[Senate Hearing 107-783]
[From the U.S. Government Publishing Office]
S. Hrg. 107-783
ELECTRICITY INFRASTRUCTURE
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
TO CONDUCT OVERSIGHT TO EXAMINE ISSUES RELATED TO THE NEED FOR, AND
BARRIERS TO, DEVELOPMENT OF ELECTRICITY INFRASTRUCTURE
__________
JULY 24, 2002
Printed for the use of the
Committee on Energy and Natural Resources
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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
Leon Lowery, Professional Staff Member
Howard Useem, Senior Professional Staff Member
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 1
Burns, Hon. Conrad, U.S. Senator from Montana.................... 1
Cantwell, Hon. Maria, U.S. Senator from Washington............... 2
Coale, M. Carol, Senior Vice President, Prudential Financial,
Houston, TX.................................................... 34
Kyl, Hon. Jon, U.S. Senator from Arizona......................... 3
Landrieu, Pete, Vice President, Electric Transmission for Public
Service Electric and Gas Company, Newark, NJ................... 41
Makovich, Lawrence J., Ph.D., Senior Director of North American
Energy Group, Cambridge Energy Research Associates (CERA),
Cambridge, MA.................................................. 37
Nevius, David R., Vice President, North American Electric
Reliability Council............................................ 13
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 4
Ward, Stephen, Public Advocate, State of Maine................... 45
Wood, Patrick, III, Chairman, Federal Energy Regulatory
Commission..................................................... 5
APPENDIXES
Appendix I
Responses to additional questions................................ 55
Appendix II
Additional material submitted for the record..................... 59
ELECTRICITY INFRASTRUCTURE
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WEDNESDAY, JULY 24, 2002
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 3:02 p.m., in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN,
U.S. SENATOR FROM NEW MEXICO
The Chairman. The hearing will come to order.
Recent news stories have portrayed an energy industry in
dire straits. Yesterday, stock values of energy trading
companies continued to drop and analysts have projected serious
shortages in the near future because of the market reaction to
the news of the past few months, also because of a reluctance
to invest in energy companies and in energy infrastructure.
This hearing is to look into these circumstances, to learn
what we can about our energy infrastructure needs, and also
whether the necessary investment is likely to be made in order
to fill those needs. We hope to hear recommendations as to what
the government and particularly the Congress can do to help in
the situation.
We will hear from Chairman Pat Wood of the Federal Energy
Regulatory Commission reporting on a series of technical
conferences that the Commission conducted around the country on
energy infrastructure needs.
We will also hear from the vice president of the North
American Electric Reliability Council, David Nevius reporting
on NERC'S 2002 summer assessment.
The second panel is made up of two energy industry
analysts, a representative of a major utility, and a consumer
advocate. This panel will discuss the investment climate and
make recommendations for government action on those fronts.
Let me see if Senator Kyl has an opening statement he would
like to make before we begin with our witnesses.
[The prepared statements of Senators Burns and Cantwell
follow:]
Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
I don't believe I am overstating the facts when I say that
continued growth of America's economy depends on more and better
electricity transmission. As this country grows, so do our energy
needs, and to some extent, so does the generation of electricity. While
many generation projects have been put on hold this year, there has
been a promising increase in generation--mainly natural gas fired. As
we provide more certainty to the market, it is my hope those projects
will continue.
The problem lies in the fact that you could increase generation by
10,000 megawatts a year, but without a way to move it to market, that
generation capacity is practically worthless. Imagine if the United
States had no transportation system to move our agricultural goods to
market. Without an interstate highway system, or railroads, or barges,
the world's most productive farmers could not get their product to
market. People might starve, or at the very least, much more of their
paycheck would go toward groceries, because they would be very
expensive.
The same thing is true for the energy industry. We have the
resources to create energy, and while there are some difficult barriers
to siting and development, we manage to produce electricity pretty
well. But without improving our transmission capability, this country's
economy is going to slowly starve.
In my home State of Montana, we have tremendous generation
capacity. We have vast natural resources of coal, and natural gas, and
hydropower, and we are wisely developing those resources to provide low
cost power to Montanans and to other consumers. The problem is that
there are a few traffic jams on the ``Interstate for electricity''.
We will hear many reasons for this situation from our witnesses
today, and many suggestions of how to correct the problem. I would say
that part of this responsibility rests squarely on the shoulders of
Congress, at least in the case of the Bonneville Power Administration.
When power from Montana is exported to the West, it moves over
Bonneville Power Administration lines. At a point on the Washington-
Idaho border called West of Hatwai, there is a huge bottleneck in the
system which reduces the reliability of the system and makes is much
harder to transport electricity from where it's generated in Montana
and Idaho, and get it to the population centers of the West Coast.
I have talked with BPA Administrator Steve Wright many times about
this issue, and he is well aware of the problem and willing to work on
it. However, BPA--which is by law a self-financed agency--needs
permission from Congress to increase its borrowing authority for the
investment. My colleagues from the Northwest and I have worked on this
issue with the Administration and with the Energy Committee, and I want
to bring to bring the seriousness of this problem to your attention.
Before we talk RTO, or deregulation, or anything else, we need to be
able to move electricity around. That is not physically possible right
now, and it is a major consideration in this debate. We will be
addressing this issue in the conference of the Energy bill, and
possibly in the appropriations season, so I ask all of you to keep it
in mind.
Another concern in the West and throughout this country is siting
of both generation and transmission facilities. I especially want to
make sure that our public lands agencies are not hindering the movement
of electricity. There need to be corridors for future development
identified, and the process for siting should be streamlined. We need
to use common sense here--it should not cost ratepayers years--or
millions of dollars in planning and process--to add one more string of
wire to an already existing line. Public lands should be used for
public benefit, and when the highest and best use of the land is for
energy development or transmission, then that's what we need to do.
Thank you, Mr. Chairman. I look forward to the testimony of the
witnesses.
______
Prepared Statement of Hon. Maria Cantwell, U.S. Senator From Washington
Thank you, Mr. Chairman, for holding this important hearing on
issues related to the development of energy infrastructure. I also want
to welcome FERC Chairman Wood here today. I know you will be
testifying, in part, about what you learned about western
infrastructure issues last November, when you, Commissioner Brownell,
and members of the FERC staff visited my home state of Washington. I
can tell you that we in the Northwest are proud of our history and we
are always pleased to be able to bend the Commission's collective ear
and educate about the unique nature of our energy system.
In reviewing FERC's western market infrastructure assessment and
your testimony here today, its clear that there are areas where we
likely disagree. As you well know, many in my region are very concerned
about the issue of standard market design and what it could mean in
terms of the Commission's intentions regarding a regional transmission
organization (RTO).
As my colleagues from the Northwest and I have said on numerous
occasions, we believe that our region must be allowed to set ground
rules appropriate for the unique characteristics of our electricity
grid. While a consensus has not yet formed on an RTO filing among our
stakeholders, the Northwest delegation is united in our belief that
there are a number of criteria an RTO must meet to be successful in our
region. Some of those prerequisites include:
No forced movement towards a single, West-wide RTO;
An eight- to ten-year company transition period to minimize
costs among current users;
A pricing plan that limits cost shifts and protects existing
users of the system;
No impact on the Bonneville Power Administration's cost-
based power rates (that is, BPA's power business line should
not be subject to FERC authority simply because BPA
participates in an RTO.)
And an independent, credible cost-benefit study that shows
sustainable net benefits to consumers in every affected state.
That said, Mr. Chairman, I can say that there are also many areas
where agreement exists. For example, I believe FERC's conclusion that
the West must make significant investments in energy infrastructure to
meet the growing needs of our 21st Century economy is directly on
point. While we are currently mired in a painful recession, there is no
doubt in my mind that the Northwest economy will rebound--and when it
does, our region will again be among the fasted growing in the nation
thanks to the diversity of our economy, our natural resources and the
presence of a highly skilled workforce that will sow the seeds for the
next waves of innovation. In order to make this a reality, however--and
as the devastating effects of the western power crisis have
demonstrated-a stable, reliable and efficient supply of energy is
absolutely crucial.
For those reasons, I absolutely agree with a number of FERC's
recommendations for improving our Western infrastructure. There is no
doubt in my mind about the benefits of promoting demand response
programs to encourage conservation and peak load reduction; encouraging
the diversity of generation to reduce our reliance on hydropower and,
soon, natural gas; promoting the use of distributed generation;
establishing and enforcing reliability standards; and making
significant new investments in transmission infrastructure. So indeed,
I look forward to your testimony here today.
But I also want to touch on an issue that remains at the forefront
of the minds of many in my state. As I mentioned--and as we have
discussed many times--the Western power crisis has taken a devastating
toll on the economy of Washington state. And the citizens of my state
need to know when they can expect relief from the exorbitant power
costs they will continue to pay for years to come, unless FERC uses its
authority to remedy the price gouging that occurred during the height
of the crisis. Even though wholesale costs returned to more normal
realms after FERC finally acted to cap prices throughout the West, many
of our utilities will continue to pay outrageous rates for up to eight
years under long-term contracts they signed during the worst of the
crisis. These costs surpass a billion dollars for Northwest utilities,
and our economy will continue to suffer mightily--unless FERC steps in.
Mr. Chairman, it's been more than a year since FERC finally did
mitigate prices in the West and began to investigate the ``just and
reasonableness'' of rates in my state. And to date, all we have to show
for it is a slew of administrative processes--which, to consumers in my
state, simply seem like new ways to protect those who conspired to take
money out of their pockets in the first place.
I assure my colleagues that the Northwest's focus on this issue
will not relent until FERC resolves our claims one way or another.
And, Mr. Chairman, I would be remiss if I didn't suggest that--to
the people of Washington state--FERC appears to be a latter-day Nero, a
federal agency that fiddled while our economy burned to the ground. I
submit that this isn't a particularly fruitful state of affairs, given
the many difficult issues we have to work together to solve in the
coming years.
So I look forward to the testimony here today, and hearing from our
witnesses on these issues.
STATEMENT OF HON. JON KYL, U.S. SENATOR FROM ARIZONA
Senator Kyl. Thank you, Mr. Chairman.
Just two brief comments: The first is I know there will be
some testimony, and Mr. Wood and I have visited a little bit
about the need to expand our capacity for transmission in the
Western United States.
And while I support that, I also made it clear and I
reiterate today, that they need to protect the local customers
of the utility who have already bought and paid for a system to
deliver power to themselves. Their rights should not be
diminished as a result of making that transmission facility
accessible to others; that where there is a so-called native
load, it needs to be served first and foremost by the utility
that built it, and not to have to pay for the right to get on a
system that they have already paid for as a result of the rates
that they have paid for power over the years.
Secondly, I note that while neither the House nor Senate
conference bill in the energy conference committee deals with
the subject of Federal eminent domain, there is increasing
concern on the part of people in the West that the problem
within the domain is not the need to grant Federal condemnation
authority; it is to remove the ability of the Federal land
owners in the Western United States from stopping projects that
have the support of the local decision makers with respect to
transmission rights of way.
So if we are going to talk about eminent domain, I think
the first subject that has to be talked about is all of the
panoply of laws that make it possible for people to stop or to
require relocation of sites that are agreed to by the local
people who have the decision making authority in the States.
But because there is a Federal nexus, because of the amount of
Federal ownership, there is a requirement for some kind of
Federal sign-off, or at least an opportunity for people who
want to stop it to cause mischief using the Federal laws that
exist.
I share the commissioner's goals here of increasing our
capabilities here. And I think the way we do it, it matters a
great deal to the people who are on the ground, so to speak.
The Chairman. Well, thank you very much.
Senator Thomas, did you have any opening comment before we
start hearing from our witnesses?
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. Yes, Mr. Chairman. I am pleased you are
having this hearing. We, of course, are working very hard on
this in the energy bill, seeking to do something.
In my State of Wyoming, we have real problems with
transportation. We have lots of opportunities for generation,
and we need to get it to the market and those kinds of things.
I just think we really need to come to grips with how we
are going to do something with a national transmission grid and
the RTOs off that. And I think you know we have talked about it
a long time. And I understand that the uncertainty of it as we
sort of not know exactly where we are going, particularly with
generators and so on. But really we have to start to get right
to the core of it and do some things. So I am glad we are
having this hearing.
The Chairman. Well, thank you very much.
Senator Feinstein, did you have any comment before we start
with the witnesses?
Senator Feinstein. No, thank you very much, Mr. Chairman.
The Chairman. Well, let us turn to our two witnesses.
Chairman Wood, thank you for being here. I noticed from the
news that you have been busy with several items in recent weeks
and months, and we are anxious to hear about those and
particularly as they relate to the energy infrastructure needs
that you see in the country and how we are going to meet those
needs. So go right ahead.
STATEMENT OF PATRICK WOOD III, CHAIRMAN,
FEDERAL ENERGY REGULATORY COMMISSION
Mr. Wood. Thank you, Mr. Chairman, Senators. I appreciate
your having this conference today. In prior testimonies before
the committee, my colleagues and I have visited about the
strong need to have customer protection through vigilant market
oversight and also the need to have important and balanced
rules of the marketplace. Those are two of the three legs of
really the three-legged stool that FERC's strategic plan is
about.
But the first leg--and honestly of the three, the first in
time as well--is the sufficiency of a robust energy
infrastructure. And I am, again, pleased that that is the focus
of the committee's effort today, because quite frankly it is
the focus of well over half of the FTEs that you all have
allocated to our agency to do the nation's work on energy
regulation are focused on the efforts of sufficient and safe
and robust, environmentally responsible energy infrastructure.
We have had in that regard a number of conferences, three to
date, with two more planned so that we complete our run around
the country, to really go out into the regions of the country,
talk to utilities there, talk with customers there, co-ops, big
and small players, financial investors, State regulators, State
government officials, to talk to those people on their home
turf about the needs that exist on energy infrastructure.
Our first of these was in November in Seattle, where we
talked about needs across the western part of the grid from
really Arizona up to British Columbia. And that was the first
of our efforts.
And the work that we did there was recently updated to
underline the decisions that the committee made last week to
continue further mitigation of market power out in the West due
to the lack of sufficient investment in infrastructure.
My testimony on page four--there are a couple of maps. I
think I will mention the one in light of, I believe, Mr.
Thomas's comments about the need to get, for example,
generation out of Wyoming. On page five of my testimony, in
figure two, there is a map of the Western grid. It is showing
the different constraints that exist on that grid, and you will
notice one in Western Wyoming, Path 19, that is constrained and
is, in fact, trapping a significant amount of Rocky Mountain
generation from getting into the western part of the grid.
There are constraints throughout the grid, as you can see.
The lack of investment in transmission was an issue that came
up in the West. But quite frankly, it came up in the Northeast
when we met in December--I believe--I'm sorry, at the end of
January in New York, and came up again when we met last month
in Orlando to discuss issues in the Southeast.
The recurring theme that we are seeing is, yes, powerplants
are getting built. And I think that has been a phenomenon that
has really dropped off a lot in the past few weeks and months
with the dramatic escalation of the cost of credit in this
industry. But the under-investment in transmission grid was a
recurring theme across the country.
The secondary effect of infrastructure that we studied as
well, and heard a lot about, was the sufficiency of the natural
gas transportation grid.
An increasing amount of fuel--an increasing amount of power
is being generated by natural gas. It has a lot of
environmental attributes. It is a domestic fuel. There are a
lot of positive things about natural gas.
But one of the most important things about it is that it
really only exists on certain parts of the Continent and needs
to get to the markets, which are generally distant from where
the production zones are. And the need to stay ahead of that
curve on construction has generally been met over the past
decade. But I do fear that with certainly the type of headlines
like we saw in today's Journal, ``Amid Collapsing Power Market,
Energy Companies Are Reeling,'' there is a significant overlap
on the natural gas side.
This is not just a power--electric power issue. It also
spills over into the natural gas side.
I asked staff this morning to tell me who the top companies
on the natural gas side were for pipelines. The first is El
Paso Natural Gas. The second is Williams. The third is Duke.
The fourth is NiSource. The fifth is Kender-Morgan. And the
sixth is Enron. Not all the companies on that list are what you
would call in trouble, but more than half of them are.
And so for it to depend on that list to be the golden arrow
on the natural gas side to make sure we have sufficient natural
gas, the recent credit-worthiness issues that have been raised
about a number of these companies really do bring us to a very
critical point on the future of infrastructure investments in
this country.
What can we do about it? I know your committee, Senator
Bingaman, always looks for good answers. One of the things that
FERC is trying to do is to give some certainty about the rules
of the road for the power industry much as it did with the gas
industry a decade ago, trying to put the balance out there,
getting good infrastructure with sufficient protection of
customers so that a balanced and reasonable price for power and
a sufficient reliable supply of power results from that.
We are planning on proposing next week a rule to
incorporate the best practices of power markets across the
world and adopt those as a standard for the power markets here
in the United States so that we can move forward with some
consistency and some tangible benefits for customers from a
power market that to date has not produced those.
It is very important certainly in the ongoing work of our
Commission and in our collegian work with other commissions to
continue to monitor these markets. I think as we had discussed
at prior hearings, it is important to have a vigilant market
cop looking over the industries here to make sure that rules
are obeyed and followed.
And the Commission, as you referred to in your opening
statement, Mr. Chairman, is busy with investigating a number of
issues related to power and gas markets, particularly in the
West, where we have had two years ago now sufficient
disruptions in gas and power supplies.
So the Commission is moving forward on a number of fronts.
I appreciate and recognize that the Congress is also moving
forward in looking at a number of legislative issues. And I
think the commission and my colleagues and I have weighed in on
that when we have been asked.
And I am encouraged by the efforts of a number of you on
the conference committee to pursue and wrap up that bill. I do
think some certainty from both the regulatory side and from the
legislative side will help a lot in bringing the energy markets
back to some sort of equilibrium, because they are clearly not
there today.
And with no further ado, I will stop and look forward to
your questions.
The Chairman. Well, thank you very much.
[The prepared statement of Mr. Wood follows:]
Prepared Statement of Patrick Wood III, Chairman, Federal Energy
Regulatory Commission
Thank you for the invitation to speak to you today about the
nation's energy infrastructure. My colleagues on the Federal Energy
Regulatory Commission and I share this Committee's concern over the
adequacy of America's energy infrastructure. It has been proven
repeatedly that without enough power plants, transmission lines, fuel
supplies and customer demand response, electricity becomes less
reliable and wholesale prices become more costly and more volatile.
Dependable, affordable, competitive wholesale energy markets rest on a
three-part foundation: adequate infrastructure, sound market rules, and
vigilant oversight of the marketplace. Weakness in any one element can
hurt markets, hurt American energy customers, and ultimately impact the
entire U.S. economy. FERC is working hard to set clear rules that
promote all three goals.
Today I will address several issues. First, I will review how
electric infrastructure affects wholesale electric markets and offer
some examples drawn from the Commission's regional infrastructure
studies and conferences. Second, I will talk about the steady growth in
the nation's natural gas pipelines as a significant success, reflecting
both the solid competition in the natural gas commodity market and
sensible economic regulation of the pipeline industry. This is the
model we hope to emulate, in part, with our Standard Market Design
initiative in electricity. Third, I will look at the importance of
technology and innovation to improve the quality of today's
infrastructure and leverage it into the future. Last, I will talk about
FERC's strategic plan and the resources we have committed to promoting
infrastructure adequacy.
infrastructure and wholesale electric markets
It has long been understood that without adequate electric
infrastructure, grid reliability becomes compromised and costs rise. In
decades past, this was less of a problem than it is today, because
state regulators ordered utilities to build more power plants and
transmission lines to connect the plants to the customers and acted to
assure cost recovery for those investments. Reserve margins generally
exceeded twenty percent, reliability was good, and utilities rarely
balked at making new infrastructure investments.
President Bush's National Energy Plan offered numerous
recommendations addressing the nation's energy infrastructure.
Consistent with the Plan, the Department of Energy recently issued the
National Transmission Grid Study, which does an excellent job of
explaining the vital role of the transmission grid and the consequences
of our national failure to invest in it. Today's 150,000 mile high-
voltage transmission system was originally built by integrated
utilities to deliver electricity from large, remote power plants to
their customers; the grid was then expanded and interconnected among
utilities and regions to improve reliability by sharing excess
generation.
But the situation is very different today. For the past decade,
most of the new generation in the country has been built by independent
merchant generators rather than by vertically integrated utilities. As
it became harder to site new transmission lines and returns on
investment appeared to be more dependable in other sectors, investment
in new transmission fell behind the pace of economic growth and
electric load growth. Although the economy grew by 40% between 1989 and
2000, during that same period electric demand grew by 29% while
transmission mileage increased by only 11%.
As Americans' energy demands have grown, the high-voltage grid has
become increasingly congested, increasing costs across the board for
most customers. Across the country, transmission constraints limit the
amount of electricity that can flow from one region into another. Most
constraints raise prices--for instance, constraints cost California
electricity customers $222 million for congestion alone between
September 1999 and December 2000. In other cases inside southwest
Connecticut, in New York City and Long Island, on the Wisconsin-Upper
Michigan Peninsula, and elsewhere--transmission constraints limit
electricity imports to such a degree that it can become a daily
challenge for the local utility to keep the lights on when temperatures
peak and raise demand, or when local generators fail inside the
electrically isolated ``load pocket''.
Figure 1 * shows some of the major transmission constraints in the
Eastern Interconnect, the degree to which each is congested, and the
direction of the flow. Many of these constraints occur within broad
regional markets, limiting the ability to deliver power from one sub-
region into another--for instance, there are large concentrations of
generation in Maine seeking to export into the Boston and central New
England market. Similarly, many generators concentrated in the lower
South and Midwest are trying to sell into Florida.
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* Figures 1 through 4 and Attachments A and B have been retained in
committee files.
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DOE and FERC have concluded that the lack of a strong, nation-wide
transmission system is limiting effective competition, raising costs to
all electric customers, and risking reliability in many areas. We must
begin working to relieve these transmission bottlenecks, pursuing broad
regional interests and needs. DOE's National Transmission Grid Study
recommends the creation of multi-state planning entities with a long-
term time frame and inclusive process to identify needed transmission,
generation, and efficiency improvements that will benefit entire
regions. FERC will be considering such a process in our Standard Market
Design proposal, due out at the end of July. The National Governors
Association recently issued a thoughtful report calling for regional
planning for energy infrastructure. I strongly endorse its
recommendations. Cooperation and mutual support between states and
governments at every level will be essential if we are to solve these
pressing infrastructure challenges.
