[Senate Hearing 107-240]
[From the U.S. Government Printing Office]




                                                        S. Hrg. 107-240

                 BPA IN PROMOTING ENERGY CONSERVATION 
                             AND RENEWABLES

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON WATER AND POWER

                                 of the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

TO RECEIVE TESTIMONY ON THE ROLE OF THE BONNEVILLE POWER ADMINISTRATION 
            IN PROMOTING ENERGY CONSERVATION AND RENEWABLES

                               __________

                            AUGUST 13, 2001

                               __________

                              SEATTLE, WA


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

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

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

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               Brian P. Malnak, Republican Staff Director
               James P. Beirne, Republican Chief Counsel
                                 ------                                

                    Subcommittee on Water and Power

                BYRON H. DORGAN, North Dakota, Chairman
BOB GRAHAM, Florida                  GORDON SMITH, Oregon
RON WYDEN, Oregon                    JON KYL, Arizona
TIM JOHNSON, South Dakota            LARRY E. CRAIG, Idaho
DIANNE FEINSTEIN, California         BEN NIGHTHORSE CAMPBELL, Colorado
MARIA CANTWELL, Washington           RICHARD C. SHELBY, Alabama
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska

  Jeff Bingaman and Frank H. Murkowski are Ex Officio Members of the 
                              Subcommittee

                         Deborah Estes, Counsel
                    Jonathan Black, Staff Assistant


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Cantwell, Hon. Maria, U.S. Senator from Washington...............     2
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............     1
Hauser, Steven, Senior Energy Programs Manager, Energy Division, 
  Pacific Northwest National Laboratory, Portland, OR............    39
Hickok, Steven G., Chief Operating Officer, Bonneville Power 
  Administration, Portland, OR...................................     7
Nelson, Sharon L., Member, Board of Trustees, North American 
  Electric Reliability Council, Princeton, NJ....................    17
Shimshak, J. Rachel, Director, Renewable Northwest Project, 
  Portland, OR...................................................    44
Spigal, Harvard P., Partner, Preston Gates and Ellis, Portland, 
  OR.............................................................    13

                                APPENDIX

Additional material submitted for the record.....................    55

 
          BPA IN PROMOTING ENERGY CONSERVATION AND RENEWABLES

                              ----------                              


                        MONDAY, AUGUST 13, 2001

                               U.S. Senate,
                   Subcommittee on Water and Power,
                 Committee on Energy and Natural Resources,
                                                       Seattle, WA.
    The subcommittee met, pursuant to notice, at 10:00 a.m. in 
the Commission Meeting Room, Port of Seattle, Pier 69, Hon. 
Byron Dorgan presiding.

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

    Senator Dorgan. This hearing will come to order.
    My name is Senator Byron Dorgan, and I am chairman of the 
Water and Power Subcommittee of the Energy Committee of the 
U.S. Senate.
    I am joined today by Senator Maria Cantwell from the State 
of Washington, who also is a member of the Senate Energy 
Committee, and we are pleased today to hold a hearing of the 
subcommittee here in Seattle, Washington.
    The energy situation in this country is interesting and 
challenging, to say the least. All of us understand that there 
are things happening in America today that literally require 
the U.S. Congress to write a new energy plan. The House of 
Representatives has written a new bill. We in the Senate are in 
the process of writing a new energy bill, after which, of 
course, there will be a conference. Senator Cantwell and I 
participated with the Energy Committee in writing the first 
title to that bill just prior to the August recess. We wrote 
the research and development title, and following the August 
recess we will reconvene and complete our work on the energy 
bill.
    It is quite clear not only from the standpoint of what has 
happened in California, but what has happened in other parts of 
the country as well, and also from the spreading from 
California to the entire West, and especially the Northwest, 
the energy situation in this country has been unstable, and we 
need a new plan.
    The Northwest has some peculiar, interesting and unique 
characteristics about its' energy situation, and we do not want 
to write an energy bill in the U.S. Senate without fully 
understanding and considering the unique circumstances that 
exist here in the Northwest. We have a substantial amount of 
hydropower unlike most other areas of the country. You have 
purchased power from the wholesale market to blend with that 
hydropower and to extend that hydropower, and of course, as 
that wholesale market has changed dramatically in California, 
that has had a profound impact here on the Northwest power 
supply and power price. My understanding is that you have been 
challenged and confronted with some rather substantial 
increases in electric rates recently, and perhaps again this 
fall if my understanding is correct, and all of that leads to 
the question what do we do about it? What kind of a sensible, 
thoughtful, nation-wide energy plan can we construct that is 
not only fair to the American people, but also is one that does 
not have a ``yesterday forever'' flavor to it.
    It is clear to me that an energy plan must require some 
additional use of coal, that is digging, and discovery of oil 
and natural gas, that is drilling. So digging and drilling is 
part of a national energy plan, provided that we do that with 
thoughtful safeguards and thoughtful environmental protection, 
but if our energy plan is simply drilling and digging and 
nothing much more than that, it is truly only ``yesterday 
forever,'' and that will not in my judgment represent the best 
interests of this country.
    If I might just for a moment digress to say that my first 
car was a 1924 Model-T Ford that I bought and restored when I 
was a young boy, and it is interesting to me that you put 
gasoline in the 1924 model car exactly the same way you put it 
in a 2001 model car. Nothing much has changed in 76 years, and 
a week ago I was able to drive a fuel cell car, a car that puts 
hydrogen and air in one end, and out comes electricity and 
water. It is quite remarkable, and my hope is that our energy 
bill will not only be using coal, using clean coal technology, 
finding more oil and natural gas in environmentally sensitive 
ways, but also a plan that produces new opportunities for 
conservation, a plan that provides more renewable and limitless 
energy supplies, and one that promotes more efficiency. All of 
these elements must be part of a thoughtful energy plan, and 
let me again say that we cannot write an energy plan that is a 
national plan without understanding the unique characteristics 
of certain regions, and this region is certainly a region that 
has those unique characteristics, and Senator Cantwell has 
asked that we hold this hearing, and I am very pleased to do 
that for the purpose of making sure that the interests here are 
represented in the writing of a new energy plan.
    We are joined by a professional counsel, the counsel of the 
Senate Energy Committee, Deborah Estes, and Jonathan Black, who 
is with the Energy Committee and helps us arrange hearings.
    We are holding hearings in various parts of the country 
prior to the September completion of the writing of the energy 
bill, and as I said, I am very pleased to be here, and now let 
me call on my colleague, Senator Cantwell, for any comment she 
might have.

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

    Senator Cantwell. Thank you, Chairman Dorgan, and thank you 
for holding this hearing in the State of Washington to talk 
about how the Northwest fits into a larger energy bill and how 
we preserve some of the key interests of the Northwest in 
moving forward in a national energy policy.
    I do have comments that I will submit for the record, so 
that I, we can get onto some of our panelists today, but I do 
want to make a few comments.
    First of all, I want to thank you for spending your recess 
time in the Northwest to learn more about the unique reliance 
of our region on hydro and how we move forward on diversifying 
that and preserving our system at the same time.
    I also want to thank you for your interest in the other 
problems in the State of Washington. This Water and Power 
Subcommittee, I am sure, could be of great assistance in the 
future to some of the challenges we are also seeing on the 
water issue, and I will submit some testimony on that, and from 
my understanding, the Northwest owes a great deal of thanks to 
you for yesterday throwing out the first pitch of the Mariner 
baseball game. That saved the Northwest from three losses in a 
row. Something that is very important for us. So thank you for 
being part of our winning baseball season, and thanks, I guess, 
initially go to your wife, who is an Everett native, for 
constantly bringing you to the Northwest to pay attention to a 
variety of our issues.
    Today we are here to hear from a distinguished panel of 
people about the incredible challenges we face in the Northwest 
in regards to the energy challenges. We have seen in the last 
year some of our consumers facing as much as 50 percent rate 
increases with additional challenges this fall as Bonneville 
Power Administration implements its 46 percent rate increase.
    You will hear from some of the panelists today about how we 
have maneuvered through that very difficult situation, and my 
hat is off to the many people who have worked together on 
conservation and curtailment programs and to the public who has 
weathered this very trying time, but we are here today to also 
talk about how we move forward on a 21st century energy policy 
that will allow smart technologies, conservation and new 
sources of energy to be part of the 21st century energy plan.
    Mr. Chairman, I am starting on the process with Senator 
Murray, who also sends her thanks and well wishes for being in 
our State to focus on this issue. She and I have been working 
on a variety of things related to what may become a Northwest 
title to the energy plan, something that will include 
reauthorization of the REPI program, so that we continue to 
focus on renewable resources, making sure that BPA gets the 
borrowing authority it needs to continue to make sure that 
transmission needs are addressed in the Northwest, and the 
issues of hydro relicensing to make sure that that process is a 
more expeditious process in the future. These are all important 
issues to the Northwest and are critically important to the 
economy.
    I think the main challenge that you will hear today is 
given our 70 percent reliance on hydropower in the State of 
Washington, given the fact that we just have suffered the 
second worst drought on record, how do we move forward with an 
energy plan that allows the great Northwest economy that you 
can see basically on these placards behind you, technology, 
power, agricultural, and transportation to benefit from an 
energy plan that moves us forward.
    So again, I thank you for holding this hearing today, for 
bringing the Water and Power Subcommittee to the State of 
Washington to understand the unique challenges that we will 
face in putting together a Northwest title and an energy 
package that meets the economic needs of this region. So thank 
you.
    [The prepared statement of Senator Cantwell follows:]

        Prepared Statement of Hon. Maria Cantwell, U.S. Senator 
                            From Washington

    Thank you, Mr. Chairman, and welcome to the great state of 
Washington.
    My friend and colleague Senator Murray asked me to extend her 
greetings as well, to express her appreciation for your interest in 
this vital Northwest issue, and to offer her apology for not being able 
to attend today's hearing due to a scheduling conflict.
    Mr. Chairman, I also want to thank you for taking time from your 
own busy recess schedule in your home state of North Dakota to come and 
learn about energy policy in the Northwest--and what the Northwest's 
unique experience can contribute to the national debate.
    As you know, the Senate Energy and Natural Resources Committee has 
already started marking up comprehensive new energy legislation that 
will provide the foundation of the United States' energy policies and 
practices for many years to come.
    How the Northwest fits into the new national paradigm without 
sacrificing its traditional leadership on renewable energy resources, 
conservation and energy efficiency, and what the nation can learn from 
the Northwest experience, are both vital questions that must be 
considered in that debate.
    These are also questions that have sweeping ramifications for the 
economy of my state and my constituents' way of life.
    We've all heard a lot lately about energy problems, and you'll hear 
more about those today. But our region, and our nation, must begin to 
take a close look not only at where we are today and how we got here, 
but also at where we want to be tomorrow and what we must do now to 
achieve that goal.
    At today's hearing, Mr. Chairman, you will hear about more than the 
Northwest's energy problems. You'll also hear about opportunities, and 
about energy solutions being developed here that may have national 
applications.
    In our discussion today, I believe there is a guiding principle we 
should follow. It is that the Northwest's system of low-cost, reliable 
power should foster a thriving, diverse economy; one that benefits all 
of our region's interests--commercial, residential, industrial and 
agricultural.
    This principle is the bedrock of our regional economy and has 
yielded a proud history. As we look to the future, we must recognize 
the changing demands on this system and the changing national landscape 
around it, but there is one thing we must not allow to change: the 
fundamental value that has made this region great.
    The Northwest power system has built our region, and it has served 
as a model for the rest of the country on many fronts. We'll hear about 
several of those innovations today, including such things as smart-grid 
technologies and the next generation of renewable energy resources.
    As the Western energy crisis has made us all too aware, the health 
and efficiency of power markets has a direct impact on jobs and 
paychecks, the environment, and our quality of life. Here in the 
Northwest, we have a unique energy history centered on the Bonneville 
Power Administration (BPA)--an invaluable public resource charged with 
allocating output from the region's federal hydroelectric dams.
    BPA and the low-cost hydropower it provides to domestic consumers, 
agriculture, business and industry has long been the engine driving our 
thriving regional economy. We should view this hydropower as a solid 
foundation on which to build. But as the demand for power has continued 
to grow and other pressures on our energy system have increase, we must 
look toward diversifying our generating resources.
    On a related note, Mr. Chairman, the Subcommittee on Water and 
Power possesses jurisdiction over many other water issues that our 
region faces--with the competing demands of fish, people, agriculture 
and industry. While media coverage of the drought in Washington state 
has focused on the Yakima Basin and other areas in eastern Washington, 
we face upcoming water shortages in many of our western Washington 
communities, such as Issaquah, Kent and Sumner.
    While short-term assistance is needed in our eastside agricultural 
communities, both sides of the state will benefit from longer-term 
planning that can apply creative solutions. These include:

   Building inter-ties between existing systems.
   Innovative reclamation projects like that of the Lakehaven 
        Utility District in Federal Way, which may help maintain stream 
        levels during droughts and recharge the aquifers without using 
        additional surface water.
   Enhanced storage projects such as Tacoma Public Utilities' 
        Howard Hansen Dam, which better serve both people and fish.
   A rededication to all forms of water conservation, including 
        the leadership being shown by many of our irrigation districts 
        throughout central and eastern Washington.

    Indeed, water use issues are one of the most complex and difficult 
challenges facing our region, and they are an important part of our 
deliberations on energy policy here in the Northwest. As you know, Mr. 
Chairman, the comprehensive energy legislation that we will continue to 
work on when Congress reconvenes in September will include language on 
electricity--a topic of paramount importance for this region, given our 
reliance on BPA and the hydro-rich nature of our energy resources.
    It is my hope that parties within the region will use this 
opportunity to join together to retain the benefits of our existing 
system. But as the Western energy crisis has clearly demonstrated, we 
must also keep our eyes focused on the future. We need to devise both 
regional and national solutions that will prevent this type of crisis--
and the resulting economic devastation--from happening again.
    While the national spotlight has been trained on California, the 
Pacific Northwest has been enduring severe economic impacts from this 
crisis: retail rate increases that have created hardships for both 
consumers and businesses, and job losses that already number in the 
tens of thousands. While prices have stabilized throughout the West, 
the worst is not yet over for this region. BPA will put in place a 46 
percent wholesale rate increase this October.
    Ironically, one of the most telling things about the severity of 
this crisis is that BPA's 46 percent rate increase actually came as a 
relief to Northwest ratepayers, who were expecting a 250 percent 
increase. In addition, no one is quite certain how our region will fare 
during the winter peak heating season, when supply is expected to be 
tight up and down the West Coast.
    As a member of the Senate Energy and Natural Resources Committee, 
and this subcommittee, I have worked to draw attention to the unique 
circumstances of the Northwest and how the current crisis is affecting 
Washington state residents, industries and communities.
    I will not dwell on those impacts today, because many in this room 
are all-too-well acquainted with those problems, having felt them 
personally at home and at work. I am pleased that Mr. Hickok of BPA is 
here to testify today, however, because I believe Bonneville has a 
compelling story to tell about precisely how California's flawed 
partial restructuring, combined with the drought, caused significant 
damage to the Northwest energy industry and economy.
    At the same time, the circumstances that rendered BPA and our 
region susceptible to these impacts need further exploration. Under 
law, BPA is charged with supplying our entire region with ``adequate, 
efficient, economical, and reliable'' power.
    Particularly in light of this crisis, I believe it's time for the 
Northwest to take a hard look at whether BPA has the tools it needs to 
fulfill this mandate. If the answer is yes, then how should BPA's 
resource acquisition and allocation policies be reformed to better 
accomplish this goal? If the answer is no, then how can the situation 
be remedied through federal electricity legislation?
    Enhancing the reliability of our national and regional grid seems 
to be yet another part of the equation. The Northwest's transmission 
system is already severely constrained, and without significant 
infrastructure improvements it's not clear whether we will be able to 
get the additional generation on line that is so sorely needed to 
remedy the West's supply-and-demand imbalance. I look forward to 
hearing testimony today on the best way to address the issue of 
reliability--particularly for the Northwest--since it is yet another 
component of the legislation this Committee will consider next month.
    In the 1970s, our nation experienced an energy crisis of similar 
proportions. Yet, as one elementary school student pointed out to me 
this spring, it doesn't seem as though the lessons we should have 
learned back then truly stuck. Thirty years have now passed, and in the 
interim the advent of new technologies and innovations have made the 
promise of a cleaner, more efficient and reliable energy system a real 
possibility.
    Here in the Northwest--with BPA at the helm--we have historically 
been leaders in renewable energy development, conservation and energy 
efficiency. I believe that part of the solution for the Northwest 
includes diversifying our region's energy supply, which will render us 
less susceptible to drought. It's clear that we need a diversified 
energy portfolio that includes more traditional forms of supply. 
Increasing natural gas pipeline capacity in the Northwest will be key 
to serving the many plants that are planned for construction in the 
region--so long as the proper pipeline safety regulations are in place.
    But the value of renewables to complement our existing hydro system 
cannot be overestimated. Just last week I visited the Stateline Wind 
Project outside Walla Walla, Washington. When it is complete, it will 
be the West's largest wind farm, generating more than 260 megawatts, 
enough energy to power more than 60,000 homes. The project is scheduled 
to go online by the end of December to take advantage of the existing 
wind energy tax credit, which expires at the end of the year.
    Wind energy grows increasingly cost-competitive, and there are 
parts of Washington and other Western states with tremendous wind 
resources. These projects also provide an additional source of income 
to farmers, who lease land to developers while retaining the right to 
grow crops or graze cattle alongside the wind generators--an important 
benefit to the hard-pressed agricultural industry.
    To continue supporting projects like Stateline while a market for 
wind energy is being created, I believe Congress must extend the 
existing tax credit. Further, to encourage public utilities--which 
can't take advantage of tax credits--to think more creatively about 
diversifying their energy supply, I am sponsoring a bill that will 
reauthorize the Renewable Energy Production Incentive, or REPI. The 
REPI program provides public utilities, rural co-ops and tribal 
governments, which account for about 25 percent of the nation's 
electric utility industry, with a direct, 1.5 cents/KWh payment for the 
generation of renewable power.
    I also believe we must continue to vigorously pursue research and 
development initiatives that will make our existing energy 
infrastructure more efficient, more receptive to the addition of 
distributed power resources, and more reliable. Northwest businesses 
are global leaders in software and telecommunications, and I believe 
there is significant promise in bringing some of these technologies to 
bear on our power transmission grid.
    During mark-up of federal energy research and development 
legislation earlier this month, I sponsored a bipartisan amendment with 
Senator Gordon Smith of Oregon, directing the Department of Energy, in 
cooperation with industry, to explore these new applications.
    Mr. Chairman, it is often said that crisis breeds ingenuity, and it 
is clear to everyone here today that Northwest consumers and businesses 
have been hard-hit by skyrocketing energy prices. It is my hope that 
this hearing will begin a serious discussion that will allow the 
Northwest to seize the opportunity presented by federal legislation to 
preserve the benefits of our existing system, while also cementing our 
role as a region with innovative solutions to help meet our nation's 
energy needs.
    Again, I'd like to thank you, Mr. Chairman, for holding this 
hearing, the Energy Committee staff for their work on this hearing, and 
the witnesses for appearing here today. 

    Senator Dorgan. Senator Cantwell, thank you very much. It 
is going to be very helpful to have Senator Cantwell on the 
Energy Committee as we write this legislation, and we are 
delighted she is there, and are, of course, working as well 
with Senator Murray on these issues.
    We have a first panel today composed of Mr. Steve Hickok, 
Chief Operating Officer, Bonneville Power Administration, 
Portland, Oregon, Ms. Sharon Nelson, member of the board of 
trustees, North American Electric Reliability Council, 
Princeton, New Jersey, Mr. Harvard Spigal, partner, Preston 
Gates and Ellis in Portland, Oregon, and we will ask that you 
summarize. Traditionally, we try to have testimony last no 
longer than 5 minutes, and we have a light. There is not a trap 
door through which you will fall if you go over, but it allows 
us more time for questions if you are able to submit your 
entire statement for the record.
    Mr. Hickok, this has been a remarkable and interesting time 
for Bonneville Power. I am sure you would agree. You have 
testified before the Energy Committee on a number of occasions. 
We appreciate you being here today, and why don't you proceed?

