which part(s) of this order would not 
have been possible had the authorities under the Defense 
Production Act not been used?

A.1. The element of the emergency orders requiring PG&E's 
natural gas vendors to continue supplying PG&E volumes of 
natural gas conforming to then-current or recent commercial 
contracts with PG&E was premised on the Defense Production Act. 
Although PG&E advanced a legal argument that the text of 
Section 302 of the Natural Gas Policy Act might have authorized 
this element of the emergency order, we concluded it was 
legally prudent to include reliance on the Defense Production 
Act in view of its clearly-
established authority to require priority performance of 
existing contracts with, and priority fulfillment of new orders 
by, entities receiving priority assistance under the Defense 
Production Act.

Q.2. The Federal Order specified the terms of the contract 
between Pacific Gas & Electric and the suppliers affected by 
the order, as those that are consistent with the terms of 
previous contracts in existence within 30 days of the order, 
with the exception of ``extraordinary payment terms.'' This 
specification of contract terms had the effect of setting the 
prices of natural gas to be sold under the Order.

A.2. We do not agree that the emergency orders' requirement 
that natural gas continue to be provided to PG&E on terms 
consistent with the regular commercial prices in PG&E's 
contracts with its natural gas vendors constituted the 
``setting [of] prices'' by the emergency order.

Q.2a. Was the Natural Gas Policy Act or the Defense Production 
Act used to set prices under the Order?

A.2a. To the extent that it might have proven necessary to 
``set prices'' under the emergency order, the authority to do 
so would have been the Natural Gas Policy Act.

Q.2b. Did any of the contracts require or allow the supplies to 
be paid a higher price for natural gas if Pacific Gas & 
Electric's credit worthiness came into question? If so, which 
suppliers held such contracts and what would the price have 
been?

A.2b. We do not know whether any of the inventory of contracts 
between PG&E and its gas vendors provided for per-unit price 
escalation in the event of a credit worthiness problem. Instead 
our understanding was that, in such an event, some contracts 
might have accelerated the timing of PG&E's payment obligation 
(collapsing the prior normal payment interval of net--25th of 
the month--for the next prior month's deliveries) or provision 
of external credit guarantees. Our understanding also was that 
some vendors holding individual recently-expired contracts with 
PG&E were requiring, as a condition of future deliveries, 
advance payments or third-party credit guarantees which PG&E 
could not then provide. Imposition of the up-front payment and 
credit guarantee requirements was not feasible because, 
although PG&E's natural gas tariffs for its sales of natural 
gas allowed full recovery of its natural gas acquisition costs, 
in its electricity revenue-starved situation PG&E could not 
either advance funds for paying for its natural gas acquisition 
costs before receiving its revenues from those sales or secure 
new credit guarantees.

Q.2c. If the contract signed by the supplier and the purchaser 
required or allowed a different price to be charged under 
different conditions, such as a reduction in the buyers' credit 
rating, can a price required under the existing contractual 
agreements be considered an ``extraordinary payment''?

A.2c. We are not aware of any such contracted-for price 
differential. None was presented to us during the period the 
emergency orders were in effect. The only question regarding 
the economic terms of the emergency order was presented by a 
unit of Goldman Sachs, which is described in the attached 
order.

Q.2d. Regarding those natural gas sales where the Defense 
Production Act authority was invoked, if the existing 
contractual agreement requires a specific price to be paid 
under certain conditions and if those conditions exist, how can 
the Department of Energy order prohibit that contractual price 
and impose another price without violating the statutory ban on 
the ``imposition of wage or price controls''?

A.2d. As was stated above, the emergency orders did not purport 
to impose general price controls. To the contrary, they 
embedded in their terms the regular contract prices currently 
and recently (in the next prior 30-day period) charged by 
natural gas vendors to PG&E. No disagreement of the price to be 
charged PG&E was brought to our attention by the natural gas 
vendors or by PG&E. Therefore the Department had no occasion to 
impose sales prices by vendors of natural gas to PG&E under the 
orders, and the orders instead incorporated simply the current 
and recent (within the prior 30 days) contract sales prices 
between PG&E and its vendors.