But neither FERC nor DOE can solve the siting problems that impede
most new transmission construction. Most citizens oppose the siting of
new transmission lines close to their communities, and their opposition
can delay or kill a new line. Since citizen opposition will not change,
we can only deal with this challenge by: motivating state regulators to
use their siting authority in a more aggressive yet cooperative
fashion; using energy efficiency, load management, distributed
generation and demand response to limit the number of new lines needed;
and using new transmission technologies such as FACTS (Flexible
Alternating Current Transmission System) and advanced conductors that
can transmit more energy through a given cable to maximize the grid
assets already in place. FERC fully endorses the DOE Grid Study's
thoughtful recommendations on transmission planning and siting.
A healthy grid needs not only new transmission, but also new
generation sited in locations that are beneficial to the grid as a
whole. To date, generators have built wherever they can build most
cost-effectively, which tends to be at locations which combine access
to available transmission, available gas pipelines, cooling water, and
welcoming communities. Although traditionally the interconnection of
new generation has been negotiated on a case-specific basis between
each new generator and its host utility, FERC recently began working to
develop a standardized interconnection contract and process to assure
that every new generator is treated fairly, consistently and promptly.
This rule, and the policies pertaining to how we pay for new
interconnections and grid expansions, are now under consideration and
out for public comment. These policies should be decided by the end of
the year and should add further clarity and certainty to the investment
climate.
regional infrastructure conferences
Over the past year, FERC has held three regional conferences to
conduct in-depth studies of the broad conditions of the area's energy
infrastructure, and to understand the issues in each region. These
conferences have featured fact-filled presentations on the state of
each region's energy infrastructure (electric power plants, fuel
sources, hydro facilities, gas pipelines, electric transmission system,
and other relevant information), demographic and energy load forecasts,
and panels of experts talking about specific issues. Each conference
has enjoyed strong attendance from state energy regulators as well as
industry members and concerned citizens, enabling wide-ranging
discussions about key regional concerns. The presentation materials for
these conferences are available from FERC's website (see Attachment A).
We will be holding the Midwest conference this fall in Chicago and
going to the Southwest in early 2003.
The first conference, in Seattle on November 2, 2001, studied the
Western states; the data developed then was updated last week to lay a
foundation for our Western electric markets orders. The Western states
are highly interdependent for their electricity and gas supplies, and
have only a 10% reserve margin for electricity. While electric load has
been growing at over 3% per year in the region, the Western states face
slow growth in generation due to the ``tabling'' or cancellation of
over 40,000 megawatts (MW) of planned power plants (California alone
accounts for over half of this number). California and the Pacific
Northwest are highly dependent upon hydro-electric generation, which is
in turn dependent upon yearly rain and snow levels; the extended
drought years from 1999 through 2001 dropped hydro-generation
availability by 40%. California imports on average 20% of its
electricity each year, and imports 85% of its gas to generate over 50%
of its electricity in plants that are old, unreliable, expensive and
inefficient. But while new interstate gas pipelines are being built
across the West, little or no bulk transmission has been built to span
the long distances between generators and customers, or to deliver more
inexpensive electricity between sub-regions. The net result is that the
inefficiencies and shortages in the California electricity market drive
up prices across all other Western states, while the lack of new
transmission and demand response means that congestion costs are
increasing and reliability is decreasing in many areas. For this
reason, the Commission deemed it necessary to continue a tighter market
mitigation regime than exists in other established wholesale electric
markets.
Figure 2 shows how transmission constraints hamper the free flow of
electricity and cause price differentials between constrained sub-
regions of the Western Interconnection. Note how the bottleneck at the
California-Oregon border effectively keeps most cheap hydro-power
bottled up in the Northwest, where prices stay low (recently at $18/
MWh), and limits flow south into California; how the limited flow along
Path 66 pushes electricity prices to $65/MWh north of the Path 15
constraint and $68/MWh south of that constraint (although in other
seasons the price differential is reversed and higher to the north than
the south); and how coal- and gas-fired generation in Arizona and New
Mexico is bottled up east of the Path 49 constraint. These constraints
impede competition between generators and fuels and raise prices for
customers inside the constrained areas (also called load pockets).
Looking ahead, we see several significant problems relating to
Western infrastructure. This summer, there are very tight reserve
margins in California and in the Arizona-Nevada-New Mexico areas. If
either area experiences high generation outage rates (as is possible in
California, with an aged fleet of fossil units) or loses much import
capability (as happened recently on the Bonneville Power Administration
system and in Arizona near Palo Verde due to fires near high-voltage
transmission lines), they could face reliability problems. Over the
long term, new infrastructure is not being funded because there is
little confidence that new facilities will be profitable. Most
infrastructure is built after funding is assured through the
acquisition of long-term contracts with credit-worthy partners; yet
with so many of the utilities in the West either bankrupt or in junk
bond status (see Figure 3), few infrastructure investors are willing to
risk investments in the West. Additionally, it is hard to build in the
West because so much of the land is owned by either federal agencies or
Native American tribes; it can be a challenging and lengthy process to
route a transmission line across these lands. With population growing
significantly in the Southwest and Northwest, once-excess electricity
and natural gas in those regions will become unavailable to export to
California--which will exacerbate shortages in the near future. And
last, with the entire region so dependent upon hydroelectricity, it
remains highly vulnerable to droughts. The financial consequences of
such shortages could again ripple across the entire West.
In the Northeast, there are two main infrastructure stories. The
first is the difficulty of siting new transmission and gas pipelines in
densely populated areas. Although the Northeast, like every other
region, has a growing population with a large appetite for gas and
electricity, few want to live near transmission lines, power plants or
gas pipelines. Thus it is hard to site new power plants next to the
load centers where customers live (as is needed inside New York City,
Long Island, and southwest Connecticut), or to route new gas pipelines
(as with Millennium into the New York City area) or transmission lines
(into southwest Connecticut or across the Long Island Sound) into these
dense urban areas. It is also difficult to motivate the people in one
state to live next to, much less pay for, lines which will benefit
their neighbors but not themselves. As long as these obstacles persist,
the costs of doing nothing will mount--FERC estimates that current
levels of transmission constraints into southwest Connecticut,
southeast Pennsylvania and eastern New York are costing electric
customers as much as $1 billion extra per year in energy costs.
A second, more positive trend is the development of several
proposed merchant (non-utility) electric transmission lines, for-profit
businesses which propose to build new high-voltage transmission lines
to connect loads with energy sources. These include the Neptune
Regional Transmission project (which will bring 4,800 MW from Nova
Scotia, New Brunswick and Maine to Boston and New York City), the
TransEnergie Cross Sound project (which would move 330 MW between New
Haven, CT and Long Island, NY), and the TransEnergie Lake Erie project
(which would transmit 975 MW from Ontario across Lake Erie to either
Ohio or western Pennsylvania). I strongly support the development of
for-profit transmission. FERC is working to assure that independent
transmission companies have a clear opportunity to earn appropriate
rewards for the investment risks these projects pose.
While the Northeast is dominated by aggressive competition between
wholesale generators, with retail competition in most states, the
Southeast is characterized by large, vertically integrated utilities
under traditional cost-of-service regulation, with extensive generation
portfolios and limited opportunities for independent generators.
Electric demand in the region is expected to grow by 20 to 30 percent
over the next decade, primarily fueled by natural gas, even as gas
production in the Gulf of Mexico declines. The grid in the Southeast
was designed to move generation from plants to nearby loads, so it is
inadequate to serve the needs of the competitive wholesale market,
which seeks to move low cost generation in bulk from the Midwest and
central south into Florida and the Mid-Atlantic states. And absent a
liquid power market, incumbent transmission companies have tended to
act in ways that favor their own generation and impede power flows for
independent generators.
The central question to be resolved in the Southeast is, who should
pay for the new transmission facilities that are desperately needed for
the region as a whole? Much of the demand for generation (and thus the
beneficiaries of new bulk transmission lines) comes from neighboring
states, but the new power plants are being built in more central
states. Although the residents of Mississippi, Alabama and Louisiana
are benefiting from the investment dollars, jobs and tax benefits of
these power plants, they are reluctant to pay for any new transmission
lines that may be needed to enable these plants to reach their intended
interstate markets. Similarly, utility customers in Florida and other
power-hungry states don't want to pay to build new power lines outside
their utilities' service territories, even though they want the energy
those lines will deliver. Without regional planning and some wide-
ranging balancing and reallocation of the costs and benefits of this
needed infrastructure, overall delivered energy costs will continue to
rise and competition between regions and efficient plants will be
stifled. I am hopeful that state participation and cooperation can help
solve this difficult problem.
Although it has become a cliche in the past six months, it is worth
repeating that the energy sector has been hard-hit by the collapse of
Enron, investigations by FERC and others into energy trading problems,
and recent business accounting improprieties. Many of the energy
companies that were planning to make significant infrastructure
investments only a year ago have since cancelled their plans or sold
off assets to improve their financial profile. Others would like to go
ahead but cannot find credit-worthy customers to back their plans with
solid contracts. Thus, a strong economy and a strong dose of confidence
and stability in the nation's energy markets will be needed before the
perceived level of infrastructure risk improves and major new energy
investments begin.
gas pipelines as a regulatory success story
America's gas pipeline system has the capacity to carry over 105
billion cubic feet of natural gas per day from Canada, Mexico, the Gulf
of Mexico, and domestic producers across the nation to local
distributors and end users. (See Figure 4) It consists of over 180,000
miles of high strength steel pipe, with regularly spaced compressor
stations to boost the pressure of the gas inside the pipe and keep it
moving. The pipeline system is supported by underground storage
caverns, which hold about 20 percent of the gas consumed each winter to
assure reliable delivery when needed.
The gas pipeline system has been steadily expanded over the years.
Today there are over 60 major pipeline projects proposed by private
investors, funded on the strength of long-term contracts and other
commitments for gas. These projects will build another 5,600 miles of
pipeline at a combined investment cost of over $9.8 billion, to
transport another 20 billion cubic feet of gas per day (a 20% increase
over current levels). Additional liquefied natural gas import
facilities are also planned for near-term investment, to supplement the
nation's aging gas production fields with new supply sources. Amid
these expansion plans, however, several large projects (including the
Independence line that was sponsored by Williams, El Paso, and National
Fuel and Williams' Western Frontier project) have recently been
cancelled due to softness in the short-term market and some financing
problems.
There are several reasons why expansion of the gas pipeline system
has been more successful than expansion of the electric high-voltage
system. First, on the gas side there is a relatively small number of
large interstate pipelines, so each player must take a broad, multi-
state view and has both control of and accountability for the full
geographic span. These companies can secure siting, eminent domain,
cost recovery and rates approvals at FERC. In contrast, electric
transmission companies tend to have a smaller footprint, so they have
little motivation to participate in a multi-state, region-wide project
that benefits customers outside their home turf. In addition, electric
utilities face regulation both at FERC and by state regulators, who may
be reluctant to approve rates for projects without significant local
benefit.
Second, the criteria for pipeline approval and cost recovery at
FERC have been clear and stable for a decade, so pipeline investors
face a relatively clear and certain regulatory environment (other than
the siting risks). On the electric side, the transition to competition
varies by state and FERC's progress toward Regional Transmission
Organizations, Standard Market Design and rate recovery are just now
becoming clear. Last, when FERC issues a certificate to approve a gas
pipeline that authority includes the right of eminent domain if
necessary to acquire pieces of the pipeline route. FERC environmental
and routing approval is lengthy, but swifter than the multi-state
review required for major electric lines.
I believe that Standard Market Design and standard interconnection
rules for new generation will do for electric infrastructure what gas
rules have done over the past decade stabilize the rules for all market
participants, create certainty so that the road to market success
becomes clear and predictable and risks are easier to identify and
evaluate, and establish meaningful incentives for new construction with
clear path to cost recovery.
Another infrastructure issue related to natural gas is the fact
that although the nation's power plant portfolio is relatively diverse
today, over 95% of the new power plants coming on-line in the
nationwide are gas-fueled. Gas demand to serve power plants is so
great--even with recent plant cancellations--that almost all of the
demand for new pipeline capacity is to serve electric generators.
Pipelines into the Northeast, Southwest and California are already
fully subscribed, and new pipelines are becoming fully utilized as soon
as they come on-line. This high level of pipeline utilization, and the
competition between bulk customers and regions for available capacity,
is raising significant gas allocation and service reliability issues up
and down the pipelines. At the same time, production from a number of
the nation's premier gas production areas is flattening, especially in
the Gulf of Mexico, Permian Basin, and elsewhere, so it is likely that
new gas sources and routes will be needed over the long run.
technology leverages infrastructure
There are a number of ways that new technologies will allow us to
leverage our existing electricity infrastructure system in innovative
ways. Some of these include strategies to better use the existing grid,
through energy efficiency, distributed generation, and demand response;
transmission enhancements such as grid optimization through better data
collection, enhanced power device monitoring, and advanced conductors;
and using new technologies to use the grid in different ways, including
advanced power electronics, high voltage direct current lines, and new
cables such as high temperature superconducting cables.
Energy efficiency includes classic energy conservation and load
management. Energy conservation devices such as compact fluorescent
light bulbs and high-efficiency appliances and windows reduce total
energy use across the board. Load management reduces peak loads, either
by eliminating or reducing the activity (as by cycling residential air
conditioners on and off during peak use hours) or by moving the
activity to off-peak hours. Energy efficiency is an essential way to
leverage existing transmission assets because it allows customers to
get more results from each MWh consumed--for instance, the combination
of passive solar architecture with insulated building shells and
windows, a ``cool roof'' (low heat-absorbing), and efficient appliances
and plug loads inside a home or office building significantly reduces
the energy used to keep its occupants cool and effective during summer
peak hours. Thus the building consumes much less electricity during
peak hours and uses less of the limited assets of the local generation
and transmission system. This reduces total energy use, lowers summer
air pollution, and improves urban reliability within the load pocket
often at lower net cost than adding new generation or transmission.
Demand response is a crucial element for efficient grid use, as
well as an effective deterrent to the exercise of supplier market
power. Demand response moves a step beyond energy efficiency, to
empower customers to change their energy consumption in response to
energy prices over time. Most retail customers see flat, ``after-the-
fact'' electric prices that give little hint of the underlying cost of
energy production; they don't reflect scarcity, as when total demand
outstrips supply and purchasers compete for the limited power
available, or the higher production costs that occur when more
inefficient (and costly) power plants are brought on-line. Most
customers have a sense of when a product or service costs too much, and
many would be willing to use less electricity when it costs more.
Demand response programs give customers this opportunity, using
technologies ranging from real-time pricing with ``smart meters'', to
time of use rates with interval meters, or classic interruptible and
curtailable programs which reward customers for sudden power
reductions. Such programs allow grid managers to leverage existing grid
assets by reducing peak loads and thus improve the ability of a
constrained grid to serve more customers reliably. Demand response,
energy efficiency and distributed generation programs can be targeted
within constrained load pockets to relieve strains on the grid and
delay asset exhaustion--this is being done in New York City, Southwest
Connecticut, Chicago, and elsewhere.
Distributed generation (small generators using renewable or fossil
fuels) can be used close to load centers to improve grid reliability
while reducing the need for new transmission and reducing transmission
line losses (the need for additional generation to replace energy lost
due to resistance along the lines). Distributed generation includes
solar photovoltaics (as on home rooftops), small wind generators (as at
farms and oilfields), combined heat and power (once called
cogeneration, used at office buildings and industrial sites), diesel-
or natural gas-fired reciprocating engines (as for hospital and
industrial emergency generators), and newer technologies such as fuel
cells, microturbines, and flywheels (technically a form of energy
storage). These are often installed by customers who wish to improve
site reliability, reduce or stabilize energy costs, reduce
environmental impact, or gain greater independence from the grid. Used
in urban areas and at transmission substations, distributed generation
can improve local voltage stability, reduce the need for imports into
the urban area, expand the capability of local substations, and reduce
net emissions from power generation.
It is also possible to enhance the operation of existing grid
assets. One way to do this is to collect better data on the condition
of the grid in real-time, using direct system voltage and flow sensors
and dynamic power device monitors to better measure system operating
conditions. This allows operators to manage the system less
conservatively without sacrificing reliability, and run the system
closer to its true capabilities. Improvements in system optimization
modeling are giving grid managers a more sophisticated and wide-scale
understanding of grid conditions and interactions, so they can use
transmission and generation dispatch more effectively and reliably. And
recent improvements in the materials used to make transmission
conductors (high voltage cables) are improving the voltage carrying
capacity of the wire, so it can be used under higher temperatures and
often at lighter weights. These conductors can be used to replace
existing wires in a strained transmission system, so the same right-of-
way and towers can support greater throughput after reconductoring.
Although these cables are not inexpensive, they are an attractive way
to get more energy into constrained urban areas that face opposition to
new transmission lines.
It is worth noting that once Regional Transmission Organizations
are in place, they will have the analytical tools and regional scope to
operate the transmission grid and generation resources more effectively
than is currently possible for smaller utilities and ISOs. RTOs will
also be charged with facilitating the integration of demand response
into wholesale markets, as a way to balance against generator market
power. RTOs will be the coordinators and facilitators for a very open
regional power planning process, which should encompass not only which
new transmission lines are needed, but also how to use energy
efficiency, demand response, distributed generation and smarter
generation siting to better manage existing and future grid assets for
economy and reliability.
Last, there are a number of new technologies that offer
opportunities to change the way engineers design and use the grid.
These include high temperature superconducting cables, high-voltage
direct current lines (HVDC, which can link asynchronous systems and
perform long distance transmission with low losses), and flexible
alternating current transmission system devices (FACTS, which is a set
of power electronics technologies that allow rapid, precise control of
grid flows and eliminate loop flows). Many of these technologies, and
others, are not fully commercial yet, but they offer great promise.
Unfortunately, it will take some time before this promise is realized,
because the energy industry today faces so much business and regulatory
risk that its members are hesitant to take on increased technology
risks as well.
DOE's National Transmission Grid Study offers a good overview of
these technology options and opportunities, as does extensive work by
the Electric Power Research Institute and other sources. Both sources
note that if we wish to reap the benefits of such technologies in the
future, we must continue to support and fund research and development
efforts in the present.
infrastructure in ferc's strategic plan
In September, 2001, the Commission adopted a strategic plan to
support the vision of reliable energy markets. But it is impossible to
achieve that goal without a sound energy infrastructure. Thus, the
first of the three substantive challenges in FERC's strategic plan (see
Attachment B) is to ``Promote a secure, high-quality, environmentally-
responsible energy infrastructure through consistent policies.''
Agency objectives and major activities under this goal include:
1.1 Remove roadblocks impeding market investment--processing
gas pipeline certificate applications and hydroelectric dam
license applications, handling gas and hydro compliance
matters, preparing the electric standard interconnection rule,
and preparing for and conducting the regional infrastructure
conferences; work with Council on Environmental Quality and
other agencies to strengthen inter-agency coordination and
shorten processing timelines;
1.2 Provide clarity of cost recovery to infrastructure
investors--process rate filings from gas and oil pipelines, and
consider innovative rate proposals from electric transmission
entities;
1.3 Proactively address landowner, safety and environmental
concerns--dam safety program, including inspections of 2,058
dam safety inspections, LNG reliability inspections, respond to
landowner inquiries, conduct environmental analyses for new gas
and hydro projects, incorporate reasonable environmental and
safety provisions into new licenses, collaborate with
stakeholders and conduct gas outreach activities;
1.4 Stimulate use of new technology--become familiar with
new technologies and their uses, ensure that rules enable the
use of new technologies;
1.5 Promote measures which improve the security and
reliability of energy infrastructure--improve security at dams
and pipelines, process applications for security-related cost
recovery, protect critical energy infrastructure information,
develop standards for electric industry cyber-security, and
coordinate with other agencies and stakeholders to better
understand infrastructure security issues and work proactively
to reduce energy infrastructure vulnerability.
For fiscal year 2002, FERC has committed over half of our
approximately 1,150 full-time employees to these infrastructure
activities. In sum, I believe that an adequate energy infrastructure is
critical for the economic success of our nation. Infrastructure
investments bring disproportionately high returns for society--new
pipelines and transmission lines lower delivered energy costs by
reducing congestion and improving competition and commerce between
regions. Better infrastructure lowers costs by lowering supplier market
power. It improves energy reliability and security. And thanks to the
promise of new technologies and smarter operations, we may be able to
get better grid operations without a bigger, more intrusive footprint
on our physical environment. I urge your continued attention to this
important, yet under-appreciated, problem.
The Chairman. Mr. Nevius, why don't we hear from you on
behalf on the North American Electric Reliability Council? And
then we will have some questions.
STATEMENT OF DAVID R. NEVIUS, VICE PRESIDENT,
NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL
Mr. Nevius. Thank you. Thank you, Mr. Chairman, members of
the committee, fellow witnesses, not only Chairman Wood but
others that will follow, and guests, good afternoon.
NERC is very pleased to have this opportunity to appear
today and address some of the barriers to expansion of our
Nation's electricity supply and delivery systems. These
barriers must be removed if we are to maintain the reliability
of our electric supply and to reap the benefits of competitive
electricity markets.
While there are issues and uncertainty surrounding the
development of electricity supply, namely generation, the lack
of expansion in the Nation's electricity transmission systems
is by far the more serious concern. If the current trends
continue, it will seriously restrict the choices we have
available to us for meeting the growing demands for electricity
in the country.
First, let me tell you where we are today. And this is
based on our 2002 summer assessment. The high voltage electric
transmission systems that serve North America are expected to
perform reliably this summer.
However, transmission congestion is expected. And that is
going to require the use, in some cases, of congestion
management tools or the implementation of what is known as
NERC's transmission loading relief procedures to avoid
violating the system operating security limits, the physical
limits of transmission lines and transformers.
Already this summer some firm power transfers from the
Southwest to the Midwest have had to be curtailed on several
occasions due to these limits.
Looking ahead, with electric demand growth, new generation
additions, and the increasing number of electricity
transactions, that is going to continue outstrip the proposed
expansion of our transmission systems in many areas of North
America.
Chairman Wood has already documented in his testimony how
much transmission expansion has lagged behind the developments
in other areas of the electricity industry. Unless the barriers
are removed, few new lines and other reinforcements will be
made, and electricity transactions in many parts of North
America will become increasingly limited.
The transmission dollars are being spent today, some of
which are quite significant. Later, you will hear from Mr.
Landrieu in his prepared remarks where he cites $600 to $700
million worth of planned transmission investments over the next
five years in the PJM area alone.
PJM may be the exception in this regard as other areas, the
only significant transmission investments are those used to
connect new generation or large customers to the grid, not to
build lines that will strengthen the overall grid's ability to
move power from one part of the country to another.