    STATEMENT OF STEVEN G. HICKOK, CHIEF OPERATING OFFICER, 
         BONNEVILLE POWER ADMINISTRATION, PORTLAND, OR

    Mr. Hickok. Thank you, Mr. Chairman, Senator Cantwell. I am 
the Chief Operating Officer of Bonneville.
    Before coming to work for Bonneville in 1981, I was the 
staff director for the Republican side for the U.S. Senate 
Subcommittee on Energy and Natural Resources. Hardly a man or 
woman is now alive who remembers those famous days and years, 
but I frequently look back at that period of time, in the late 
1970's. I look at some of the aspects of PURPA, the Powerplant 
and Industrial Fuel Use Act, the entire U.S. Synthetic Fuels 
Corporation effort, and am reminded of the extremes we can go 
to sometimes when we get infrastructure wrong. Infrastructure 
is that basic fabric that underlies American commerce and 
really supports our society. When something is wrong in that 
area, the response gets pretty emotional. The Acting 
Administrator, Steve Wright, and I have frequently been asked 
to come to the annual meetings of business associations this 
year on the west coast. I think every one of those associations 
wants a utility executive to come to the meeting and explain 
just what the heck is going on with electricity. And, those 
invitations come across with a certain amount of emotion.
    I will submit for the record a standard response that I 
usually make in answering questions about what happened and how 
we got into this as well as a copy of my written statement for 
the record. I will also summarize one of the things we did back 
in the late 70's when Congress passed the Pacific Northwest 
Electric Power Planning and Conservation Act. I submit that is 
one of the things we got mostly right. It is the act that 
created for Bonneville a utility service obligation in the 
Pacific Northwest, something we did not have before then. Prior 
to the passage of that Act, Bonneville disposed of Federal 
hydro, such as it was available, almost as if it were a surplus 
Federal commodity. But the 1980 Act made Bonneville the 
backstop for supply in the Northwest and required us to serve 
the retailing utilities. We're a wholesaler. It required us to 
supply the power requested by retail utilities for their firm 
power loads and it defined conservation as a power resource.
    Now, there were a number of utilities at the time in the 
country that were doing conservation, but largely they were 
doing it as a low-income assistance kind of a program. But, the 
Act was an unabashed, purely economic effort to develop 
conservation as a power plant. If it was less expensive to free 
up a kilowatt hour with an existing user than to invest in the 
new power plant, we did that. I was hired on at Bonneville in 
1981 as the first vice-president in charge of conservation and 
renewables development for Bonneville, and we literally wrote 
the book on how to develop conservation as a power plant. We 
had to define it; we had to understand it in terms of what it 
was doing in our system, its energy and capacity factor, 
reserve requirements, and so forth. Because if you are going to 
invest in conservation, you have got to be sure it is there 
from a reliability standpoint when you need it.
    Now, fast forward to 1992. Congress passed the Energy 
Policy Act in that year and set the electric utility industry 
on a course to the restructuring that we are now in the middle 
of. Congress basically said that we could separate electricity 
into a juice business and a wires business, with the wires 
being the natural monopoly. It said that if the wires business 
is operated as an open-access common carrier, we can develop a 
competitive wholesale market environment for sellers and buyers 
of electricity. In fact, in the West, which was surplus in 
capacity in the early and mid-1990's, this created a commodity 
environment. Bonneville was able to access markets in the 
western interconnection we had never had access to before, and 
our competitors were able to sell into the Northwest, which had 
been our backyard. In a surplus commodity environment, prices 
went into the tank. The next generation of power developers 
were supposed to be the merchants--not necessarily the 
integrated utilities who had the load serving obligation--but 
they didn't build the next generation of power plants. There 
has been hardly a dime's worth of power developed in the whole 
West coast since 1992.
    We got way behind the eight ball in terms of supply, and 
one of the things that Bonneville noticed about the competition 
was that it did not have the cost of conservation in its 
megawatts. It did not have the ``negawatts'' in the 
``megawatts,'' and Bonneville, which did, was viewed as 
uncompetitive. In fact, the Northwest Governors in their 
Comprehensive Review in 1996 decided that Bonneville should not 
acquire power resources anymore to serve load, that it should 
basically stick to what it had, and that others would be out 
there building power plants. Our customers rushed off to that 
admittedly wonderful, short-term market. But, what a difference 
a few short years makes. They all have come storming back to us 
for service. When we offered contracts for 2002, those 
customers who had gone off into the short-term market, 
basically taken service off of Bonneville, came back demanding 
the full extent of Bonneville's legal obligation to serve them. 
We found ourselves with 11,000 megawatts of business in 2002, 
and only about 8,000 megawatts of supply. When we turned to 
develop that supply, buying from the market the supplies that 
are necessary to make up the 3,000 megawatt gap, California 
imploded, and about that same time the drought hit the west 
coast.
    In short, there are two things going on. First, there is 
the immediate drought situation. We got through this winter by 
basically buying out large industrial users of electricity, 
because it was cheaper to do that than buy power on the spot 
market. Second, as we turned to the prospect of developing 
supplies for the next 5 years, we found that in the first 
couple of years there just is not enough new supply coming on 
line to do much about the picture, at least from a reasonable 
price standpoint. California locked up a lot of power in long-
term contracts that it signed just within the last year. So we 
again turned to the demand side of the equation, and working 
with our direct-service industries and with our utility 
customers, we backed about 2,000 megawatts of the demand off of 
the Bonneville system for 2002. Basically, that is how we 
handled the short-term supply crisis. But if I were to leave 
you with one strong message this morning that message would be 
that there is a long-term problem. We actually did not get into 
this shortage situation overnight, even though it almost seems 
like it sprang up on us overnight.
    One of the things that was masking the problem West-wide 
was the fact that the Northwest has had good-to-fabulous water 
for the last 6 years. When we have good or better water, it 
affects the spot market price throughout the entire Western 
interconnection. The drought just ripped the mask off the 
supply problem. As we walked into this winter, we and everybody 
else in the Northwest, which is hydro-dominated, were buying 
heavily in that market, and we realized just how short we were.
    There are three issues that are in front of us: first is 
infrastructure, meaning both the demand-side investment, 
notably conservation measures that can contribute to this, as 
well as the supply side. Also needed are the transmission 
lines, the gas lines and the power plants.
    Second is the adequacy of the grid, whether you are talking 
about reliability; wholesale market efficiency; access for 
customers; transparency of markets; congestion management; the 
operating efficiency of the grid; the expansion, who is going 
to do it and what is the least cost expansion; and getting the 
right price signals for the grid. These problems are with us in 
spades right now. RTO's, regional transmission organizations, 
are the answer, but not just any RTO. One of the things that 
California showed us is how not to form an RTO, and the 
California ISO is not the model we would suggest. But a 
correctly formed regional transmission organization can address 
each of the seven or eight problems that I just ticked off, and 
we believe it is absolutely essential for the security, 
stability, and efficiency of the grid.
    The third issue is retail engagement. Wholesale and retail 
markets are disconnected. We deregulated our way halfway into 
the middle. We have got a competitive market environment at 
wholesale. We do not at retail. There just is not any demand 
response to ten jillion dollar per megawatt-hour power at 
wholesale. I'm not saying that retail needs to experience real 
time pricing. If somebody wants to buy power flat 7 days a 
week, 52 weeks a year, they ought to be able to buy that 
product. But they also ought to be able to engage in a way that 
would make this grid and its power supply much more efficient. 
Because we do not experience costs that way at wholesale, flat, 
7 days a week, 52 weeks a year, figuring out how to get out of 
this hybrid, the deregulated wholesale and the regulated, 
rolled-in retail, is a huge issue. If we stay in the middle, we 
will surely experience more of the kind of difficulty that we 
have got ourselves into since 1992. Eight years into 
restructuring, it is still not clear how we are going to get on 
through to retail. We either have to go back the way we came in 
or we have to get out on the other side. We cannot stay in the 
middle.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Hickok follows:]

   Prepared Statement of Steven G. Hickok, Chief Operating Officer, 
             Bonneville Power Administration, Portland, OR

    Mr. Chairman, distinguished members of the Subcommittee, my name is 
Steve Hickok. I am the Chief Operating Officer for the Bonneville Power 
Administration (Bonneville). We appreciate this opportunity to appear 
today and we thank the Subcommittee for its attention to the unique 
circumstances of the Northwest within the context of the national 
energy policy debate.
    Mr. Chairman, arguably Bonneville has just come through the 
roughest year in its history. Wholesale market power prices in the 
Northwest hit levels ten times higher than anything anyone had ever 
seen in the western grid. The unheard of happened in California with 
rolling blackouts under relatively light loads. Far from being able to 
help the Northwest during this winter's drought, California came 
looking for additional power from us to help it cope with its frequent 
power emergencies.
    There were some scary days this past winter when the Northwest 
teetered on the brink of power shortages. In one 4-day period last 
January, we spent $50 million on power purchases. These costs gave us a 
pretty strong signal that supply was drying up fast. Bonneville was 
forced to declare power system emergencies on three occasions this 
winter and extended emergency operations through the summer. High 
market power prices and significant increases in loads led Bonneville 
to project a potential wholesale rate increase for this fall of 250 
percent or more.
    Today, thanks to great regional cooperation, when our new rates go 
into effect in October, our customers will see an average rate increase 
of about 46 percent. Impacts at the retail level should be half of that 
or less. The region avoided economic disaster. We helped preserve 
system reliability, and Bonneville stayed financially solvent this 
year.
    My purpose today is to address the basics of where we have been, 
what we have accomplished, and what the Pacific Northwest needs to do 
in the future to make sure that an energy crisis like we have 
experienced does not happen again. I also want to highlight for members 
of the Subcommittee that Bonneville has a unique historic role in the 
Northwest. As the Senate considers energy legislation this session, we 
would ask that Bonneville's role be carefully considered, particularly 
as it affects the future of the Northwest economy and the Columbia 
River.

                      BONNEVILLE'S PUBLIC MISSION

    Bonneville is a not-for-profit Federal electric utility, under the 
U.S. Department of Energy, that markets wholesale electrical power and 
transmission services in the Pacific Northwest. The power comes from 31 
federal hydroelectric projects located in the Columbia River Basin that 
are owned and operated by the U.S. Army Corps of Engineers and the U.S. 
Bureau of Reclamation. Bonneville also markets power from the Columbia 
Generating Station, a nuclear plant owned and operated by Energy 
Northwest. Close to half of the Northwest's electricity comes from 
Bonneville. Bonneville's transmission system accounts for about 75 
percent of the region's high-voltage capacity. Bonneville also owns and 
operates portions of the large interties that ship and receive power 
from California, the Southwest, eastern Montana, and Canada. 
Bonneville's customers include publicly owned and investor-owned 
utilities, as well as some large industries. Bonneville also sells or 
exchanges power with utilities in Canada and the western United States.
    Bonneville is a self-funding agency, which pays for its costs 
through power and transmission sales. Both power and transmission are 
sold at cost, including the cost of mitigating environmental impacts of 
the Federal hydro system. Bonneville repays any borrowing from the U.S. 
Treasury with interest at market rates.
    Revenues Bonneville earns help it fulfill public responsibilities 
that include low-cost reliable power and investments in energy 
conservation and renewable resources. Bonneville also funds the 
region's efforts to protect and rebuild fish and wildlife populations 
in the Columbia River Basin.

                 BONNEVILLE'S NEW POWER SALES CONTRACTS

    Bonneville's low-cost power is immensely attractive in today's 
market and demand for it exceeds our resources. By law, we have an 
obligation to serve every retailing utility in the Northwest, public 
and private, to the full extent of their net requirements, which is 
their retail load net of their own generating resources. Public utility 
districts, municipalities, cooperatives, and the residential and small 
farm loads of the investor-owned utilities have a preference status and 
qualify for our lowest firm power rate. We also have had a long 
tradition of serving directly some electricity-intensive industries, 
primarily aluminum smelters, although they are not preference 
customers.
    With our current 20-year contracts with these customers expire this 
year, we negotiated new contracts in a 3-year regionwide process we 
called subscription. When this process culminated in October 2000, we 
had about 11,000 megawatts of load to begin serving on October 1, 2001, 
with only about 8,000 megawatts of resources in our system or under 
contract to us. As late as May 2000, that did not look like too bad a 
challenge. We could augment these resources by going to the market and 
melding that slightly higher priced power with our low-cost federal 
power. It appeared we could do that and hold the new rates quite close 
to the old rates.
    But soon after, as we were about 1,000 megawatts into the 
augmentation effort, the wholesale electricity market took off for the 
moon.

                      THE WEST COAST ENERGY CRISIS

    A number of events conspired to set this off, the most notable 
being California's flawed approach to restructuring the State's power 
system. But the fundamental problem was the basic issue of supply and 
demand. Demand for electricity on the West Coast had increased over the 
last ten years with population growth and strong economic expansion. 
Throughout this period, there had been no significant building of new 
resources. And, for the last six years, this growing problem had been 
masked by good to extremely good water supplies in the Northwest 
hydropower system. This year's drought ripped that mask off.
    By last December, wholesale electricity prices were sky high in the 
West. And what a winter we faced the California disaster on top of the 
second worst water year in the 77 years we have been keeping record. 
The Northwest teetered on the brink of blackouts.

        BONNEVILLE'S SHORT-TERM MEASURES TO DEAL WITH THE CRISIS

    Overall, during the first nine months of fiscal year 2001, 
Bonneville spent over $1.5 billion on purchased power, but even that 
was not nearly enough. It was only through such extraordinary measures 
as paying industrial plants to shutdown, buying power and water back 
from farmers, foregoing spill and flow augmentation for fish, and doing 
two-for-one power exchanges with California that netted water and 
energy for the Northwest, that we were able to meet reliability 
standards and preserve financial solvency.
    I particularly want to note our appreciation to the U.S. Army Corps 
of Engineers, the Bureau of Reclamation, the National Marine Fisheries 
Service, and the Environmental Protection Agency, all of whom worked 
diligently to help to manage the hydro system through this challenging 
period. And Energy Northwest, which manages the region's nuclear plant, 
took extraordinary actions to keep power flowing this past winter and 
spring.

                   BONNEVILLE'S LOAD REDUCTION EFFORT

    We made it through the winter. But, while we had purchased 
considerable power to meet our loads in the upcoming contract period, 
we still needed to close a 2,000-megawatt gap. When we calculated the 
cost of continuing to arrange those purchases in this overheated 
market, it soon became apparent that it would cause a rate increase of 
250 percent or more.
    We knew this would be disastrous for the Northwest economy. We 
anticipated that, as new supplies were developed, market prices would 
eventually settle out. The big challenge was getting through the first 
18 months to 2 years.
    That is when we decided to turn to the demand side of the equation. 
We asked our aluminum customers to delay the restart of their smelters 
for another one to two years. We offered to cover their costs of 
staying down, plus pay and benefits to their workers during the 
downtime. At the same time, we also called on our utility customers, 
both public and investor-owned, to reduce their demand for Bonneville 
power by ten percent.
    I do not know that anyone would have bet on us for a good outcome 
at the time we started down that path. But, thanks to a tremendously 
positive response from our customers and the support of the Governors 
and the congressional delegation, we got the rate increase down to 46 
percent. We invested $250 million to reduce demand and saved ratepayers 
$4 billion. We estimate that 25,000 jobs were saved in the Northwest 
economy. Aluminum smelters are down for some time, but they are not out 
of business permanently and their workers will be paid.
    Our load reductions also improved Northwest reliability, since the 
bulk of the reduction came about through conservation or curtailment. 
The Northwest Power Planning Council estimates that the load reduction 
exercise cut the probability of further regional shortfalls this coming 
winter from approximately 25 percent to 12 percent. And market prices 
started to come down, partly and significantly because Bonneville 
stayed out of the market.
    Preserving our financial solvency, of course, is critically 
important to our ability to preserve funding for the region's fish and 
wildlife program, including efforts to save endangered fish. Bonneville 
revenues are the principal source of funds for this effort.

                        MUCH REMAINS TO BE DONE

    But if I leave you with any message today, it is that we cannot be 
lulled into a false sense of security by the current lower market 
prices, or we will be doomed to repeat our recent history.
    Bonneville's entire effort to bring the rate increase to a 
manageable level and to keep the lights on during this drought year was 
simply short-term crisis management. We cannot forget that we got 
through this period only by draconian efforts and some considerable 
hurt. We are still curtailing loads. Aluminum smelters and other 
manufacturing operations are still shut down. We spilled little water 
at the dams for fish migration because of concerns over electricity 
reliability and financial solvency. We have incurred environmental 
costs because of the operation of emergency diesel generation.
    What we need now is to forge the same kind of regional cooperation 
we just saw on the demand side and focus it on building an energy 
infrastructure for the Northwest that will ensure reliable electricity 
supply, without environmental compromise, without industries shut down, 
without sacrificing fish and wildlife protection, and without 
sacrificing our low-cost energy base.
    Let me outline the areas I believe the Pacific Northwest needs to 
focus on as its maps out its energy future.
    First, obviously the region needs to ensure there is adequate new 
generation to meet the needs of a growing population and a growing 
economy. The Pacific Northwest needs low-cost kilowatts added to its 
system from a variety of sources, including gas-fired generation, 
renewable power and investments in the existing hydropower system. 
Bonneville is working with private sector entities to help integrate 
new generation resources into the transmission system while also 
continuing to assure transmission and power reliability in the Pacific 
Northwest. And Bonneville now has 33 megawatts of wind power operating, 
another 340 megawatts under development, and is reviewing proposals for 
another 830 megawatts.
    Second, we should not turn to generation alone. We must refocus on 
using energy efficiently. We need to create sustainable energy 
efficiency and conservation programs that are maintained through high 
and low market periods. True energy efficiency means maintaining the 
same amenity levels but using less energy to do so.
    Third, the Northwest's high-voltage transmission system is 
stretched to the limit. Other than one interregional transmission line, 
there has been no major new transmission built in the Northwest since 
1987. Yet, with dozens of companies now lining up to develop power for 
the future, we must be able to deliver that power where it is needed. 
The critical path for developing new generation will be transmission 
construction because it is more difficult to site and build 
transmission than generation.
    Fourth, while hydropower will remain the basis of our region's 
electricity system, it is not likely to be a major source of new 
supplies. While additional wind power and other renewables should make 
a significant contribution, much of the next increment of electricity 
generation likely will come from combustion turbines fueled by natural 
gas. They have advantages in that they can be sited and built 
relatively quickly, and they have relatively low air emissions. But we 
must ensure that we have the gas pipeline and storage capacity to 
provide the fuel for these resources.

         CONTINUING TO PROVIDE PUBLIC BENEFITS TO THE NORTHWEST

    There are three other critical policy issues that we have to 
resolve if we are to have a sound energy system. First among these 
issues is the future of our fish and wildlife. With the issuance of the 
National Marine Fisheries Service 2000 Biological Opinion, it is time 
to move forward aggressively to implement this recovery effort, in 
coordination with the Northwest Power Planning Council's fish and 
wildlife program.
    Another critical policy issue is how future service to electricity 
consumers will be assured in a world of market forces. The role 
Bonneville plays in this region, its future and its management, will be 
an integral part of this discussion.
    The 1980 vision for Bonneville was that Bonneville would be a 
wholesale resource provider serving the needs of the region's retail 
utilities and direct-service industries. Then, in 1996, the region 
conducted a comprehensive review of the Northwest energy system. The 
long-term vision for Bonneville that came out of that review was for 
Bonneville to be a niche marketer and not an acquirer of resources to 
meet load growth. It was envisioned that as a result of deregulation, 
merchant suppliers would provide the resources of the future. However, 
the utilities that left Bonneville and ventured into the market, when 
it appeared market prices would stay low, came storming back to 
Bonneville during our subscription contract offerings, demanding 
service when it appeared market prices would go high. What a difference 
a few short years can make.
    Today, new resources are being developed independently in this 
region, but customers are still counting on Bonneville to serve their 
load for the next five years and beyond. However, because of the risks 
in today's erratic market, it would not be prudent and we are not 
willing to buy resources for periods that are any longer than our 
supply obligations to these customers.
    And finally, a key policy issue will be the ultimate shape and 
scope of the regional transmission system. The Administration and the 
Federal Energy Regulatory Commission are strongly supporting the 
formation of independent regional transmission organizations, known as 
RTOs, throughout the nation. Bonneville and the other filing utility 
partners are supportive of the effort and have been working on ``RTO 
West'' that could comprise most of six states and two Canadian 
provinces. RTOs, if properly formed, will facilitate deregulated 
wholesale energy markets and improve overall system reliability by 
having a single, independent entity manage the region's transmission 
transactions, as opposed to a fragmented approach.

                               CONCLUSION

    Mr. Chairman, members of the Subcommittee, as I stated at the 
outset, this has been an incredibly challenging year for Bonneville. We 
have avoided falling on the stumbling blocks this dangerous market has 
presented us. But our future and the future of our role in the 
Northwest still hangs in the balance. There is a tremendous challenge 
ahead of us to keep this system in shape so we do not have to go 
through this kind of crisis again. I think we know what the challenges 
are, and we know what we need to do.
    It is imperative that we deal with all of these issues if we are to 
preserve the benefits that Bonneville and the Columbia River provide to 
the economy and the environment of the Northwest.
    Thank you for your attention. I am available now to answer any 
questions you have about Bonneville and its role in the Northwest 
energy issues.

    Senator Dorgan. Mr. Hickok, thank you very much. We will 
ask questions after we have heard all three witnesses.
    Mr. Harvard Spigal is someone who has had a wealth of 
experience, I understand, with Bonneville and other experience 
as well and is going to give us his perspective of the history 
of this, and Mr. Spigal is a partner with Preston Gates and 
Ellis.
    Mr. Spigal, we appreciate you being here. Why don't you 
proceed?