Q.2e. If the Department of Energy can mandate suppliers to 
provide natural gas based on the contracted prices of the last 
30 days, and have such a mandate not be considered a price 
control, could not the Department of Energy require suppliers 
to use the contracted price of 2 years ago and still maintain 
that this is not a price control?

A.2e. As was stated above, there was no specified price in the 
emergency orders requiring continuity of supply to PG&E on 
normal commercial contract terms. We do not understand the 
Defense Production Act as a device that would permit any 
rollback ``price control'' of the sort that is suggested in the 
question. None was considered or imposed in the California 
emergency natural gas orders.

Q.3. While it is necessary for the President to declare an 
emergency under the Natural Gas Policy Act, such a formal 
declaration was not used for the Department of Energy to invoke 
the Defense Production Act to allocate materials or to set the 
priority performance of contracts.

A.3. The emergency declaration by President Clinton was 
necessary to invoke the emergency provisions of the Natural Gas 
Policy Act. That is because President Carter's 1980 delegation 
withheld from the Secretary of Energy the authority to make the 
emergency finding necessary to invoke these authorities. 
Therefore invocation of the emergency authorities of the Natural Gas 
Policy Act was dependent on the President's January 19, 2001 finding.

Q.3a. Why was President Clinton's January 19, 2001, White House 
Memorandum needed in order for the Department of Energy to 
exercise its authorities under the Defense Production Act?

A.3a. The President's Memorandum of January 19, 2001 was 
necessary to instruct the Secretary of Energy as to the 
authorities he should employ to meet the declared natural gas 
supply emergency in northern and central California, and 
procedurally how to use those authorities in this emergency 
setting.

Q.3b. In your view, did the Memorandum waive the Department of 
Energy's own regulatory procedures for implementing the Defense 
Production Act?

A.3b. The President's Memorandum, by its terms, supplanted for 
this emergency period internal governmental procedures 
otherwise stemming from the various prior executive orders 
relating to use of the Defense Production Act in its normal, 
nonemergency application. Those procedures are structured for 
nonemergency application of the Defense Production Act priority 
assistance authority, and have the effect of minimizing 
governmental intrusion into the general economy.

Q.3c. Is it your opinion that the Memorandum properly waived 
the requirements of Executive Orders 11790 and 12919?

A.3c. The President's Memorandum speaks for itself, and we have 
no occasion to doubt its legal effectiveness in governing the 
manner it specified for action by the Secretary of Energy in 
carrying out the statutory authority vested in the President.

Q.3d. Are Executive Orders 11790 and 12919 still in effect, or 
did the White House Memorandum permanently waive the 
requirements of those orders?

A.3d. Executive Orders 11790 and 12919 remain in effect for the 
general and regular administration of the Defense Production 
Act. The provisions of the President's Memorandum of January 
19, 2001 by their terms apply only to the natural gas emergency 
in northern and central California that was declared pursuant 
to Section 301 of the Natural Gas Policy Act. Unless extended 
by further action by the President, such an emergency 
declaration expires 120 days after its issuance.

Q.4. Were alternatives to using the Defense Production Act in 
the context of Pacific Gas & Electric's inability to purchase 
natural gas evaluated by the Department of Energy or, to your 
knowledge, any other governmental entity? Did the Department of 
Energy consider, for example: Using the Defense Production Act 
to force Pacific Gas & Electric to prioritize transmission-only 
service for defense installations and defense contractors in 
order to ensure that their natural gas supplies would not be 
confiscated and redirected for core customer use?

A.4. This approach was not seriously considered. It would have 
constituted an attempt at Federal micro-management incompatible 
with the emergency circumstance that was presented. The unknown 
collateral effects of permitting events to work their will 
under such a limited approach likely would have had adverse 
operational effects on defense-related facilities and 
activities that such an approach would not have accurately 
predicted.

Q.4a. The ability of the California Public Utilities Commission 
to order the ``ring-fencing'' of natural gas accounts 
receivables to be used as collateral by Pacific Gas & Electric so 
that they may continue to enter into natural gas purchase contracts 
with their suppliers?