This means there will be increasingly--we will increasingly
experience limits on our ability to move power around and that
commercial transactions that could displace higher priced
generation in some areas will not occur.
It could also mean that some areas experiencing temporary
generation shortages may not be able to import all the power
that they could otherwise from other areas.
To address this growing concern regarding the lack of
transmission development, NERC's planning committee in October
2000 established a task force to analyze the issues and
obstacles that are impacting the planning and expansion of
transmission systems.
Now, their report, which I have noted in my testimony,
``Transmission Expansion Issues and Recommendations,'' was
approved by our board of trustees in February of this year. It
presents recommendations to reduce or eliminate many of these
obstacles.
In my prepared remarks, I cited a few of the report's
recommendations, and I commend the full report to the
consideration not only of the committee but of others who are
dealing with these issues.
NERC is also participating in the transmission grid
solutions subcommittee of the Secretary of Energy's Electricity
Advisory Board to provide recommendations to the board and the
Secretary on how to improve the physical and financial State of
our Nation's transmission infrastructure.
The subcommittee's work, which is still in progress, is
organized around a review of the National Transmission Grid
Study recommendations
I would be remiss if I did not acknowledge this committee
and the full Senate for the major step they took to ensure the
reliable operation of the North American bulk power system when
it adopted H.R. 4 back in April.
H.R. 4, as you all know, authorizes the creation of an
industry-based North America wide electric reliability
organization to develop and enforce reliability standards.
Special thanks to Senator Thomas for his leadership on this
issue and to Mr. Ward, who is representing NASUCA for his
organization's continuing support for this important
legislation.
Just before I close, I would like to take off my NERC hat
for a minute and offer a personal observation as someone that
has been in the transmission planning business and has
participated in a number of the studies that have been done
over the years addressing the barriers to transmission
development. Some of these studies date back to the mid-
eighties.
In my opinion, we do not have a shortage of good analysis
of the barriers or a shortage of good recommendations that can
eliminate many of those barriers. I would note in this regard
the excellent recommendation of the National Governors
Association study on barriers to the development of
transmission. But the study I am referring to is one done in
1987.
And the current study that was just released early last
week, I believe, repeats some of the same recommendations. But
not many of them have been followed through on.
I guess I would also note that some work that the Keystone
Policy Dialog Group did on model State siting and certification
codes. Some of the more recent recommendations that appear in
the NGA report and others repeat some of the same points that
were made back in 1987 and subsequently.
My point is here that we have to do more than just develop
the recommendations and leave them on the bookshelf to collect
dust. Hopefully the work that FERC will do through its standard
market design initiative and DOE's follow on initiatives to the
national grid study will be able to pick up on some of these
recommendations and move them forward.
In conclusion and with NERC hat back on we commend the
committee for attending to this critical issue of enhancing our
electricity supply and delivery infrastructure.
I would note that in Mr. Makovich's prepared remarks the
solutions to transmission investment gridlock are not simple,
because transmission systems are not simple. We have to pursue
a portfolio of approaches and actions to address this complex
array of technical, regulatory, and public policy issues if we
are to make the necessary improvements.
Operating around these limitations and forgoing economic
opportunities because we cannot find a way to expand our
transmission system is not a sound or responsible strategy. Our
nation's citizens and its businesses deserve a robust
electricity supply and delivery system that allows us to
realize our full potential. Thank you very much.
[The prepared statement of Mr. Nevius follows:]
Prepared Statement of David R. Nevius, Vice President, North American
Electric Reliability Council
summary
The North American Electric Reliability Council (NERC) \1\ believes
that barriers to the development of the Nation's electricity supply and
delivery infrastructure must be addressed if we are to maintain the
reliability of our electric supply and reap the benefits of competitive
electricity markets. The expansion of the Nation's electricity
transmission infrastructure, in particular, has lagged far behind,
which seriously restricts the available choices for meeting the growing
demand for electricity.
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\1\ 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 customers 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.
---------------------------------------------------------------------------
In the near term, transmission congestion is expected to continue.
Demand growth, new generation additions, and the increasing number of
energy transactions continue to outstrip the proposed expansion of
transmission systems. Unless regulators authorize cost recovery
mechanisms that encourage investment in needed transmission facilities
and address obstacles to the siting of new lines, few new transmission
facilities and needed reinforcements will be constructed. Absent new
transmission facilities, electricity transactions in many parts of
North America will become increasingly limited.
The outlook for generation supply is more positive, but there are
still many uncertainties. Recent events have caused some project
developers to cancel or delay planned new generating facilities.
Fortunately, most of the affected projects were planned for service
beyond the next few years, so generation supply in the near term is
expected to be adequate.
In the longer term, generation adequacy is more difficult to
assess. Generation developers are challenged to obtain suitable
interconnection and transmission access agreements, the necessary
siting and environmental permits, financial backing, and a dependable,
cost-effective fuel supply and price. Political and regulatory actions,
such as wholesale power price caps and state mandated moratoriums on
the construction of new generating facilities within their borders,
could also influence the amount of new generation built over the next
ten years in some areas. Further, the lack of new transmission
construction can hinder the ability of plant developers to get their
power to market. Finally, because the majority of new generating
capacity additions are being driven by market signals, rather than
established capacity margin targets, margins will likely fluctuate from
year to year and area to area, similar to normal business cycles
experienced in other industries. NERC is tracking this issue closely
and will continue to address it in NERC's annual 10-year Reliability
Assessment reports.
nerc's 2002 summer assessment
Generating resources are expected to be adequate to meet projected
demand for electricity in North America this summer. However,
southwestern Connecticut and southern Nevada are areas of concern.
Transmission limitations into southwestern Connecticut and tight
capacity margins in southern Nevada make these areas particularly
susceptible to reliability problems associated with delays in the
installation of new resources, lower than expected generating unit
availability, or extreme weather.
Even in areas where resources are expected to be adequate,
unanticipated equipment problems and extreme weather can combine to
produce demands that temporarily exceed available generation and
transmission capacity, as we have already seen in several areas this
summer.
Significant amounts of new generating resources have been added in
several Regions since last summer and projected capacity margins have
likewise increased, especially in the Midwest, Southwest, and Texas.
Despite recent announcements that planned new generating plants will be
delayed or canceled, those previously planned to be in-service this
summer are still on schedule and are expected to be available to serve
peak demand.
The peak demand for electricity in the U.S. is projected to be
about 2\1/2\ percent higher than last summer. However, last summer's
demand was below forecast, so the projected increase indicates
essentially no real growth in peak demand. This situation is primarily
the result of the slowdown in the North American economy. The
historical average annual demand growth for the last ten years has been
about 2\1/2\ percent.
The North American transmission systems are expected to perform
reliably this summer. However, transmission congestion is expected,
which will require the use of congestion management tools or the
implementation of NERC transmission loading relief (TLR) procedures to
avoid violating operating security limits. Already this summer, firm
power transfers from the Southwest to the Midwest have had to be
curtailed on several occasions.
transmission expansion lags
Over the last 10 years, circuit-miles of high voltage transmission
lines (230 kv and above) increased at only 0.75 percent per year. Over
the next 10 years transmission owners are projecting that circuit miles
of high voltage transmission will increase at a rate of less than 0.5
percent per year. Stated another way, in North America 10 years ago we
had a little less than 200,000 circuit-miles of high voltage
transmission lines. Right now we have about 200,000 miles of lines. And
10 years from now we are projecting that we will have just a little
more than 200,000 circuit-miles of high-voltage transmission lines.
Transmission dollars are being spent today, some of which are quite
significant. However, these transmission expenditures are primarily
used to connect new generation or large customers to the grid, not to
build new lines to strengthen the grid's ability to move large blocks
of power from one part of the country to another. That lack of
transmission expansion means that we will increasingly experience
limits on our ability to move power around the country and that
commercial transactions that could displace higher priced generation
won't occur. It will also mean that areas experiencing temporary
generation shortages may not be able to import power from other areas
in emergencies.
addressing the impediments to transmission expansion
The reliable operation of the interconnected transmission systems
in the near term is highly dependent upon coordination and proper
actions by transmission system operators. In the longer term, the
reliability of these systems will also be highly dependent upon the
location of new generation resources and the addition of new
transmission facilities.
We clearly need to remove the impediments and disincentives to
expansion of the transmission grid. With few major transmission
facilities and reinforcements identified for construction over the next
several years, transmission congestion is expected to increase and
electricity transactions will likely continue to be curtailed.
To address this growing concern, the NERC Planning Committee, in
October 2000, established a task force to analyze the issues and
obstacles that are impacting the planning and expansion of transmission
systems. Their report, ``Transmission Expansion: Issues and
Recommendations,'' \2\ approved by the NERC Board in February 2002,
presents recommendations to reduce or eliminate these obstacles to the
expansion or reinforcement of the transmission systems. Particular
emphasis is placed on the recommendations where NERC can play a
significant role in achieving these objectives.
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\2\ ftp://www.nerc.com/pub/sys/all--updl/docs/archives/
TransmExpansion--BOTapprvd--022002.pdf
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Some of the recommendations addressed to others that appear in the
report are:
Transmission owners responsible for the reliability of the
interconnected transmission systems should periodically review
and document their future transmission corridor requirements
with appropriate regulatory bodies.
Major transmission projects, where possible, should be
planned with appropriate margin to provide capacity to meet
system needs beyond the current or near-term system
requirements. Such margins may provide the flexibility required
to maintain reliability during maintenance and construction
outages, and may also help conserve and make optimal use of
difficult to obtain right-of-way corridors. These transmission
margins could be achieved, for example, by using larger
conductors, providing space for additional circuits on
structures (e.g., double circuit structures) or on the right of
way, and employing tower designs readily adaptable to higher
voltage operation.
Formal coordination procedures among neighboring Regions,
systems, and other entities should be developed by the regional
transmission organizations (RTOs) and regional reliability
organizations to avoid case-by-case resolution of the planning
and expansion of the transmission systems. The coordination
process should integrate the planning of generation facilities
with transmission.
Consistent with FERC Order 2000, regulators should authorize
cost recovery mechanisms that encourage investment in needed
transmission facilities. Further, where regional transmission
projects are involved, regional cost recovery mechanisms need
to be developed.
The transmission system planning process must encourage
greater regulatory and stakeholder participation. This
participation must occur early in the planning process as
opposed to waiting until the certification or licensing phase.
Even though transmission expansion may not be required for
several years into the future, the certification or licensing
process should allow for the identification and acquisition of
critical rights-of-way or corridors for transmission projects
as early as possible. Transmission providers should be
permitted to acquire and recover costs for future use
corridors.
Regulatory agencies should be adequately staffed or engage
outside consultants, as needed, to implement the siting process
in a timely fashion. Siting laws should permit the applicant
entities to fund such consultants.
In addition to this NERC study, the Secretary of Energy's
Electricity Advisory Board in April 2002 approved the formation of the
Subcommittee on Transmission Grid Solutions to provide recommendations
to the Board and the Secretary of Energy on how to improve the physical
and financial state of our nation's transmission infrastructure. The
Subcommittee's work, which is still in progress, is organized around a
review of the National Transmission Grid Study and will focus on the
most important policy recommendations contained in that report.
Also, the National Governors' Association recently released a
report of its Task Force on Electricity Infrastructure titled,
``Interstate Strategies for Transmission Planning and Expansion.'' The
Task Force's Gubernatorial Steering Committee is co-chaired by
Governors Engler (Michigan) and Patton (Kentucky).
The Committee should consider in its deliberations the findings and
recommendations from these and other studies on removing impediments to
the expansion of our electricity infrastructure.
securing the grid
Another critical aspect of our electricity infrastructure,
especially in light of recent world events, is its ability to avoid
disruption by physical or cyber threats. NERC, as the Information
Sharing and Analysis Center (ISAC) for the electricity sector, works
with federal, state, provincial and local organizations, and its
Regions to monitor the activities under way to protect the physical and
cyber security of the North America's electricity systems. NERC will
continue to coordinate security alerts throughout the industry to
protect the infrastructure of the electric systems.
In addition, NERC has prepared an Approach to Action and Business
Cases for Action that define the need for vigilance in securing
critical assets, and developed ``Security Guidelines for the
Electricity Sector'' that suggest ``best practices'' for protecting
critical facilities against a ``spectrum of threats.''
reliability--the foundation of a sound and secure electricity
infrastructure
The Senate took a major step to ensure the reliable operation of
the North American bulk power system when it adopted H.R. 4 on April
25, 2002. H.R. 4 authorizes the creation of an industry-based, North
America-wide electric reliability organization, or ERO, to develop and
enforce the standards needed to protect the reliability of the electric
grid.
In approving this bill, the Senate has clearly indicated that we
need to get on with the job of creating an electric reliability
organization that will have the ability to set and enforce mandatory
reliability standards throughout North America. Congress has been
debating reliability issues for the past several years, and with the
passage of this bill, we are strongly encouraged that it will finish
the job this year.
The Senate's reliability provisions provide for FERC oversight in
the United States, ensure the full and equal participation of Canada
and Mexico, and protect the important roles of the states and regions
in supporting the reliability of the interconnected North American
electric grid. FERC oversight also ensures that the new ERO will
operate efficiently and fairly.
conclusion
NERC commends the Committee for attending to the critical issue of
enhancing our electricity supply and delivery infrastructure. There is
no one action that will solve the challenges we face. Instead, we must
pursue a portfolio of actions. We are not likely to achieve everything
we would wish for out of any of them, but taken together, the portfolio
approach provides the strongest opportunity for us to make the
improvements we need.
First and foremost, we need legislation authorizing development of
an ERO to set and enforce mandatory reliability rules for all users of
the bulk power system. This will promote and maintain the reliable
operation of the bulk power system that we do have. Further, we need to
expand demand-side measures and develop additional generation (both
central station and distributed). Finally, we need to expand the
transmission grid, by both building new lines and exploiting new
technologies to get more capacity out of the existing grid and carry
more energy over existing rights-of-way.
Operating around limitations and foregoing economic opportunities
because we can't find a way to expand our energy infrastructure is a
not a sound or responsible strategy. Our nation, its citizens, and its
businesses deserve a robust electricity supply system that allows us to
realize our full potential. Thank you.
The Chairman. Well, thank you both for your testimony. Let
me start with a few questions and then defer to Senator
Murkowski.
There is a statement in your testimony, Chairman Wood, that
is or seems quite optimistic, I would say. It is on page nine.
You say, ``I believe the standard market design and standard
interconnection rules for new generation''--these are--this is
the set of rules you are coming out with next week you
indicated, I believe.
Mr. Wood. The first part, yes, sir.
The Chairman. The first part, yes. You say that you believe
those will do for ``electric infrastructure what gas rules have
done over the past decade--stabilize the rules for all market
participants, create certainty so that the road to market
success becomes clear and predictable and risks are easier to
identify and evaluate, and establish meaningful incentives for
new construction with clear path to cost recovery.''
That is a fairly ambitious accomplishment if you can do
that. I do not know if you are in a position to give us any
more insight.
I guess the two aspects of this issue of obtaining adequate
transmission infrastructure that occur to me are how do we
build in reasonable assurance for companies that they can in
fact recover their costs if they invest in additional
infrastructure?
And secondly, how do we ensure that there is adequate
reserve capacity built in or a reserve margin built in, so that
you do not get the situation which at least some people thought
we had in California, which was that all the incentives were
for them to not build any more than was absolutely necessary,
to just build what they were sure would be used. And some
people, at least at the time, were arguing that that is part of
the problem we encountered.
So if you have any thoughts on that, I would be anxious to
hear them.
Mr. Wood. Well, since the second one is easier to answer
than the first, I will take it.
The adequacy of the reserve margin for years in the
regulated era, the States or the local power councils that fell
under NERC's jurisdiction set minimum standards of, say for
example, as we had in Texas: 15 percent over and above your
peak August usage, you should have under contract or under some
sort of agreement that was relatively dependable.
I mean, they kind of varied from State to State. But there
was a--basically a requirement that you overbuy by 15 percent
so that--and everybody had the same obligation big and small,
so that there was no free riders.
In the California--in the early days of the California and,
in fact, currently still, restructuring the State did not
continue that obligation. And, in fact, by its over-reliance on
the spot market, there was not really a strong signal to
anybody either through an overt regulatory means like we used
to have or through any sort of contractual means to build ahead
of the curve. And so when it got hot and hydro went down, there
was, in fact, as you laid out, a dearth of sufficient
infrastructure.
In the new world, there are two ways of dealing with it. A,
trust the market; or B, put in an obligation on the part of
every load serving entity, whether that be in a retail open
State or a retail closed State, to have that same insurance
requirement that we have always had under the regulated era and
then enforce that.
So in other words, if it is 12 percent or 15 percent extra
that is necessary, then have that be done. There are different
ways to do it, and quite frankly that is one of the--the items
that is still very much being discussed up and down our hallway
at FERC, how to do that in a way that really does not recreate
some of the problems of the Old World. And I think we can get
there.
But a resource adequacy requirement, I think you can expect
that FERC will make sure that that is part of the new world. It
may be necessary only in the transition for the first 5 years
or so. And then when the markets are sufficiently robust and
deep, then that may not be needed. But I think certainly for
the front end, I would have to admit that that would be needed.
And I do support that concept.
As to how to assure reasonable recovery to infrastructure
investors, that is easier to guarantee on the regulated side,
i.e., the pipeline and the transmission line side than it is on
the competitive side, which is the gas production, the
powerplants in particular.
We are seeing some more at-risk transmission projects come
to bear. I think the most important way that--the most
important thing missing from the picture today that would be
needed to ensure a reasonable recovery of investment in the
competitive part, i.e, the gas production and power production
segment would be some steady and relatively dependable rules of
the road.
And there are no standard rules of the road now. You have
got some rules here in PJM and I think Dave pointed out that
you are seeing investment done there.
You have got other rules in other parts of the country that
are more or less amorphous. And so an investor looks at that
and says, ``Gosh, that is kind of a risk. I do not believe I
will take it.''
I think we can, by having clear rules, reduce what we call
regulatory risk quite a bit. And I do hope that that is what we
can achieve by the proposed rule making that FERC will put out
for comment next week and by the already released proposed rule
making on hooking up of new powerplants and the standard
interconnection process that that would have.
The Chairman. All right, my time is about up. Instead of
launching into another line of questioning, let me go ahead and
defer to Senator Murkowski.
I know we have several Senators waiting here to ask
questions.
Senator Murkowski. Thank you very much, Senator Bingaman.
I think we are all concerned about the long-term picture.
We recognize that Rome was not built in a day. And you do not
get transmission lines built in a day, and you do not get
powerplants built in a day. And we are not building them this
day. And you and I both know it.
And while your remarks have been somewhat satisfying, the
facts still remain that we do not have the confidence in the
regulatory authorities for some kind of assurance of
consistency. We also have a situation where there is
uncertainty in the marketplace, just as a consequence of the
herd mentality which exists in every investment consideration.
But, if we look at the situation now, we do not have the
luxury of time eternal. We have got to meet the energy needs of
tomorrow by making the investments today. And the investments
are simply not being made.
It is a bleak picture. In the West, we have got tens of
thousands of megawatts of powerplants that have been delayed.
Some have been cancelled.
I am told reserves are about 10 percent, compared to some
States that are a little better off. Texas has got about 30
percent. California needs new transmission import power, but
insolvent utilities, cannot build. They cannot get the
financial commitments. The Government is stepping in to extend
Path 15, which is a responsible alternative.
East coast utilities certainly point out the problem.
Complicated with the financial meltdown, as I indicated,
regulatory uncertainty left a cloud.
California is still blaming industry for problems the State
created trying to duck responsibility. But that is just
politically astute as long as you can spin it.
FERC has been, I think, a part of the problem. And I think
it is appropriate that the Honorable Mr. Wood reflect on that.
FERC has launched a number of restructuring initiatives that
seem to be consistently changing.
And, you know, one of the things that industry wants in the
assurance is some degree of certainty. Some of the initiatives
such as the affiliated--the affiliate conduct rule making
proposed major structural changes without adequate
consideration of the impact on the investment of the
operations.
Some of its investigations have had doubt on the sanctity
of a power supply contract in the Western United States. I
think FERC needs to finish its investigations and swiftly
pursue those who are in violation of law and prosecute, but
lift the cloud over those that have been performing within the
law so that they have the assurance that whatever FERC's
evaluation, review has been concluded.
A financially weakened industry is not going to make the
investments for generation for transmission and pipelines that
are necessary to meet future needs.
And the July 23 New York Times, ``Bloomburg Sees Need for
More Power Plants in New York,'' indicating the city was in
desperate need of more powerplants. They had a damaged power
supply, a fire, and so forth.
But they indicate without the explosion, problems
generating enough electricity still exist. Several new plants
have been approved for construction, but power generation
companies have had hard times attracting financial commitments.
And power marketing competitive realities dictate discouraging
power markets and power companies from investing.
And that would be substantiating with further reviews,
Senator Bingaman, on the status of the public service
commission within New York. So it looks like you could predict
which way the train is heading.
We have identified the need, but we are not getting the
combination of the regulatory authorities and the investment
community together so that the investments can be made.
I would like both your reactions as to whether or not you
feel that this thing can be turned around in time. Or are we
already so far behind from the standpoint of financing and
building that we are facing another crisis in this country that
is going to be promulgated probably by a combination of either
an accident in one area and/or a realization that we are just
going to continue to increase our power utilization in contrast
with bringing on new line reserves to take care of the
increasing demand?
Because, if you agree--and we all seem to agree that the
need is increasing--we are not building them, and we are not
financing them and the regulatory oversight is not moving in an
expeditious manner, are we not heading for the inevitability?
Where is the light at the end of the tunnel, or do we even have
a tunnel?
Mr. Wood. Oh, we are in a tunnel. I would say certainly we
are in a tunnel.
Senator Murkowski. Is the other end open?
Mr. Wood. It is open.
Senator Murkowski. Is the train coming this way?
Mr. Wood. I think it is the sunshine shining through, but I
think it is a long tunnel. And I do think it is important to
understand that a lot of the expectations that underpin the
future for a number of investors in new powerplants assumed a
less robust market and higher prices than have actually come to
bear.
I think it is important to remember that there has actually
been a lot of powerplant construction across the country in the
last 3 to 4 years. Not everywhere--as I am sure Senator
Feinstein knows--but by and large, there has been a substantial
amount of construction of powerplants.
And that surplus of powerplants has put significant
downward pressure on future prices. I think a lot of the
expectations of investors in the current companies that are
building powerplants was that there would be a shortage in 2003
and 2004, and that the forward prices of power were going to be
substantially higher than they are looking to be today.