  STATEMENT OF HARVARD P. SPIGAL, PARTNER, PRESTON GATES AND 
                      ELLIS, PORTLAND, OR

    Mr. Spigal. I am not here on behalf of any client. The firm 
represents many participants in the utility industry, but I am 
appearing here presenting only my own views and not advocating 
any positions.
    I have been asked to testify about the history of the 
Pacific Northwest power system based on my 26 years of 
experience at Bonneville, 14 years as general counsel, 2 years 
as senior vice-president of Bonneville's transmission business 
line. Like Steve, I am probably one of the few who is still 
around, who remembers, active in the industry, who remembers 
working on the Northwest Power Act, and I know there are new 
perspectives about how the region should meet its power supply 
requirements, and there are new perspectives about Bonneville's 
possible role in the region, but I am here to talk about that 
historical role, and that historical role included a public 
service responsibility. The public service responsibility was 
to attempt to serve all load, but there was a preface 
requirement that Bonneville attempted to serve all load of 
utilities and industries including commercial, industrial, and 
agricultural load.
    The Bonneville Project Act established a mandate for the 
sale of Federal power generated at Federal hydroelectric 
projects, and the mandate was to sell power and give first 
priority to publicly owned utilities, PUDs, municipalities, 
cooperatively-owned utilities, and then to sell power to 
investor-owned utilities and direct service industrial 
customers, principally aluminum companies. That economic 
development role was key in Bonneville's history. Bonneville 
was an engine for regional economic growth, and I tried to 
think about how to illustrate that, and rather than talk, I 
found a poster which Bonneville, if you want to look at that, I 
will offer it, which Bonneville did in 1943, and that reflected 
Bonneville thinking of itself at that time, and economic 
development was a key part of that role. That worked until the 
early 1970's when basically the additional developments of the 
Federal, at Federal hydroelectric projects were insufficient to 
meet increasing load growth, could not keep pace with demand, 
and Bonneville cut off the last and best drawing utility 
service in 1973.
    By the late 1970's, Bonneville had issued a notice of 
intent to allocate power among its preference customer. DSI, 
Direct Service Industrial customers were basically told that 
they would not get new contracts when their existing contracts 
terminated. That kicked off an intense period of regional 
discussion about how to meet that problem and how to avoid an 
allocation, and the result was the Northwest Power Act, and the 
Northwest Power Act had as its essential purpose to avoid a 
dispute over the allocation of Bonneville's limited power 
supply, and it had as another purpose a desire to maintain a 
strong regional economy using the economic benefits of the 
Federal Columbia River power system, and the way that the 
regional power act attempted to achieve that objective was to 
give Bonneville the authority to expand its power supply, to 
acquire new general resources, both generating resources, 
conservation, and renewable resources. To the extent that an 
individual utility whether publicly owned or investor-owned 
utility looked to Bonneville to meets its power supply 
obligation, Bonneville had the authority to expand the Federal 
power supply to meet that obligation.
    During debate on the regional act, there was never in my 
recollection, and there is never any indication in the 
legislative history of any serious consideration during that 
period of dropping load to put the region in load resource 
balance. The objective was to expand the power supply even 
though at the time new generating resources were about 10 times 
the price of BPA's power supply. Now, of course, new generating 
resources are probably closer to two, maybe three times the 
cost of BPA's power supply.
    The second way the regional act was supposed to end the 
dispute over the allocation of Federal power was by spreading 
the benefits of Federal power to investor-owned utility, 
residential consumers, but we find ourselves, as Steve 
indicated, at a point in time where the power supply did not 
expand, and we are not able to meet all loads, and I think that 
it is an important issue about whether or not the choice to 
serve the regional economy as well as meet Bonneville's other 
statutory mandates is going to be satisfied by expanding the 
power supply or dropping loads or being forced into an 
allocation among a class of BPA customers or a subclass. Thank 
you.
    [The prepared statement of Mr. Spigal follows:]

  Prepared Statement of Harvard P. Spigal, Partner, Preston Gates and 
                          Ellis, Portland, OR

                              INTRODUCTION

    My name is Harvard P. Spigal. I am a partner with Preston Gates & 
Ellis LLP. Although I and other members of my firm represent 
participants in the electric utility industry, I am not appearing on 
behalf of any client, or advocating any position on behalf of a client. 
The views I express are my own.
    I have been asked to testify about the history of the Pacific 
Northwest power system based on my twenty-six years of experience as an 
employee of the Bonneville Power Administration (``BPA''), of which, 
fourteen years were spent as General Counsel and two years as Senior 
Vice President of BPA's Transmission Business Line. Like many others, I 
participated in negotiations that led to the Pacific Northwest Electric 
Power Planning and Conservation Act (the ``Northwest Power Act'') and 
worked on implementation of that act.

                            HISTORICAL ROLE

    Before enactment of the Northwest Power Act, BPA's role was to 
market power produced at Corps of Engineers and Bureau of Reclamation 
dams on the Columbia River and its tributaries. As new dams were 
constructed into the 1950's, additional amounts of power were made 
available to meet the region's increasing demand for energy as the 
economy and population expanded. One focus of BPA's marketing efforts 
was to bring new industry to the region. Power surplus to the needs of 
preference customers (publicly owned utilities), was sold to investor 
owned utilities and to BPA's direct service industry customers 
(``DSIs''). In the early 1970's, BPA participated in a program to 
purchase the energy generating capability of nuclear power plants in 
order to enable the agency to continually meet the load growth of its 
preference customers. As loads grew, however, BPA stopped selling power 
to investor owned utilities. By the late 1970's, BPA had announced the 
need to allocate its limited power supply among preference customers.

                   PURPOSE OF THE NORTHWEST POWER ACT

    The Pacific Northwest is unlike other regions in three ways. First, 
the region relies on hydroelectric power to meet its needs. Even today, 
low cost hydroelectric power serves almost half of the load in the 
region. Second, the region has a large number of publicly owned 
utilities that are a powerful force in the Pacific Northwest. Public 
power serves about a third of the region's load, and is given 
preference and priority to BPA power. Third, BPA is the dominant 
wholesale power supplier and transmission provider. Bonneville markets 
approximately 40 percent of the power consumed in the region, and owns 
and operates approximately 75 percent of the transmission system. These 
three elements--low cost hydroelectric power, the importance of public 
power, and Bonneville's role in the market and as a transmission 
provider--were even greater factors twenty-five years ago when Pacific 
Northwest utilities, BPA's direct service industrial customers, and BPA 
started to work with the Pacific Northwest's Congressional delegation 
to produce the Northwest Power Act.
    Senator Jackson succinctly stated the reason why the Northwest 
Power Act was needed. ``Reduced to one sentence the heart of the 
regional power bill is the authority for BPA to acquire from non-
Federal entities additional electric power resources, including 
conservation, to meet the needs of Northwest consumers.'' \1\ Senator 
Jackson asked why this authority was needed ``instead of relying solely 
on existing systems, public and private, to meet growth needs.'' \2\ 
Senator Jackson answered his own question by stating that the 
alternative was ``a battle over the allocation over the large but 
limited pool of Federal power.'' \3\ The only solution, Senator Jackson 
explained, was to expand the resource pool and legislatively allocate 
BPA's power. ``First and foremost, the region is extraordinarily 
dependent on electric energy. In the absence of legislation resolving 
the allocation issue, the whole fabric of the utility industry and the 
Northwest economy will be in turmoil for a decade.'' \4\
---------------------------------------------------------------------------
    \1\ 26 Cong. Rec., S 14690 (daily ed. Nov. 19, 1980) (statement of 
Sen. Jackson).
    \2\ Id.
    \3\ Id.
    \4\ Id. at S 14691.
---------------------------------------------------------------------------
    Congressman Dicks, during the House debate on the bill, also 
explained its purpose.

          I cannot emphasize enough how vitally important this 
        legislation is to the economy and welfare of the residents of 
        the Pacific Northwest region. . . . . With this legislation, 
        the potentially explosive reallocation problems can be 
        resolved. This bill embodies a regionally negotiated and 
        supported ``peace treaty'' by all of the affected parties. In 
        ensures a smooth reallocation of power by establishing a 
        regional planning process permitting the BPA to expand its 
        resource base, and thereby sign the new utility and industry 
        contracts necessary for the coordinated planning and efficient 
        use of regional energy resources.

          126 Cong. Rec., H 9859(daily ed. Sept. 29,1980) (statement of 
        Rep. Dicks).

    The Northwest Power Act begins with a ``Congressional declaration'' 
\5\ of purposes, including to ``assure the Pacific Northwest with an 
adequate, efficient, economical and reliable power supply.'' \6\ BPA 
was required to meet the firm power loads of each publicly owned and 
investor owned utility exceeding each utility's own resources,\7\ and 
to offer DSIs new power sales contacts.\8\ BPA was given the authority 
to acquire sufficient resources to meet these loads, however, a utility 
could choose not to put its load on BPA and develop its own resources 
to meet its load, or to purchase power from others.
---------------------------------------------------------------------------
    \5\ Pacific Northwest Electric Power Planning and Conservation Act, 
Sec. 1, 16 U.S.C. Sec. 839.
    \6\ 16 U.S.C. Sec. 839(2).
    \7\ 16 U.S.C. Sec. 839c(b)(1).
    \8\ 16 U.S.C. Sec. 839c(d)(1)(D).
---------------------------------------------------------------------------
                        REGIONAL POWER PLANNING

    In 1980, all utilities shared their twenty-year forecasts of loads 
and resources. Utilities, BPA, and state officials were able to 
determine if the region was taking steps to assure an adequate power 
supply. Of great significance was the expectation of each utility to at 
least be in load-resource balance. It was unacceptable for a utility to 
be in load resource deficit. Today, however, individual utility load 
and resource information is not available, and one cannot know whether 
individual utilities have made arrangements to meet their firm loads, 
or are relying on the spot or short-term market, which might or might 
not have adequate power available to meet demands.
    In 1980, the Pacific Northwest was believed to have an inadequate 
power supply. Nevertheless, it was expected that all loads would be 
served because Pacific Northwest utilities, like utilities elsewhere, 
would meet their power supply obligations. The first obligation of a 
utility was to plan resources sufficient to serve its entire load. Even 
high costs for new resources did not justify dropping load to keep 
rates low for other consumers. The BPA power rate for preference 
customers was $8 MWh, and the rate for power from thermal power plants 
was estimated to be ten times as much.\9\ Today, power from new power 
plants probably costs two to three times the cost of BPA power.
---------------------------------------------------------------------------
    \9\ H.R. Rep. No. 96-976(I)(1980).
---------------------------------------------------------------------------
    Congress and the Pacific Northwest could have let DSI contracts 
terminate in the mid-1980's to allow the power used by DSI's to serve 
other loads. That alternative was rejected, in part because many DSIs 
could take service from publicly owned utilities that purchased power 
from BPA. The Northwest Power Act directed BPA to offer DSIs new, 
twenty-year power sales contracts, which BPA was able to sign in the 
face of a forecasted power shortage because the Northwest Power Act 
``deemed'' BPA to have sufficient power to enter into new contracts 
with the DSIs.

                             NEW RESOURCES

    When the Northwest Power Act was enacted, publicly owned utilities 
were expected to rely on BPA to acquire power to meet their load 
growth. It was believed that high costs and risks of new generation 
could be absorbed only by spreading the costs and risks to all BPA 
ratepayers. BPA was empowered to meet these loads by acquiring 
resources. Resources were the electric power capability or output from 
generation or ``the actual or planned load reduction'' from direct 
application of renewable resources by a consumer and conservation.\10\ 
Because conservation was defined as a reduction in consumption as a 
result of increases in the efficiency of energy use, production or 
distribution, load reductions achieved by high prices or dropping loads 
was not conservation.
---------------------------------------------------------------------------
    \10\ 16 U.S.C. Sec. 839d.
---------------------------------------------------------------------------
    BPA was required to secure the approval of the Regional Power 
Council before acquiring major resources.\11\ Major resources were 
defined as a purchase of more than 50 average megawatts for more than 
five years.\12\ BPA resource purchases were required to be consistent 
with the Northwest Power Planning Council''s power plan, which meant 
they had to be cost effective, meaning a cost ``no greater than that of 
the least-cost similarly reliable and available alternative measure.'' 
\13\ The intended consequence was that resources compete to determine 
to most cost effective resource.
---------------------------------------------------------------------------
    \11\ 16 U.S.C. Sec. 839d(c).
    \12\ 16 U.S.C. 839a(19).
    \13\ 16 U.S.C. 839a(4).
---------------------------------------------------------------------------
                            BPA TRANSMISSION

    BPA's transmission role has been unchanged for decades. In 1980, 
BPA owned approximately 80 percent of the region's high voltage 
transmission system. BPA's responsibility on key paths, such as the 
Cross-Cascades path used to deliver electricity from hydroelectric and 
thermal plants on the Columbia River, is particularly critical. Total 
Cross-Cascades transfer capability is about 10,500 megawatts. Puget 
Sound Energy owns 450 megawatts, and the rest is owned by BPA. In 1974, 
legislation was enacted to allow BPA to borrow funds from the U.S. 
Treasury Department to construct transmission facilities.\14\ This 
authority freed BPA from annual appropriations for costly transmission 
facilities, making it possible for utilities developing power plants to 
be confident that BPA transmission facilities would be ready when their 
plants were completed.
---------------------------------------------------------------------------
    \14\ 16 U.S.C. Sec. 838k(a).
---------------------------------------------------------------------------
    BPA is required to set rates for transmission service that 
equitably allocate its transmission costs between federal and non-
federal users. Although BPA is not subject to most provisions of the 
Federal Power Act, under the Energy Policy Act of 1992, BPA is a 
transmitting utility \15\ and can be ordered the Federal Energy 
Regulatory Commission (``FERC'') to provide an interconnection and 
transmission service. The Energy Policy Act also required that BPA 
transmission rates ``not be unjust, unreasonable, or unduly 
discriminatory or preferential, as determined by the Commission.'' \16\ 
The provisions also provide for a complaint process and a FERC hearing 
and determination.
---------------------------------------------------------------------------
    \15\ 16 U.S.C. Sec. 796(23).
    \16\ 16 U.S.C. Sec. 824k(i)(b)(B)(ii).
---------------------------------------------------------------------------
                               CONCLUSION

    The Northwest Power Act provides a statutory structure ``to assure 
the Northwest of an adequate, efficient, economical and reliable power 
supply.'' The objective was to spread the benefits of the low cost 
Federal Columbia River Power System to all consumers and to avoid an 
unwanted allocation fight over the limited amount low cost Federal 
hydroelectric power. The result was to be a stronger Pacific Northwest 
economy.

    Senator Dorgan. Mr. Spigal, thank you very much.
    Next we will hear from Miss Sharon Nelson, a member of the 
board of trustees, North American Electric Reliability Council. 
It says here Princeton, New Jersey. You are from this region, 
right?
    Ms. Nelson. That is correct.

STATEMENT OF SHARON L. NELSON, MEMBER, BOARD OF TRUSTEES, NORTH 
      AMERICAN ELECTRIC RELIABILITY COUNCIL, PRINCETON, NJ

    Ms. Nelson. Thank you, Mr. Chairman. I am here, Mr. 
Chairman, and Senator Cantwell, thank you for the invitation. I 
am here representing the North American Electric Reliability 
Council. It is based in Princeton. I am an independent member 
of the board of that non-profit organization. My day job is as 
director of the University of Washington Law School Center for 
Law, Commerce and Technology, and previously I was two terms as 
head of the Washington State Utilities Transportation 
Commission, and in those 12 years it was my privilege to serve 
with Bruce Haggen from your State, Mr. Chairman, and to work 
with you actually, on a very complex phantom tax issue many, 
many years ago. You might remember.
    My point following these distinguished gentlemen, whom I 
have known for quite a long time in other roles, is much 
simpler, a much simpler point than theirs. My point today is 
that if Congress does nothing else this year, Congress must 
address the question of how to institutionalize responsibility 
for reliability assurance for the electric power grid. This is 
a simpler question, and I don't mean to say that it is 
exceedingly simple, because nothing in this industry is 
exceedingly simple, but it is a doable proposition as opposed 
to many of the other thorny issues that face the Congress.
    Comprehensive restructuring at the retail level as Mr. 
Hickok suggested is something that needs to be addressed by the 
Congress, but it has been many years in coming, and may be 
again impossible, and while your bill will deal most likely 
with the bulk power market, it may not get to the retail 
market, but I think the California debacle demonstrates why 
this is no ordinary commodity, and this is not garden variety 
deregulation, and again why Congress must address the 
reliability issue.
    Electricity simply is the life blood of our economy. Our 
very public safety and our economy depends on its availability 
and reliability. As former Commissioner Ron Laird from the 
Colorado commission once said, you know, when the phones go 
out, you finally can get some work done, but when electric 
power goes out, you have got to move out, and that is true 
whether you are at home, whether you are at the hospital or 
whether you are on the factory floor. There simply is no ready 
substitute for electricity for most of its uses, and as my 
current, as sitting Commissioner Dick Kemp said on the 
Washington Commission said, saying that electricity is like any 
other commodity is saying that oxygen is like any other gas. 
Again, it is a fundamental and essential part of our economy.
    My own history, it may be a dubious distinction, but I have 
been a student of deregulation. I started on the congressional 
committee in the U.S. Senate in 1976 when Senator Magnuson was 
its chair and was privileged to be there when Congress 
abolished the Civil Aeronautics Board. It abolished the 
economic regulator of the airline industry, but it did not 
abolish the Federal Aviation Administration, the safety 
regulators of the airline industry. When it changed the rules 
for trucking, it changed the rules for the Interstate Commerce 
Commission economic regulation of the trucking industry, but it 
left the safety and the workplace rules intact at the 
Department of Transportation.
    When the FCC deregulated administratively the 
telecommunications industry, it found that it had to create a 
reliability council to take care of some of the problems that 
were unanticipated in its scheme for economic deregulation, and 
recently the Congress, trying to be respectful of the 
marketplace realities, and I am convinced of how markets can 
function very effectively in formerly regulated industries, 
much better than they ever did when they were regulated, still 
Congress has been trying to establish self-regulating 
organizations, and ICNN, the Internet Corporation for Signs, 
Names and Numbers is a recent example which may not be a model 
for my testimony today. I should also indicate that one of my 
other night jobs is sitting on the National Academy of Sciences 
board and reviewing Corporation for Signs, Names and Numbers 
now to see just how well it is operating.
    One of the chief criticisms for ICNN has been that it is 
way too American-economy centric, not international enough, 
which is again, which brings us back to this legislation that I 
am advocating today.
    The North American Electric Reliability Council had 
proposed to transform itself starting in 1977 from a volunteer, 
self-regulating organization, organized primarily in a 
contractual manner. We have been in existence since 1968. We 
were created in the wake of the 1965 New York City blackout.
    The industry has shown great leadership in trying to 
transform itself, but it needs Congress's help to give finally 
the enforcement authority that it needs to make sure that 
people do not lean on the electric power grid and try to seek 
competitive advantages through misusing the grid.
    Senator Cantwell has joined Senator Gordon Smith from 
Oregon in promoting this reliability title to the legislation, 
and I am here today to urge you to really take a serious look 
at it, and despite whatever else happens in Congress to try to 
make sure that this gets through on a stand-alone basis. This 
legislation did make it through the Senate once before. It is a 
doable proposition.
    Recently, some of our consensus, the proponents of the 
legislation has been almost God, apple pie and motherhood, have 
retracted their support, but I know that various members of the 
former coalition met last Thursday and are working to try to 
make the legislation simpler so that it can be passed by 
Congress this year.
    Many of the people who have left the coalition are arguing 
that the FERC should be given the reliability authority, and I 
would just like to tell you from my own experience at the 
Washington Utilities and Transportation Commission, that 
combining economic regulation and safety regulation is not 
always an easy fit.
    Again, in the wake of the trucking deregulation experiment, 
the UTC kept a lot of safety regulations for trucks, but 
finally our legislature realized that in an era of scarce 
resources, both personnel and budgetary, that it was much more 
sensible to put safety regulation with the Washington State 
Patrol where the personnel already exists to do that kind of 
work, and the same was true of the natural gas deregulation 
issue where the commission shared safety enforcement with the 
Department of Transportation, and frankly, it is going to be a 
tight budget year for Congress, and adding the adequate 
personnel and budgetary resources to FERC budget may be more 
difficult than to simply approve and to continue in existence 
NERC, which wants to transform itself from something called 
NERC to something called NAERO, the North American Electric 
Reliability Organization, which will have the benefit of again 
of being something that we can work with our neighbors to the 
north in Canada and our neighbors to the south in Mexico 
without running afoul of their notions of their own 
sovereignty, and the other criticisms that have been lately 
filed against NERC are that it is too slow, and it is too 
captured by incumbent electricity providers.
    Again, I think the industry has shown great leadership. The 
nine independent trustees that I am one of have taken over the 
organization now, and it is our mission to make the 
organization truly independent, its processes truly fair to 
everyone in the industry, and its processes truly transparent.
    Thank you, Mr. Chairman, for your attention. I am hoping 
that at least the electric reliability title is not an ``only 
yesterday'' policy. I think it is clearly one for the future, 
and the only one that Congress can address in a comprehensive 
and rational way. Thank you.
    [The prepared statement of Ms. Nelson follows:]

  Prepared Statement of Sharon L. Nelson, Member, Board of Trustees, 
       North American Electric Reliability Council, Princeton, NJ

                                SUMMARY

    Good Morning Mr. Chairman and members of the Subcommittee. My name 
is Sharon L. Nelson, and I am a member of the Independent Board of 
Trustees of the North American Electric Reliability Council (NERC). I 
am also Director, Center for Law, Commerce and Technology, at the 
University of Washington. I recently completed two terms as Chairman of 
the Washington State Utilities and Transportation Commission. I was the 
Past President of the National Association of Regulatory Utility 
Commissioners and the Past President of the Western Conference of 
Public Service Commissioners.
    NERC strongly urges Congress to enact reliability legislation in 
this session of Congress. NERC and a broad coalition of state, 
consumer, and industry representatives are supporting legislation that 
would transform the current system of voluntary operating guidelines 
into a set of mandatory transmission system reliability rules, 
promulgated and enforced by an industry-led reliability organization, 
with FERC oversight in the United States. NERC firmly believes that 
steps must be taken now to ensure the continued reliability of the 
electricity transmission system if the Nation is to reap the benefits 
of competitive electricity markets. The changes taking place as the 
electric industry undergoes restructuring are recasting the long-
established relationships that reliably provided electricity to the 
Nation's homes and businesses. Those changes will not jeopardize the 
reliability of our electric transmission system IF we adapt how we deal 
with reliability of the bulk power system to keep pace with the rest of 
the changes that the electric industry is now experiencing.
    NERC is a not-for-profit organization formed after the Northeast 
blackout in 1965 to promote the reliability of the bulk electric 
systems that serve North America. It works with all segments of the 
electric industry as well as consumers and regulators to ``keep the 
lights on'' by developing and encouraging compliance with rules for the 
reliable operation of these systems. NERC comprises ten Regional 
Reliability Councils that account for virtually all the electricity 
supplied in the United States, Canada, and a portion of Baja California 
Norte, Mexico.