A.4a. When the likelihood of interruption of natural gas 
supplies to PG&E was brought to our attention in early January 
and confirmed formally in PG&E's and the California Governor's 
January 12 and 13, 2001 correspondence to President Clinton, 
the California Public Utilities Commission had yet to take 
action that would segregate PG&E's natural gas receivables. 
After the emergency orders were issued the California Public 
Utilities Commission did so, on January 31, 2001.

Q.4b. The ability of the California Public Utilities Commission 
to issue an order, similar to the Federal Order, requiring 
other California natural gas local distribution companies 
regulated by them to sell natural gas to Pacific Gas & 
Electric?

A.4b. While we were aware that PG&E had made an emergency 
request on January 18, 2001 for an order directing Southern 
California Gas Company to provide ``mutual assistance,'' that 
is, to sell gas to PG&E for PG&E's core customer needs, the 
California Public Utilities Commission had not entered such an 
order at the time the Department issued either of its emergency 
orders.

Q.4c. An emergency facilitation of contracts between Pacific 
Gas & Electric's core customers and others that purchase 
natural gas directly from Pacific Gas & Electric, and 
alternative natural gas distributors, producers, marketers, or 
traders, using Pacific Gas & Electric for transmission-only 
service?

A.4c. We do not understand what is meant by ``emergency 
facilitation'' between ``core customers,'' and ``others,'' and 
``alternative natural gas distributors, producers, marketers, 
or traders.'' We were unaware of any ``emergency facilitation'' 
authority that was available here, and the question's terms 
imply the desirability of some sort of onmidirectional 
consultation instead of taking decisive executive action deemed 
necessary to deal with an emergency placing millions of natural 
gas consumers and electricity consumers at risk of breakdown in 
service.

Q.4d. Allowing Pacific Gas & Electric to reorganize or 
liquidate through bankruptcy?

A.4d. The potential of relying on a voluntary bankruptcy 
scenario was evaluated informally in connection with this 
emergency. This evaluation indicated two conclusions: (1) The 
reorganization provisions of the Bankruptcy Code generally are 
useful for a going concern when its operating revenues cover 
its operating costs, but when the concern's threatened 
insolvency stems from a significant negative operating cash 
flow (as appeared to be the case with PG&E), reorganization 
under bankruptcy protection is not an assured pathway to 
continued near-term operation of the utility; and (2) under the 
Bankruptcy Code, neither a reorganization nor a liquidation 
bankruptcy proceeding could afford the bankruptcy court the 
unilateral ability to raise customer electricity rates without 
approval by the California Public Utilities Commission.

Please furnish the Senate Banking Committee with copies of the 
Department of Energy's, or any other governmental entity's, 
evaluations of all alternatives considered, including those 
listed above.

    As was described in the Department's testimony for the 
February 9, 2001 hearing, the matter was presented to the 
Department as an emergency circumstance. Much of the inquiry 
was done orally by and among senior officials of the prior 
Administration, and was directed to understanding the need for 
immediate action rather than simply awaiting the next 
Administration. The evaluation of alternatives was not preceded 
by documentation of this sort, although one document summarized 
the situation for the then-head of the National Economic 
Council. The legal evaluation was done through submitting the 
text of the proposed Presidential Memorandum to the Office of 
the Counsel to the President and the Justice Department's 
Office of Legal Counsel. Because of the emergency nature of the 
matter (with additional delivery interruptions anticipated on 
January 19, 2001), the legal evaluation was directed to the 
draft text of the President's Memorandum itself without 
ancillary written analyses. The legal evaluation was expressed 
orally during a conference call among the responsible DOE 
General Counsel attorneys and those in the White House 
Counsel's Office and Justice's Office of Legal Counsel.

Q.5. In his letter dated January 9, 2001, the President of 
Pacific Gas & Electric indicated that the natural gas crisis 
was ``a credit-based shortage, not a physical supply 
shortage.'' In assessing possible credit assistance to Pacific 
Gas & Electric, the California Electricity Oversight Board 
determined that the California Constitution prohibited any 
guarantee or credit backing by the State of California to 
Pacific Gas & Electric. Yet numerous credit and loan guarantee 
programs are available to private parties throughout the State 
of California on a wide range of activities. Given the numerous 
State-sponsored loan, loan guarantee and financing programs, 
why was it deemed unreasonable for any of these State programs 
to be utilized, redirected, or similarly created, in order to 
address the credit problems of Pacific Gas & Electric?