Of course, a big part of that is due to the general
economic slowdown in the country and the commensurate reduction
of growth and power usage. But with an extra bubble, as we saw
in the gas industry after gas got opened up in the Eighties and
Nineties, if there is a big bubble there, the prices do stay
down.
While that benefits customers, it does not help those who
want to invest in the future. So as to some of the cause of the
current, I guess, deflation of the power market investors, that
certainly ought to be considered.
I think some of the other factors that Senator Murkowski,
you laid out, are valid and guilty as charged. I think we were
rushing to try to get some certainty back into the industry by
resolving these unanswered questions and trying to, at least
from our angle and I think the States are moving in the same
direction, trying to get some certainty and streamlining to the
overall regulatory process so that it is clear how an investor
would get his money back if he built a powerplant or drilled
for gas or laid pipe or built a power line.
Going forward, I think the answer that I gave Senator
Bingaman's first question is going to be an important part of
the puzzle, that there is a requirement for a company that
serves power customers today to have a contract for 3 years
from now as sufficient excess of power.
I mean, the buy now for your needs 3 years from now is that
steady method that got us the sufficient power supply across
the country for the last 100 years. And I think a version of
that has got to continue in the future to make sure
particularly as the country catches back up to the power
supply, and the bubble, in effect, pops, that we are building
ahead of that bubble for the next time around.
That would put us in the--and I think David may have better
data--but in the 2004, probably, time frame, 2005 time frame is
when you do see the construction curve and the demand curve
getting back close again. And we have got to make sure we are
back on track.
I think getting back on track by the end of this year is
certainly an imperative to make sure that that works.
Senator Murkowski. Well, my time is up, but I do not know
whether Mr. Nevius has any comment on that, Senator Bingaman,
but it would seem to me that if you are going to require an
excess capacity as a condition of your approval in the hopes
that it will be utilized in 2 or 3 years, you are putting quite
a burden on the companies and the financial community, because
they are not going to be able to amortize that additional third
until it actually comes on line.
You are going to have to put in the capacity, have the
investment, but are you going to allow them a higher rate of
return to pick up what they would ordinarily amortize under a
regular utilization? And only the stronger companies are going
to be able to afford to have that financing capacity.
And I would hope that your standard marketing design rule
making, which you are coming down with very soon, which I
understand has some criticism because some folks do not feel
there has been enough public input in it, will help address
some of these problems. But, you know, we have an oversight
responsibility here.
You have an obligation to perform and, frankly, I would
rather have the oversight responsibility than the performance
mandate.
The Chairman. Mr. Nevius, did you have a comment before we
go to other questions?
Mr. Nevius. Just very briefly. I think Chairman Wood is
right. We have a few years here in most parts of the country to
get things set right.
Some of the cancellations of plants that Senator Murkowski
referred to actually were plants planned several--for several
years into the future. And most of the plants planned that come
in in the next year or so have not been affected. I say most.
Again, this is not uniform around the country. The other
thing is that I think, on a positive note, folks are putting
more and more attention on the demand side. And I know in
several of the testimonies that were submitted for this
hearing, folks emphasized putting attention on the demand side
of the equation as another way to help address either temporary
shortages or longer term shortages.
So I am not sure it is quite as bleak at the moment, but
things could get worse if the issues are not addressed soon.
The Chairman. Senator Feinstein.
Senator Feinstein. Thanks very much, Mr. Chairman.
Mr. Wood, it is my understanding that as of yesterday, the
major energy companies and the energy sector had lost about 86
percent of its value and $220 billion of capital in about a
year's period of time.
When you said that you felt that one of the most important
things that needs to be forthcoming are stable rules of the
road, I just want to say I could not agree with you more. That
plus transparency in every aspect of trading and dealing in
this economy, or in this energy sector.
I think one of the things that I have found is that this
sector just increasingly loses credibility with people, and the
absence of transparency has become so significant as they look
at it.
I wanted to ask you if you have heard something that I just
got off the Internet, and that is that some kind of an
agreement had been made to provide traders an incentive to move
business away from Enron online; that a company could gain a
greater share of the intercontinental exchange's ownership if
it boosted trades for profit on the exchange; and that some
kind of an arrangement was made between a number of companies.
Insiders apparently say that wash trades would not be
included, but others say that the volume would be a
measurement, therefore creating an incentive to do wash trades.
Do you know anything about this?
Mr. Wood. Not specifically, Senator. As you know, in our
investigation we are looking at the online trading platforms,
which ICE is one.
Senator Feinstein. If I might, I would like to give this to
you then.
The second thing I wanted to ask is when do you expect to
be able to issue your report on market manipulation in
California and the Western energy markets?
Mr. Wood. As I promised you and the members of the
committee in January, we would like to get, and we plan to have
in your hands, an interim report on where we are this summer. I
hope to have that in the next couple of weeks completed.
The staff is, as you can imagine, deep into depositions and
working with our outside consultants and experts on analyzing
what, I believe, is now our millionth page of data in the
market investigation.
But we will have an interim report on what we have learned
and what we are looking at so that you can get a sense of the
breadth of the review.
Senator Feinstein. When would that be?
Mr. Wood. In the next 2 weeks.
Senator Feinstein. In the next 2 weeks.
Mr. Wood. Yes, ma'am.
Senator Feinstein. In the market mitigation order you
issued last week to address the California and Western energy
markets beginning October 1, you pointed out that prices have
rarely reached the $92 price cap, and that for the most part,
the California market is now generally working. As you know,
much of the planned additional generation is not coming online
for one reason or another.
In addition to the credit issue, which you mentioned, what
other signals are there that are--that is a detriment to adding
needed generation, particularly in California?
Mr. Wood. Well, credit certainly is a big one. In my
testimony on one of the maps there, we did a map of all the
pipelines and all the power companies on page six. And I hope
we got you a color copy, because it says who is at junk status,
who is on credit watch, and who is stable in the Western grid.
And we looked at pipelines and power companies, not to
mention all the traders who are not on here. And it was a
colorful map in the wrong way.
The credit-worthiness certainly is a key issue, Senator
Feinstein, for not only construction of new powerplants, but
the power lines and the gas pipelines to get the power to the
system. And I would say that is certainly an important one.
California proposed, and we largely accepted, a number of
definitely good rule changes to bring the rules that the
California market has in line with the ones that have worked
pretty well here on the East Coast for the past 5 or 6 years.
That is an important indicator, but new pipeline capacity,
we did approve of a huge, doubling of the current pipeline last
week. It was our fastest approval ever to bring gas right into
the middle of the State, about 800 million cubic feet per day,
which is a little over 15 percent of the total coming in there.
So that increasing of gas capacity is important. But, you know,
if it is going to a plant that is not built----
Senator Feinstein. Right.
Mr. Wood. I mean, you need both.
Senator Feinstein. Right.
Mr. Wood. You need the gas and the plant itself.
Senator Feinstein. Right.
Mr. Wood. But the two are needed. I think certainly, with
all due respect, maybe a little bit friendlier investment
climate there from the local officials would be a lot more
helpful for people looking where to put capital.
They are building okay in Arizona and Nevada and in Oregon,
but they are not as inclined to go inside----
Senator Feinstein. Well, if you could give me any of the
specifics of that----
Mr. Wood. Thank you.
Senator Feinstein [continuing]. I will do a little
hammering out on the coast.
But let me just say one quick thing. As I have watched this
in the last 2 years from a FERC that was basically a non-
regulatory body that let sort of anything happen to see a new
FERC under your leadership, I must tell you I think is the
single most important thing that can restore credibility to the
investor as well as to the community.
And the fact that you are such a straight shooter and that
you are taking this commission in a new direction, I think is
extraordinary, is important. And I think long-term, the Nation
is going to be much better off for it. So I just want to say
thank you for everything that you have been doing. And I know
it is tough.
Mr. Wood. Well, you are kind, and I should note that I have
got some good colleagues to work with. It is not a one-man
show. Thank you.
The Chairman. Senator Kyl.
Senator Kyl. Thank you, Mr. Chairman.
I especially appreciate, Chairman Wood, the last comment
you made. And maybe, let me throw you a knuckle ball to see if
you can hit that out of the park as well here.
Several of us asked the question in a little different way,
but it all has to do with a comment you made earlier about
trying to provide some degree of certainty so that the
investors will have a sense that they can get in.
FERC was holding hearings on refunds in California--I think
those are done--potential modifications of contracts in
California, Nevada, and elsewhere in the West and imposing
price caps and broad refund provisions on market-based rate
transactions in the West, possibly elsewhere in the country,
I'm not sure.
Will this actually help investors make decisions if they
think that negotiated contracts might be broken or market
prices retroactively lowered? In other words, do you have any
concern that the cumulative impact of these FERC's actions will
actually deter development of additional needed generation in
the West as opposed to helping the situation?
Mr. Wood. I would definitely say that they do not help the
situation. I wish I had come to a different state of facts than
existed when we came a year ago. But the price caps, the
contract hearings, and the refunds, all that did emanate from a
set of facts in late 2000, early 2001 that, I think, evinced a
broken market or one that was pretty close to being broken that
impacted not just Californians, but people across the West.
So I would love to have never been down that path, Senator
Kyl, and quite frankly, a big part of our standard rule making
that we are putting out next week is to make sure we never do
go down that path again, but have clear rules up front that
tell people up front what their expectations are on both the
customer and the supplier side.
Senator Kyl. Thank you. And by the way, Mr. Nevius, if you
want to add anything to any of these, just feel free to jump
in. I will ask the chairman another question.
It has to do with the RTOs. You have certainly encouraged
the development of regional transmission organizations, RTOs,
to facilitate the competitive power and energy markets. And I
am curious both as to your evaluation of the status of the RTO
development around the country, number one.
And secondly, a little bit of a curve ball, not a knuckle
ball, this time, there has been some delay, I am told,
especially in the West connect RTO for the Southwest. I think
it has been pending since October of, yes, 2001. And I am just
curious if you could comment a little bit about how you can
accelerate that process and what the status of it is.
Mr. Wood. This afternoon, we posted an agenda for our
meeting a week from today. And on that meeting is the filing of
the West connect RTO, along with that of RTO West and another
group out there, Transconnect, which is a subset of RTO West.
So it is on our docket for this as we speak.
We are working on the orders on those issues. The
assessment of RTO is more broadly, I think, in the last year,
it certainly has taken an interesting set of turns. But again,
I think most people in the industry, kind of regardless of
their feelings about certain specific issues, do recognize it's
time to get there, to get on to a new level.
I have to say I think the standard market design on rule
making is probably the most open and consultative rule making
process that I have ever seen or been involved in, at either
the State or the Federal level. And plenty of people have
weighed in with their feelings on a number of very important
market design issues in the last year.
That open process, I think, has allowed us all to get
closer together and understand issues such as the native load
issue that you and I have talked about before, Senator Kyl, a
number of issues related to the role of hydro-power in the
broader markets to market mitigation, a lot of the whole host
of issues that the committee and the commission have had a
dialogue on for the last couple of year really have come to
fruit here.
And I think alongside that, certainly is a realization that
the infrastructure to make that happen, whether you call that
an RTO or something else, really has got to be part of the
puzzle. We cannot kind of keep having three or four different
agencies responsible for something and, in fact, never have
anything get done. That is what got us in trouble, I think, 2
years ago.
So I do sense that just the open process that certainly the
committee has facilitated with your frequent hearings and, I
think the commission has done with an open and public process
out there has allowed a lot of people that were not talking to
each other to start talking to each other.
Senator Kyl. One of the concerns obviously in the West are
the number of the public power entities that are not at least
directly subject to the FERC jurisdiction, but it is important
that they be included in this process as well.
You and I have talked about that. Will FERC recognize that
it has to be flexible enough to, in its RTO policies and market
designs, to permit the public power entities that need to be a
part of this to participate in the RTOs and have a voice in how
they are set up.
With due recognition, by the way, of differences between
some of the Western and Eastern kinds of issues?
Mr. Wood. That is correct. Yes, sir, we do.
Senator Kyl. I thank you. And I thank you for the good
meeting we had a few weeks ago in which we went over a lot of
these subjects.
Mr. Wood. Thank you, Senator.
Senator Kyl. I appreciate that.
Mr. Nevius, are you happy with all that?
[Laughter.]
Mr. Nevius. Yes, I am.
Senator Kyl. Okay.
Mr. Nevius. I would second what the Chairman said as far as
RTOs. They are going to be an important element. From a
reliability standpoint, they are going to be the entity that
carries out and makes sure that the reliability of the grid is
there, as well as the market--operating a fair market.
The Chairman. Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman.
And Mr. Wood, good to see you here. I have a general
question about the transmission issue as it particularly
relates to the Northwest. And I think you know of our unique
situation there with BPA and how important it is in the arena
of transmission. And so I just wanted to make sure I understood
whether FERC supported the additional $1.3 billion in borrowing
authority for us to improve and upgrade that transmission,
which is so important for us in moving forward to meet our
growing energy demand.
Mr. Wood. And would have loved even more, but I think from
my discussions with Mr. Wright at BPA, certainly $1.3 billion
can get a lot done. And I am 100 percent behind that.
Senator Cantwell. Good. Well, we hope we can call on you if
we have ever need----
Mr. Wood. We have weighed in. I would be glad to.
Senator Cantwell [continuing]. If we ever need anything
through the budget office, to make sure that they get that
point.
You know, last time we had a chance to talk, we obviously
talked about the situation in the West. And obviously some of
my colleagues have brought that up, and specifically I asked
you last time about whether you thought that the Enron schemes
had represented market manipulation, and you said, ``Yes''; and
whether you thought that manipulated markets could have been
just and reasonable. And you said, ``No.''
And then we got into this point where you said, ``Well, we
have got to make sure the contracts that were signed with Enron
during that period were signed before the FERC price cap was in
place.''
So I just wanted to see where you were in that process. I
mean, in our understanding, all of those contracts in the
Northwest, which I think, you know, are over a billion dollars
of contracts, were all signed prior to the price cap. Basically
most of them were signed from January to May of 2001, so prior
to your mitigation efforts.
So I just want to reiterate how critical it is for FERC to
deal with this issue and get a response to the Northwest's
needs and see where you are in that process relating to unjust
and unreasonable long-term contracts.
Mr. Wood. My understanding, Senator, is that since you and
I visited at the last hearing those have been--I think those
may have been referred to hearing about the time we last
talked.
And I understand from reviewing our dockets before I came
over here that those, in fact, are--a number of those already
are before judges. There is discovery going on. The parties on
both sides are--have, in fact, there is an appeal I had to deal
with last night from one party that--on discovery.
I get to deal with the discovery appeals. I guess that is
why they pay me the chairman's salary. I get to do those. But
there is a discovery appeal that I rejected from a party that
did not want one of the Washington PUDs doing discovery on
their records. And the judge said they should do discovery, and
I agreed.
So I think we are pretty well into those hearings as we
speak and are before one of our independent judges. And they
will write a decision, I assume, in the next short period of
time and get those back to the commission for----
Senator Cantwell. And is the standard that they are going
to use ``unjust and unreasonable?''
Mr. Wood. I think it depends on whether there is a Mobile-
Sierra clause in there, and I think you and I talked about that
last time. And the court, in fact, just 10 days ago reminded us
that there is a difference in a Mobile-Sierra clause--those are
two cases from the fifties or sixties----
Senator Cantwell. Where utilities wanted to come in and
actually increase their rates after you had already approved
them.
Mr. Wood. Right. So that neither party will come in under
either 205 or 206 to either increase or decrease the rates that
they have negotiated. And that is what a Mobile-Sierra clause
is.
I believe some of the contracts out there may have had that
provision in there. We sent all that to the hearing.
Senator Cantwell. Did not FERC just recently issue an
order, which dealt with utility reporting requirements that
said that the standard for market-based rates and contracts
should be the unjust and unreasonable standard?
Mr. Wood. And that is the standard under 205. And if a
party wants to agree that it should be a different standard,
they can do so.
Senator Cantwell. I think you understand our concern in the
Northwest, but let me make sure I am clear. We do not want to
be held to a different standard than California. Our markets
are linked. We have had the same problem.
We obviously want to see unjust and unreasonable as the
standard used to review these contracts. I do not see anywhere
in the Federal Power Act where it says that you should use a
higher standard, the public interest standard, on these
contracts in reviewing them. Is that FERC's intent?
Mr. Wood. The Supreme Court has--and, again, the D.C.
Circuit last week reaffirmed that. So I mean we do and have
lived in a world where there----
Senator Cantwell. On rates that you had already approved,
unlike market-based rates? This--those are----
Mr. Wood. Correct. These are a little different under
market-based rates. That is fair.
Senator Cantwell. I think they are very different under
market-based rates.
I believe that FERC is becoming more hands-off, looking
less at what and how to protect the consumers and assuming that
the market is going to do it. And now when there is a problem,
instead of using the Federal Power Act standard on unjust and
unreasonable, saying, ``Oh, we will use a higher standard of
whether it meets the public interests to void those
contracts,'' FERC is basically moving farther and farther away
from protecting consumers.
Mr. Wood. Well, I would not characterize the current FERC
as being in that mode, Senator Cantwell. I think--however, we
do have the law to deal with. And the law exists out there. The
Supreme Court has interpreted that people can agree to bind
themselves to a higher standard. And that would be the public
standard.
Senator Cantwell. And who is agreeing----
Mr. Wood. Well, a buyer and a seller.
Senator Cantwell. Who is agreeing to binding----
Mr. Wood. A buyer and a seller that sign a contract.
Senator Cantwell. I do not think that any of those PUDs or
the BPA is agreeing to that higher standard.
Mr. Wood. Okay. Well, then in that case, it would not be in
the contract so you would have a just and reasonable standard,
just like we do for----
Senator Cantwell. So FERC will use that standard when it
comes to the Northwest?
Mr. Wood. If, in fact, those parties did not agree to be
judged by a different standard, that is correct.
Senator Cantwell. Okay. That is a very important point, so
I appreciate that if that is the case you will use the Federal
Power Act standard because it is critical to the Northwest in
having some relief from these long-term contracts.
You know, I am sure the committee has probably heard this
over and over, but we have utilities that have had an 85
percent rate increase in Washington. BPA is considering another
11 percent for October of this year.
These contracts are anywhere from 5- to 8-year contracts.
The Northwest is not going to see relief unless FERC acts. So I
appreciate it very much.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Thomas.
Senator Thomas. Thank you.
Senator Thomas. Well, Mr. Chairman, it is interesting that
it sounds from this discussion like FERC is the key to all of
energy. On the other hand, you go on the floor and we get great
debates that it ought to be more to the State and less to FERC.
How do you kind of deal with that division of authority?
Mr. Wood. Well, as a former State regulator, I kind of have
to internalize that schizophrenia myself. You know, you read
the Constitution that did that delicate balance and how the
Senate was set up and how the House was set up to recognize
State and Federal balance.
And I think 230 years later we are still living that. It
works. Whether it is the neatest of all ways to, yes, it would
be--some things might be a lot easier if there were FERC and
nobody else. But, you know, some of the decisions we make might
be wrong and not be checked by anything other than a court.
Senator Thomas. Yes. What----
Mr. Wood. So I think, in a perfect world, it probably is
not too bad from where we are right now.
Senator Thomas. Well, pretty clearly the FERC is in the
interstate movement----
Mr. Wood. Yes, sir.
Senator Thomas [continuing]. And the distribution and the
intrastate ought to be pretty much up to the States. And if I
understand it correctly, that is why we are organizing NTOs, is
to get--or RTOs, is so that the multi-States can deal with
these problems that many of the States are going to you to
resolve.
Mr. Wood. And without having to really federalize every
problem, just empower significantly large regions such as the
west to do the same thing.
Senator Thomas. Now, Mr. Nevius, there are issues
different--we talk about the difference in the West and so on.
How much difference is there in your view in the transmission
system in the West as opposed to the east and so on?
Mr. Nevius. Well, from a technical engineering perspective,
there are a few differences, but not as many as some might
think. There are longer lines, generation and load is separated
often by greater distances.
They do encounter some different technical problems, but
there are parts of the East that do as well.
So I do not think it is--from a physical transmission
system standpoint, the differences are not that great. In terms
of a regulatory standpoint, there are a lot of differences.
As someone pointed out earlier, a lot of the land on which
transmission lines we built are governed by Federal agencies in
the West. And that is not quite as much the case in the East.
Senator Thomas. Western Governors make a big point that
there is a huge difference between the West and the rest of the
country.
Mr. Nevius. From a technical transmission standpoint?
Senator Thomas. Just from every standpoint.
Mr. Nevius. From every standpoint. Well, I can speak to the
technical standpoint, and it is not a huge difference.
Senator Thomas. Yes. Mr. Chairman, I understand FERC will
soon issue a standard market design. How long--will there--is
that going to be short in terms of its input from the public,
or will you lay it out there where there is time for people to
participate? What is the time frame on that?
Mr. Wood. We plan to put it out, Senator Thomas, on next
Wednesday. And instead of the 30-day comment cycle, we are
talking about 75, holding probably a series of six to eight
workshops to follow up.
We started in last October with--we had ten workshops in
one week, two a day for a week. And we did that again in
February. And we have had probably a series of--they have been
all commissioner-led workshops.
We even had one last week on computer software. So it has
been a process where we got a lot of input going into the rule.
And then, of course, as is required under the Administrative
Procedures Act, there will be a lot of input after the rule.
Senator Thomas. Oh.
Mr. Wood. Now that it is all pulled together in one piece,
people will have the chance to look at it and give us their
comment and hopefully work out any problems that may pop up.
Senator Thomas. No one has seen it yet. And so it is going
to take some time to get----
Mr. Wood. Yes.
Senator Thomas. In a general simplified way, in terms of a
nationwide transmission grid, how do you see that? Do you see
sort of a Federal in-State grid off--with the RTOs off of that
and so on? Is that generally the direction you all are going?
Mr. Wood. I think really it is a little more evolutionary
than that. I think it has taken the grid that has gotten us
where we have gotten today, recognizing that it is regional in
nature, not just one State or one utility, but does cover a
number of States. And there is not one national.
I think as a practical matter, there are at least three
regions--the three independent NERC regions, the East, the
West, and the ERCOT. But probably within the East, because of
it being so large and populated, you could subdivide that a
couple of regions.
So there may be, you know, five natural energy markets in
North America, including our friends from Canada and some from
Northern Mexico, as well, pretty tied to our grid.