                          WHAT IS RELIABILITY?

    Reliability means different things to different people. For the 
consumer it could mean, ``Does the light come on when I flip the 
switch?'' Or, ``Does a momentary surge or blip re-boot my computer or 
cause me to lose a whole production run of computer chips I was 
manufacturing?''
    To NERC, reliability means making sure that all the elements of the 
bulk power system are operated within equipment and electric system 
thermal, voltage, and stability limits so that instability, 
uncontrolled separation, or cascading failures of that system will not 
occur as a result of sudden disturbances such as electric short 
circuits or unanticipated failure of system elements. It also means 
planning, designing, and operating each portion of the bulk power 
system in a manner that will promote security in interconnected 
operations and not burden other interconnected systems.
    NERC sets the standards by which the grid is operated from moment 
to moment, as well as the standards for what needs to be taken into 
account when one plans, designs, and constructs an integrated system 
that is capable of being operated securely. The NERC standards do not 
specify how many generators or transmission lines to build, or where to 
build them. They do indicate what tests the future system must be able 
to meet to ensure that it is capable of secure operation. Up to now, 
NERC's rules have generally been followed, but they have not been 
enforceable. As more entities become involved in the operation and use 
of the bulk electric systems, and use these systems to full competitive 
advantage, NERC is seeing an increase in the number and severity of 
rules violations. Hence, the voluntary approach is no longer adequate 
for maintaining the reliability of the bulk power system. Just as the 
rest of the electric industry is changing, the reliability 
infrastructure must change too.

    VOLUNTARY RELIABILITY RULES WILL NOT WORK IN A MORE COMPETITIVE 
                           ELECTRIC INDUSTRY

    NERC's formation in 1968 was the electric industry's response to 
legislation that had been introduced in the Congress following the 1965 
blackout in the Northeast. That legislation would have given the then 
Federal Power Commission (FPC) a central role in the reliability of the 
bulk electric system. Instead of adopting that legislation, Congress 
opted for a voluntary, industry-led effort. For more than thirty years, 
this voluntary system has worked very well and we have had an extremely 
reliable electric system. But the reliability rules or standards have 
no enforcement mechanism. Peer pressure has been the only means 
available to achieving compliance.
    As good as that system has been, the voluntary system will not 
serve us well for the future. Here is why:

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

    A number of factors have contributed to our present circumstance. 
Demand has been steadily increasing over the past decade and is 
expected to increase. Just last week, peak demands were recorded in 
many areas of this country and in Canada. Second, merchant generators 
are now building or planning to build hundreds of new plants across the 
country to meet that increased demand in response to the increased 
prices that we have been seeing in the wholesale electricity markets.
    The same is not true for transmission. Ten years ago North America 
had a little less than 200,000 circuit-miles of high voltage 
transmission lines. Today we have about 200,000 circuit-miles of lines. 
Ten years from now we are projecting that we will have just a little 
over 200,000 circuit-miles of high voltage transmission lines. All of 
these new generators will need to access the transmission grid to get 
their power to where it is needed. For the most part, however, the 
transmission dollars that are being spent today are to connect new 
generation to the grid; they are not going to result in major new power 
lines that will strengthen the grid's ability to move large blocks of 
electricity from one part of the country to another. That lack of 
additional transmission capacity means that we will increasingly 
experience limits on our ability to move power around the country, and 
that commercial transactions that could displace higher priced 
generation with lower priced generation will not occur.
    Moreover, the existing grid is being pushed harder and is being 
used in ways for which it was not designed. Historically, each utility 
built its generating stations close to load centers, which were largely 
cities. As the cities grew, the electric systems grew with them, 
spreading outward from the center. The weakest part of the electric 
grid is generally where one system abuts another. Initially, utilities 
installed connections between adjacent systems for emergency purposes 
and to share generating reserves to keep costs down. Gradually those 
interconnections were strengthened so that adjoining utilities could 
buy and sell electricity when one had lower cost generation available 
than did the other. But these systems were not designed to move large 
blocks of power from one part of the country to another, across 
multiple systems. Yet that is the way business is being conducted 
today. The volume and complexity of transactions on the grid have grown 
enormously since the advent of open access transmission.
    Electric industry restructuring adds to the challenge. In the past, 
vertically integrated utilities with monopoly franchise service 
territories had complete responsibility for all aspects of their 
electric systems. They planned and built their transmission systems, 
ensured that sufficient generation was constructed, and operated and 
maintained their transmission and distribution systems, all to serve 
customers within designated service areas. With restructuring, there 
may no longer be a designated group of consumers for which to plan 
service. Instead, responsibilities to construct and maintain 
generation, transmission, and distribution are being divided among 
multiple entities. In some cases, those responsibilities may be falling 
between the cracks. Regional Transmission Organizations (RTOs) may 
provide a means to reintegrate some of these functions. But the RTO 
proposals that have been filed to date vary considerably in the extent 
to which the RTO has the authority to plan and expand the transmission 
system, not only to connect new generation, but to meet broader needs 
of regional reliability.
    The result of all this is that the transmission grid is being 
increasingly stressed. NERC is seeing more congestion on the grid, for 
more hours of the day. NERC is also seeing increasing violations of its 
reliability rules. If these trends continue, we risk the increased 
likelihood of grid failure.

LEGISLATION IS NEEDED TO ENSURE BULK POWER SYSTEM RELIABILITY IN A MORE 
                     COMPETITIVE ELECTRICITY MARKET

    We need legislation to change from a system of voluntary 
transmission system reliability rules to one that has an industry-led 
organization promulgating and enforcing mandatory rules, backed by FERC 
in the United States. In August 1997, NERC convened a panel of outside 
experts to recommend the best way to ensure the continued reliability 
of North America's interconnected bulk electric systems in a 
competitive and restructured electric industry. On a parallel track, in 
the aftermath of two major system outages that blacked out significant 
portions of the West in July and August 1996, the Secretary of Energy 
convened a task force on reliability, chaired by former Congressman 
Phil Sharp. Both groups came to the same conclusion: The current system 
of voluntary guidelines should be transformed into a system of 
mandatory, enforceable reliability rules, AND the best way to 
accomplish that was to create an independent industry self-regulatory 
organization, patterned after the self-regulatory organizations in the 
securities industry, with oversight in the United States by the Federal 
Energy Regulatory Commission.
    NERC and a broad coalition of state, consumer, and industry 
representatives have been pursuing legislation to implement those 
recommendations. That coalition includes the American Public Power 
Association, the Canadian Electricity Association, the Edison Electric 
Institute, Institute for Electrical and Electronics Engineers--USA, the 
Large Public Power Council, the National Association of Regulatory 
Utility Commissioners, the National Association of State Energy 
Officials, the National Association of State Utility Consumer 
Advocates, the National Electrical Manufacturers' Association, the 
National Rural Electric Cooperative Association, the Northwest Regional 
Transmission Association, the Transmission Access Policy Study Group, 
and the Western Interconnection Coordination Forum.
    On June 18, 2001, that coalition sent a letter to the Senate 
Committee on Energy and Natural Resources, the House Energy and 
Commerce Committee, and the Administration in support of the NERC 
legislative proposal embodied in both S. 388 and S. 597. On July 13, 
2001, the Western Governors Association also sent a similar letter 
supporting the pending NERC legislative proposal to the Senate Energy 
Committee, the House Committee, and the Administration.

                    GOALS OF RELIABILITY LEGISLATION

    The following goals are embodied in the NERC legislative proposal:

   Mandatory and enforceable reliability rules;
   Apply to all operators and users of the bulk power system in 
        North America;
   Rules fairly developed and fairly applied;
   Independent, industry self-regulatory organization Oversight 
        within U.S. by FERC;
   Must respect the international character of the 
        interconnected North American electric transmission system;
   Regional entities will have a significant role in 
        implementing and enforcing compliance with these reliability 
        standards, with delegated authority to develop appropriate 
        Regional reliability standards.
    ferc should not be given the job of promulgating and enforcing 

                         RELIABILITY STANDARDS

    Because of FERC's limited jurisdiction and authority, because of 
the international character of the North American grid, and because of 
the technical expertise required to develop and oversee compliance with 
bulk power system reliability standards, the development and 
enforcement of reliability rules is not a job that can simply be given 
to FERC. Furthermore, FERC does not even have clear authority over 
reliability matters for the utilities that it does regulate. 
Legislation that would have given FERC's predecessor, the FPC, plenary 
authority over reliability matters was introduced in Congress following 
the Northeast blackout in 1965, but that legislation was not passed. 
Instead, the electric industry took on the responsibility for ensuring 
the reliability of the interconnected bulk power system. NERC was 
formed in 1968 to lead that industry effort.
    FERC lacks jurisdiction over approximately one-third of the owners 
and operators of transmission facilities in the United States. It lacks 
jurisdiction over facilities owned by municipalities and state 
agencies, rural electric cooperatives that have Rural Utility Service 
financing, the Federal power marketing administrations (such as the 
Bonneville Power Administration and the Western Area Power 
Administration), the Tennessee Valley Authority, and utilities within 
the Electric Reliability Council of Texas.
    Having an industry self-regulatory organization develop and enforce 
reliability rules under government oversight also takes advantage of 
the huge pool of technical expertise that the industry currently brings 
to bear on this subject. FERC does not now possess and is never likely 
to achieve anything approaching the level of technical sophistication 
inherent in the NERC standard-setting process, which involves dozens of 
committees and working groups and thousands of professionals 
representing all segments of the electric industry. Having FERC itself 
set the reliability standards through its rulemaking proceedings, even 
if based on advice from outside organizations, converts matters that 
ought to be resolved by those with technical engineering expertise and 
commercial expertise into matters that are the province of lawyers. 
These complex rules need to be worked out together in a collaborative 
fashion by all segments of the industry.
    A further and often overlooked impediment to FERC's ability to act 
directly on reliability matters is that the grid is international in 
nature. There is strong Canadian participation within NERC now, and 
that is expected to continue with the new organization. Having 
reliability rules developed and enforced by a private organization in 
which varied interests from both countries participate, with oversight 
in the United States by FERC and with oversight by Canadian regulators 
in Canada, is a practical way to address the international character of 
the grid. Otherwise, U.S. regulators would be dictating the rules that 
Canadian interests must follow--a prospect that would be unacceptable 
to them. There are also efforts under way to interconnect more fully 
the electric systems in Mexico with those in the United States, 
primarily to expand electricity trade between the two countries. This 
is one element of the President's National Energy Policy. With that 
increased trade, the international nature of the self-regulatory 
organization will take on even more importance, further underscoring 
the necessity of having an industry self-regulatory organization, 
rather than FERC, set and enforce compliance with grid reliability 
standards.
    FERC's strong competence lies in assuring fairness and openness of 
process and regularity of proceedings. The combination of industry 
technical expertise to work on substantive reliability rules and FERC 
oversight to assure due process is an effective and efficient way to 
address reliability issues.

            STATUS OF RELIABILITY LEGISLATION AND RTOS/ISOS

    Last year, the Senate adopted the NERC legislation as S. 2071, but 
the bill died in the House. Senator Smith reintroduced that legislation 
this year (S. 172). In addition, the NERC legislation (including 
provisions addressing coordination with regional transmission 
organizations (RTOs)) has been included as part of both Senator 
Bingaman's bill (S. 597) and Senator Murkowski's bill (S. 389). Similar 
language has been introduced in the House of Representatives by Mr. 
Wynn (H.R. 312).
    The pending legislation addresses the role of both independent 
system operators (ISOs) and RTOs, as well as the role of state 
commissions. Independent system operators and regional transmission 
organizations fall within the defined term ``system operator'' in the 
pending legislation. As system operators, both ISOs and RTOs would be 
obligated to comply with established reliability rules, just as other 
kinds of system operators and other users of the bulk power system 
would be obligated to comply with those rules. In Order No. 2000, FERC 
stated that RTOs must perform their short-term reliability functions. 
An RTO is directed to notify the Commission immediately if 
implementation of those or any other externally established reliability 
standards would prevent it from meeting its obligation to provide 
reliable, non-discriminatory transmission service.
    The issue of coordinating the reliability-related activities of the 
new electric reliability organization envisioned by this legislation 
and RTOs arose during last year's legislative efforts. NERC worked with 
FERC, PJM, the California Independent System Operator and several 
others to address that issue. We agreed to specific language to address 
that issue, and that language has been incorporated in both Senator 
Bingaman's bill (S. 597) and Senator Murkowski's bill (S. 389). It is 
also included in the bill pending in the House of Representatives (H.R. 
312).
    Finally, the NERC reliability legislation addresses the role of 
state regulatory commissions. The legislation gives the new electric 
reliability organization authority to set and enforce rules for only 
the bulk power system. Eighty percent of power outages take place on 
local distribution systems, and those remain wholly under state 
jurisdiction. Language has been included to make clear that issues 
concerning the adequacy and safety of electric facilities and services, 
matters traditionally within the purview of state commissions, remain 
with the state commissions. The new reliability legislation 
specifically would not preempt actions by a state commission with 
respect to the safety, adequacy, and reliability of electric service 
within that state, unless the state's actions were inconsistent with 
reliability rules adopted by the new reliability organization. Those 
provisions were worked out with representatives of the states. Both 
Senator Bingaman's and Senator Murkowski's bills contain that language.

              CURRENT INDUSTRY DISCUSSIONS OF LEGISLATION

    Although a broad coalition of state, consumer, and industry 
representatives are supporting passage of the NERC legislative 
proposal, we recognize that that support is not unanimous. Just as NERC 
and its coalition worked with state regulators in 1999 and with the RTO 
representatives last year, NERC and its supporting coalition are 
continuing discussions with those who are not now supporting the 
legislation to determine whether changes to the proposal can broaden 
the base of support even further. One of the major criticisms of the 
legislative language is that the proposal is longer and more detailed 
than may be appropriate for a legislative enactment. NERC is in the 
process of working with all interested parties to develop a shorter, 
less detailed bill that nonetheless retains the essential criteria 
needed to create an independent industry self-regulatory organization 
that will command at least the same level of support as exists for the 
current version. Members of the coalition met on August 9, 2001, in 
Washington, DC to review those efforts. We anticipate that this process 
can be completed and revised language provided to the Committee 
shortly.
    FERC's recent RTO orders do not change the need for Congress to 
enact reliability legislation because those orders do not address any 
of the reasons why this legislation is needed. Those orders cannot 
confer jurisdiction that FERC does not now have, either over 
reliability matters or over non-jurisdictional entities. Nor do they 
provide FERC with the resources or technical competence to undertake 
the task of setting and enforcing reliability rules itself. Finally, 
those orders do not address in any way the international nature of the 
interconnected grid.
    Even if FERC's vision were someday completely realized, there would 
be six (not four) RTOs in the United States: Northeast, Southeast, 
Midwest, Florida, ERCOT, and West. The Canadian provinces and Mexican 
states are not accounted for. It is also questionable whether all non-
jurisdictional transmission-owning entities will join an RTO. Finally, 
there is the question of the time it will take for the RTOs that FERC 
envisions will actually come into being. With the additional 
uncertainty generated by those orders as to who will ultimately operate 
and plan transmission, it is more important than ever that an industry-
led self-regulatory organization be created to establish and enforce 
reliability standards applicable to the entire North American grid, 
regardless of who owns or manages it. Because FERC will provide 
oversight of the self-regulatory organization in the U.S., FERC can 
ensure that the self-regulatory organization's actions and FERC's 
evolving RTO policies are closely coordinated.

                               CONCLUSION

    NERC commends the Subcommittee for attending to the critical issue 
of ensuring the reliability of the interconnected bulk power system as 
the electric industry undergoes restructuring. A new electric 
reliability oversight system is needed now. The continued reliability 
of North America's high-voltage electricity grid, and the security of 
the customers whose electricity supplies depend on them, is at stake. 
An industry self-regulatory system is superior to a system of direct 
government regulation for setting and enforcing compliance with grid 
reliability rules. Pending legislation would allow for the timely 
creation and FERC oversight of a viable self-regulatory reliability 
organization. The reliability of North America's interconnected 
transmission grid need not be compromised by changes taking place in 
the industry, provided reliability legislation is enacted now.