A.5. Whether it would have been reasonable for the State of 
California to establish a credit or loan guarantee program to 
assure continuity of natural gas supplies in northern and 
central California is not a question on which this Department 
formulated a position. Instead the Department was confronted in 
January 2001 by the fact that, in the view of the California 
authorities, such financial assistance could not be immediately 
forthcoming. The Department's action was taken to stem a ``run 
on the bank,'' and by its terms was temporary in nature and 
therefore did not indicate the Department's view whether such 
State-granted credit or financial guarantees were a proper 
measure for the State to initiate.

Q.6. The Department of Energy generally uses its authority 
under the Defense Production Act to force the prioritization of 
contractual agreements already in place between buyers and 
suppliers that also include agreed upon terms, including 
quantities and prices. In this case, the Department of Energy 
used the Defense Production Act to force natural gas sellers to 
sell to Pacific Gas & Electric even if there were no exiting 
contracts in place. Does Section 101(a) of the Defense 
Production Act apply only to the prioritization of contracts or 
does it also grant authority to force sellers to enter into a 
new contact or to extend a contract, or to compel a sale even 
where no sale to any party was contemplated by the supplier? 
Please explain.

A.6. Section 101(a) of the Defense Production Act, by its 
terms, authorizes priority performance of both existing 
``contracts'' and priority performance of new ``orders'' for 
``materials.'' This structure indicates that the authority of 
Section 101(a) is not limited to the performance of existing 
contracts. It also suggests, however, that the obligor to the 
recipient of priority assistance filling a new ``order'' is in 
the regular commercial business of providing to commercial 
buyers the ``materials'' that are the subject of the order.

Q.6a. Has the Department of Energy ever used the Defense 
Production Act to force suppliers to sell to purchasers without 
the existence of a contractual agreement between the two 
parties? Please furnish the Committee with the details, 
including the dates and parties involved, of all instances in 
which the Defense Production Act was used to force the 
initiation or the extension of a contract.

A.6a. The available records that document the Department's 
historical use of the Defense Production Act do not indicate 
whether the priority assistance was extended to performance of 
an existing contact or to the filling of a new order not yet 
memorialized in an existing contract. The records do suggest 
that the entities subject to priority assistance orders were in 
the regular business of providing the called-for materials or 
services to the commercial sector.

Q.6b. Consider that the Federal Government wants, or determines 
that there is a need for, a commodity that is generally 
available from the marketplace. Can the Federal Government use 
the Defense Production Act to require that a holder of that 
commodity make a sale to the government, or to some third 
party, even though the holder does not, and has no intention 
to, make the product available for sale?

A.6b. On these facts, it is difficult to understand how the 
Defense Production Act might come into play. Additional, and 
less abstract, facts might suggest that the Defense Production 
Act could become relevant. If, however, a ``commodity'' is in 
fact ``generally available'' and in fact is made available 
without discrimination to entities in circumstances that meet 
all defense or energy-related needs, then it is difficult to 
understand the role of priority assistance under the Defense 
Production Act.

Q.7. In your view, does money and credit meet the definition of 
``materials, services and facilities'' as it is used in 
Sections 101(a) and 101(c) of the Defense Production Act?

A.7. We never have had occasion to consider whether money or 
credit might meet the definition of ``materials, services, and 
facilities'' under Sections 101(a) and 101(c) of the Defense 
Production Act. In the case at hand, we viewed natural gas to 
be ``materials'' within the meaning of the Defense Production 
Act, and as we indicated during the February 9, 2001 hearing, 
we believe that the text and the legislative history of the 
1950 Act support understanding the Defense Production Act to 
include natural gas (as well as the explicitly mentioned 
``petroleum'') as a ``material'' susceptible to priority 
assistance under the Defense Production Act.