So it is not quite analogous to the interstate highway
system. It still ultimately is regional. And so the evolution
from what we have got today to where we are going would be more
investment upgrade in that--in increasing the reach of each of
those regional----
Senator Thomas. It looks like if you are going to do
something of that kind, you are going to have to have an
interstate grid that is probably owned by a third party in
which everyone has access everyone pays. And you cannot just be
going off in all directions on something like that. And it
seems like we need a vision of where we are going to be in ten
years.
Mr. Wood. Oh, I can lay that for you. I think you pretty
much articulated it; independently owned transmission as
administered by somebody that does not have a pony in the
generation business or in the customer business, but is into
making transmission happen in probably three to five regional
markets in the country, you would probably have ideally three
to five regional transmission companies that span very large
markets.
Senator Thomas. You were talking a lot about gas and, of
course, if we are going to have market generators, why, you
could be maybe moving more electricity than you are gas.
Gas is trying to move the generation in small plants to the
market where it is still more efficient to do it in a larger
plant and move the electricity perhaps. So I hope we can get a
kind of a vision of where we are going to go and begin to move
in that direction. Thank you very much.
Mr. Wood. Thank you, Mr. Thomas.
The Chairman. Well, let me thank both witnesses very much.
I think it has been useful testimony and we appreciate it. And
we will follow up and we will look with interest at the
standard market design you come out with next week.
Mr. Wood. And we would be glad to come and brief the
committee or staff or either on that, Senator Bingaman.
The Chairman. I think we will probably ask you to come back
in September once the Congress reconvenes to have a hearing on
that, at least one hearing.
Mr. Wood. Right. Thank you.
The Chairman. Thank you very much.
Let me call the second panel.
[Pause.]
The Chairman. We have four witnesses: Ms. Carol Coale,
senior analyst with Prudential; Dr. Lawrence Makovich with
Cambridge Energy Research Associates; Mr. Pete Landrieu, the
Public Service Enterprise Group; and Mr. Stephen Ward from the
State of Maine, the public advocate there.
[Pause.]
The Chairman. All right. Why do we not just start on our
left and move to the right?
Ms. Coale, why don't you go ahead? And give us 5 minutes,
if you can, give us 5 minutes of summary of your testimony. All
of your statements will be included in the record as if read,
but if you could make the main points that you think we need to
understand.
Let me also just advise that in about ten minutes here, I
am going to have to run off to do a statement at a conference
in the Armed Services Committee, and I will be right back after
that. Senator Thomas will preside.
But, Ms. Coale, go right ahead.
STATEMENT OF M. CAROL COALE, SENIOR VICE PRESIDENT, PRUDENTIAL
FINANCIAL, HOUSTON, TX
Ms. Coale. Thank you, Senator, and thanks for inviting me
to speak at this hearing today. I am going to try to get
straight to the point because a lot of the issues this morning,
or early this afternoon have already been addressed that I
would like to address as well.
But I understand that you are concerned about how the
transmission grid is going to be paid for, and what the
barriers are there, and how we are going to improve the
infrastructures. And just some of my key messages are:
Obviously, the logical constructors of the transmission grid
are publicly traded companies. And the destruction of capital
has been extreme.
Dianne, or Senator Feinstein cited some numbers about the
destruction in stock performance and destruction of capital. I
would like to single out just a few names and compare it with
the market. Williams is down 95 percent today. El Paso is down
75 percent. Now this is not today. This is year to date. Dynegy
is down 95 percent. Duke down 50 percent, and they are a
logical builder of the infrastructure. And the S&P is down
about 30 percent.
So relative to market, these stocks have been severely
punished. The reasons, of course, are pretty obvious. The
rating agencies have been on their backs. There has been
deterioration of energy trading books which I will address in a
minute; renewed regulatory concerns; sham trading practices;
loss of management credibility. But the question remains: Who
is going to build the infrastructure?
And one other concern that you should have is how to
improve the infrastructure, and should the regulators and
Congress be protecting the infrastructure that is there with
their actions?
I am advocating that we allow the companies to do their
jobs. We do not want to prevent them from doing their jobs with
the actions at the Government level. And lack of capital should
be a concern of the regulators in the Government as well. I am
not advocating rogue business practices, but I need to remind
the regulators in the Government that there is nothing wrong
with investing capital and earning a positive return on that
invested capital. That is what the premise of capitalism is
based on.
And unless the Government wants to take over the system, it
currently is in the hands of publicly traded companies, and
there is some obligation on behalf of the regulators and the
government to protect those companies.
Let me just run through a few items that we think should be
addressed that are affecting the stocks that may not have been
addressed earlier, and then a few recommendations as well.
We believe that the regulators need to prioritize their
agenda in a more market friendly way. For example, Wall Street
is not as concerned about standard market design as they are
about resolving the ongoing FERC investigations in the West on
market manipulation. We would rather see that moved to the
forefront instead of to the back.
The market hates uncertainty. Rating agencies, in my
opinion, are overreacting. They have shifted their posture
several times this year. They are downgrading the credit of the
publicly traded stocks faster than they can get their
restructuring initiatives completed or even in place. And we
think that there should be some oversight there as well. The
threat of re-regulation, whether you are considering it or not,
has discouraged infrastructure development. That was addressed
earlier this morning, or earlier this afternoon.
But it is very key every time the FERC goes into a closed-
door meeting, that the stock reaction is negative among the
publicly traded energy merchant companies. I mean, they are
very keyed into what is going on up here on the Hill, and just
the threat of any re-regulation initiative sends the stocks
plummeting. In my opinion, re-regulation is not the answer. We
are in favor of some oversight as long as it is rational, but
again, you know, re-regulation depresses the capital markets.
Also, I would like to address the adverse regulatory and
political bias towards the energy marketing traders and the
business in general. It is not necessarily an evil business. We
believe it is viable. Although much maligned, the basic premise
of energy trading was to bring buyers and sellers to the
market, hedge that price while they were exposed, and create
efficiencies on a transmission grid. And I would argue,
Senator, that without some sort of a merchant or marketing
business, that the transmission grid will not be efficient.
So I am going to close my comments there. Thank you for
your attention.
The Chairman. Thank you very much.
[The prepared statement of Ms. Coale follows:]
Statement of M. Carol Coale, Senior Vice President, Prudential
Financial, Houston, TX
Thank you for the invitation to speak to you today about the
nation's energy infrastructure. There is a clear need for additional
electricity transmission capacity in certain regions of the U.S., but
the lack of cohesiveness in developing new infrastructure has created
both surplus and deficit power supply situations. However, rather than
cite the obvious benefits and roadblocks to expanding the electric
transmission grid, I would like to call attention to the devastation of
the financial health of the power companies, which are the logical
builders of generation and transmission capacity.
access to capital has been impaired, and growth capital budgets
have been cut
The capital markets are in shambles, and the decline in stock price
performance among the power merchants and electric utilities, in
particular, has been swift and extreme. A combination of growing
liquidity concerns, heightened scrutiny by the credit rating agencies,
deterioration of energy trading books, renewed regulatory concerns,
revelations of sham trading practices and loss of management
credibility has been eroding investor confidence over the past nine
months. As investors flee from the market, the companies have lost
access to capital from external funding in the equity market. The
degradation of credit among the utilities and merchants has limited the
use of debt funding. In an effort to shore up their liquidity strength,
many companies are scaling back their investments in capital projects.
Most of these projects were proposed infrastructure expansions that are
likely to be postponed indefinitely. Without the available traditional
financial resources and discretionary growth capital spending, we
question whether the utilities/merchants will be able to pay for the
needed electric transmission capacity in this country.
The stock market hates uncertainty. The current political and
regulatory environment regarding the power and energy merchant business
is far from certain. For example, it is still unknown whether the
federal government and/or regulators will mandate refunds of profits
earned by the power merchants during the energy crisis in the West in
2000-2001. It is uncertain when the ongoing investigations by the FERC
into the western power markets or the SEC investigations into round-
trip gas and power trades will be resolved. As headline news in the
media tends to draw the attention of the regulators, the stock market
is over-reacting to news stories, even if the information is dated or
erroneous.
The media should be monitored or controlled. Lately, it appears
that the media has more influence on the stock market than equity
research analysts have had. In this regard, the media has taken on the
role of an investment advisor, and we believe that reporters and
editors should be required to carry qualifications such as NASD broker
license registration. This would put the reporters under scrutiny by
the SEC, and would improve accountability and accuracy of reporting.
Regulatory oversight of rating agencies is needed. Over corrective
measures taken by the credit rating agencies are largely to blame for
the horrendous stock performance in the power and energy merchant
sector. The ratings agencies, to avoid regulation of their own
business, have taken on a policing role toward the merchants. Recently,
the agencies have hit many of the merchants with numerous and
successive credit ratings downgrades before balance sheet restructuring
initiatives are complete. The risk of further ratings downgrades has
not only impaired the energy trading business but has also jeopardized
the liquidity of the parent companies. Several energy merchants have
succumbed under the rating agency mandates to either downsize, spin
off, or joint-venture their trading operations or face the risk of
losing investment-grade rating status, but delays in these initiatives
has further spooked the market.
The threat of re-regulation has discouraged infrastructure
development. The energy crisis in the West was not simply caused by
market manipulation by a few misguided energy merchants. It is clear
that the California situation was brought on by flaws in the initial
deregulation framework and was aggravated by the lack of natural gas
and electric transmission and generation capacity. Regulation and quick
fixes by the local and federal government did not and have not resolved
the lack of generation and transmission capacity in that region, and in
our view, have had the effect of discouraging future investment. If the
government is involved at all, we believe it should establish
incentives to encourage the expansion of the electric and gas grid
rather than establish price controls and limit the profits of the
companies that are the logical architects of an expansion.
Re-regulation can cause markets inefficiencies. The establishment
of price caps on electricity not only discourages the development of
new power facilities but may also allow for certain companies to take
advantage of or ``game'' the system. One could argue that the
restrictive price caps in California that were in place during 2000-
2001 created enormous inefficiencies because the sales price of power
was capped but the cost to generate that power was not. However, the
profit margin for power generators narrowed significantly in mid-2001,
and since then, some margins have fallen into the red. No power
developer in his right mind would build new generation in such an
uneconomic environment, and existing generators were forced to sell
power at a loss. As the power markets were unencumbered by price caps
in neighboring states, opportunistic companies exported power out of
California, which further exacerbated the supply situation. Certain
companies with less ethical standards gamed the system by withholding
the exported capacity until emergency stages were declared, and resold
that capacity back to California at inflated, uncapped prices. While we
believe the rules of wholesale power sales and punishment for violation
of those rules should be clarified.
Re-regulation scares Wall Street investors. Each time the
government threatens to proposed re-regulation of the electric and/or
energy trading markets the stock performance of the utilities/merchants
has tumbled. In my view, the market has gone to far down the
deregulation road to return to the way it was. While we agree that the
energy traders behaved like a group of undisciplined kindergarten
children when the teacher left the room, we believe a standard set of
rules and guidelines, rather than regulation.
Adverse regulatory and political bias toward energy trading likely
to destroy what we believe is a viable business. Though much maligned,
we believe energy trading is still a viable business. At the very
least, marketers create liquidity and provide financial products and
services. However, we believe that the current credit, legislative, and
political climate is destroying many energy trading companies and
making others shy away from the business altogether. This course of
events may turn out to be a long-term detriment to the nation's energy
markets. Energy trading companies that are willing to risk their
capital to earn a profit will be needed to maximize the value of
infrastructure investments. Even if the nation's electrical
transmission grid becomes better connected and generation capacity is
optimized, sophisticated traders with the ability to perform arbitrages
and risk management services will be key to an efficient market place
where consumers win.
We are concerned that if the energy merchant sector is totally
decimated, there will be the unanswered question of who will build the
power plants and transmission grid. Although an efficient market would
allow new companies to emerge from consolidation and substitution, this
could take years. The need for expanded generation and transmission
capacity is sooner than later.
We have, therefore, suggested the following actions by the federal
government to help restore investor confidence in the power sector and
consumer confidence in the deregulated energy grid.
Expedition of ongoing SEC, FERC and U.S. Attorney
investigations should be encouraged.
Address and resolve pending issues such as power refunds and
market power in the West expeditiously and judiciously.
Adopt standardized pricing mechanisms in both the wholesale
spot power and transmission capacity markets, off of which
regional basis differentials can be marked, and clarify the
rules of energy trading in the wholesale markets.
Create incentives to encourage investment in the electric
and gas infrastructure. This may attract non-traditional
players that may have better access to capital.
Avoid price controls such as price caps and allow the free
markets to develop; lessons can be learned from mistakes and
inefficiencies.
Rational regulatory oversight rather than new or renewed
regulation would help stabilize both energy markets and stock
markets while allowing the free markets to develop.
Concentrate on integrating the electric transmission grid
between the states and regions. One problem with electricity
deregulation is that the market is still inefficient and the
grid structure is regional; deregulated European markets have
been more efficient because of an integrated cross-country
electricity grid.
The Chairman. Dr. Makovich.
STATEMENT OF LAWRENCE J. MAKOVICH, Ph.D., SENIOR
DIRECTOR OF NORTH AMERICAN ENERGY GROUP, CAMBRIDGE ENERGY
RESEARCH ASSOCIATES (CERA), CAMBRIDGE, MA
Dr. Makovich. Thank you.
The American electric power industry is at a critical
juncture. The current energy bills and the pending Federal
Energy Regulatory Commission rulings will help define the
investment climate of the power business in the years to come.
Now, a positive investment climate is essential for success
in power deregulation because the electric power business is
one of the most capital-intensive businesses in the U.S.
economy. Electric infrastructure accounts for 8 percent of all
U.S. business fixed assets. So issues relating to the need for
and barriers to development of electric infrastructure are
central policy concerns because generation transmission and
distribution systems are critical infrastructure to all sectors
of the U.S. economy.
Now, the current investment climate for electric power
infrastructure is negative. The U.S. electric power industry is
over 5 years into a muddled move from comprehensive regulation
to the market. Today, only one third of electric generation
infrastructure is unregulated. Less than half of the retail
power customers can choose electric suppliers. And wholesale
power markets remain ill-defined with no standards for rules
and institutions. Such conditions do not foster desired
investment patterns.
The transmission and distribution sectors suffer from
under-investment while the power generation sector is in the
throes of a costly boom-and-bust cycle. Government policy is
one of several factors responsible for this current negative
investment climate.
The U.S. electric transmission infrastructure suffers from
under-investment. The real investment in transmission did not
turn up in response to record amounts of new generation supply
additions in the past several years. As a result, congestion
and inefficiency are increasing in most regional transmission
networks.
A gridlock plagues most transmission investment decisions
because incentives are misaligned. Alignment is a challenge
because of network economics. An investment anywhere in an
alternating current electric grid can affect power flows
everywhere in the grid. When CERA completed our transmission
sector study 2 years ago, we identified significant
transmission investment opportunities in which the benefits far
outweighed the costs. Yet these investments clearly were not
being undertaken because no one faced the full costs and
benefits of these AC network investments and was in a position
to pursue these opportunities profitably.
The U.S. Department of Energy's National Transmission Grid
Study finds a similar result. Transmission investment is
currently insufficient and the resulting inefficiency imposes
considerable costs to the U.S. economy. The DOE study lists
over 50 recommendations, clear evidence that solutions to
transmission investment gridlock is not simple because
transmission networks are complex and the solutions are complex
as well.
Many of the actions needed to break this gridlock in
transmission infrastructure investment require congressional
action. There is a need to establish limited eminent domain
authority at the Federal Energy Regulatory Commission to
facilitate investment in these multi-State grids. We need to
create authority for reliability standards across regional
transmission grids connecting the diverse set of electric
market participants. And we need to change laws to ensure
publicly-owned transmission infrastructure can fully
participate in these regional transmission organizations.
Now government action is also needed to improve the
investment climate in electric generation infrastructure. Power
deregulation began over 5 years ago without any consensus on
how to set up a workable power market. Consequently, many
different power market designs were tried, often with little
regard to investment issues. As a result, flawed markets arose
and created distorted price signals. What has followed is a
strong boom-and-bust cycle in power generation infrastructure
investment.
This cycle has caused the merchant electric generating
companies to lose over two-thirds of their equity value in the
past year and a half. Today, an investment retrenchment is
roaring through the power industry. Cancellations and
postponements of powerplants under development in the United
States have topped 82,000 megawatts since the start of just
this year.
And the leading region for development reversals is the
West, a power system that has recently shown signs of supply-
and-demand tightness again.
Today, some regional power markets that still need
additional supply are relying on companies at the brink of
bankruptcy to deliver generation infrastructure needed to
maintain reliability in the years to come. In other cases,
regional power markets have very costly overbuilds of
generation that have to be worked off.
Now timely investment price signals and efficient
investment patterns are important criteria to judge the success
of power industry restructuring. The FERC stands at a critical
juncture. Its pending ruling on standard market design will
shape the future investment climate and likely determine the
success or failure of power deregulation.
CERA's new study, ``Energy Restructuring at a Crossroads:
Creating Workable Competitive Markets,'' recommends several
necessary things to be done. I am just going to highlight some
of the recommendations here relating to investments.
Senator Thomas [presiding]. Try and wind up as soon as you
can.
Dr. Makovich. Okay. It is critical that FERC aligns the
markets with the grids when they set these RTOs up. It is
important that they set up capacity markets. When we talk about
reserves, that is not surplus capacity. That is necessary
capacity to make these markets work.
We need to recognize that we cannot just rely on locational
marginal pricing in transmission to create investment. We need
to plan these transmission systems at the network level. We
need to make sure that siting and permitting targets are set
and that these targets are met.
And finally, we need to minimize distortions of market
signals, doing away with wholesale price caps, retail price
freezes. Both of these are having a negative impact on
investment in this sector.
Senator Thomas. Okay. Thank you very much.
[The prepared statement of Dr. Makovich follows:]
Prepared Statement of Lawrence J. Makovich, Ph.D., Senior Director of
North American Energy Group, Cambridge Energy Research Associates
(CERA), Cambridge, MA
issues relating to the need for, and barriers to, development of
electricity infrastructure
The American electric power industry is at a critical juncture. The
current proposed energy legislation and pending Federal Energy
Regulatory Commission rulings will help define the investment climate
of the power business in the years to come. A positive investment
climate is essential for the success of power deregulation because the
electric power industry is one of the most capital intensive sectors in
the economy--electric infrastructure accounts for eight percent of
business fixed assets. Issues relating to the need for, and the
barriers to, development of electricity infrastructure are central
policy concerns because generation, transmission and distribution
systems are critical infrastructure to all sectors of the U.S. economy.
the current investment climate for power infrastructure is negative
The current investment climate for electric power infrastructure is
negative. The U.S. electric industry is over five years into a muddled
move from comprehensive regulation to the market. Today, only one third
of electric generation infrastructure is unregulated, less than half of
the retail power customers can choose electric suppliers and wholesale
power markets remain ill-defined with no standards for rules and
institutions. Such conditions do not foster desired investment
patterns. The transmission and distribution sectors suffer from under-
investment while the power generation sector is in the throes of a
costly boom and bust cycle. Government policy is one of several factors
responsible for the current negative investment climate.
The U.S. electric transmission infrastructure suffers from under-
investment. Real investment in transmission infrastructure did not turn
up in response to record amounts of new supply additions in the past
several years. As a result, congestion and inefficiency are increasing
in most regional transmission networks. A gridlock plagues most
transmission investment decisions because incentives are misaligned.
Alignment is a challenge because of network economics--an investment
anywhere in an alternating current electric grid can affect power flows
everywhere in the grid. When Cambridge Energy Research Associates
completed our transmission sector study two years ago we identified
significant transmission investment opportunities in which the benefits
of investment far outweighed the costs.\1\ Yet these investments
clearly were not being undertaken because no one faced the full costs
and benefits of AC network investments and was in a position to pursue
these opportunities profitably. The U.S. Department of Energy's
National Transmission Grid Study finds a similar result transmission
investment is currently insufficient and the resulting inefficiency
imposes considerable costs to the economy. The DOE study lists over 50
recommendations clear evidence that solutions to transmission
investment gridlock are not simple because transmission networks are
complex, and the solutions are complex as well. Many of the actions
needed to redress gridlock in transmission infrastructure investment
require Congressional action to:
---------------------------------------------------------------------------
\1\ ``High Tension: The Future of Power Transmission in North
American,'' Cambridge Energy Research Associates, Cambridge, MA, June
2000.
Establish limited eminent domain authority at the Federal
Energy Regulatory Commission to facilitate investment in
existing multi-state grids.
Create authority to set mandatory reliability standards
across regional transmission grids connecting diverse sets of
electric market participants.
Change laws to ensure publicly-owned transmission
infrastructure can fully participate in regional transmission
organizations.
Government action is also needed to improve the investment climate
in electric generation infrastructure. Power deregulation began over
five years ago without any consensus on how to set up a workable
competitive power market. Consequently, many different power markets
designs were tried--often with little regard to investment issues. As a
result, flawed markets arose and created distorted price signals. What
followed was a strong boom and bust cycle in power generation
infrastructure investment. This cycle caused merchant electric
generating companies to lose over two-thirds of their equity value over
the past year and a half.\2\ Today, an investment retrenchment is
roaring through the power industry. Cancellations and postponements of
power plants under development in the United States have topped 81,921
megawatts since the start of the year--close to one third of proposed
development. The leading region for development reversals is the West--
a power system that has recently shown signs of supply and demand
tightness again. Today some regional power markets that still need
additional supply are relying on companies at the brink of bankruptcy
to deliver the generation infrastructure needed to maintain reliability
in the years to come. In most other cases, regional power markets have
costly overbuilds of generation infrastructure to work off.
---------------------------------------------------------------------------
\2\ ftp://www.nerc.com/pub/sys/all--updl/docs/archives/
TransmExpansion--BOTapprvd--022002.pdf
---------------------------------------------------------------------------
Timely investment price signals and an efficient investment pattern
are important criteria to judge the success of power industry
restructuring. The Federal Energy Regulatory Commission stands at a
critical juncture--its pending ruling on standard market design will
shape the future investment climate and is likely to determine the
success or failure of U.S. power industry deregulation. CERA's new
study, Energy Restructuring at a Crossroads: Creating Workable
Competitive Power Markets, recommends a series of actions needed to
create workable power markets and a positive investment climate in the
power sector.\3\ These twelve recommendations are:
---------------------------------------------------------------------------
\3\ ``Energy Restructuring at a Crossroads: Creating Workable
Competitive Power Markets,'' Cambridge Energy Research Associates,
Cambridge, MA, April 2000.