    Senator Dorgan. Miss Nelson, thank you very much.
    Let me start with the issue of reliability. FERC has not 
distinguished itself in my judgment in the recent years. I have 
indicated that I thought that FERC has done a great imitation 
of a potted plant for a couple of years as California has 
suffered blackouts and the wholesale market went haywire. So I 
do not, I do not know where we ought to put reliability. I mean 
that is something that we are spending a fair amount of time 
trying to think through, but it also seems to me that you must, 
you must assign the reliability piece somewhere where there is 
some responsiveness and where you are not going to have a 
sweetheart connection to industry, either. I mean can you, how, 
if we, if we did not use FERC here, how would we be sure that 
we are not seeing a reliability piece that has a large grip by 
the industry, itself?
    Ms. Nelson. That is always the problem in an industry 
capture, and it happens even to government agencies. George 
Stigler first got a Nobel Prize for noticing that regulatees 
could capture their regulators, and I think the reason for 
FERC's potted plant attitude in the last several years has been 
a capture in the other way, an ideological capture saying that 
markets will cure anything, sort of a fundamental 
misapprehension of the competitive realities underlying the 
economy of electricity.
    Our model for this legislation is really modeled on the 
Securities and Exchange Commission and securities regulation 
institutions of the country, and I think most people while they 
may be impatient with the SEC, the Nasdaq and the New York 
Stock Exchanges and the National Association of Securities 
Dealers, think that that market functions fairly and most of 
the time fairly efficiently and fairly nimbly, and it addresses 
problems when they emerge. That is the model this legislation 
seeks to impose for the electricity industry.
    FERC would get delegated authority from Congress to enforce 
reliability rules which in turn would be redelegated to the 
NAERO which would then be formed, again like the National 
Association of Securities Dealers and the exchanges, would then 
become a self-regulating organization which through its 
regional councils, working in numerous committees composed of 
many professionals, utilizing checks and balances, would 
formulate the standards that would apply to the industry.
    This is not a new model for industry. It is, standard 
setting is done this way in many different venues, but we think 
this can work, and what the missing piece is is now the way the 
industry since 1968 functioned is essentially sunshine and peer 
pressure and public embarrassment, but as competition comes, we 
need the authority to single out the bad actors and actually 
give them meaningful sanctions, and that is what the 
legislation would do.
    Senator Dorgan. Thank you.
    Mr. Hickok, what do you expect will happen between now and 
the end of the year with respect to rates from Bonneville?
    Mr. Hickok. We have a 46 percent rate increase that is set 
to go into effect on October 1. When we first began assembling 
that additional 3,000 megawatts to close the gap I mentioned 
when our customers came back to us, we thought we could do that 
with very little impact on our current rates, which averaged 
about 2.3 cents a kilowatt hour or $23 a megawatt hour.
    When we were about 1,000 megawatts into assembling that 
power supply, which we were doing quite well at prices under 
$30 a megawatt hour, we suddenly hit the competition with 
California and its desire to lock up in long-term contracts 
very large supplies, and prices went into outer space. So we 
decided to move in, as I mentioned, on the demand side in order 
to hold a rate increase down from what would have been about 
250 percent, if we bought our way out of the situation, to 46 
percent. But I have to confess to you, Mr. Chairman and Senator 
Cantwell, we hate this curtailment business. We are doing it on 
a willing-buyer/willing-seller basis, but we know that upstream 
and downstream from the industries that we are dealing with, 
including irrigated agriculture as well as aluminum, chemicals, 
pulp and paper, steel and so forth, we know that upstream and 
downstream we are doing damage in the Northwest economy. We are 
resorting to these curtailment actions to avoid a wider 
calamity which a 250-percent rate increase undoubtedly would 
have caused. We estimated it would have put 25,000 people out 
of work. As it is, we were able to cover the employment of the 
industries we curtailed, but there are employment effects 
upstream and downstream from these industries--not as severe as 
25,000, but they are definitely there, and we want to get out 
of curtailment just as rapidly as we can. So, as we look to the 
long-term future, our desire is to put together the power 
supplies that let these industries come back up just as rapidly 
as we can assemble those supplies at reasonable prices.
    Senator Dorgan. What do you mean by ``long-term'' when you 
refer to it here?
    Mr. Hickok. Well, we basically arranged with the industries 
and our utility customers to keep a lot of users off-line for 
the next 1 to 2 years, because we are getting fairly decent 
price quotes in years 3, 4 and 5 of the next 5-year period 
covered by our rates. It is the first 2 years in which it is 
incredibly tight. And in order for those supplies to come on 
line, we have got to build transmission, because we have got 
equally as big a transmission problem, congestion in the 
system, in addition to a power supply problem. In other words, 
even if all the plants in the world, and there is 30,000 
megawatts of development interest just in the Pacific 
Northwest, even if it all suddenly arrived, the grid cannot 
handle it.
    Senator Dorgan. I did not mention transmission in my 
opening statement. We need to talk a bit about transmission 
here, because that is integral to solving all of these issues, 
but let me ask the question that came to my mind when both you 
and Mr. Spigal discussed the notion that we did not have the 
power supply expand when it was expected to expand here in this 
region, because you could go to other wholesale markets and buy 
it at a price that would really render it worthless to go build 
additional plants here, so if that power supply did not expand 
because the market system sent signals that it should not 
expand, does not that undercut the whole notion of the market 
system sending appropriate signals with respect to future 
needs?
    Mr. Spigal. If I could answer, I think it does. I think 
there is a major disconnect between a market approach and the 
fact that supply meeting reliability responsibility lies with 
individual utilities.
    Twenty years ago or even 10 years ago here in the Northwest 
all of the utilities submitted load forecasts and resource 
forecasts demonstrating how they were going to meet their 
obligation to carry their load for 20 years in the future, and 
that information was publicly available, and there was a real 
sense of duty, responsibility, utility responsibility, if you 
will, to keep yourself in load resource balance and not have a 
deficit. Now, none of that information is available. It is all 
commercially sensitive, and so nobody knows which individual 
utilities, publicly owned or investor-owned have taken the 
steps to secure an adequate supply to meet their loads. A lot 
of utilities, obviously as Steve indicated, relied upon spot 
market to meet their load. No signal was sent to the market. 
The only way a signal gets sent to the market is when there is 
a shortage and prices spike or when individual utilities go out 
and contract with developers. So I think there is a real, there 
is an issue there how to assure you are going to have an open 
market on the generation side, how to send the signals when the 
supply reliability is basically at the local level.
    Mr. Hickok. I have a bit of a different take or maybe it is 
in addition to Harvey's take, and that is who is going to have 
the load serving obligation at retail is unclear. The utilities 
that traditionally have had it do not know exactly how much of 
that load they are going to continue to be obligated to serve 
in the future, and those who would enter the market and compete 
to serve that load, presumably the aggregators or the 
merchants, do not know what the rules are going to be either. 
So one of the things that has been a problem for the last 8 
years is the rules for retail are not clear. Basically, you 
could not set up to do that business. A number of companies set 
up and began going down that road, and then pulled out because 
they could not understand what they were going to have access 
to.
    On the wholesale side, we were in surplus for a number of 
years, so it was not worth going into the business to serve at 
wholesale, and wholesale supplies were artificially high 
because Northwest hydropower was plentiful for a good number of 
years, probably masking what otherwise would have been a signal 
sent to that market much sooner than it was sent suddenly two 
summers ago.
    Senator Dorgan. What impact can wind generation or the new 
technology of wind turbines play in this region of the country 
for the generation of additional power?
    Mr. Hickok. In this region probably more than any other 
region in the country, Mr. Chairman, and that is because 
intermittent resources such as wind, which does not blow all 
the time and the sun, which doesn't shine all the time, depend 
on hydro storage for their efficacy for serving firm retail 
load.
    The Northwest system with its large storage batteries in 
the form of the reservoirs behind the large dams in the 
Columbia and Snake River systems gives us the ability to 
integrate these resources--wind, solar and other intermittent 
resources--better than any other system I know. So, they will 
probably play a much larger role in this region than they will 
play anywhere else in the country. In fact, Bonneville is 
currently developing about 350 megawatts of wind power that 
will be coming on-line in the next several years. We are in 
negotiation with a number of companies to add up to 800 
megawatts more which will make us by far the largest acquirer 
of wind resources in the country.
    Senator Dorgan. One of you said that, you talked about 
retail disengagement, I think you were talking about 
California, perhaps, was that----
    Mr. Spigal. Yes.
    Senator Dorgan. Whoever, the issue of retail disengagement, 
and I got the feeling that retail disengagement meant that the 
market system really never had a full opportunity to work. My 
sense is that retail disengagement, for example, in the 
California broken or failed experiment was the only method by 
which they could possibly pass legislation as goofy as that, 
suggesting that somehow you could just, that just the market 
system will send whatever signals it sends all the way through 
to the retail customer, and whatever happens happens, and that 
the market system will be the arbiter or the allocator of the 
goods and services here in a manner that is fair and 
responsible at all times, but as you indicated, Mr. Spigal, in 
your testimony, and you just stated as well that individually 
utility loads and resource information is no longer available 
in these circumstances. It seems to me that we have a cross-
word puzzle here with pieces that do not fit.
    Mr. Spigal. Exactly.
    Senator Dorgan. That is why I come to this issue of retail 
disengagement. My guess is there is not a sober legislator 
within 8,000 miles who could possibly put together a system 
that says, oh, and by the way the market system will work here, 
and we will have no stop limit for retail customers in terms of 
what happens to their rates. Yes?
    Ms. Nelson. May I, Mr. Chairman?
    Senator Dorgan. It was therapeutic to say that. I am not 
sure what the----
    Ms. Nelson. It is absolutely a puzzle where the pieces do 
not fit, and it is again why students of deregulation, and 
especially in our area urged caution a few years ago to our 
public policy makers. In this State, for example, only one-
third of the retail sales are by private investor-owned 
utilities.
    Senator Dorgan. What percent?
    Ms. Nelson. About a third. The rest are by municipal 
utilities, and what we call public utility districts that buy 
power from Bonneville, so they are not even, in your classic 
sense, private market actors. They have a different set of 
availability of capital. They have different tax 
responsibilities, and so right away you get a disconnect and 
short of trying to shape the market with their involvement in 
it.
    We have a Federal agency that is our big transmission owner 
in this region. That is really different than the rest of the 
country, and in California's case, they tried to do it all. 
They thought there was only upside market potential. They 
forgot about the downside of the market, and so they thought 
all the rates were going to be down, and in fact, the 
legislature said we are going to have a 10 percent right across 
the board retail rate drop, but they could not continue to 
honor that with their rate payers, and when the wholesale 
market went whacko, then the market signal, as Steve indicated, 
did not get passed through to customers, instead the governor 
stepped in hoping to become the buyer of last resort of power 
and tried to discipline the market.
    Senator Dorgan. Explain the phrase, ``the market signal did 
not get passed through to the customers--''
    Ms. Nelson. That means the rates have to go up.
    Senator Dorgan. I understand that. You are putting it in an 
antiseptic way. The point is they protected the customer from 
being crushed by an overburdening rate increase that they could 
not possibly deal with. So they created this structure of, the 
wholesale price structure bearing the increase, with, you know, 
a stop limit for retail customers.
    Ms. Nelson. And I have to say we are hoping that the 
Pennsylvania and Texas experiments in retail will be better, 
but they are just beginning.
    Senator Dorgan. I think their pieces do not fit in their 
puzzle either, but we'll see.
    Mr. Hickok.
    Mr. Hickok. Retail has not actually been engaged. I think 
California taught us how not to try to go with retail. The 
Federal Government's jurisdiction was wholesale, and the 
Federal Government acted in 1992 and the FERC just came along 
and underscored it with its rules, 888, 889 and 2000. But the 
States' jurisdiction is at retail, and they will determine how 
retail does engage, and right now they are totally 
disconnected. If retail basically had been engaged from the 
beginning, that is to say if the transformation had begun, you 
would not see something as wildly out of whack as we have got 
right now. California was bullying its way through by basically 
attempting to throw all of its retail customers into a short-
term market. California basically prohibited the kind of 
engagement that a retail aggregator would have taken on by 
assembling a portfolio of supplies, and most States are 
thinking about portfolio approaches as they think about how 
they ought to develop retail. They said basically in California 
everybody is going to be in the short-term market, and that 
guaranteed they were going to swing with a very volatile kind 
of market. Wholesale is always going to be volatile, and retail 
for the most part should not be, and I would argue it need not 
be, and that people who supply at retail will need to 
understand that they have a set of customers that need 
something different from the wild swings that can happen at 
wholesale. Nevertheless, somebody has got to assemble the 
wholesale supply, and, as you know, they do not experience 
costs that reflect flat kinds of rates which is now what we 
have at retail.
    Mr. Spigal. Mr. Chairman?
    Senator Dorgan. Yes?
    Mr. Spigal. If I could disagree with Mr. Hickok a bit, I 
think there were problems at retail with failure to pass price 
signals with the consequences on the retail customers, but I 
think the problem, the missing piece was at the wholesale 
level.
    In the Pacific Northwest, Mr. Hickok says that the 
shortages, the failure to acquire generation, build generation 
was masked by good water years, but that never happened in the 
past, and the reason it never happened in the past is people 
made decisions about how much power they needed to buy, 
utilities did, based upon critical water, worst water year of 
average, and saying that, taking the position that the utility 
taking the position that it did not have to arrange resources, 
because it hoped it would be lucky and that it would rain a lot 
and there would be surplus power available to buy at very low 
prices, that was incurring a risk. That was willing to take a 
bet, and so that created a consequence, ultimately now for 
Bonneville in terms of the load that is placed on Bonneville.
    I think the fundamental issue is the load-serving entities 
whether they are investor-owned utilities or public-owned 
utilities have a responsibility either in terms of the actions 
they take or the type of notice they give Bonneville in this 
region, so that the generation can be built. Absent that, the 
only signals that are going to occur are going to be short-term 
price spikes. That is the way that the developers will learn.
    Senator Dorgan. And the short term is really antithetical 
to reliability?
    Mr. Spigal. Absolutely. It is antithetical to supply 
reliability.
    Senator Dorgan. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman.
    This reliability question is so interesting, I think we 
should continue on it for a second, and Miss Nelson, if you 
could just walk us through, say the legislation that Senator 
Smith has introduced and has passed the Senate before was 
actually in place prior to say, you know, last summer, how 
exactly would they have operated in avoiding the situation as 
it relates to California?
    Ms. Nelson. Well, I do not want to fall into the trap of 
saying if the legislation had been in place that this would 
have eased problems in California. In fact, the rolling 
blackouts were conducted well according to NERC rules. There 
was not----
    Senator Cantwell. By that you mean?
    Ms. Nelson. That the whole system did not go down. The NERC 
rules were followed, so the curtailments happened in an orderly 
way. It may not have been orderly from the customers' point of 
view, but at least the whole system did not collapse, and I 
want to make sure that you understand that what the NERC 
legislation is proposing again as the wholesale-retail dividing 
line is a not a bright line, but it is the line that we in 
electricity rely upon to try to get the jurisdictional piece 
between the Federal and the State dividing lines for 
jurisdiction established, and it is essentially the States are 
responsible for retail and intrastate safety and transmission, 
but again, each State is so different that in California they 
had already formed what Mr. Hickok referred to as a regional 
transmission organization, a California independent system 
operator, and its rules were primarily followed last month, in 
the last few months.
    Just a week ago they weren't followed, and the ISO issued 
some very stern admonitions to a couple of these retail 
marketeers, but what we are proposing is that the FERC would 
create a delegation of authority that really what would change 
would be that people who did what happened in California last 
week would be fined, so that it would hurt for them to violate 
NERC rules, and they would be a deterrent effect, so they would 
not do----
    Senator Cantwell. When would somebody receive the fine 
under that situation?
    Ms. Nelson. Hopefully not months after the fact.
    Senator Cantwell. Which is what, NERC was very late at 
citing an actual problem?
    Ms. Nelson. Exactly. There would be a real deterrent 
effect, and people would know that it would really hurt them in 
their pocket book, so they would not do knowingly what they are 
alleged to have done last week in California, and what was 
alleged to have been done in Ohio a couple of years ago, but 
again, the jurisdiction of the NERC FERC would be different 
than what the California ISOs or the RTOs would have 
jurisdiction over enforcing, as the, as you step down in terms 
of where you are in the grid. This is really bulk power we are 
talking about here. The State responsibilities for the local 
utilities would remain unaffected, and so the rules that are 
there would remain as they are, and it is again, it is not, 
this is not the most comforting answer I can give you, but it 
certainly would have helped.
    Mr. Hickok. Senator, could I add a note to that? Stability 
and reliability are a real time operations issues, and are 
distinguished from the adequacy of the physical amounts of 
generation and transmission that exist in the system. It is a 
different issue.
    Basically, the narrow issue of stability and reliability is 
how do you run given the physical assets you have got, how do 
you run reliably and safely, and what limits do you put on 
lines for loadings and what limits on operating plants so that 
the grid does not collapse. So, if you are in an adequacy 
problem, there just literally is not enough physical supply as 
we saw in California, it governs the way demand will be 
involuntarily shed through rotating blackouts. That is really 
NERC's responsibility to be sure that all of these real time 
operations happen within certain parameters, so that the grid 
maintains its integrity, but it is a completely separate issue 
in terms of, what we do to ensure the adequacy of the physical 
assets, the amount of generation that is available to us to 
work with, and the amount of transmission to work with in this 
system.
    Senator Cantwell. I want to follow up on that, because I 
think what is at heart here in the complexity is really the 
consumer, and one of my energy advisors who is here this 
morning had suggested to me that really this is the equivalent 
of what we do with banks and FDIC insurance. The banks have to, 
once entering into a relationship with consumers, make sure 
that they have a reliable supply of money, and when there are 
runs on banks, they have to have a back-up plan, or so it seems 
to me at the national level we are faced with giving FERC more 
responsibility, an entity may not have reacted as quickly or 
have all the tools, still may not be the right model, as Sharon 
was saying, to mix economics and regulatory.
    There is one aspect of the NERC that I do think is 
valuable, Mr. Chairman, and that is the ability to have 
international input and conversation which FERC cannot do, 
because if we have that, then we are not constantly dealing 
with well, if we put these regulations on at the U.S. level, is 
not that just going to invite people to do things on an 
international basis.
    So my question is, we have these choices. We have, you 
know, more empowerment to FERC to have oversight here, which 
people say this is a puzzle that there will only be a piece of, 
we have the ability to make more responsibility in 
organizations like FERC, or we have the ability to make more 
consumer-friendly requirements of entities to make sure that 
they either have the load or the back-up plan that will not 
leave consumers in the lurch when we have a hydro shortage or a 
spot market that is out of control, and that is really what I 
think we have to answer to consumers. So I do not know which of 
those, if you could just each answer. I kind of know where 
Sharon is, because she has already supported the legislation, 
but where are you, Mr. Spigal and Mr. Hickok, on which of those 
entities which we invest in, or should we do all of those in 
the sense of putting further reliability in the hands of 
entities that will protect consumers?
    Mr. Hickok. From a reliablity and stability standpoint, we 
are completely in support of the NAERO legislation, and I would 
support Sharon Nelson's testimony entirely in terms what they 
need to make sure that the grid operates in a stable and 
reliable fashion, given the assets that are engaged real time. 
Those are big issues, no question about it. The grid right now 
is precarious, and it is operated now in ways that were not 
anticipated because we basically imposed a market environment. 
Generation patterns are from an operational standpoint, 
frankly, pretty wild, they do threaten the integrity of the 
grid, and they demand a different approach. So we are with that 
a hundred percent.
    Senator Cantwell. And nothing, no further involvement of 
FERC, no further responsibilities or oversight from FERC?
    Mr. Hickok. From a reliability and stability standpoint, 
the Congress is basically putting in the underpinnings that are 
necessary at FERC, to be then delegated to the NAERO board. 
This is an independent board, by the way, NAERO. Hopefully, it 
will not be captured by the industry. That is why it was 
designed to be the way it is, but it does depend for technical 
support on industry committees that provide the technical 
information on which it acts. We think that is definitely the 
way to go, but that is only half the picture, as you are 
pointing out. The other half is how do you secure an adequate 
supply of both transmission infrastructure and generation, and 
even the conservation on the demand side, that assures that 
people who bought firm service get firm service. As the Silicon 
Valley Manufacturers Association will remind us all, what they 
contracted for, they haven't been getting lately, and it is a 
lot like doing business in a third-world country last summer 
down there. What we want to assure is that we do not have that 
situation operating in the Pacific Northwest.
    Senator Cantwell. Mr. Spigal, you made the points that we 
do not really know the loads that the utilities have now, so if 
the information is not available how can we tell whether we are 
going to meet demands for the future?
    Mr. Spigal. If I could back up for just a second, I agree 
completely with Mr. Hickok and Miss Nelson. I think the 
transmission reliability and transmission planning and 
transmission operations jurisdiction proposed for FERC, that is 
encompassed within the NAERO proposal is long overdue, and I 
think it is a terrific idea. That does not address fixing the 
supply responsibility. I thought your analogy to FDIC was 
fabulous, and that is exactly the problem. Historically that 
has been handled at the State and local level, and it is 
particularly an issue here in the State of Washington where 70 
percent of the load is the responsibility of publicly-owned 
utilities which are not subject to review, subject to the 
jurisdiction of the Washington Utilities and Transportation 
Commission, and I think the question that I thought I heard was 
should that be a FERC responsibility? Should that be a national 
responsibility?
    That would be, I think, historically, an enormous shift in 
responsibility to the Federal level, and yet there is a problem 
which if it is not fixed in terms of making sure that local 
distribution utilities have responsibility of doing exactly 
what Mr. Hickok says, making sure the firm power is available 
when people flick the switch or when they turn on their 
computer and when the server farm is operating, and that is a 
critical responsibility, and that responsibility no longer 
works if that responsibility is fulfilled through the cultural 
mandate of what it means to be a utility. Utilities are 
businesses, and they look at cost benefits of buying fairly 
high cost power versus hoping that it rains or hoping that 
something good happens, that is really tough and unless that 
piece is fixed either through some Federal legislation or 
through some local State-by-State initiative, the California 
experience will repeat itself. It will repeat itself, and that 
experience was nobody was buying in the forward market. FERC 
has identified that, and FERC's studies are very clear on that. 
I hope that answers your question.
    Senator Cantwell. So should you be saying that we should be 
looking on the State-wide basis instead, because I think 
somewhere the consumer has to be protected, and I think your 
last point is the more important one, and that is we have 
visited this problem before, and so how do we protect ourselves 
in the future, and again we are going to hear from the next 
panel about renewables and I am sure about diversifying our 
energy source, and obviously we are in this national debate, 
but how do we make sure that we protect consumers from this 
situation again?
    Mr. Spigal. I am cringing saying Federal legislation is 
necessary, because----
    Senator Cantwell. You could say that the missing link here 
is as partial deregulation has taken place, there is nobody 
responsible making sure that that load supply is there, and I 
think one of the FERC commissioners has suggested that is what 
you put, must-build requirements in legislation, and I am sure 
that will be discussed at the national level.
    Ms. Nelson. Senator Cantwell, can I just take a stab with 
this? We have all been infatuated with the market for the last 
two decades, this jurisdiction, for example, when I started in 
1985 at the commission, we had utilities file their budgets 
with us every year. They told us what they were going to do 
next year, 5 years out, 10 years out. Well, over time we said, 
hey, that is kind of an infringement on their free market 
prerogative. Why should they be disclosing to a public body 
what they are going to do? So we abolished all that budget 
thing, and we do not allow the telephone companies to build 
anymore, so the whole digital divide that the Congress is 
worried about is another fact in our State that we, as public 
officials, they, as public officials, can no longer get their 
hands around even at the State level. So it might be wise for 
Congress to look at from some sort of notion, again, from sort 
of from the ground up, what does the obligation to serve mean 
anymore?
    Mr. Hickok. And I would say that is largely a State issue. 
The Federal Government can move to preempt the States, but 
right now it is squarely with the States to decide who has the 
obligation to serve at retail, and most of the States are 
considering how that obligation will change, whether the 
existing distribution utility will be the primary supplier, a 
backstop supplier, or will competition be allowed at retail?
    Bonneville, for its part, is the backstop wholesale 
supplier to every retail utility in the Northwest. One of the 
things that we noticed was that, as they all ran from us 5 
years ago and then came running back just last year, that puts 
us in a fairly precarious situation for ensuring stability of 
rates, because we suddenly had to assemble a power supply, and 
we were actually told 5 years ago not to worry about that.
    So there is a contractual issue in terms of who has the 
obligation, and then as they turn to supplies, they can develop 
those supplies themselves, or buy from Bonneville, give us 
little advance notice, or buy from a merchant developer. But we 
need to know what the rules are going to be at retail.
    Ms. Nelson. Senators, Senator Dorgan's admonition about not 
yesterday's policy I think is also really well taken in this 
industry. It seems in this industry in my professional lifetime 
we always learn the wrong lesson from the last war.
    When I left the commission in 1997, our governors convened 
something called the Regional Review to look at how the States, 
the four Northwest States should respond to the 1992 
electricity revolution, and Montana and Oregon went the 
California route, the retail route, and just for an instance, 
we have had Interrun enter Oregon's market and exit in the 4 
years since I left. They thought there was a really good deal 
there. They bought Portland General Electric. They thought they 
could go into retail in Oregon, and then did they sell it yet?
    Mr. Spigal. No.
    Ms. Nelson. They are trying to sell it, but it has not 
worked up here in the Northwest, and so I think the State 
legislative bodies and the Governors are trying to deal with 
that reality at this point, and I do not envy Congress' job, 
but the FDIC is sort of, the consumer disclosure issue might be 
another way to go, but these fundamental issues of who is going 
to be providing generation supply, who is going to be siting 
new transmission? These are huge, huge issues, and they are 
different from the NERC, NAERO reliability piece.
    Mr. Spigal. Maybe the type of solution is one where it is a 
Federal mandate, but it is supplied at the State and local 
level. There are many Federal programs where local governments 
make the implementing decision, but the standards are federal, 
and I know that would be an anathema to many utilities. I think 
probably most States have that established, but as long as the 
responsibility lies with local distribution utilities invested 
or publicly owned, and as long as the information is basically 
proprietory under this type of market situation, nobody knows, 
except in the case of Bonneville. Bonneville publishes resource 
balance information.
    Senator Cantwell. I think that perhaps we just enter these 
perfect storm conditions, that we had the second worse drought 
on record, that the spot market was made worse by California, 
and that all these things happened, and even if you had 15 or 
20 percent reserves it would not have helped, but I think the 
economic consequences to the region have been so drastic, 50 
percent rate increases, people basically conserving as much as 
20 or 30 percent of their businesses and still seeing huge rate 
increases, the loss of jobs, the potential economic impact to 
some of the large industrial users, it is just too significant 
for us to say that they were perfect storm conditions, and 
there is no way to plan for them, so I think we will have to 
look hard at that question.
    Mr. Chairman, I know we have a second panel, but if I 
could----
    Mr. Hickok. Senator, if I could add one note, so it is not 
lost, the adequacy of the bulk transmission is equally as 
difficult an issue as the adequacy of the generation to serve 
this need. This is not well understood, so it kind of gets 
short shift. People understand that power supply and demand are 
out of balance, but honestly how the grid will be expanded and 
how it will be operated are equally difficult issues. For that 
we are looking at an NTO, a regional independent grid operator 
who will do the planning and make the decisions and operate the 
grid, so that it is a fair, open, non-discriminatory common 
carrier, and it is not benefitting a generation affiliate 
against the competition, and it is making the kinds of 
investments in the system that make sense from a regional 
standpoint.
    Right now there are no easy solutions to all of the bulk 
transmission expansion and operation issues without a creature 
like that or something to serve equally in that place.
    Senator Cantwell. I know we have a second panel, but there 
are two other important issues that I just feel that I would 
love to hear from the panelists on. I feel somewhat like I am 
hearing the previous statements of Senator Jackson and Senator 
Magnuson about Northwest power and the direction of our State, 
and clearly, Mr. Spigal, in your testimony about the Northwest 
Power Act ensuring that the Northwest have an adequate and 
efficient, economical power supply, it seems there is some 
difference here among the panelists on how we should or how we 
have proceeded, let us say, in the last couple of years, and 
how we should proceed going further on this, and so my question 
is first and foremost, should we create a Northwest title in 
the legislation and be specific about the direction? Should it 
be a time again in which our delegations said this is the focus 
of power for the Northwest, and secondly, what do we need to do 
to get the administration to be supportive of BPA borrowing 
authority given that part of our challenge is expanding 
transmission within our State?
    Mr. Spigal. So from what I understand the debate is 
inevitable about Bonneville given the fact that there is a 
substantial load on Bonneville. There are demands on 
Bonneville's limited power supply. There is a debate about 
whether or not Bonneville should acquire resources. It has been 
a little over 20 years since the regional act was passed. I 
suspect the debate will be on, and there will be expectations, 
and there will be opposing visions about Bonneville's future 
role, and even if it is an affirmation in some manner or 
tweaking of the statutory responsibility for Bonneville, that 
is probably not avoidable.
    I also believe that it is necessary for the Northwest, a 
Northwest section to create clear authority for Bonneville to 
be part of an RTO. I think the existing fragmented system, 
transmission system in the Northwest should be replaced by a 
single operator, and I believe that legislation is required for 
that and has been proposed in previous congresses, and I think 
that is something, even before then, Senator, I think that 
inability of Bonneville to have sufficient funds to build 
transmission to provide service for many of these power plants 
which are coming on or supposed to come on line in the next few 
years is going to have a chilling effect. If Bonneville does 
not get the funding, the light at the end of the tunnel, the 
rainbow we all seek is not going to materialize if plant 
builders see Bonneville cannot supply transmission.
    Some of those plants, even the ones which look like they 
are well organized and well funded, they just probably are not 
going to have a choice. They are going to have to stop spending 
money. I think that is a very credible issue. Is that 
responsive?
    Senator Cantwell. I would be interested in what you meant 
by tweaking. That would be the delegation saying specifically, 
here is the broad focus of who should be served by BPA?
    Mr. Spigal. Yes.
    Senator Cantwell. You think we should decide that and be 
specific?
    Mr. Spigal. I think it is clear that at this point, for 
example, the direct service industry is on their way out, that 
Bonneville has contracts to serve the direct service industries 
through 2006, and most of those industries are shut down 
through 2003, and I understand informally, there has been no 
formal position that Bonneville says it will not serve the 
industries after 2006, that they have to find other supply 
sources. So I think that debate is going to go on, and there is 
going to be a resolution, either no legislation which means 
they will be off the system, or there is going to be 
legislation.
    It is an issue about what it means to be a load serving 
entity, which Bonneville is, directly or indirectly, and I 
think there are people who would want to revisit the issue 
about whether Bonneville should be buying resources, buying, 
whether it is conservation, renewable or generating plants. I 
just think that debate is inevitable, and having the debate 
without having closure, some restated mandate for Bonneville 
would not be productive. It will just leave us where we are 
today, a lot of dispute about Bonneville's role.
    Ms. Nelson. I agree.
    Mr. Hickok. Senator, Bonneville has not said it cannot and 
it will not supply the direct service industries after 2006, 
but we do need to know to what extent that we will, and we need 
to know that a long time before we get to 2006. So, we have 
been encouraging the industries as we have negotiated contracts 
with them for supplies in the 2002 to 2006 period to let us 
know whether they are going to want service from us after 2006 
or not, to square that up, so we do not get to that point where 
suddenly we have a big regional discussion, and it is decided 
Bonneville should supply them, and we haven't had time to 
arrange for the adequacy of the supply.
    Bonneville as a backstop supplier in the region can work in 
the new environment. The transmission issue, how Bonneville's 
transmission system is operated in an RTO kind of environment, 
how a Federal entity turns over effective control of a Federal 
system to a non-Federal entity, that is a little bit trickier 
issue. We believe that discussion needs to take place because 
Bonneville is 80 percent of the transmission in this part of 
the country, and it does not make sense to have an RTO without 
us. We have been working with the other transmission owners and 
with FERC to understand how we can bring that together. It may 
take legislation. There are some legal opinions as to whether 
it will or it will not. We are proceeding under the assumption 
that it will not, but we would not shy away from encouraging 
you to clarify some of the issues that are around the edge of 
that situation.
    Senator Cantwell. I know I am joined by several of my 
Northwest colleagues on the Energy Committee in being very 
concerned about the BPA bonding authority, and Senator Murray 
has been a leader in making sure that that concept becomes a 
reality, but how can we better explain the BPA case to the 
administration that the current bonding authority that is left 
over is not sufficient for what we need to do to move forward?
    Mr. Hickok. I think that the case has been made pretty 
well. Bonneville is self-financed. We do not get annual 
appropriations to operate. We are entirely financed with 
ratepayer revenues, but our access to capital is the sale of 
bonds. In 1974, when that authority was provided, we were going 
to go straight to the capital markets. But, at the last second 
before that legislation was passed, the U.S. Treasury stepped 
in and said no, we do not want a competing Federal security out 
there. We will buy your bonds, package you up with the rest of 
the government which we are financing and refinancing every 
day, and that will be efficient. That has indeed been 
efficient.
    Later, when the budget act which formed the budget 
committees and the current scoring system was enacted, a 
situation was created where Treasury buys Bonneville's bonds, 
it looks like an outlay, just like any Federal appropriation, 
as if it never comes back to the treasury. In fact, we repay 
all of those loans from Treasury in full at market interest 
rates, Treasury's cost of money plus a markup. So it is not a 
subsidy situation, and unfortunately it really confounds the 
situation when the Appropriations Committee and OMB face the 
issue of how does Bonneville square in the budget. From a long-
term perspective, we are a net zero, if you look out long 
enough, because we are repaying everything we get as Treasury 
loans, which we only get when Treasury buys our bonds.
    Right now the situation is that we will reach our bonded 
indebtedness limit in 2003. So technically, do we need more 
borrowing authority in 2002 for the 2002 program? Literally, 
no, but almost all of the projects that we are describing that 
respond to the infrastructure needs are multi-year projects. 
These require 2, 3, 4 years to complete, and with the existing 
borrowing authority, we do not have the bonded indebtedness to 
cover completion of projects we would start in 2002, and 
therein lies the rub. The picture is pretty clear in terms of 
when we run out. We run out at the end of 2003. The question 
is, if we do not get additional borrowing authority, would we 
start projects that we cannot finance to completion? No 
business would do that.
    Senator Cantwell. Thank you for that answer, and, Mr. 
Chairman, I think it is something that I think the committee 
will be dealing with, and your seatmate as well plays an 
important role from the budget perspective, and how we get a 
resolution to this issue. So thank you very much.
    Senator Dorgan. Let me ask one additional question of Mr. 
Hickok, and then we will be finished with the panel.
    You indicated in your testimony that you had some scary 
days, and you had power system emergencies, but you had not had 
blackouts here. Can the residents of the Northwest expect that 
will continue, not the scary days, but that you have matters in 
hand, and they will not experience blackouts in the future?
    Mr. Hickok. It takes a coincidence of several events, each 
of which has a very low probability of occurrence to get us 
close to the edge the way we were last winter. Last winter we 
literally had that with lowest water or second lowest in 
recorded history, starting the winter 3,000 megawatts short of 
what we should have had on the system from an historic 
reliability standpoint, and being unable to import power from 
California in winter. We normally can import large amounts of 
power from California in the winter. California is a summer-
peaking system, and last winter with 55,000 megawatts of in-
State generation and about 35,000 megawatts of in-State load in 
California, they were blacking out. That was astonishing. We 
had never seen anything like it. So those were the three 
strikes and you are out, literally. The lights in the Northwest 
should have gone out in February, and the only reason they did 
not is that we and some of the investor-owned utilities and 
some of the big public systems bought out load. I mean we shut 
down, as I said, a total of about 3,000 megawatts of industrial 
traffic in the region.
    Senator Dorgan. I am asking about the future. My question 
is can the people of the Northwest expect that will remain the 
case, that they will not see rolling blackouts here?
    Mr. Hickok. Absent another water year like the present, we 
will not be that close to the edge again, but we definitely 
have to climb out of the hole. We are 3,000 megawatts in the 
hole.
    Ms. Nelson. Mr. Chairman, I am glad Mr. Hickok is chief 
operation officer if Bonneville is optimistic about that. I am 
also glad I am not in the chair of the utilities commission.
    Senator Dorgan. This has been a very interesting panel. We 
thank you for being with us and presenting testimony today.
    We will next call on Miss Rachel Shimshak and Mr. Steve 
Hauser. Miss Shimshak is a director of the Renewable Northwest 
Project in Portland, Oregon, and Mr. Hauser is senior account 
manager, Pacific Northwest National Laboratory in Richland, 
Washington. We welcome both of you, and we will include both of 
your statements as a part of the permanent record, and we would 
ask you to summarize, if you would, and why do not I call on 
Mr. Hauser first? Mr. Hauser, you are with Pacific?
    Mr. Hauser. Yes, sir.