                  PREPARED STATEMENT OF ELI D. BEBOUT

         Former Speaker of the Wyoming House of Representatives
                  Past Chairman of the Energy Council

                            February 9, 2001

    My name is Eli Bebout; I'm a former speaker of the Wyoming House of 
Representatives, and past Chairman of the Energy Council, a group 
composed of legislative representatives from 10 energy-producing 
States, Venezuela and Alberta, Canada. It is a privilege to subit 
testimony into the record regarding Wyoming's perspective on the 
Western energy crisis.
    First of all, the California energy crisis is a situation 
precipitated by California and its misguided effort 5 years ago to 
deregulate the utility industry. But instead, California's State 
government actually re-regulated the industry, stripping long-term 
power contracts from its energy companies, and prohibiting other 
suppliers from competing in the California energy marketplace. Instead 
of curbing consumer demand with open market rates, California 
encouraged demand with artificially low demand with open market rates, 
California encouraged demand with artificially low prices and spot 
prices. Instead of addressing their rising energy consumption by the 
construction of additional power plants, Californians ignored their 
power deficit, and created almost impossible hurdles for plant siting.
    So now the California power crisis is both a Western States problem 
and a national concern. Wyoming and other western States cannot ignore 
the fact that the western power grid has linked all of us to the 
California energy situation, and the grid is both part of the problem, 
and part of the solution.
    I am in agreement with Wyoming's Senator Mike Enzi who stated that 
President Clinton's solution to the problem was inappropriate. His 
sanctioning the National Defense Act of 1950 to force companies to 
continue providing natural gas to a heavily indebted California public 
utility was a misuse of that law. The law was written to protect 
national security in a time of war. And as Senator Enzi correctly 
stated, it would have given California an unfair power priority over 
every other western State. I was glad to see that President Bush ended 
that order--it is time to think about other solutions--both in the near 
and the long term.
    The Western Governors' Association has considered the energy crisis 
at length, and their recommendations are worth reviewing. Many of the 
short-term solutions fall in the California jurisdiction--conservation 
measures and consumption shifting must come first. The most critical 
thing California must do as soon as possible is remove the impediments 
to a free marketplace--allowing California power companies to enter 
into long term power contracts, adopting rate reforms that will more 
accurately reflect actual costs. The free marketplace must allow true 
competition in the electrical grid--so there is direct access to the 
market for all buyers and sellers. The rate changes might be painful 
for California consumers at first, but the solutions have to start in 
California. The other part of the problem is the lack of a national 
energy policy. So in the long-term, there is much that we can all work 
toward.
    The Energy Council has developed a proposal for a national energy 
policy, and that will be presented to the appropriate national Energy 
Subcommittee in March. Many of the recommendations found in that 
proposal are similar to those being discussed by Senator Murkowski, 
which include focusing on natural market forces and increasing the 
supply side of the power equation. I also know our Wyoming Senators are 
working with Senator Murkowski on this.
    On the supply side, we can streamline the cumbersome regulatory 
processes to site and build new power-generating plants, particularly 
in Wyoming--not jeopardizing any part of the environment--but working 
together more efficiently and quickly, pulling together State, local 
and tribal governments to act on these issues. We can reactivate 
retired generating plants, and get additional energy from those areas. 
Homeowners can be encouraged to install their own small systems, such 
as wind turbines, fuel cells, and solar. In fact, the Wyoming 
legislature is working on a bill to help in this area. We can 
supplement research and development for promising renewable energy 
technologies and enable exploration and development of promising 
domestic oil, natural gas, coal, geothermal, or wind resources. We can 
improve our energy infrastructure with additional gas pipelines, power 
plants, and extensive power database to help predict and manage 
demands. We need access to our Federal lands to allow responsible 
development, in an environmentally-sound way, of the tremendous natural 
resources that are available.
    On the demand side, we can accelerate the development of more 
energy efficient products in the marketplace, and adopt building codes 
that will improve conservation. More information and tax incentives for 
energy conservation could be provided to individuals.
    To sum up, the crisis started in California, and the solution has 
to start in California. Wyoming--the BTU capitol of the Western 
Hemisphere--will continue to provide as much energy as it can to its 
neighboring States. But as a Nation, we need a national energy policy, 
and it should remove impediments to new powerplants, allow suppliers to 
compete in the marketplace, provide incentives for the development of 
alternatives energy sources, and encourage conservation.