Define the bounds of the wholesale power markets. The
Federal Energy Regulatory Commission (FERC) needs to align the
market boundaries with the physical grids.
Define wholesale power markets to achieve critical mass. The
number of consumers and producers in a wholesale market must be
sufficient to ensure rivalry, and these rival players must make
up the lion's share of the power system.
Expand the regional transmission organization (RTO) mission
to tightly integrate system operations and market operations.
Each RTO must be a multi-objective institution, facilitating
the market and coordinating the power system under the
management of a strong, independent executive.
Create regional wholesale spot power markets. Workable spot
power markets do not emerge themselves. The FERC should require
each RTO to set up spot markets within each wholesale region.
Create capacity markets. A capacity market is the best
mechanism to keep energy price volatility at a politically
tolerable level while promoting economically efficient price
signals for investment.
Adopt pricing mechanisms to manage transmission congestion.
Transmission systems are complex and require complex pricing
mechanisms, particularly to provide price signals to manage
congestion. The FERC should encourage RTO's to move toward
locational marginal pricing, accompanied by a system of
financial or firm transmission rights. These pricing mechanisms
are a necessary but not a sufficient action to stimulate
desired transmission investment.
Stimulate appropriate transmission system planning and
investment. Transmission planning must be done at the grid
level to accurately assess the system wide trade-offs of costs
and benefits required to develop an optimal transmission
investment plan. Merchant transmission investment is part of
this solution but not sufficient on its own to deliver desired
transmission investment patterns.
Ensure market transparency through information disclosure.
Transparency is a key feature of a well-functioning market.
Consistent obligations should be imposed for reporting market
information across all multilateral marketplaces. Limited
surveillance and/or regulatory reporting requirements should be
put in place, with the FERC responsible for the cash market and
the Commodities Future Trading Commission responsible for
electronic derivative marketplaces.
Rationalize energy infrastructure and development. States in
conjunction with the RTO, must set siting and permitting
targets in line with the infrastructure development needs and
demonstrate that those targets are being met on an annual
basis.
Coordinate wholesale and retail transactions. Retail markets
should be opened as quickly as possible once wholesale markets
are functioning, but in phases to reduce stress on the system.
State regulators should be encouraged to achieve some
consistency in retail regulation.
Minimize distortions of market price signals. Wholesale
price caps should be phased out and retail rate freezes should
be thawed to reconnect wholesale and retail prices. Regulatory
objectives should be kept independent of market prices and
whenever possible made transparent on consumers bills.
Connect demand to the market. Demand responsiveness is a
necessary component of a competitive workable wholesale market
to encourage price stability and efficient allocation of
resources.
conclusion
Under-investment in transmission and distribution infrastructure
and a costly boom and bust cycle in power generation investments are a
direct result of the prolonged, muddled transition from comprehensive
regulation to competitive markets in the U.S. power sector. Government
policy is needed to align incentives for transmission and distribution
investment and to establish standardized market designs that enable
workable competitive power markets. Such policies can deliver desired
electricity infrastructure investment patterns. Time is of the essence,
the power infrastructure is too important to the U.S. economy to allow
barriers to investment to cause continued deterioration in power
systems operations.
Senator Thomas. Mr. Landrieu.
STATEMENT OF PETE LANDRIEU, VICE PRESIDENT, ELECTRIC
TRANSMISSION FOR PUBLIC SERVICE ELECTRIC AND GAS COMPANY,
NEWARK, NJ
Mr. Landrieu. Thank you very much for inviting me and for
holding this hearing on infrastructure issues.
I come from a utility that is in the Mid-Atlantic PJM
arena. And it is at a slightly different point than many of my
brethren in that, about 7 years ago, I had the pleasure, I
think, to lead the group that redesigned or designed the PJM
ISO, which had existed for roughly 70 years and had been
started to address this area of large regional transmission as
opposed to the more traditional value proposition that has
gotten transmission built over the years, which is to move
favorable generation to someone's load. And transmission has
been sort of the enabler to allow that to happen. And that is
what got it built.
In most vertically integrated utilities, transmission is
but 10 percent financially of the beast, generation being maybe
60, the distribution 30, but the transmission is important in
that it enabled the other two pieces to work together.
With open access in 1996, that transmission was no longer
able to be used in that way, and that value proposition that
got it built over all these years evaporated. That is one of
the reasons you do not see transmission being built much
anymore in the past few years.
Another reason is many of us, my utility and others
certainly in the Mid-Atlantic area, are under some sort of
State retail rate cap which means that to the extent you invest
in transmission, you have no path to recovery. Now those things
will expire in time and that may be less of a problem, but at
the moment, it is a disincentive for somebody to put money into
something when they cannot recover it.
And finally, there currently, in most areas of the country,
are not what I would call regional planning processes in place
and working. That is one of the things that is a goal of FERC
and their RTO formation. It is one of the things that their
RTOs will do, and it is something that, because we got a
somewhat early start on it at PJM, we have in place.
And there is a new value proposition that replaces that old
one that disappeared, and that is really with the properly
designed markets. And if those markets include creatable
financial property rights for those who invest in transmission,
you can see people come and want to invest. And we are seeing
that right now in PJM.
So the good news from my experience at PJM is that FERC is
on the right path because we have had a good 5 years of
experience with our market up and running. And we are seeing
that investment in generation is coming. We are seeing
investment in transmission, and we are seeing merchant
transmission projects emerge because you have the right market
giving the proper pricing signals, and you have the property
rights that go to those who invest in transmission.
Just to give an example of some of these investments: We
currently have $200 million worth of transmission under
construction in PJM for reliability improvement purposes. We
have another $400 million-plus approximately to interconnect
new generation that is coming online.
And we have 3,000 megawatts of merchant transmission
projects; that is, people who are willing to invest on their
own nickel without a guaranteed return, but in areas where they
think that the pricing signals will make it a favorable
investment. And those, we have four projects connecting into
the PJM grid.
We have connected 3,900 megawatts of new generation in the
past 3 years, and we are looking at that, really, 328 folks
have come forward with projects they wanted to do. Now in the
recent months, many of those have withdrawn, 138, so we are
left with 190 active. But that 190 active still represents
3,800 megawatts of new generation that are coming, and they are
coming because we have the proper pricing signals and the
tradeable transmission rights.
I will take your questions.
Senator Thomas. All right. Thank you, sir.
[The prepared statement of Mr. Landrieu follows:]
Prepared Statement of Pete Landrieu, Vice President, Electric
Transmission for Public Service Electric and Gas Company, Newark, NJ
Good afternoon. I am Pete Landrieu, Vice President--Electric
Transmission for Public Service Electric and Gas Company, and chairman
of the mid-Atlantic area electric reliability council. In 1995, I
chaired the group that turned PJM into an Independent System Operator.
I want to thank you for the opportunity to testify today. This
committee is to be commended for holding this hearing and for giving
infrastructure issues the in-depth consideration they deserve.
Our nation's electric transmission infrastructure is a vital
national resource. The investments made in transmission facilities over
the last century are as important as any in making possible our
country's economic growth and prosperity. In the century ahead, it will
be absolutely essential to ensure that our nation has a robust,
reliable transmission infrastructure fully capable of serving the long-
term needs of the American people.
PSE&G is the largest electric and gas utility in New Jersey and one
of the largest in the nation. We own approximately 1,400 miles of
transmission lines in New Jersey. We are a founding member of the
Pennsylvania-New Jersey-Maryland Interconnection, which operates one of
North America's largest power grids and serves more than 25 million
people in New Jersey, Pennsylvania, Maryland, Delaware, Virginia, West
Virginia, Ohio and the District of Columbia.
Our New Jersey utility is part of PSEG, a diversified energy
company with $25 billion in assets. PSEG also owns PSEG Power, one of
the largest electric generation companies in the eastern United States,
as well as other U.S. and international energy facilities and
investments. Our company, which will be marking its 100th anniversary
next year, takes pride in its long, continuing tradition of providing
safe, reliable and affordable energy. We actively support competitive
markets, clean energy and sustainable development in the U.S. and
around the world.
Let me begin by summarizing my testimony here today.
First, there is increasing concern that investment in transmission
infrastructure has not kept pace with growing market demand.
Second, infrastructure needs are best met through market-based
solutions that is, by attracting private investment, encouraging
competition and innovation, and allowing the market to work. Efficient
markets require proper price signals--so that market participants can
make the appropriate investment decisions. PJM's locational marginal
pricing, which I'll discuss in more detail later in this testimony, is
an example of how the market can send the right price signals to
attract investment.
Third, the good news is that FERC is on the right path with its
Regional Transmission Organizations (RTOs) and standard market design
initiatives. Getting these large regional markets up and running
quickly with the right rules is really the key to progress nationwide.
In fact, there is considerable evidence that where RTOs with a good
market design are already in place, new electric infrastructure is
being built.
The challenges facing our country in the area of transmission
infrastructure investment have been documented in the Department of
Energy's recent National Transmission Grid Study and through a wide
array of research. For several years, the industry has been
transitioning from the old, centralized, highly regulated public
utility regime to a much more market-driven, competitive and open
industry. Transmission must now support large transactions of power on
behalf of many wholesalers and other market participants over long
distances even though it was not originally designed for this purpose.
The restructuring of the electric industry has fostered the
development of a competitive wholesale generation sector, but
investment in transmission facilities has not kept pace with need in
many areas of the country. Recovery of transmission costs used to be
assured through bundled retail rates, but that is no longer the case in
many markets today. Investments in transmission also face a higher risk
profile because of competition from supply side and demand side
alternatives, as well as the political hurdles to siting new
transmission lines.
Our company strongly believes that market-based solutions are the
key to meeting the infrastructure needs and challenges I've just
mentioned. Allowing free market competition functioning through proper
price signals and financial property rights without subsidies,
distortions or price controls--provides the surest means to attract
private capital and spur innovation. Alternative solutions--including
transmission, generation and demand-side options--should be allowed to
compete on an equal basis within a price-responsive and market-oriented
framework.
As I said, the good news is that the key elements of this framework
are being advanced by the Federal Energy Regulatory Commission (FERC)
through its present initiatives to establish large, independent
Regional Transmission Organizations (known as RTOs) and a standard
market design. FERC needs to be able to continue down this path.
A standard market design across the country will allow each RTO to
utilize the same method to schedule and price energy and transmission.
In that way, transactions can easily take place between any wholesale
participants under a uniform set of rules and business procedures.
Markets need a reasonable degree of certainty to function well, and
uniform rules are indispensable to providing that certainty.
Of course, proper pricing signals and financial property rights for
those who invest in transmission support competition. The market itself
should determine the optimal mix of competing transmission, generation
and demand-side solutions. We believe that a standard market design,
where transmission congestion is factored into the price of power, will
send a more precise signal about where new infrastructure is needed.
Tradable property rights, in the form of financial transmission rights,
make this ``locational marginal pricing'' system work.
The reality is that even though PSE&G is a transmission owner, our
company recognizes that there isn't just one way to meet infrastructure
needs. There are circumstances when building new generation at the
right location is the best solution. In other cases, new transmission,
or demand-side solutions like real-time pricing, will best serve the
public's needs. An RTO's planning process should provide a safety net
for instances when the market does not address reliability needs. In
cases where transmission enhancements are required for reliability but
aren't being adequately addressed by the market, these investments
should be financed through rate-based rates of return commensurate with
the risk profile of the investment.
The RTO transmission planning process should evaluate transmission
expansion, new generation, demand-side programs, and new technologies.
Demand-side, transmission, and supply-side solutions should have
economic symmetry in order to prevent any seller, buyer or asset owner
from gaining an unfair strategic or competitive advantage. Creating
this level playing field is the only way that we can assure that
consumers actually get the benefits of robust competition.
As in any market, cost must be weighed against potential benefits
in evaluating investment options. For example, the cost of eliminating
all congestion would greatly exceed the savings realized. The law of
diminishing returns applies, and a point is eventually reached where
generation or demand-side options are less expensive for the ultimate
consumer than additional transmission enhancements to eliminate further
congestion.
Openness to various approaches and innovative options has already
proven successful in PJM. Through its market design, proper price
signals and a governance structure independent of any market
participant, PJM has fostered an environment in which substantial
amounts of new infrastructure both generation and transmission are
being built.
Reliability within PJM is now stronger than it's ever been. At the
same time, the planning process for new infrastructure is open to all
interested parties. Locational marginal pricing combined with tradable
financial transmission rights allows generators and marketers to
compete with transmission and demand-side solutions to capture economic
value.
Even in this time of transition and uncertainty, this planning
process is working well. PJM has approved over $200 million in new
transmission projects for reliability to be constructed over the next
five years. An additional $400 to $500 million in transmission
investment is linked to the construction of new generation expected to
be built in the PJM region during the same period. Four large merchant
transmission projects aggregating over 3,000 MW have been proposed to
connect to PJM markets. Additional merchant projects aggregating about
4,000 MW have been proposed elsewhere in the Northeast where Locational
Marginal Pricing are in effect or being planned. The market signals
from locational prices, together with the award to the projects' owners
of tradable financial property rights to capture the investment value,
are driving this new investment in transmission.
It is worth taking a moment to raise the issue of transmission
siting. Even with the proper price signals and regional markets, it can
still be difficult to build new interstate transmission lines if a
state or a local community is opposed. Whether to grant federal eminent
domain for transmission siting as already exists for natural gas is a
thorny issue, and I know you have grappled with it here in Congress.
From our perspective, some kind of RTO-led regional planning process,
including significant state input, with FERC as a backstop, would be a
helpful step in ensuring we have a national grid to meet our country's
needs.
Along similar lines, to ensure the development of a national
transmission grid, it's important to have all transmission subject to
FERC jurisdiction. Since electricity does not recognize different
ownerships or geography, it is the electrical topology of the
transmission system that is important and all significant portions of
the nation's transmission system need to be under FERC jurisdiction. We
are pleased at the steps the Senate electricity title takes toward
achieving this goal.
In conclusion, adequate transmission investment will occur when the
right price signals are sent to investors. Regional transmission
organizations with a market-based approach to infrastructure
development are critical to that endeavor, as is FERC jurisdiction over
major transmission facilities, and a cooperative approach to building
support for transmission additions. If we can get those elements in
place, we will be a long way toward ensuring that the rest of the
country benefits from the kind of infrastructure investment we're
seeing now in PJM.
Thank you. I'd be pleased to answer any questions.
Senator Thomas. Mr. Ward.
STATEMENT OF STEPHEN WARD, PUBLIC ADVOCATE,
STATE OF MAINE
Mr. Ward. Thank you very much. I am Stephen Ward, and I
have served since 1986 as Maine's public advocate for utility
consumers. I am also president of NASUCA, the National
Association of State Utility Consumer Advocates. It is an
organization with members in 40 States and the District of
Columbia.
NASUCA is keenly interested in the issues associated with
wholesale competition and, with an adequate transmission
infrastructure, has adapted a series of resolutions which are
identified in my testimony.
Senator Thomas. Let me interrupt so I can understand a
little better. Are you part of the same region as PJM?
Mr. Ward. I am from the State of Maine, and I represent
Maine consumers. PJM is a different control area and it is a
different independent system operator arrangement.
Senator Thomas. Okay.
Mr. Ward. Maine is part of what is called ISO New England,
the Independent System Operator, New England. But it is a very
similar kind of power grid, and it is developed in a very
similar way.
Senator Thomas. It is not an RTO where you are both in the
same section. All right. Thank you.
Mr. Ward. There have been times when it has been discussed
that the two regions would join, but that is----
Senator Thomas. That is why I was a little confused.
Mr. Ward. I just want to focus on four topics that have
been highlighted in a study the Department of Energy put out in
May. ``The Grid Study'' is what it is referred to as. And the
topics also have come up here today on the part of previous
panelists.
One of the key points that I need to make is: NASUCA's
membership is very concerned that wholesale electric markets
really do need effective oversight to function properly, and
market monitoring units within PJM, or ISO New England, New
York ISO, the California ISO need to be--to function
effectively with adequate resources and adequate management
attention. And likewise, FERC needs to have adequate resources
to provide oversight in wholesale markets. It is only in the
presence of a vigorous and adequately funded fully authorized
oversight role that we avoid abuses in wholesale markets.
This actually is one of the observations that DOE made, the
Department of Energy, in their grid study, and it is an
observation that NASUCA is in full support of. Federal
legislation should make compliance with reliability standards
mandatory. That grid study points out that power utilities can
no longer rely on the historic system of voluntary compliance.
What we really need is a national mandatory system to ensure
that the nation's interconnected transmission systems operate
properly. And I believe that the previous speaker made a
similar point.
Providing a clear statutory mandate to both NERC, North
America Electric Reliability Council, and to FERC is, I think,
critical to consumers. Keeping the lights on, no matter what,
is a task that really needs, in our opinion, an additional
grant of authority to both FERC and to North America Electric
Reliability Council.
A second recommendation in the Department of Energy's grid
study was one that Chairman Wood made reference to in his
testimony today. It is also one that NASUCA's members fully
agree with. That is to increase the rule of a voluntary load
reductions and energy efficiency on the part of users of the
transmission system. DOE's grid study correctly points out that
without meaningful participation by the demand side, today's
market is, at best, half a market. NASUCA has adopted
resolutions provide support for that proposition.
I do have some concern about mandatory requirements for
special meterings so that the price swings associated with
wholesale markets are passed on directly to residential retail
customers, but I think there are any number of improvements in
demand response that are entirely appropriate for wholesale
customers and large business customers.
I do strongly disagree with one of the recommendations made
in DOE's study and it has also come up here, which is that we
need special incentives, super returns, that we need to abandon
traditional cost-based rate of return regulation in order to
ensure there is adequate transmission investments. In our view,
in many parts of the country, there has been adequate
transmission investment, and we are not experiencing generation
scarcity in terms of getting generation to the market.
I think it is too soon to talk about dismantling FERC's
traditional cost-to-service system. And there is little virtue
in throwing ratepayers dollars at incentives when less costly
alternatives are available such as demand response, such as
targeted upgrades, things that fall short of major transmission
line proposals.
Finally, the last point I wanted to make is a point
referred to earlier today by Mr. Makovich, which is the use of
eminent domain. Even a limited use of eminent domain as
proposed by the Department of Energy, I think, creates real
problems for the States and for agencies like my own that
represent the interests of retail consumers.
I do not think that eminent domain will simplify the siting
process. I think it will make collaboration in the regions
between State and Federal authorities that much more difficult
and that much more contentious.
Thank you for the opportunity of making those four points.
Senator Thomas. All right. Well, thank you.
[The prepared statement of Mr. Ward follows:]
Prepared Statement of Stephen Ward, Public Advocate, State of Maine
Chairman Bingaman, distinguished members of the Committee on Energy
and Natural Resources: I am Stephen Ward and have served since 1986 as
Maine's Public Advocate representing utility consumers before Maine's
Public Utilities Commission, before FERC, the FCC and the courts. I
also have served since March of 2000 as President of NASUCA, the
National Association of State Utility Consumer Advocates. NASUCA
consists of organizations charged by statute with the representation of
utility consumers and currently has members in 40 states and the
District of Columbia. I also serve as an appointed member of NERC's
Market Interface Committee and as a member of one of the North American
Energy Standards Board's divisions.
It is an honor and a privilege to appear on this distinguished
panel and I thank you for the extending this invitation to NASUCA and
its 43 member offices for whom I am testifying today. Since July of
last year when I testified on behalf of NASUCA before this Committee,
NASUCA's representatives offered written comment at FERC on numerous
occasions in proceedings related to wholesale electricity markets and
have participated in four FERC Roundtable discussions. We are very
happy to be invited once more to provide the consumer's perspective at
these hearings, as I will attempt to do again today.
My last appearance before this Committee was to discuss a White
Paper on electricity legislation which Chairman Bingaman had circulated
for comment, prior to any action in the Senate on electric
restructuring and reliability issues. This appearance is triggered by
the release in May of the Department of Energy's ``National
Transmission Grid Study,'' as well as recent developments at the
Federal Energy Regulatory Commission (FERC) pertaining to the formation
of Regional Transmission Organizations (RTO).
I should state at the outset that NASUCA, for whom I currently
serve as President, has adopted a number of resolutions that are
directly relevant to today's topic. I will summarize pertinent aspects
of these resolutions shortly. However, in many other instances NASUCA
has not yet adopted, as an organization, any specific view on proposals
made in the DOE Grid Study or now pending before FERC or the Congress.
In such cases, I will note the absence of a NASUCA position and will
speak solely in my capacity as Maine's advocate for utility consumers.
In a series of resolutions in recent years NASUCA has strongly
endorsed a vigorous federal role in providing oversight and
enforcement, as necessary, in wholesale electric markets. These
resolutions included the following statements:
1. ``1998-07'': ``NASUCA supports federal legislation that
would clarify FERC authority to review the reliability
requirements imposed by NERC (or any successor national
organization) and to ensure that such requirements are adopted
and implemented in a manner that benefits all consumers;''
2. ``1999-11'': ``NASUCA calls for federal and state
legislative or regulatory bodies as appropriate to . . . ensure
appropriate regulatory oversight over all procedures, tariffs,
rules, requirements and procedures employed or enacted by the
RTO or related entity;''
3. ``1999-11'': ``NASUCA calls for federal and state
legislative or regulatory bodies as appropriate to . . .
require all RTO's and related entities to enforce compliance
with reliability rules and protocols promulgated by the North
American Electric Reliability Council or any duly authorized
successor operator(s) by all members, customers, users and
owners of transmission;''
4. ``1999-11'': ``The National Association of State Utility
Consumers Advocates (NASUCA) calls for all ISOs and RTOs, as
well as any other entities charged with or assuming the
operational control of a regional portion of the transmission
grid, to possess the following minimum characteristics:
it must be independent from market
participants;
it must serve a region of sufficient scope
and configuration to perform effectively and support
efficient and non-discriminatory power markets;
it must have operational responsibility for
all transmission facilities under its control; and
it must have authority for maintaining the
short-term reliability of the grid;''
5. ``2001-01'': ``NASUCA urges the FERC to use the powers
vested in it by Congress and assure just and reasonable rates
by ordering cost-based price regulation and/or other
appropriate means of mitigation in any wholesale market where
rates are not demonstrably and reliably just and reasonable;
and that the FERC should use the powers vested in it by
Congress to act to identify revenues secured as a result of the
exercise of market power and in violation of the FPA and order
that these revenues be refunded to customers.''