  STATEMENT OF STEVEN HAUSER, SENIOR ENERGY PROGRAMS MANAGER, 
    ENERGY DIVISION, PACIFIC NORTHWEST NATIONAL LABORATORY, 
                          PORTLAND, OR

    Mr. Hauser. Thank you very much.
    Good morning, Chairman Dorgan and Senator Cantwell. I am 
pleased to be here this morning to participate in this timely 
and critically important hearing.
    My name, as you mentioned, is Steven Hauser. I am a senior 
manager with the Energy Division of Pacific Northwest 
Laboratory, which is operated for the Department of Energy.
    My colleagues and I at the laboratory appreciate the 
leadership that both of you are providing in creating new 
national policies related to energy. I am also pleased to share 
with you some of the innovative ideas and technologies that we 
are developing at the laboratory. We believe that these ideas 
can have significant impacts on the future of our energy system 
in the Northwest and across the Nation.
    As Senator Cantwell knows, the Pacific Northwest National 
Laboratory provides the region and the Nation with over 3500 
dedicated staff members that explore the fundamentals of 
science and technology leading to break-through solutions for 
many of our toughest problems. In addition to our main facility 
in the Tricities, PNNL operates a marine sciences laboratory in 
Sequim in this State, and also has offices in Seattle, Portland 
and Tacoma.
    We have many staff that focus on energy programs that range 
from developing new fuel cells to analyzing the reliability of 
the electrical grid, to changing the use of energy in 
buildings.
    We have a strong historical relationship with Bonneville 
and significant partnerships with other regional organizations 
supporting them with research, development and analysis for 
more than two decades now.
    The Northwest has always been a leader on energy issues--
with PNNL and Bonneville providing much of that leadership. 
This leadership has been key in developing and deploying new 
energy technologies and innovative energy systems throughout 
the Northwest. Much of this work has been recognized nationally 
and even internationally as pioneering efficient and reliable 
energy technologies. We are now faced with new opportunities to 
show this leadership.
    The region has an infrastructure that is not meeting our 
current and projected needs given a continuing strong economy 
and the lack of investment during the last decade. Incremental 
improvements may keep an efficient system afloat, at best, and 
at worse, may lead us to another even larger crisis in the 
future. The challenge is to ensure that new investments in 
central plants, gas and electric transmission and distribution 
and use efficiency distributed generation and other distributed 
resources are the right investments, the investments that 
create a cleaner, cheaper and more reliable system, one that 
integrates production, delivery and consumption to sustain our 
increasingly dynamic and technology-driven economy. For this, 
we need a new look at the situation, one that embraces the 
growing complexity of our energy system, where simple solutions 
are no longer possible. I believe we are on the verge of a 
major transformation in the energy system that meets this 
challenge, a transformation that recognizes, that recognizes 
and embraces the complexity while it preserves the health of 
the entire system and meets the diverse and individual needs of 
each consumer, a transformation that creates a web of energy 
sources and synchs, buyers and users, all interacting in near 
real time to balance supply and demand, investments and costs.
    As we begin this 21st century, the information age demands 
a new model, one that leverages information to optimize our use 
of energy. This new model promises to carefully manage our use 
of precious resources and expensive assets while protecting the 
environment and enhancing the economy. Let us just imagine for 
a moment what if every business, home and appliance connected 
to the system could provide information to the system on its 
need for energy now, today, this week, and in the future. What 
if they each could also let the system know what energy they 
are willing not to use today, this week and in the future? What 
if every electrical generator from Grand Coulee Dam to a small 
fuel cell in a microturbine in this building could provide 
information to the system on what energy it could provide and 
at what cost, and what if the system could take this 
information and create a network and a market for optimizing 
the best use of energy, meeting every need and do all of this 
in real time?
    This vision of the future is not just a dream, but a 
potential reality. Right now we have technology and techniques 
that are already transforming other business sectors and are 
now ready to transform the energy sector. Advances in 
information technology continue at an astounding rate. 
Companies here in the Northwest are instrumental in creating 
some of these technology break-throughs and bringing them to 
market. Faster processors, new operating systems, optical, 
wireless and infrared telecommunications, intelligent software 
agents and more are transforming supply chain management and 
other business sectors today, and they will, these same 
technologies will transform the energy sector tomorrow.
    These new technologies will allow for distributing, 
computing, and communications to be imbedded in equipment at 
all levels of the energy system, providing a pipeline for data 
and financial transactions. These innovations provide the 
potential to create virtual resources where geography and 
ownership are less important than contract terms, real time 
measurement, control and valuation.
    The challenge is to define the protocols and the 
appropriate infrastructure requirements to enable security, 
privacy, accountability, robustness, flexibility and 
adaptability of these new energy networks.
    We believe that this level of interactive communication 
across the entire network of supply and demand will better 
capture the inherent variability of such factors as time of 
use, emissions, power quality, production costs, value of end-
use services, reliability and reserve capacity. Although we 
have not quantified all of these benefits, we are convinced 
that higher asset utilization and increased efficiency will 
result.
    This is not just a national laboratory vision. IBM, Alstom, 
and other companies share this vision and are creating new 
products and services to begin this transformation. 
Opportunities will explode over the next few years as current 
prototypes become real solutions.
    Now, in my testimony, I have given several examples of 
these technologies. In the interest of time, I want to just 
highlight a couple of those. The laboratory has already begun 
working with Bonneville, for instance, on a concept called the 
EnergyWeb. This is an Internet-based system of monitoring 
controls that will enable distributed generation and demand 
resources to be dispatched remotely. It will include technology 
such as wind, solar, biomass, standby generators, storage and 
load controls. This new tool for aggregating resources is 
useful to determine the real impacts these technologies could 
have on the power system and the dynamic optimization 
strategies.
    We are also developing a new system of what we call grid-
friendly appliances, buildings and loads, computer chips 
embedded in grid-connected devices will be able to sense the 
condition of the grid, and also sense real-time price signals 
and adjust their performance accordingly. For example, 
refrigerators could potentially precool or avoid defrost 
operations during periods of peak demand, momentarily 
interrupting operations to stabilize the grid during 
emergencies.
    Other appliances like water heaters as an example will 
support end-use gray-outs that reduce system demand, but still 
keep the power on for priority loads like traffic lights that 
would otherwise be blacked out.
    Distributed generation offers opportunities to 
incrementally add capacity where it is needed most, reducing 
the risk of building large powerplants, displacing the need for 
new substations and lines, and offering huge opportunities to 
use waste heat for useful purposes in buildings and industry. 
By networking these devices we can optimally dispatch them to 
cooperatively meet both local loads, and system needs. 
Distributed generation also establishes precedents for 
interconnect protocols, policy and financial mechanisms that 
will facilitate the entry of other technologies such as 
storage, demand-side resources, fuel cells and even renewables.
    Let me end by saying that PNNL is committed to work with 
Bonneville and other Northwest utilities and organizations to 
explore these new concepts and test them in facilities, 
neighborhood and communities around the region. We believe the 
Northwest can provide a unique testbed for advanced prototype 
and pilot scale projects.
    The committee's current legislation supports many of these 
new ideas that I have discussed. We look forward to working 
with the appropriate committees including your own and other 
parties to see the potential of these ideas bear fruit.
    Thank you very much for your time and attention, and I will 
be happy to answer any questions.
    [The prepared statement of Mr. Hauser follows:]
 Prepared Statement of Steven Hauser, Senior Energy Programs Manager, 
  Energy Division, Pacific Northwest National Laboratory, Portland, OR
    Chairman Dorgan and Senator Cantwell--I am pleased to be here this 
morning to participate in this timely and critically important hearing. 
My name is Steve Hauser and I am a Senior Energy Programs Manager in 
the Energy Science and Technology Division at the Pacific Northwest 
National Laboratory, operated for the Department of Energy by Battelle 
Memorial Institute. My colleagues and I at the Pacific Northwest 
National Laboratory appreciate the leadership that both of you are 
providing in creating new national policies related to energy. I am 
also pleased to share with you some innovative ideas and technologies 
we are developing at the Laboratory. We believe that these ideas can 
have significant impacts on the future of our energy system in the 
Northwest and across the nation.
    As Sen. Cantwell knows, the Pacific Northwest National Laboratory 
(PNNL) provides the region and the nation with 3500 staff members 
dedicated to exploring the fundamentals of science and technology 
leading to breakthrough solutions for many of our toughest problems. In 
addition to the main complex in Richland, PNNL operates a Marine 
Sciences Laboratory in Sequim and offices in Seattle, Portland and 
Tacoma. We have many staff focused on the energy sector with programs 
that range from developing new fuel cells to analyzing the reliability 
of the electrical grid to changing the use of energy in buildings. We 
have a strong historical relationship with Bonneville and significant 
partnerships with other regional organizations, supporting them with 
research, development and analysis for over two decades.
    The Northwest has always been a leader on energy issues--with PNNL 
and Bonneville providing much of that leadership. This leadership has 
been key in developing and deploying new energy technologies and 
innovative energy systems throughout the Northwest. Much of this work 
has been recognized nationally, and even internationally, as pioneering 
efficient and reliable energy technologies.
    We are now faced with new opportunities to show our leadership. The 
region has an infrastructure that is not meeting our current and 
projected needs given a continuing strong economy and the lack of 
investment during the last decade. Incremental improvements and panic-
driven searches for ``silver bullet solutions'' may keep an inefficient 
system afloat, at best, and at worst may lead us to another, even 
larger crisis. The drought condition currently in the Northwest 
complicates the situation and adds uncertainty. The challenge is to 
ensure that new investments in central plants, gas and electric 
transmission and distribution, end-use efficiency, distributed 
generation and other distributed resources, are the right investments--
the investments that create a cleaner, cheaper, and more reliable 
system; one that integrates production, delivery, and consumption to 
sustain our increasingly dynamic and technology driven economy. For 
this, we need a new look at the situation, one that embraces the 
growing complexity of our energy system where simple solutions are no 
longer possible
    I believe we are on the verge of a major transformation in the 
energy system that meets this challenge. A transformation that 
recognizes and embraces the complexity while preserving the health of 
the entire system and meeting the diverse, individual needs of each 
consumer. A transformation that creates a web of energy sources and 
sinks, suppliers and users, all interacting in near real time to 
balance supply and demand, investment and cost.
    Our energy system has its roots in the 19th century industrial 
revolution with demand driving supply, and large investments in 
infrastructure driving the economy. This system has served us well. As 
we begin the 21st century, the ``Information Age'' demands a new model, 
one that leverages information to optimize our use of energy. This new 
model promises to carefully manage our use of precious resources and 
expensive assets while protecting the environment and enhancing the 
economy.
    What if every business, home and appliance connected to the 
``system'' could provide information to the system on its need for 
energy now, today, this week, and in the future? What if they each 
could also let the system know what energy they are willing to not use 
now, today, this week and in the future? What if every electricity 
generator from Grand Coulee Dam to a small fuel cell or micro-turbine 
in this building could provide information to the system on what energy 
it can provide and at what cost? And what if the system could take this 
information and create a network and a ``market'' for optimizing the 
best use of energy, meeting every need? Plus do it in ``real time''?
    This vision of the future is not just a dream but a potential 
reality. Right now, we have technologies and techniques that are 
already transforming other business sectors ready to transform the 
energy sector. Advances in information technology continue at an 
astounding rate. Companies here in the Northwest are instrumental in 
creating technology breakthroughs and bringing them to market. Faster 
processors, new operating systems, optical, wireless and infrared 
telecommunications, intelligent software agents, and more are 
transforming supply-chain management and other business sectors today. 
They will transform the energy sector tomorrow.
    These new technologies will allow for distributed computing and 
communications to be embedded in equipment at all levels of our energy 
system providing a pipeline for data and financial transactions. All 
parties, without regard to their position within the physical 
hierarchy, will be allowed to participate in open, free markets for 
energy commodities. These innovations provide the potential to create 
``virtual'' resources where geography and ownership are less important 
than contract terms, real-time measurement and control, and valuation. 
By valuation I mean how much it's worth and when and where it is used 
or not used. The challenge is to define the protocols and appropriate 
infrastructure requirements to enable security, privacy, 
accountability, robustness, flexibility, and adaptability of these new 
energy networks.
    We believe that this level of interactive communication across the 
entire network of supply and demand will better capture the inherent 
variability of such factors as time-of-use, emissions, power quality, 
production cost, value of end use services, reliability, and reserve 
capacity. Although we have not quantified all of the benefits of such a 
vision, we are convinced that higher asset utilization and increased 
efficiency will result.
    This is not just a Pacific Northwest National Laboratory vision. 
IBM, Alstom, and other companies share this vision and are creating new 
products and services to begin the transition. Opportunities will 
explode over the next few years, as the current prototypes become real 
solutions.
    Let me give a few examples to make these concepts more tangible. 
PNNL and Bonneville have jointly developed the Wide Area Monitoring 
(WAM) technology suite that now provides real-time monitoring of the 
performance of the Western grid. This system of data collection and 
analysis provides valuable insights to anticipate grid stress and to do 
``post mortem'' analyses of complex outages such as the 1996 blackouts 
in the West. These systems are being installed this summer in CA at the 
Independent System Operator's facilities. The WAM system was also 
recognized this year as one of DOE's top 100 technology developments in 
the 20th century.
    Similarly, we also believe that tools can be developed to better 
match output of the Columbia River Basin hydro system with the power 
demands of the region. Dry conditions in the Northwest this year have 
increased our awareness of the tradeoffs between power, irrigation, 
recreation and fish. An integrated science and technology development 
program including power market behavior, water resource management, 
fisheries biology, regional climate based forecasting, and information 
technology can advance the regions ability to balance power needs with 
fisheries resource management and other regional needs. Bonneville, 
PNNL and other regional organizations are already exploring these 
possibilities.
    PNNL is also beginning to work with Bonneville on a concept called 
the EnergyWeb. This is an internet-based system of monitoring and 
controls that will enable distributed generation and demand resources 
to be dispatched remotely. It will include technologies such as wind, 
solar, biomass, standby generators, storage, and load control. This new 
tool for aggregating resources is useful to determine the real impacts 
these technologies will have on the power system and the dynamic 
optimization strategies. The rapid growth of wind energy farms in the 
region, in particular, will present new challenges to system 
operations.
    We are also developing a new system of ``grid-friendly'' 
appliances, buildings, and loads. Computer chips embedded in grid 
connected devices will be able to sense the ``condition'' of the grid 
in real time and adjust performance accordingly. For example, 
refrigerators can pre-cool and avoid defrost operations during periods 
of peak demand, momentarily interrupting operation to stabilize the 
grid in emergencies. Other appliances like water heaters will support 
end-use ``greyouts'' that reduce system demand but still keep the power 
on for priority loads (like traffic lights) that would otherwise be 
blacked out.
    Distributed generation offers opportunities to incrementally add 
capacity where it is needed most, reducing the risks of building large 
power plants, displacing the need for new substations and lines, and 
offering huge opportunities to use waste heat for useful purposes in 
buildings and industry. By networking these devices we can optimally 
dispatch them to cooperatively meet both local loads and system needs. 
Distributed generation also establishes precedent for interconnect 
protocols, policy and financial mechanisms that will facilitate the 
entry of storage, dispatchable demand-side resources, fuel cells, and 
renewables. PNNL is leading a national program to develop new fuel cell 
systems whose clean, quiet, and efficient operation make them suitable 
for even our own backyards. We are also developing advanced diagnostics 
and control strategies for these devices.
    PNNL has recently launched a new effort to construct a new 
simulation of the energy system using the latest computer modeling 
techniques. This simulation will analyze technologies and markets to 
understand and quantify benefits. It will provide insights needed to 
determine appropriate system control and operational strategies, to 
guide technology development, study the impacts of open, evolving 
energy markets, and develop public policy and regulation in ways that 
equitably enhance the benefits of the transformation. A key part of 
this simulation is that it combines the engineering aspects of the 
system with dynamic, evolving markets, strategies and financial 
instruments.
    PNNL is committed to work with Bonneville and other Northwest 
utilities and organizations to explore these new concepts and test them 
in facilities, neighborhoods, and communities around the region. We 
believe the Northwest can provide a unique testbed for advanced 
prototype and pilot scale projects.
    The Committee's current energy legislation supports many of the new 
ideas that I've discussed. We look forward to working with the 
appropriate committees and other parties to see the potential of these 
ideas bear fruit.
    Thank you very much for your time and attention.

