[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

                              ----------                              

                               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

                              ----------                              


                        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.
---------------------------------------------------------------------------
    * Figures 1 through 4 and Attachments A and B have been retained in 
committee files.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \2\ ftp://www.nerc.com/pub/sys/all--updl/docs/archives/
TransmExpansion--BOTapprvd--022002.pdf
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
               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.''
---------------------------------------------------------------------------
    * The letters have been retained in committee files.
---------------------------------------------------------------------------
  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''.
---------------------------------------------------------------------------
    * The report has been retained in committee files.
---------------------------------------------------------------------------
    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.

                                    

      