Several themes emerge from these resolutions that are particularly
germane to today's hearing. In fulfilling their statutory obligation to
represent retail consumers in each of their states, NASUCA's membership
is very concerned that wholesale electric markets may function at times
without effective oversight--neither from the Market Monitoring Units
of existing RTO's nor as a result of effective federal regulation at
FERC. It is only in the presence of a vigorous, adequately-funded and
fully authorized oversight role that abuses in wholesale markets can be
controlled. Similarly, it is only when FERC possesses plenary authority
over the operation of the transmission system and over the activities
of transmission users and owners that consumers can have confidence
that bulk power markets are workably competitive.
These observations tie easily to one of the findings of the DOE
Grid Study with which NASUCA is in full support: federal legislation
should make compliance with reliability standards mandatory. As the
Grid Study points out at page 47, the power utility ``can no longer
rely on the historic system of voluntary compliance with rules to
ensure the reliability of the nation's interconnected transmission
systems because of the competition among firms in today's
marketplace.'' Providing a clear statutory mandate to both NERC and
FERC to specify and enforce, respectively, the reliable operations of
the grid is critical to consumers, and a key recommendation of DOE's
Grid Study. Keeping the lights on--no matter what--is a task that
really needs an additional grant of authority to FERC and NERC. Other
federal requirements such as the Paperwork Reduction Act--are a much
lower priority, in our opinion.
A second recommendation in the Grid Study with which NASUCA's
members fully concur is to increase the role of voluntary load
reduction and energy efficiency on the part of users of the
transmission system. The Grid Study correctly observes at page 41 that
``without meaningful participation by the demand side, today's market
is, at best, half a market.'' NASUCA shares this view and adopted last
month its most recent resolution on RTO functions (``2002-3'') which
emphasizes the benefits to all customers when a demand response by
customers is available to reduce peak-hour prices. Speaking for myself,
I diverge, however, from the Grid Study's claim on page 42 that,
``real-time pricing is essential for allowing customers to determine
how much power they wish to use based on the actual price of
electricity at any point in time.'' To the extent this claim is made
for large business customers with a sophisticated knowledge of power
markets and a tolerance for price volatility, I do not disagree. I
strongly disagree that residential customers, particularly those on
fixed incomes, can be expected to welcome the volatility that exposure
to wholesale market swings will bring to household budgets.
The DOE Grid Study makes a recommendation in another area with
which I also must strongly disagree. At page 32, the Report claims that
traditional cost-based regulation of transmission investment is
inconsistent with market-based approaches and is less attractive to
investors than performance-based regulation (PBR). This is undoubtedly
true but it opens the door to needless increases in rates for
customers. NASUCA is interested in promoting the least costly solution
to transmission bottlenecks, be it a demand-response initiative, a
capacity upgrade or a new line project targeted to the congested side
of a bottleneck. The risk in promoting incentives for all transmission
investment is that much more expensive projects will become financially
attractive to the detriment of less costly approaches. In our view it
is too soon to dismantle FERC's basic cost-of-service ratemaking
structure in favor of PBR approaches for regulating non-merchant,
utility-owned transmission plant. We do not take exception to the
notion of merchant transmission going forward with an enhanced
opportunity for returns on investment, since ratepayers are
categorically exempted from paying these costs. But we see little
virtue in throwing ratepayer dollars at incentives and other
inducements for transmission construction when other approaches are as
workable and less costly.
Finally, there is a fourth area to which I must take exception on
my own behalf that received emphasis in DOE's Grid Study. That report
endorses a limited use of eminent domain by FERC for transmission line
siting in cases where a transmission bottleneck otherwise would remain
in place. Even this limited exercise of eminent domain by the federal
government raises troubling issues, it seems to me, in the context of
state siting authority for transmission upgrades. I believe this
proposal will only complicate--and not simplify--the siting process. I
think FERC's ability to rely on eminent domain ``as a last resort''
actually could weaken its willingness to explore fully collaborative
siting processes with state and local authorities. The ability to
overcome parochial objections to a new transmission infrastructure,
even if they are well-founded, with eminent domain will, over time,
prove irresistible, to federal transmission regulators in my opinion.
Thank you again for the opportunity of testifying today on behalf
of the nation's electricity consumers. When it comes to retail
competition in markets as small as those serving my home state of
Maine, it is clear that getting the bugs out of the wholesale market
and the interstate transmission grid is an absolutely necessary first
step. There can be no workable competition at the retail level unless
regulators and legislators are vigilant and determined in strengthening
competition at the wholesale level. You are to be congratulated for
making such an effort today.
Senator Thomas. I thank all of you. I appreciate it very
much.
Maybe just a quick question and then we will wind up here:
Carol, if you can, you talked about perhaps too many
regulations from FERC. What specifically would you feel
uncomfortable with?
Ms. Coale. Well, the specific one that I was worried about
was actually coming out of the Senate, but it was re-regulation
of the energy trading business. And in our view, we do not feel
that every player in that industry is a bad seed. I mean, there
is obviously a few that have misbehaved in the classroom, but
there are also those who are actually having that business
stripped away from them because of the actions of others. And I
am not sure that they are being treated judiciously.
My criticism of the FERC has been, as I mentioned earlier,
the prioritizing of their actions, but also the delays. I would
like to specifically mention El Paso's gas market power case in
California. I mean, it has been re-opened three times--or it
has been before the FERC three times. It has been re-opened
twice. Every time the words ``FERC,'' ``California,''
``energy,'' and ``El Paso'' flash across my screen at the
office, the stock goes down. And that could even actually be
good news, but it is just the market is waiting for some
action, and that----
Senator Thomas. How much of that is involved with the
electric's behavior, and how much is involved with all of the
activities that are going on in all the other corporations?
There is a strife in this country about corporations.
Ms. Coale. Well, I cannot----
Senator Thomas. I do not think it is focused particularly
on the electric movement of wholesale power?
Ms. Coale. As I mentioned, the performance of the electric
companies have been dramatically worse in the rest of the
country, and maybe you could attribute it to a few rogue
players in this business, but it is clear that the power sector
has under-performed relative to the rest of the group.
Now someone has got to build the grid. You are asking, or
you are looking for infrastructure expansion, and there is no
capital. I mean, the market has stripped the capital away from
these companies. There is no equity. People are not buying the
stocks of these companies. There is no secondary offering
market for equities today. There is no debt capital. And the
companies are cutting their growth budgets. Publicly announced
cuts have been in Williams and Dynegy.
Senator Thomas. Well, okay. But this, what you are saying,
has only happened in the last 6 or 8 months.
Ms. Coale. That is correct.
Senator Thomas. The idea of transmission slowdown has been
going on for quite a long time. You mentioned a lot about no
investment. The fact is, other than California, things have
been going fairly well.
Ms. Coale. In my opinion, the transmission grid probably
should have been built before deregulation was even considered.
That is one reason why maybe the gas market behaved as
efficiently as it did, is because the grid was already up and
running and a spot market was developed in a more organized
way. But I do admit that the PJM has appeared to have operated
efficiently.
I am very much opposed to regulating price. I am opposed to
price caps. I think that the opportunistic and somewhat maybe
misguided companies in the West took price caps and used it to
their advantage to gain the system. Had it not been for price
caps, maybe those opportunities and those missteps may not have
occurred.
We are not in favor of contract abrogation. That was
discussed earlier today. But as I recall, when those contracts
were being negotiated, the price of power was above the
negotiated contract price and actually, the power companies did
not want to enter into those contracts. And today, they are
being accused of manipulating the market, when indeed, they
were taking cuts as it appeared at that point in time on the
market price of power.
Senator Thomas. Had it not been for California, much of
this would not be the case, I think. And so, in any event--all
right.
Dr. Makovich, you talked about the bust and the boom. Do
you think that has been the bust and the boom all over the
country in power and power generation?
Dr. Makovich. Yes. If you look at the data, we added more
powerplants in this country last year than we have ever added
in the history of this industry, and we are likely to top it
this year, along with this record amount of retrenchment.
And the problem with the investment cycle that we have seen
is: We built too much. We built in the wrong places. We lack
fuel diversity. And it is probably the wrong technologies. Now
other than that, it looks like everything is okay.
[Laughter.]
Senator Thomas. Good. That really makes you feel
comfortable.
[Laughter.]
Dr. Makovich. And so the repercussions here we have seen on
these companies is more than just a general stock market move.
These companies move down way ahead of this general market
decline. They have moved down far more, and a lot of it was
launched because these markets were so ill defined. We allowed
the herd mentality and a couple of other things to come into
play here. And we have had a very costly overbuild in some
places, and we are still worried about being short in others.
Senator Thomas. So you are very much in favor of controls,
controls over all of the business.
Dr. Makovich. Well, the controls that we are talking about
here are well structured markets that give timely price signals
that will create not only----
Senator Thomas. How do you structure that?
Dr. Makovich. Well, it is----
Senator Thomas. What can FERC do to structure what you are
talking about?
Dr. Makovich. One of the most important things, and
something that is the root cause of California, is this whole
question of the capacity market. We need another commodity here
that pays for the capacity to be there to meet peak demand.
Senator Thomas. Well, it would also help if California was
willing to build some supply----
Dr. Makovich. That is right. And the siting and permitting
regs----
Senator Thomas [continuing]. Rather than expecting it to
come from somewhere else.
Dr. Makovich. That is right. So you have to make it
possible, and you have to make it profitable, and the
investment will follow.
Senator Thomas. I guess I am a little troubled, but we have
seen--you all seem to be making out for a national problem what
happened in California. And I must tell you, I do not think
that is necessarily the case. You have to deal with
California's problem, but show me where those kinds of things
have happened anywhere else.
Dr. Makovich. Well, downstate New York is another good
example. The same kind of siting and permitting problems that
prevented people from building powerplants in California have
put downstate New York in the same kind of tenuous position.
Senator Thomas. I thought PJM was doing pretty well.
Dr. Makovich. This is the New York Power Pool. PJM is
separate from downstate New York.
Senator Thomas. Where do you live, for heaven's sake?
[Laughter.]
Senator Thomas. Nobody claims you.
[Laughter.]
Mr. Landrieu. Now, I live in New Jersey, and PJM started
out as three utilities in Pennsylvania, New Jersey, and
Maryland which is where the initials came from.
Senator Thomas. I see. Okay.
Mr. Landrieu. And it has grown over the years, and is still
growing. But the key thing that has been demonstrated by having
the proper market prices and price signals is that we get the
generation that comes in and wants to invest, and it comes to
where it should come because the pricing signals incent
generation to go to where generation is needed. That is the way
the locational pricing works.
And it sort of complements the physics of the electric
system. You have prices that really are married to the physics
of the electric system; so the pricing gets the infrastructure
built in the right places in a manner that enhances and
complements reliability. It is pretty neat.
Senator Thomas. Some of us live in places where we are
happy to generate. We just need a way to get it to the markets.
But if you have to take the fuel to generate somewhere first,
that makes it more difficult. So I do not think there is a lack
of willingness to generate electricity if we have a way to
deliver it to the markets. And so that is one of the things,
obviously.
You have indicated, I think, you are kind of interested in
price caps, is that right, or price controls?
Mr. Landrieu. No, I am really for and we have in PJM, a
system that I think is quite similar to where the path that
FERC is heading down with their standard market design. So that
is not really price controls, although we do have a $1,000
price cap, but that is hardly ever approached.
Senator Thomas. I see.
Mr. Ward. What was I going to say? Oh, oversight, you
wanted oversight clear down to the retail distribution
customer, as I understand.
Mr. Ward. Not in the case of FERC's role. FERC is
responsible for the oversight of wholesale markets and, in my
opinion, has done a good job of setting up a market monitoring
section within FERC now.
Market monitoring and investigation has required that the
RTOs to get formed, like PJM, like ISO New England, like New
York, have a market monitoring function that is very attentive
to possible gaining of the markets, market abuses in terms of
bidding behavior by players in the market.
Senator Thomas. So distribution intrastate you would leave
to the States.
Mr. Ward. Absolutely. That is right. That is a State
responsibility, and States like mine in Maine where 40 percent
now of the energy comes from competitive markets to retail
customers, that is a legitimate State interest to keep an eye
on how that retail market develops.
Senator Thomas. Sure. It is sort of interesting. Most of
you are interested in more FERC activity. And while we are
putting together our energy bill, the western governors were
very strong in their wanting less FERC and letting the States
through the RTOs and others do more.
Is there a great deal of difference between your operation
and out in the West?
Mr. Landrieu. I do not think there is that much difference
in mode of operation. There is a difference, as Mr. Nevius
pointed out, in geography, and distance between generation, and
load that makes minor technical issues.
Senator Thomas. Yes, but that does not have much to do with
standards and oversight.
Mr. Landrieu. No. But what you have in the West is a
different history of contracts and what-not, whereas as I said,
we have had the sharing of transmission and generation in parts
of the East for over 70 years. So there is a--I think part of
what we are facing here in different parts of the country is
sort of cultural development along a market learning curve.
Senator Thomas. Okay. Would you like to come out and help
me with my landowners on eminent domain, Mr. Ward?
Mr. Ward. I can appreciate that any advice that I might
give you would probably be advice that would not have too much
value.
[Laughter.]
Senator Thomas. It is a tough issue obviously.
Mr. Ward. It is.
Senator Thomas. If you are going to build interstate grid,
why, you are going to have to have some authority to do that.
There is no question.
Well, thank all of you very much. I appreciate it. And the
chairman has returned, and he may have some comments.
Otherwise, we are through, sir.
The Chairman [presiding]. Well, all right. Well, thank you
very much. I apologize again for having to duck out for
attending that conference.
Let me just ask a general question. And I will have to
review your testimony and maybe each of you have already
addressed this. But let me start with Dr. Makovich and see if
he has a comment.
Do you really think that this standard market design rule
that is coming out is going to do all the things that--or holds
the promise of doing all the things that Chairman Wood talked
about, of really providing stability and clear direction to the
companies that are trying to do business in this area?
Dr. Makovich. Well, the opportunity is certainly there. The
lesson is: The rules matter a lot in this business. The
discussion that we have had on this panel I think illustrates a
very important point, what Pete has been saying. If the
regional power markets in this country were organized to look a
lot more like the way PJM is organized, their kinds of rules,
their kinds of institutions, we would have far, far fewer
problems than we have had.
And the hope here is that the standard market design will
take the lessons from power markets that are working well, that
have not been in the headlines with a lot of crises, and apply
those lessons elsewhere.
The Chairman. And the thought is, as I understand it, is
that that will not only provide greater assurance to customers,
consumers, that the power will be there and reliable and all of
that, but that it will also provide greater assurance to
investors, that they can make the necessary investments and
plan to get their capital back, and some kind of decent rate of
return.
Dr. Makovich. That is right. The kind of capacity, or the
rules that create the capacity market in PJM, the kind of
locational marginal pricing, and the property rights on the
transmission side create a whole set of signals and timely
signals that will greatly enhance the investment patterns that
we are seeing in the power business.
The Chairman. Does anybody else have a comment on that?
Yes, Ms. Coale.
Ms. Coale. Thank you. Coming from Wall Street, I can tell
you that standard market design is not something that is going
to restore confidence in the capital markets.
What is going to restore confidence in the capital markets
is expediting the ongoing investigations and clarifying what
the penalties are going to be if there are any, including
refunds, or affiliate abuses, instead of having indefinite time
frames and uncertain sort of, you know, penalties for violating
the rules.
I think that Wall Street, to restore capital, needs clarity
on defining the rules that exist today in addition to
standardizing the rules of tomorrow. But as a priority over the
past issues, I think that possibly we would advise the FERC to
rethink which should come first.
The Chairman. Okay.
Yes, Mr. Ward.
Mr. Ward. I just wanted to say, I feel very strongly that
FERC is on the right track. And it has a responsibility, not
merely to look at a catastrophe that took place in California
in the past, but also to set the rules that permit investment
to take place over the long run.
And I think standard market design is exactly that. It is
following the lead of PJM, and trying to establish consistent
and clear and workable rules that have been road-tested
essentially.
FERC also has done a very good job over the last year of
conducting round-table discussions. It is absolutely
unprecedented at FERC, where people with strong disagreements
have sat down together for four hours, eight hours at a time
with all the FERC commissioners present, fighting out
disagreements about how you create a workable wholesale market
for electricity.
So I think FERC is not responsible, or today's FERC is not
responsible for some catastrophes that took place three years
ago, two years ago. I think they are on the right track right
now.
The Chairman. All right.
Mr. Landrieu, did you have a comment?
Mr. Landrieu. Just that these things fall in an order, and
the first, which Chairman Wood mentioned, is that the
transmission system is a regional system with regional
attributes which, therefore, means you need regional
organizations to help plan it, to run the markets, and do all
the things if you are going to have an open and competitive
market.
Just having the organization is not enough. You need to
have the proper pricing signals built into the rules for that
market, because we have seen in California what having the
organization with the wrong pricing rules results in. And we
have been fortunate enough in the case of the PJM ISO to see a
different set of rules produce workable results. And we have
seen those workable rules attract investment in transmission,
in merchant transmission and in generation so that the
infrastructure is occurring.
So it is the regional organizations with the right rules
and tradeable property rights that bring the investment. And
certainly, the sooner we have the certainty, the better off we
are going to be because the investment community may not care
about, you know, the ins and outs of how some of the ISO rules
work, but the certainty of being able to make investments in a
stable market under accepted rules that you can count on
through the life of an investment I think is important.
The Chairman. Well, all right.
Thank you all very much. I think this is very useful, and
we appreciate the testimony. And we will undoubtedly do more of
this in the future.
The hearing is adjourned.
[Whereupon, at 4:49 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Federal Energy Regulatory Commission,
Washington, DC, August 30, 2002.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Re: Follow-up Questions on the Electricity Infrastructure Hearing, July
24, 2002
Dear Mr. Chairman: I appreciated the opportunity to testify before
your Committee at its July 24, 2002 hearing.
Subsequent to this bearing, you asked that I provide additional
information for the record in response to written questions by Senators
Cantwell and Landrieu. My answers to those questions are enclosed. If
you need additional information, please do not hesitate to let me know.
Best regards,
Pat Wood, III
Chairman
[Enclosures]
Responses to Questions From Senator Cantwell
Question. Isn't it true that all of the forward contracts that are
the subject of FPA section 206 complaint cases now pending before the
Commission are so-called ``market based rate'' contracts that have not
been previously approved by FERC?
Answer. The majority of the forward contracts being challenged in
the complaints currently pending before the Commission were entered
into pursuant to the seller's market-based rate authority. A seller is
authorized to make sales of power at market based rates upon the
Commission's finding that the seller lacks or has mitigated market
power. Consequently, a seller that has been granted market-based rate
authority may enter into power sales contracts without first seeking
Commission authorization of the provisions of an individual contract.
The Commission is not required specifically to review each agreement
since the Commission, when it grants umbrella market-based rate
authorization, pre-determines that rates under future contracts entered
into pursuant to the market-based rate authorization will be just and
reasonable.
Question. Isn't it true that FERC has never before applied the
Mobile-Sierra standard to a case involving ``market-based rate''
contracts? Would application in these cases be completely without
precedent?
Answer. The Commission was presented with the issue for the first
time when it decided the standard of review that applies in determining
whether changes are permitted to the forward contracts for sale of
energy in bilateral markets in California and the West entered into
pursuant to previously-granted market-based rate authority. Consistent
with the United States Supreme Court case law, the Commission held that
a party unilaterally proposing changes to a rate must meet the standard
contained in the relevant contract(s). Because some of the contracts at
issue in the California and West proceedings were not clear on their
face, the Commission set for hearing the issue of whether the parties
to these contracts intended to apply the Mobile-Sierra ``public
interest'' standard or the ``just and reasonable'' standard.
Question. On April 25, 2002, FERC issued Order No. 2001, which
clarified that market-based rate contracts did not have to be filed
with FERC for approval. In footnote 30 of that Order the Commission
also stated: ``Any provisions in agreements that purport to bind the
Commission to a standard other than the just and reasonable standard of
FPA section 206, and that are not explicitly ruled upon and accepted by
the Commission, will not be binding on the Commission.'' I read this to
mean that, if a contract has not previously been approved by the
Commission, FERC is required to apply no standard other than the ``just
and reasonable'' standard of the Federal Power Act, should it have
cause to review the contract at a later date. Don't you agree that the
language of the footnote means that the Mobile-Sierra doctrine can't
apply to market-based rate contracts that have not been previously
approved by the Commission? If not, what did FERC mean by footnote 30?
Answer. On rehearing, the Commission recently vacated footnote 30
of Order No. 2001.\1\ To address the issue of the applicable standard
of review for market-based rate contracts for wholesale sales of
electric energy by public utilities more comprehensively, on August 1,
2002, the Commission issued a proposed Policy Statement.\2\ This Policy
Statement proposes precise language that parties would be required to
include in their electric power sales contracts if they intend that the
Commission apply the ``public interest'' standard of review to a
market-based rate contract. The Policy Statement is expected to limit,
as much as possible, disputes regarding the applicable standard of
review for market-based rate contracts.
---------------------------------------------------------------------------
\1\ See Revised Public Utility Filing Requirements, Order No. 2001,
67 Fed. Reg. 31,043 (May 2002), FERC Stats. & Regs. para. 31,127
(2002), order on reh'g, Order 2001-A, 100 FERC para. 61,074, at 61,285
(2002).
\2\ Standard of Review for Proposed Changes to Market-Based Rate
Contracts for Wholesale Sales of Electric Energy by Public Utilities,
100 FERC para. 61,145 (2002).
---------------------------------------------------------------------------
Question. Isn't it true that the difference between contracts
previously approved by FERC and market-based rate contracts is that in
the former case, FERC has already found the contract's terms to be just
and reasonable (as is required by the Federal Power Act); where in the
latter case, FERC is merely presuming the contract to be just and
reasonable--unless later proven otherwise? Isn't this the only way to
reconcile Congress' clear intent in the Federal Power Act--that a
contract be ``just and reasonable''--and the courts' views that, in
limited circumstances, a contract can only be modified pursuant to a
higher burden of proof, or the Mobile-Sierra public interest standard?
Answer. The specific prices, terms and conditions of service agreed
to by willing sellers and buyers in market-based contracts are not
required to be filed with the Commission when these contracts are
entered into pursuant to market-based rate tariffs already approved by,
and on file with, the Commission.\3\ Because the tariffs are authorized
only after the Commission has made findings that the sellers under such
tariffs lack or have mitigated market power, the prices, terms and
conditions of contracts pursuant to market-based tariffs are presumed
to fall within a zone of reasonableness.\4\ However, parties to a
market-based contract may challenge its terms pursuant to section 206
of the FPA.\5\ The Proposed Policy Statement discussed above proposes
specific language which parties must include in their contracts if they
intend the ``public interest'' standard of review to apply in a section
206 proceeding.