    Senator Dorgan. Mr. Hauser, thank you very much. Next we 
will hear from Rachel Shimshak with the Renewable Northwest 
Project.

STATEMENT OF J. RACHEL SHIMSHAK, DIRECTOR, RENEWABLE NORTHWEST 
                     PROJECT, PORTLAND, OR

    Ms. Shimshak. Thank you, Senator Dorgan, and thank you for 
the opportunity to come and speak to you today, and hello, 
Senator Cantwell.
    I'm Rachel Shimshak. I am the director of the Renewable 
Northwest Project. We are a regional advocacy organization 
working in Oregon, Washington, Idaho and Montana to promote 
renewable resources such as solar, wind and geothermal.
    We are a little different from some organizations in that 
we have consumer and environmental group numbers and also 
energy companies as members. It is the one place that you can 
get together and try to work towards a common goal, and I am 
delighted to be here today among my distinguished colleagues to 
talk to you about the unique role that Bonneville has in 
pursuing both conservation and renewables to help us deal with 
our energy crisis and to help manage us into the future.
    If the goal of our energy system is to provide reliable, 
environmentally responsible, stably-priced energy resources, I 
think we can do four things as we move forward. One is continue 
to create a diverse portfolio of both demand and supply-side 
resources, implement transmission and shaping policies which 
acknowledge the benefits of clean resources, support Bonneville 
in its clean energy leadership, and enact Federal initiatives 
that will provide stable funding for conservation and 
renewables.
    I think the way that we manage ourselves out of this 
current crisis really does matter, and a wise governor once 
said that ``the most important step in developing an energy 
policy is to understand that energy is a problem that we must 
manage over the long haul, not a crisis to be solved and 
forgotten.'' Although I think a lot of people internalize that 
concept intellectually, I can tell you that the recent change 
in energy prices which have fallen in the past couple of months 
have made some energy managers revert back to their short-term, 
cost-only outlook on life as opposed to looking at the long-
term least cost, and I was interested in coming down here today 
to look at the front page of the Oregonian, which has an 
article about California, and it is titled, ``California Now 
Faces Expensive Electricity Glut,'' and the subtitle is, ``The 
State May End Up Urging Customers to Use More Power to Avoid 
Selling the Surplus at a Loss.'' So I think the long-term is 
very important to keep in perspective here.
    Let me just briefly describe the portfolio of resources 
that we consume in the Northwest. We certainly produce a lot of 
hydroelectricity. We consume about 54 percent hydro, but a full 
40 percent of the electricity that we consume in the Northwest 
is fossil fuel, and if we want to keep the system stable in the 
future, I think we need to add a diversity of resources. 
Conservation is the cheapest, quickest, cleanest resource 
available, and we ought to accelerate its implementation 
immediately.
    A whole bunch of the region's utilities and Bonneville 
joined together to offer energy efficiency programs and 
products to their customers during this crisis, and a lot of 
them, as you heard Steve Hickok say, have asked their customers 
to curtail their loads. The impact that their actions and the 
calls from Western Governors to reduce energy consumption have 
actually helped our situation quite a bit, but rather than the 
boom-and-bust nature of these efforts, we ought to have broad 
public policies at the State and Federal level that provide 
consistent investment in energy efficiency, Federal incentives 
for efficient buildings and equipment, and reserving a portion 
of utility revenues for conservation investment are just two of 
the initiatives that we should pursue. Those will help keep the 
infrastructure in place and keep the investment constant so 
that we will have the energy efficiency there when we need it.
    The next one step, the one closest to the heart, is to move 
forward aggressively with renewable resources, and I cannot 
emphasize enough how pivotal the Bonneville Power 
Administration's role is in this endeavor. As you know, 
Bonneville serves almost half the people, half the load in the 
Northwest, and also controls up to 80 percent of the 
transmission. They also have the statutory responsibility to 
encourage the development of renewables.
    Now, when Bonneville was faced with this 3,000 megawatt 
shortage, they had more demand than they had supply, they took 
a rational step, and they initiated a thousand megawatt RFP for 
wind. Now, happily the Northwest is blessed with a tremendous 
potential for wind similar to North Dakota. There is quite a 
bit of resource here, also solar and geothermal, but wind is 
really the most competitively priced of the renewable 
resources, and it can be permitted, after it is permitted, it 
can be built within 6 months, and that is a pretty good thing 
when you are experiencing energy shortages.
    I just want to tell you, this RFP has drawn a variety of 
different developers from all over the country and all over the 
world to our region to develop these resources, and the more 
competition, the better the quality of the projects, the lower 
the prices are, and the prices have been terrifically low for 
these projects. In other words, Bonneville is playing a key 
role in helping develop the market in the Northwest.
    I want to just touch on the diversity of different kinds of 
projects. We have a hundred and ten megawatts of operating wind 
projects here. The largest wind project, which Senator Cantwell 
had an opportunity to visit recently, is the Stateline Project 
which is located on the Oregon-Washington border in the eastern 
part of the State. It is a 261 megawatt project, and its 
economy of scale allowed a single buyer to purchase the entire 
output of that project, which really was, it acts as the anchor 
tenant in the region to signal everybody that it is okay to be 
building and purchasing wind.
    We have the first project being developed on Indian land in 
Montana by the Blackfeet Indian Reservation built by SeaWest, a 
developer from California. We have Energy Northwest, usually 
known for their nuclear plants also entering into a wind 
project also to serve their customers, and the owner of two 
aluminum plants is also building wind projects with some of the 
finances that they received from Bonneville for curtailing his 
load. So there is this incredible interesting diversity of 
projects.
    There are 360 megawatts under construction right now, and 
1200 megawatts in the permitting stage. So we stand to benefit 
if we can follow through to the end of this, and that is the 
key.
    There are lots of benefits to wind energy as in other, as 
other renewables. There are environmental benefits, but there 
are also economic development benefits, and for the farmers on 
whose land these resources are being developed, they get money 
for every turbine that exists on their land, and that provides 
kind of a second crop for them and helps them stay in the 
farming business. We also have quite a vital metals industry 
here in the Northwest, and the metals industry has been called 
upon to produce the towers for these wind turbines, and I just 
learned the other day that a major manufacturer of wind 
turbines is looking to locate a manufacturing facility here in 
the Northwest given the activity that is taking place in the 
market. Again, none of this would be possible without the 
critical role that Bonneville played.
    Bonneville is doing other stuff. They have a conservation 
and renewable energy discount for their customers which 
encourages them to purchase these resources, and they offer 
every one of their customers the opportunity to buy as much 
green power as they would like, but Bonneville has two 
incredibly critical roles to play that have not yet been well-
defined, especially for wind. One as you heard Steve Hickok say 
before, that the reason that the Northwest is a great place to 
develop wind is that the hydro system can act as the battery.
    Because wind is an intermittent resource, it needs to blend 
with other resources in order to deliver firm kilowatt hours, 
and it is a beautiful situation, but the cost of those shaping 
services has to be reasonable or else the resource will be 
priced right out of the market. Those decisions have not been 
finalized yet, and they need to be finalized soon, so there can 
be some certainty, and they need to be fair. The other thing is 
transmission policies. Again, wind being an intermittent 
resource does not act like a resource where you can predict 
that you are going to put fuel in the plant, and it is going to 
produce X-amount of the time. There are better ways these days 
to predict when wind will happen, but you still need a 
transmission set of policies that would accommodate 
intermittent resources at a reasonable price. Again, Bonneville 
is key to making sure that these policies work for wind.
    The developers of wind and the manufacturers of wind have 
driven the price of just producing the kilowatt hours down 80 
percent over the last 20 years, and if we can just figure out 
how to put those other two pieces together, we can have a very 
cost-competitive resource that is clean, that helps develop the 
economic opportunity in the Northwest and delivers power, clean 
power to its customers.
    Bonneville has done a great job stimulating and building 
the market in the region, but they could chill the market in an 
instant if they lose their resolve. So I urge you to support 
them as they move forward on this very important initiative, 
and the way I characterize this is they have the ruby slippers 
on. They just need to click their heels together.
    Congress can play a further role in helping the development 
of renewable resources by extending the wind production tax 
credits, which I know are before you in the Congress, and 
indeed provide those kind of tax credits to all renewable 
resources. That will ensure that we have a diverse energy 
portfolio, not only in the Northwest but at other places around 
the country.
    There is also a proposal for a Federal portfolio standard, 
and I think that would be developed the same.
    We can have a secure, clean future if we prioritize 
conservation and renewable resources and move forward with 
their implementation. Bonneville is critical to achieving a 
clean energy future in the Northwest and to preserving our 
quality of life. They deserve your support in their clean 
energy endeavors.
    Thank you very much.
    [The prepared statement of Ms. Shimshak follows:]

Prepared Statement of J. Rachel Shimshak, Director, Renewable Northwest 
                         Project, Portland, OR

    Good morning Mr. Chairman and Senator Cantwell. My name is Rachel 
Shimshak, and I am the director of the Renewable Northwest Project 
(RNP). RNP is a regional advocacy organization promoting the 
implementation of solar, wind and geothermal resources in Washington, 
Oregon, Idaho, and Montana. Our members include environmental and 
consumer groups as well as energy companies. We work together with 
policymakers, elected officials and customer groups to ensure a clean 
energy future for the region.
    I am delighted to be here today among my distinguished colleagues 
to address the electricity challenges facing the Northwest, and the 
special role of the Bonneville Power Administration in promoting energy 
conservation and renewable energy to help address those challenges. By 
now you have heard a lot about the ugly prices many utilities and their 
customers experienced over the last year, our low water situation, and 
about the uncertainty that has plagued the market over the past five 
years resulting in a lack of demand and supply-side investments.
    We have a chance to move forward and solve these problems if the 
region works together to address the situation. I want to talk to you 
this morning about solutions to the problem. If the goal of our energy 
system is to provide adequate, reliable, environmentally responsible, 
and affordable energy, I believe there are at least four important 
strategies we ought to pursue:

   Create a diverse portfolio of demand and supply-side 
        resources;
   Implement transmission and shaping policies that acknowledge 
        the benefits of clean energy technologies;
   Support the Bonneville Power Administration in its clean 
        energy leadership; and
   Enact federal initiatives that will provide stable funding 
        for conservation and renewable technologies.

    These four strategies will help us maintain a strong system to 
serve our needs, and help us maintain a high quality of life.
    I believe that the way we manage our way out of this energy crisis 
matters. A wise governor once said that, ``The most important step in 
developing energy policy is to understand that energy is a problem that 
we must manage over the long haul, not a crisis to be solved and 
forgotten.'' Although many people accept this concept intellectually, 
the truth is that, given the recent drop in energy prices, many 
managers already have amnesia about the prices and the problems we have 
all faced over the past year. Many are reverting back to their old, bad 
habits of looking only at short-term low prices, and not long-term 
least costs.
    The key to addressing our crisis is to move forward with a 
diversity of demand and supply side resources. Let me begin by 
describing the current portfolio of resources we consume in the 
Northwest. Over half comes from hydro, but a full forty- percent of the 
electric energy we consume comes from fossil fuels. To keep the system 
stable in the future, we need to add a diversity of resources, 
beginning with conservation.
    Conservation is the quickest, cheapest, cleanest resource we have 
available, and we should accelerate its implementation immediately. 
Many of the region's utilities and Bonneville have joined together in a 
rush to offer energy efficiency programs and products to their 
customers, and many have pursued load curtailments with their 
customers. The impact of their actions, coupled with the calls for 
conservation from the Western Governors have had a very positive impact 
on our situation.
    Rather than the boom and bust nature of these efforts, we should 
have broad public policies at the state and federal level that will 
provide consistent investment in energy efficiency. Federal incentives 
for efficient buildings and equipment, and reserving a portion of 
utility revenues for conservation investment are just two of the many 
initiatives that will help maintain the energy efficiency 
infrastructure and make sure that the resource is available when we 
need it.
    The next step is to move forward aggressively with new renewable 
resources. Bonneville's role in the region with respect to renewables 
is pivotal. As you know, BPA serves over 40% of the load in the region 
and controls over 70% of the high voltage transmission. They also have 
a statutory responsibility to encourage the development of renewable 
resources.
    Bonneville responded rationally to their need for additional power 
with a 1000-megawatt wind Request for Proposals (RFP). Happily, the 
Northwest is blessed with a tremendous potential for wind, solar, and 
geothermal power. Wind is the most cost competitive of the resources, 
and once it is permitted, it can be built within six months. That RFP 
has drawn a huge diversity of developers to the region. The greater 
competition created with the RFP will help deliver high quality 
projects that are competitively priced. In other words, Bonneville is 
playing a key role in developing a market for wind in the Northwest.
    We now have 110 MW of operating wind projects in the Northwest with 
over 360 MW of wind and geothermal projects under construction. The 261 
MW Stateline wind project will be on line by the end of this year. 
Another 1200 MW of wind is undergoing siting reviews and could be 
operating by 2003. This is all good news, but it is happening amidst a 
backdrop of 16,000 MW of proposed gas plants.
    Wind power is clean energy, with no air or water pollution, and no 
fuel price volatility. In fact, wind has no fuel! Wind development also 
brings with it some important economic development benefits for our 
region. Some of the best wind resources are found on rural wheat farms 
and cattle ranches. For every turbine installed on a farmer's property, 
the landowner receives a royalty payment from the wind developer. This 
helps create a ``second crop'' for these farmers which helps them stay 
in the farming business. In addition, wind turbines sit atop tall 
towers made of steel. Many in the regional metals industry have been 
called upon to produce these towers, and one turbine company is 
currently contemplating locating its manufacturing facility in the 
Northwest.
    Bonneville is providing other green power opportunities for its 
customers as well. Their recent rate case includes a conservation and 
renewable incentive program that will reduce the rates for customers 
who invest in clean resources. And all wholesale customers can purchase 
Bonneville's Environmentally Preferred Product, or a straight chunk of 
new renewable power.
    Bonneville has two other critical roles in relation to wind 
resources. One is to provide reasonably priced shaping services for 
wind. Because wind is an intermittent resource, and doesn't operate 
100% of the time, you need to blend it with other resources to create a 
firm power product. The hydro system is the perfect battery for this 
purpose.
    The final element for making wind a reality in the Northwest is to 
establish fair transmission policies for renewable resources. The 
current system was designed for large projects with control of their 
generating resources. Those existing policies disadvantage intermittent 
resources such as wind. A wind resource often has to sign up for 
transmission services to cover the entire output of the plant even 
though it may only produce energy 40% of the time. Stiff penalties are 
assessed for projects that don't use their transmission rights.
    The establishment of a new Regional Transmission Organization (RTO) 
can address these problems if the transmission owners move forward with 
the recommendations of the regional representatives group. Having a 
deep and liquid market for transmission rights across constrained paths 
is critical for intermittent renewables. FERC and the region need to 
insure that the rules of the new RTO incent the development of 
renewable resources.
    Bonneville has done a great job stimulating and building the market 
for wind in the region. But they could chill that market in an instant 
if they lose their resolve. I urge you to support Bonneville as they 
move forward on this very important initiative and urge them to find 
timely and fair solutions to the shaping and transmission issues. They 
definitely have the ruby slippers on. They just have to click their 
heals together.
    Congress can play a further role in helping the development of 
renewable resources by extending the wind energy production tax credit 
and providing the credit to all renewable resources. To ensure that we 
have a diverse energy portfolio, Congress should also enact the federal 
renewable portfolio standard contained in Senator Jeffords' bill.
    We can have a secure, clean energy future if we prioritize 
conservation and renewable resources, and move forward with their 
implementation. Bonneville is critical to achieving a clean energy 
future in the Northwest and to preserving our quality of life. They 
deserve your support in their clean energy endeavors.
    Thank you.