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\3\ See Revised Public Utility Filing Requirements, Order No. 2001,
67 Fed. Reg. 31,043 (2002), FERC Stats. & Regs. para. 31,127, at
30,135-140 (2002), order on reh'g, Order 2001-A, 100 FERC para. 61,074,
at 61,285 (2002) (although contracts are not filed, detailed
information about each transaction is reported to the Commission).
\4\ See, e.g., State of California v. British Columbia Power
Exchange Corporation, et. al., 99 FERC para. 61,247 (2002), reh'g--
pending (prior review consists of ``analysis to assure that the seller
lacks or has mitigated market power so that its prices will fall within
a zone of reasonableness'').
\5\16 U.S.C. Sec. 824e (1994).
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Question. As we have previously discussed--and because of the
interconnected nature of the Northwest and California markets, not to
mention the way they are structured--many of my constituents are served
by utilities that are facing the very real possibility that they could
be ordered to pay refunds for sales of power they made into the
California ISO and PX. In that case, FERC has already established it
will use the ``just and reasonable'' standard. I find this difficult to
reconcile with the Commission's suggestion that it could use the more
rigorous ``public interest'' standard for consumers in my state and
other states in the West that were harmed by a dysfunctional forward
market. Can you commit to ensuring a regionally equitable solution to
the numerous complaints now pending before the Commission?
Answer. Under the FPA, the Commission is charged with the duty to
ensure that the rates, terms and conditions of service are just and
reasonable and not unduly discriminatory or otherwise unlawful. In
performing this function, the Commission can on its own motion or on
the complaint of a third party investigate existing rates, and alter
them prospectively, if it finds that such rates are no longer just and
reasonable. On August 23, 2000, the Commission instituted formal
hearing proceedings under section 206 of the FPA to investigate the
justness and reasonableness of the rates for energy and ancillary
services of public utility sellers into the ISO and PX spot markets.\6\
Transactions in these markets are not arranged by contract and, thus,
do not trigger the Mobile-Sierra ``public interest'' standard.
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\6\ San Diego Gas & Electric Co. v. Seller of Energy and Ancillary
Serv., et. al., 92 FERC para. 61,172 (2000), order on reh'g, San Diego
Gas & Electric Co. v. Seller of Energy and Ancillary Serv., et. al., 96
FERC para. 61,120 (2001).
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The FPA section 206 complaints you describe challenge transactions
governed by the rates, terms and conditions of individual bilateral
contracts. The FPA provides that contracts between individual parties
can be used to set rates.\7\ In such contracts, selling utilities may
agree to voluntarily restrict some or all of their freedom to change
the contract rates, customers may agree to restrict their right to
request the Commission to change the rate, and sometimes the parties to
the contract may attempt to restrict not only themselves but also the
Commission from changing the contract rate under the ``just and
reasonable'' standard. Certain courts have required the Commission to
use the ``public interest'' standard to effect a change to a contract
rate. The Commission did not have sufficient record evidence to
determine which standard of review to apply to the complaints in
question. Accordingly, it established evidentiary hearings to interpret
the relevant contract terms and to ascertain the intent of the parties
at the time the contracts in question were signed in order to determine
which standard of review to apply, i.e., the ``just and reasonable
standard'' or a stricter ``public interest'' standard.
---------------------------------------------------------------------------
\7\ See, e.g., 16 U.S.C. 824d(d) and 824e(a).
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Response to Question From Senator Landrieu
Question. Mr. Wood, on April 24, 2002, FERC released a press
release (Docket No. RM02-1-000) stating that ``generators would pay the
full cost of sole-use direct assignment facilities, and initially pay
for any additional network facilities that would be needed as a result
of their interconnection request. The generator(s) would later receive
compensation for network costs, plus interest, through credits once
transmission service begins.'' Does this mean that the same incentive
structure will be used to boost transmission capacity enhancement?
Answer. The press release issued on April 24, 2002 describes the
Commission's proposed rule on Standardization of Generator
Interconnection Agreements and Procedures.\8\ There, the Commission
proposed to continue its current pricing policy with regard to network
upgrades, i.e., the ``rolled in'' pricing, where all users pay an
administratively determined share of new facilities. The rationale for
the policy has been that the transmission grid is a single piece of
equipment such that the system expansions are used by and benefit all
users due to the integrated nature of the grid. We requested comment on
whether there are other pricing proposals that would be appropriate. We
are currently reviewing extensive comments on this issue.
---------------------------------------------------------------------------
\8\ Standardization of Generator Interconnection Agreements and
Procedures, 67 Fed. Reg. 22,249 (May 2002), FERC Stats. & Regs. para.
32,560 (2002).
---------------------------------------------------------------------------
More recently, we have proposed to allocate the cost of
transmission expansions based primarily on participant funding. On July
31, 2002, we issued another proposed rule, Remedying Undue
Discrimination through Open Access Transmission Service and Standard
Electricity Market Design \9\ that also addresses the Commission's
interconnection pricing policy. In the proposed rule, we state that
participant funding may be appropriate for a transmission expansion
where the proposed transmission facilities are included in a regional
planning process which is conducted by an independent entity, whether
it is a regional transmission organization, an independent transmission
system operator or another such entity. In the absence of an
independent entity conducting the regional planning process, we propose
to apply a default pricing policy that rolls in on a regionwide basis
all high voltage network upgrades of 138 kV and above. Since lower
voltage, sub-regional transmission needs are less likely to benefit the
whole region, the cost of network facilities below 138 kV could be more
appropriately allocated to a sub-region where the transmission
facilities will be located. Our goal is to allocate costs to the region
that benefits from the expansion, which may not be the same as the
region in which the expansion facilities are located. We seek comment
on whether this pricing proposal is appropriate to meet our goal of
expediting needed infrastructure investment or whether another method
would be more effective. Further, to facilitate the siting of regional
expansions, we would look favorably upon states working together to
identify beneficiaries of expansion projects and make recommendations
on pricing proposals, provided that such proposals are consistent with
the Federal Power Act. We expect to issue a final rule after careful
consideration of all comments.
---------------------------------------------------------------------------
\9\ Remedying Undue Discrimination through Open Access Transmission
Service and Standard Electricity Market Design, 100 FERC para. 61,138
(2002), available on .
Appendix II
Additional Material Submitted for the Record
----------
Statement of James Avery, Senior Vice President, San Diego Gas &
Electric
My name is Jim Avery, Senior Vice President of San Diego Gas &
Electric (SDG&E). I am responsible for managing all aspects of electric
transmission for SDG&E, a distribution utility that provides service to
3 million customers through 1.3 million electric meters and 775,000
natural gas meters in San Diego and southern Orange counties. SDG&E is
a California Public Utilities Commission (CPUC)-regulated public
utility, and a subsidiary of Sempra Energy, a San Diego-based Fortune
500 energy services holding company. I appreciate the opportunity to
provide a statement for the record as part of the Committee's oversight
of the Department of Energy's National Transmission Grid Study and
related issues. In that context, we would like to share our experience
with recent impediments to the timely completion of much needed
transmission infrastructure in Southern California.
We applaud the Department's declaration that ``identifying and
eliminating major transmission bottlenecks is vital to our national
interest.'' California has only recently been able to emerge from a
severe energy crisis that included rolling blackouts, spiraling prices,
and threatened the State's economic future and well being. Although the
crisis was caused by many factors, a lack of transmission and an
insufficient supply of electricity was identified as a leading
contributor. In fact, this was widely recognized by the members of the
Senate Energy Committee and the House Energy and Commerce Committee
during hearings on the California energy crisis in early 2001.
The Department study specifically declares that California
``transmission upgrades remain an important element of a comprehensive,
long-term solution to California's electric system.'' Constraints on
electricity production and transmission in California continue to
create uncertainties in the marketplace. As you know, however,
transmission facilities can be incredibly hard to complete, no matter
how great the need for the facility. The successful completion of these
facilities requires the cooperation of all involved federal and state
agencies.
The Department study highlights the special role of the federal
government in certain infrastructure plans. As the Department
recommends in their study, ``DOE believes that federal agencies that
manage federal lands and natural resources should support regional
transmission siting agreements.'' The Department recommends that ``to
help address transmission bottlenecks, the federal government should
continue to improve coordination among federal agencies . . . Federal
agencies should support regional planning efforts by identifying and
evaluating potential transmission corridors across federal lands.'' The
Department also declares that the ``federal government has a special
responsibility to ensure that siting and permitting on federal lands is
not needlessly delayed. Federal regulators should actively support and
defer to these state and regional siting and permitting processes.''
Ironically, our experience in California has been that the actions
of the federal government itself are undercutting the development of
infrastructure that the state has identified as critical.
SDG&E's recent experience with its proposed Valley Rainbow project
is a prime example of the difficulties involved in actually siting a
major new needed transmission line, and of the impact of federal
actions on this effort. Currently, the fate of the line is at a
critical stage where it is important that the Congress and the
Administration work with SDG&E and not take action which would block
the proposed route for the Valley Rainbow project unless and until the
Congress also identifies an alternative route for the project. In the
case of the Valley Rainbow transmission line, because of the problems
encountered to date in siting the line due to federal actions, SDG&E is
interested in exploring potential routes over federal land that are not
currently available. SDG&E cannot pursue these potential routes without
the active support of the Congress and the Administration.
background and need for the valley rainbow interconnect
transmission project
SDG&E is currently involved in the siting and licensing of its
Valley Rainbow Interconnect project, a proposed 500 kilovolt (kV)
electric transmission line that would connect the existing Valley
substation in Riverside County to a new substation approximately 31
miles south in the community of Rainbow in San Diego County, and serve
more than 700,000 single family homes and businesses in Southern
California. The greater San Diego area is among the most vulnerable to
electricity supply interruptions because it has only two connections to
the California and western transmission grids, and these connections
were designed and built when the region was half its current
population. The Valley Rainbow project will provide an important new
link between the growing San Diego market and the rest of the State.
The federally-regulated California Independent System Operator
(ISO), which has responsibility for managing and planning the
California transmission grid, has concluded that a major new
transmission line needs to be built to address serious electrical
reliability deficiencies in the southern California region, and has
directed SDG&E to proceed with it.I have attached the ISO's most recent
letter of support from September 2001. Likewise, the California Energy
Commission (CEC) in its recent report entitled 2002-2012 Energy Outlook
Report (February 2002), has identified the San Diego region as one of
the most vulnerable in the State of California for future power
outages.
The business community in the greater San Diego region also
recognizes the importance of the Valley Rainbow Interconnect project.
In a November 2001 letter (attached for the record),* the San Diego
Regional Chamber of Commerce, the San Diego Regional Economic
Development Corporation, and the San Diego-Imperial Counties Labor
Council agreed that the proposed transmission line is ``critical to
helping to solve the long-term energy demands of the San Diego region''
and would ``help maintain a strong regional economy and job base for
many years to come.''
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* The letters have been retained in committee files.
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selection of a right-of-way corridor for the valley rainbow project
In response to the direction from the California ISO, SDG&E studied
more than 80 different routing links and hundreds of miles of
alternatives to determine the corridors for its Valley Rainbow project
that would have the least impact on the residents, businesses and
environment in Riverside and San Diego counties. Because of the
existing land uses, and the topography of the region, the route options
ultimately provide only three potential corridors in the southern
region of Riverside County. The first of these potential routes,
identified as the preferred route, is located on the southern and
eastern boundary of the Pechanga Indian Reservation. This route would
have the least impact on the environment and communities of Southwest
Riverside County. SDG&E initially sought Tribal approval to site the
Valley Rainbow line over the preferred route along the southern and
eastern edge of the Pechanga Reservation. Numerous meetings were held
with the Pechanga Tribal Chairman and the Tribal Council, and with many
other members of the Pechanga Tribe. Unfortunately, SDG&E's efforts to
negotiate a right-of-way for the preferred route was unsuccessful, and
the Tribal Council passed a resolution opposing the proposed siting of
the Valley Rainbow Interconnect line along the preferred route.
Because of the Tribe's opposition, SDG&E focused its attention on
the second route through the privately owned Boseker Ranch, adjacent to
the Reservation. In March 2001, SDG&E filed an application with the
CPUC for approval of the Valley Rainbow line and the Boseker route. In
May 2001, shortly after SDG&E indicated that it would be proceeding
with the Boseker route for the Valley Rainbow project, the Pechanga
Tribe purchased the property, renamed it the Great Oak Ranch and
applied to the Bureau of Indian Affairs (BIA) to take that land into
trust.
When the Company learned that this private property had changed
hands, we continued our dialogue with the Pechanga Tribe, meeting with
Tribal officials again to discuss potential alternatives, and making a
formal offer for an easement over the Great Oak property. Shortly
thereafter, we were informed that the Tribe opposed the siting of the
Valley Rainbow Interconnect on the Great Oak property, much as it had
previously opposed a transmission corridor on Reservation lands.
If those two routes are foreclosed by action by the BIA and the
opposition of the Tribe, then there is only one route available to
serve the citizens of Southern California. The third route, situated
west of Interstate 15, has been recognized as problematic because it
would traverse environmentally sensitive areas and, in addition, would
enter populated areas, triggering the need to remove businesses and
homes in one of the fastest growing areas in the nation.
sdg&e's interest in reaching a negotiated resolution of the
right-of-way issue
During the summer and fall of 2001, the Tribe sponsored an Interior
appropriations rider that would have overridden statutory authorities
and mandated that the Great Oak Ranch be taken into trust without
undergoing the required review, thereby blocking the proposed use of a
narrow corridor on the property for the Valley Rainbow transmission
line. That rider was removed by the House-Senate Conference Committee.
A subsequent effort by the Tribe to sponsor another rider to the
Defense appropriations bill did not advance. The Tribe has since
pursued federal legislation in both the House of Representatives (H.R.
3476) and the Senate (S. 2711) that would act to limit the Company's
ability to exercise its state-delegated right of eminent domain over
the property. Throughout these efforts, SDG&E has continued to
emphasize that the Company does not oppose the Tribe's request to take
additional land into trust, so long as the State's legitimate needs for
a narrow transmission corridor are accommodated.
Earlier this year, the Interior Department agreed to seek a
negotiated resolution of this matter, and arranged for face-to-face
negotiations among the parties in a meeting that was scheduled to take
place in southern California on March 20, 2002. Regrettably, a few days
before the March 20 negotiating session, the Interior Department
abruptly cancelled the meeting, and the very next day, on March 21,
2002, the Bureau of Indian Affairs (BIA) regional office in Sacramento,
California released a Notice of Decision to accept the Great Oak Ranch
in trust for the Pechanga Indians without any reservation of a
transmission corridor for the Valley Rainbow project, and without any
effort to seek a negotiated resolution of the issue. The BIA action
could have the practical effect of blocking indefinitely SDG&E's
construction of the Valley Rainbow Interconnect, because the Company
cannot condemn the land once it is taken into trust by the United
States. Yet the BIA decision completely ignored the energy implications
of their action. SDG&E has appealed BIA's decision, and believes that
the decision should, and will, be reversed on appeal.
The Company, however, continues to prefer that the corridor issue
be addressed through a negotiated resolution. While the land in trust
process should not be used inappropriately to block this needed
project, SDG&E does not oppose the Tribe's request to take the Great
Oak Ranch property into trust, so long as a right-of-way corridor is
identified and set aside for public use at the same time. In this
spirit, the Representatives of Congress from the affected areas met
with the Tribe and with SDG&E to seek a compromise on the legislation
H.R. 3476, then pending before the House Resources Committee. The
compromise that was struck was that the legislation could advance out
of committee, but proceed no further until Congress authorizes an
alternative route for the transmission line through near by federal
land. This compromise addressed the desire of the Tribe to take their
land into trust, with no transmission corridor, but only if it was
replaced with an alternative corridor that will preserve the state's
ability to keep the lights on for the 3 million people south of the
Reservation.
Thus, the compromise would require and provide a mechanism to
utilize other federal lands in the immediate area administered by the
U.S. Department of Agriculture, Forest Service and/or the Bureau of
Land Management that are not currently available for another corridor
for the Valley Rainbow project. Federal action on the land into trust
decision, ignoring the energy implications, have triggered the problem.
Congressional leadership and the cooperation of these federal agencies
is critical to implementing the compromise and helping to ensure
continued electric reliability in Southern California.
conclusion
In summary, there are always numerous difficulties encountered in
the siting of new, needed transmission lines. However, in this case, we
should not, through a federal land-into-trust action, foreclose the
proposed transmission corridor for the Valley Rainbow transmission line
without identifying an alternative route. SDG&E renews its request to
Congress, and to the Secretaries of the Interior and Agriculture, to
help it negotiate a resolution of the existing conflict in a manner
that will meet Tribal needs, while also addressing the state's needs
for a new right-of-way for the installation of the Valley Rainbow
Interconnect transmission project.
______
Statement of Robert Jack, Chairman, International Utility Structures,
Inc.
Mr. Chairman and Members of the Committee: Thank you for the
opportunity to submit testimony regarding issues relating to the need
for, and barriers to, development of electricity infrastructure. My
name is Robert Jack, and I am Chairman of International Utility
Structures Inc. (IUSI). My company is a major supplier of electric
distribution and transmission steel poles from our manufacturing
facilities in Kansas and France. Our company has a strong interest in
these issues before your Committee and would like to offer our comments
regarding the transmission expansion needs to meet the load growth, the
maintenance of a highly reliable transmission system, an a possible
approach for future financing regarding construction of transmission
infrastructure and some general comments regarding the Department of
Energy National Grid Study that was recently released.
transmission expansion
There has been an abundance of reports and analysis with respect to
transmission expansion. I would like to add ours. Based on interviews,
meetings, and review of many of these reports, we commissioned a report
in early 2001 for our own business planning purposes, that indicated
the United States was on track for the development of 290,000 megawatts
of generating capacity added in the period 2000 through 2004, which is
an increase of 25 percent to 30 percent in total generating capacity.
The disturbing part of our study was that there wasn't a corresponding
increase in transmission to go with the additional generating capacity.
The events since that time have caused us to reevaluate that
information, but have not fundamentally caused us to change course for
planning purposes.
In addition, the North American Electric Reliability Council (NERC)
who I understand will be providing testimony to your Committee,
indicated in their October 2000 Assessment Report the addition of 8,445
miles of transmission facilities 230kV and above, which is only an
increase of 4.2 percent. The report indicates new proposed gas-fired
generation will be added directly to the existing transmission
facilities near the gas pipelines and local load centers. We agree with
this assessment. We have not found the interest in building new lines,
outside of those to solve bottleneck problems such as the Path 15 in
California, to move power from one region of the country to another.
The interest has been in connecting new generation facilities to the
existing grid, which has us concerned because there is no surplus
capacity in the transmission system.
transmission reliability
One of the principle reasons that my company wanted to provide a
statement for this hearing was to convey the results of a report that
we commissioned last year regarding the aging of the existing
transmission grid and the need for additional transmission facilitates
to meet the annual load growth. The report, ``North American
Transmission Line Assessment 2000-2009'', which I would like to submit
for your record,* was startling with regard to the aging of the system.
Of the approximately 592,000 circuit miles of transmission lines 51kV
and above, it appears that about 473,000 circuit miles are on wood
poles. Although we need further study and analysis of these numbers,
based on our understanding and knowledge of the transmission grid, we
believe that over 375,000 circuit miles of the existing transmission
lines are on wood poles that are over 40 years old. To maintain the
high level of reliability that people in North America have come to
expect there is going to be a tremendous need for ``rebuilds'' and
``replacements''.
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* The report has been retained in committee files.
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What is troubling about these figures is the amount of money that
is currently not being spent in this area. In the 1980's the Western
Area Power Administration (WAPA) estimated they needed a replacement
and additions program of $100 million dollars per year to maintain
their system reliability standards. Due to cost containment programs
and potential rate impacts, the replacement program was reduced to the
current level of about $20 million per year. It is quite clear that the
current program is inadequate for their 16,000 plus mile transmission
program, let alone the efforts regarding replacement for the other
350,000 plus miles of transmission lines that are part of the grid.
financing mechanisms
The level of investment required to achieve the DOE estimated grid
capacity levels needed to support U.S. economic growth over the next 20
years is massive. Total investment in transmission and requisite
downstream distribution infrastructure will probably exceed $200
billion over that time frame. It is furthermore unreasonable to expect
that the U.S. treasury and/or U.S. industry should be capable and/or
willing to source all of this capital, given the extensive requirements
by the government to fund critically needed projects such as homeland
security and industry's future need to fund industrial and technologic
expansion.
Consequently, I strongly urge that the government encourage foreign
investment in this most critically needed infrastructure expansion and
be flexible and open to perhaps new alternative investment vehicles.
These alternatives may not only be more attractive to foreign investors
but may also give them the economic stimulus to provide funds and a
rate which is lower than the current cost of capital the utility
industry is having to pay internally.
national transmission grid study
As someone from the private sector, I greatly appreciated the
efforts of the Administration to pull together a report last year on a
National Energy Policy. The recommendations regarding the national grid
were timely and necessary if we are to have a reliable system. The
subsequent report, National Transmission Grid Study by the Department
of Energy provides valuable documentation regarding the urgent need to
modernize the system and have a reliable one at the same time. Just as
people in this country turn on a water faucet and expect good, clean
water to come out, they also expect the lights or the computer to come
on when they flip the switch. In both instances they also expect an
affordable product as well.
I believe it is important that consideration be given to the
recommendation from the study that an office of Electric Transmission
and Distribution be created at DOE. One of the important elements of
the office would be to ``support the Power Marketing Administrations'
efforts to eliminate transmission bottlenecks, introduce new
technologies that increase the reliability and efficiency of the
transmission system, and help ensure that best practices are shared''.
By DOE having such an office--a focal point for people, companies in
the private sector, the public sector and abroad--to bring new ideas
and approaches to problems on such a major issue given the role that it
plays in the economy of the United States, helps solidify a level of
confidence that economically sound solutions can be found to address
these issues.
conclusion
Thank you again for the opportunity to provide testimony. I commend
the Committee for focusing on this important issue. I know you are also
engaged in developing new, broad ranging energy legislation and look
hopefully to final action by this Congress. I cannot emphasize enough
my concern regarding the need to focus on the aging of the existing
transmission infrastructure and the accompanying reliability issues.
Expansion of the system is also necessary if we are going to service
the economic growth that is occurring and going to continue in the
future. If the Committee members or staff would like a more detailed
briefing on our report, I would welcome the opportunity.