    Senator Dorgan. Miss Shimshak, thank you very much.
    How important is the production tax credit? I assume I know 
your answer, but we are, in fact, looking at that at the 
moment, and would wind energy be developed in substantial 
quantity here without the production tax credit?
    Ms. Shimshak. I do not believe so. I attached to 
everybody's testimony a copy of the map of all of the different 
projects that are ongoing in the Northwest. About a year ago, 
there were only four dots on this, and the combination of 
Bonneville expressing a need for power, the ability of wind to 
be generated in the Northwest, and the production tax credit 
are the critical elements that need to be combined in order to 
make these things a reality. There is always a terrific amount 
of development just before the credits are expected to expire, 
and it would be a lot more sensible to signal that there is an 
interest in extending those tax credits so that the price of 
development will be reasonable over a period of time, but they 
are critical to wind.
    Senator Dorgan. It is interesting, the Department of Energy 
ranks North Dakota as the Saudi Arabia of wind potential.
    Ms. Shimshak. It is because they know you are there.
    Senator Dorgan. That is right, especially when I am there, 
but our wind energy development is retarded by transmission 
issues. So these go hand-in-hand, and I am a big fan of wind 
energy and a big supporter.
    We had a wind energy conference last January in Bismarck, 
250 people preregistered, and 550 people showed up. There is a 
lot of interest in it, and we have to solve the transmission 
issues in our part of the country.
    Mr. Hauser, you know, I keep hearing about fuel cells. I 
indicated that I drove a fuel cell car last week, but when are 
we going to see fuel cells really move into the marketplace? 
When will residential fuel cells be available and competitive 
in your judgment?
    Mr. Hauser. Well, those are two different questions 
actually in my opinion, whether they move into the residential 
markets or whether they move into other niche markets. You can 
buy a fuel cell today. It is a matter of how much you want to 
pay for it. I believe there are niche markets where there is a 
rational reason for paying the extra amount for having that 
kind of power, and those markets, I believe, will continue and 
will grow.
    It is still going to be a few years before we see them down 
to the cost point which they become more pervasive in the 
market. I do not know whether that is 3 years or 5 years, and 
we can ask a number of different fuel cell companies around the 
country, and you will probably get just about as many different 
answers.
    Senator Dorgan. Can you just give a brief description, what 
applications that you are now working on will we see move to 
the marketplace in a short-term period?
    Mr. Hauser. Well, we have a number of things that we hope 
will go into the market. As you know, going into the market is 
not an easy thing to do. It requires financing. It requires a 
lot of hard work. So I will give you an example of one that we 
think will probably move as quick as any, and that is we have 
developed a rooftop control unit that would go on an air-
conditioning system in a commercial building like this that is 
wireless. It has smart diagnostics on board so, it will 
actually monitor the health of the HVAC system in a building 
like this, and essentially phone home when there is a problem, 
and we are, our experience in being out in the field is that 
there are not very many air-conditioning systems, particularly 
commercial systems, that are working at their optimal 
performance, and there is room for maybe 20 to 30 percent 
improvement on any system including probably the one in this 
building, and so these intelligent diagnostic systems that 
could actually go out in the field and tell you how well the 
system is working, I think, will probably go into the market 
fairly quickly.
    Senator Dorgan. Senator Cantwell.
    Senator Cantwell. Thank you. If I could follow up, Mr. 
Hauser, on your discussion about how these new efficiencies in 
the system will improve, and I want to thank the chairman for 
his support of the amendment that we got on through on the R&D 
title that we basically did, and I think it was something that 
you were involved in----
    Mr. Hauser. Right.
    Senator Cantwell [continuing]. In helping to write the 
language for, but in looking at how to move forward on an 
energy policy for research and development, and looking at the 
power system efficiencies, it was critical, and so that 
language was added to the title, and I am very appreciative of 
that support, and you talk about a variety of things in 
relationship to the improvement, the how to distribute 
computing and distributing generation, virtual resources, and 
to a certain degree, when you say virtual resources, I am sure 
that makes a variety of people throughout our State anxious 
because what does that mean, virtual resources? These are 
resources that the generation is here, and we would like to get 
the benefit of those resources.
    My first question is: have you put into some context the 
savings or the efficiencies that we might reap from the system 
using new information technologies, and I know that is hard, 
but just an idea, are we talking about one to five percent 
savings? Are we talking about efficiencies in the system that 
will lower prices by a certain amount? How would you 
characterize that the best that you can today?
    Mr. Hauser. It is tough to characterize, because actually, 
the benefits are in the complication, and it is such a complex 
system that we actually operate, and the more we add 
distributive resources, the more we add renewable resources, 
the more complicated the system gets, and so the more difficult 
it is to really understand what the efficiencies are.
    I just mentioned in the previous question that we are 
finding in air conditioning systems in commercial buildings 
that there could be as much as 25 to 30 percent efficiency 
gains possible just by operating them better without really any 
new technologies.
    I think my best guess is that it is 10 to 25 percent that 
could be sort of squeezed out of the system if we really 
understood how to operate it better and more efficiently. If we 
did not run, you know, dishwashers in the middle of the day or 
try to manage loads better. I think there is a pretty 
substantial sufficient efficiency gains that could be made.
    Senator Cantwell. Those are actually large numbers if you 
think about the consequences of what we have been dealing with 
lately.
    You mentioned the need for protocols, and I am assuming 
what you are saying PNNL is advancing some of these 
technologies and efficiencies, somewhere along the line, we 
have to implement a communication and interaction throughout 
the grid? How would we go about doing that? What role do we 
need to play in making sure that that happens?
    Mr. Hauser. Well, we are already convening a group of 
industry companies. In fact, our first workshop is in late 
September in Colorado. These are companies like IBM and Cisco 
and Sun and a number of names that we recognize as well as a 
number of small companies that are playing in this market. So 
we will begin to get the industry together to start talking 
about what the issues are, what the protocols might have to be, 
what is working, what is not working, what is the Federal role, 
what kind of research needs to be done from a Federal 
perspective. So I will have better answers to those questions 
in a few months, and we will continue to engage industry over 
the period of the next few years to ensure that we are looking 
at the right issues including protocols.
    Senator Cantwell. And I am assuming the metering is just 
one small aspect of that?
    Mr. Hauser. One small aspect.
    Senator Cantwell. And you are talking about efficiencies 
throughout the whole grid and system?
    Mr. Hauser. That is correct.
    Senator Cantwell. That you would have to get some sort of, 
I do not know what would you call it, an efficiency, an 
efficiency standard or efficiency protocol, something of that 
nature----
    Mr. Hauser. Right.
    Senator Cantwell [continuing]. That goes beyond just how do 
you get distributive power hook-ups to the grid. You are 
talking about a communication system within the grid?
    Mr. Hauser. It is, and you might even--in some circles we 
talk about it as plug and play. If you were to buy a fuel cell 
and put it in your home or put it in this building in the next 
few years, what we would like to be able to do essentially is 
plug it in. The system would recognize it right away, and say, 
``A-ha, we like that you are there, and here is what we would 
like you to do in order to optimize the health of the system.'' 
Right now we do not understand the system in sufficient detail 
to really understand how to do those sorts of things, and even 
issues around renewables, we know the resources are important. 
We know that they are available, but how best to optimize them? 
You know, how many wind turbines do you really want in Walla 
Walla, and how many do you want in Ellensburg in order for the 
system to really perform at its optimum? Those are the kinds of 
issues that we would like to get at.
    Senator Cantwell. Well, I definitely made sure that the 
people at Stateline knew that there was a town in Washington, 
Ellensburg, that people are constantly complaining about the 
wind, and they ought to venture up there.
    Ms. Shimshak. You will be happy to know there is a project 
proposed for Ellensburg.
    Senator Cantwell. Miss Shimshak, have we, has your 
organization set a goal for diversifying our system within the 
Northwest? I mean, is there a number that you attached to what 
our renewable focus ought to be or just diversification of our 
existing hydro reliance?
    Ms. Shimshak. We do have a goal, the activities of last 
year have kind of had an impact on that goal, and we probably 
will revisit it shortly, but we figure if by the year 2005, we 
could have one to 2,000 megawatts of renewables in the system 
that the market would be robust and able to help sustain 
itself. That is not to say that is the end goal that we want to 
see for the system, but that is what we think is necessary in 
order to create a market that can work here.
    Senator Cantwell. You mentioned several times during your 
testimony how Bonneville plays a vital role in the market 
development or if their activities were not supportive of 
renewables which we have made direction towards in the past, 
are you saying that we need to do something further as far as a 
directive and a national policy?
    Ms. Shimshak. Bonneville does have a statutory requirement 
to encourage the development of new renewables, and just like 
any other set of power managers, they are affected by things 
that happen in the market, and when the market is very high, 
everybody runs to find new resources. When the market starts to 
dip lower, they get a little squishier about going to acquire 
those new resources, and I think they are doing something that 
is, they are going above and beyond the call of duty in what 
they are doing in helping the wind market develop in the 
Northwest, and it will be a sustainable market if they follow 
through with their expectations, and anything that Congress and 
the congressional delegation for the Northwest can do to 
encourage them forward would be most appreciated and to 
encourage them to resolve some of these outstanding issues that 
are really the key elements that had need to be solved for us 
to make sure that we can do these resources in a cost-effective 
manner.
    Senator Cantwell. You mentioned the Grassley bill, but I 
assume you are very supportive of the REPI legislation and 
continuing that as an incentive for public power to seek 
renewable resource solutions?
    Ms. Shimshak. And there were quite a few public power 
entities that are pursuing renewable. Seattle City Light right 
here put out a hundred average megawatt RFP to serve its load 
and to meet its no-new CO2 standard that the city 
council adopted, and they are taking a very positive leadership 
role in moving forward for this utility. Other public utilities 
around the region are doing good work, also.
    If I might, I wanted to go back to a question that Senator 
Dorgan asked, and that was the importance of the production tax 
credit. I know you have probably heard this before, but 
renewables and conservation have these classic market barriers. 
They have very high up-front costs, but very low long-term 
costs, because there is no fuel, and that is a market barrier 
for an energy manager, because you are looking at gas plants 
that tend to be pretty cheap to build. Only a third of the cost 
of the gas plant is in putting it in the ground, and two-thirds 
is the cost of the fuel, and you take the risk on the fuel 
price.
    Renewables, if you can get past the first decision, you 
have a stable-priced resource to add to your portfolio of 
resources which really helps customers in the end because when 
fuel prices are going up like this, you are not affected, which 
is why the Northwest has enjoyed so much low cost power, 
because of its emphasis on hydro systems over time, but the 
production tax credit is the thing that has really helped 
resolve that market barrier question. It has brought wind in 
line with other resources, and the 1.7 cents a kilowatt hour 
for 10 years has really done that, so we addressed that market 
barrier problem straight on and it really helps to make things 
happen.
    Senator Dorgan. Thank you very much. Your endorsement of 
the efforts by Bonneville in this area is very impressive. I 
can think of many instances around the country where people 
have tried to develop renewable projects, they have found 
resistance with the incumbent providers in a range of areas, 
and I think there really needs to be an enthusiastic 
endorsement and a set of goals and a willingness to want to 
make this happen, and I do appreciate the fact that you say 
that Bonneville is very interested and has been working very 
productively in that area.
    Let me thank the panel for your contribution. This has been 
an interesting bit of information this morning that I have 
received, and I know that Senator Cantwell knows this issue 
certainly better than I and our colleagues on the Energy 
Committee, because as I indicated as we started, we understand 
that the Northwest is unique and different. You have a 
different energy mix, and you have a different set of 
circumstances here, and I think that her, Senator Cantwell's 
role is going to be central on the Energy Committee to make 
sure that when we do what we do in September to put this bill 
together, that that bill recognizes and addresses the unique 
needs of the Northwest.
    So this hearing is very helpful to me and I am hoping to my 
colleagues.
    We would like to hold the hearing record open for 2 weeks, 
and if there are those who did not testify today who would wish 
to submit a statement for the hearing record, we would be happy 
to receive that statement, and you would just send it to the 
U.S. Senate, the Energy Committee, and Deborah Estes, the 
counsel with the committee as a witness today. You are welcome 
to give your name if you choose to do so.
    I thank you, Deborah, for being here, and I thank you 
Jonathan Black for being here, and I thank my colleague, 
Senator Cantwell, for being here, and this hearing is now 
adjourned.
    [Whereupon, at 12:00 p.m., the hearing was adjourned.]
                                APPENDIX

              Additional Material Submitted for the Record

                              ----------                              

                                    Lakeview Light & Power,
                                     Lakewood, WA, August 13, 2001.
    Dear Senator Cantwell: On behalf of Lakeview Light & Power and the 
Washington State Cooperatives, I offer the following comments:
    1. The President's Energy Plan, and the House Energy Proposal--
These two documents do less for renewable energy than the federal 
government currently does. We believe the Senate should make sure that 
there is adequate investment in renewables, as well as the clean coal 
investments and other energy budget items.
    2. BPA transmission--We support BPA's transmission investments over 
the next 5 years (app. $1.3 billion of new borrowing requested). 
However, we (BPA customers) need assurances that the investment will 
benefit our ratepayers and the value not shifted to other companies if 
a Western RTO becomes a reality. Concerning the $700 million in 
borrowing authority BPA is requesting for conservation and hydro 
upgrades, we strongly support the hydro upgrades and Lakeview Light & 
Power and other Washington State Coops continue to support local 
control of conservation spending.
    3. BPA's future--We strongly support preference and urge our 
Senators to defend the right of public power to continue to provide at 
cost power to citizens. We oppose market-based rates, additional 
spreading of benefits to ``for-profit'' companies, and we believe that 
BPA service to DSIs must be phased out over time, as preference 
utilities need the electricity to meet their load growth.
    4. Deregulation--We are not convinced that experiments in other 
states have provided the evidence we need to support deregulation at 
the federal level. In fact, the opposite is true. Until a number of 
states can demonstrate over a number of years that competition works in 
this inherently monopolistic industry, we would not want federal laws 
or state laws which force consumers in our state to take on such risk.
    5. Real Time Meters--We question the need to further complicate the 
lives of busy Americans by forcing them into a situation where they 
have to monitor their electricity meters for fear of using too much 
electricity when rates spike. We continue to believe that providing 
reliable, affordable electricity is our responsibility. The local 
utility has the ability to provide the high quality of service 
consumers deserve and the ability to provide cost-based rates that are 
competitive and predictable.
    6. FERC Jurisdiction--We oppose any expansion of FERC jurisdiction 
over cooperatives and the PMAs.
                                             Robin A. Rego,
                                                   General Manager.
                                 ______
                                 
                           Federal Way Chamber of Commerce,
                                  Federal Way, WA, August 13, 2001.
Senator Byron Dorgan,
Chairman, Senate Energy Subcommittee on Water and Power.
Senator Maria Cantwell,
Member, Subcommittee on Water and Power.

Subject: Electricity in the Northwest: A Unique Region Preparing for 
the Future

    On behalf of our membership and community, the Federal Way Chamber 
of Commerce respectfully submits the following comments to the Senate 
Energy Subcommittee on Water and Power at its meeting in Seattle, 
Washington on August 13, 2001. First let us state that we sincerely 
appreciate Senator Dorgan and Senator Cantwell for conducting this 
meeting in King County and for inviting the public to submit comments 
for the record on this most important issue.
    Federal Way is a community of over 105,000 residents and 
businesses. Our city is located in south King County and we receive 
natural gas and electric service from Puget Sound Energy, an investor-
owned utility. We have been fortunate, so far Puget Sound Energy has 
been able to manage through this energy crisis without having to raise 
its rates more than 1.5 percent. As you know, our neighboring 
communities have suffered double-digit rate increases as a result of 
the volatile energy markets. It is our hope that Puget Sound Energy is 
able to continue its course, however we understand that recent 
decisions by the Federal Energy Regulatory Commission are certain to 
harm PSE's customers. This is the reason we are submitting these 
comments. For ease of explanation, we have divided our concerns into 
two categories. Those applying to potential refunds for electricity 
sales and those applying to the price control mechanism FERC has 
implemented.

                                REFUNDS

    Citizens and utilities located in the Northwest have already 
suffered greatly from effects of the California energy deregulation 
experiment and the flawed markets that this experiment created. The 
current claim to refunds made by California entities from Northwest 
load-serving utilities will only exacerbate the situation.
    Like other Northwest utilities, PSE in its planning to meet its 
customers' needs last winter was often forced to buy power at high 
prices driven by California markets. On the occasions when our 
utilities' customer requirements were less than projected and they had 
surplus energy to sell to California, the prices on the California spot 
markets were likewise high. Those prices, however, reflected the 
desperate need for power in California due to their inadequate 
generation. In fact, according to newspaper stories, the federal 
government was forcing utilities in the Pacific Northwest to sell to 
California during this time. Our utilities used these sales to help 
offset the high prices they had already paid for power when we needed 
it here. Federal Way citizens shod, not pay twice for the California 
problem--we too paid high prices for power last winter, and now 
California wants a ``refund'' for the power we sold to California.
    Our Northwest utilities (and their customers) should not be 
penalized for purchasing power needed to ensure our community's 
electric reliability and for selling their excess resources into the 
marketplace at prices set by that market at that time. To treat 
utilities serving customers as if they were market speculators is 
unfair to utility customers. We object to any federal policy that would 
force Northwest citizens to provide refunds to California when many of 
our citizens have suffered so much from California's energy policies.
    As a final point on this issue, we feel strongly that California 
should be required to pay its outstanding debt to Northwest utilities 
for power they purchased and consumed. California's unpaid bills should 
not find themselves into our future electric rates and Northwest 
utilities should not be expected to absorb those bad debts as yet 
another subsidy to California.

                             PRICE CONTROLS

    On the issue of price caps, we must again make every attempt to be 
sure that the Northwest is not made to suffer even more consequences 
from the California deregulation experiment. In that regard, we do not 
believe that the prices for energy in the markets in the Northwest 
should be set by the California ISO. The California ISO will only act 
in the best interest of California and again, our Northwest communities 
will fall victim to their actions.
    As the Subcommittee is well aware, California and the Pacific 
Northwest experience peak electrical loads at opposite times of the 
year--California in the summer, the Northwest in the winter. This 
situation, with the prices set by the Cal ISO, poses the peril of the 
Northwest having a peak need for power at a time when the California 
loads are light and markets are calm. In the worst case, the Cal ISO 
could be congratulating itself for maintaining low power prices while 
Northwest citizens shiver in the cold and dark of an arctic blast.
    As a result, we urge FERC's ``correction'' to the California 
deregulation experiment take into consideration the situation in all 
states in the West, not just California. The ``correction'' should not 
``compensate'' California by further increasing the expense to 
Northwest customers and utilities. And, most of all, any such 
``correction'' should not result in the Northwest being unable to meet 
its load and experiencing its own blackouts. We understand the opinion 
of many that the electric market may need to be managed so we avoid the 
price spikes of recent months, however the notion that we are better 
off now that FERC has implemented a price cap is simply incorrect. If 
we are to have price caps then it must take into consideration the 
situation of all utility customers in the West--including those in the 
Northwest.
    Finally, any price mitigation efforts must not impair current and 
future energy supplies. The established price cap must both protect 
utility customers from unnecessary and outrageous electric prices and 
encourage future development of new energy resources. Like other 
communities, Federal Way is continuously adding new residents and 
businesses--we want to be sure that there is enough affordable 
electricity to meet this growth.
    Thank you for your consideration of our concerns on this critical 
issue for the citizens of Federal Way.
            Sincerely,
                                             Delores Shull,
                                                     President/CEO.