[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]




                  COMPREHENSIVE NATIONAL ENERGY POLICY

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

                                HEARINGS

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               ----------                              

                       MARCH 5, 12, and 13, 2003

                               ----------                              

                            Serial No. 108-7

                               ----------                              

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house



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                            WASHINGTON : 2003
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                  COMPREHENSIVE NATIONAL ENERGY POLICY

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

                                HEARINGS

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                       MARCH 5, 12, and 13, 2003

                               __________

                            Serial No. 108-7

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                    ------------------------------  

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
RICHARD BURR, North Carolina         BART GORDON, Tennessee
  Vice Chairman                      PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Energy and Air Quality

                      JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California          RICK BOUCHER, Virginia
RICHARD BURR, North Carolina           (Ranking Member)
ED WHITFIELD, Kentucky               ALBERT R. WYNN, Maryland
CHARLIE NORWOOD, Georgia             THOMAS H. ALLEN, Maine
JOHN SHIMKUS, Illinois               HENRY A. WAXMAN, California
  Vice Chairman                      EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico           RALPH M. HALL, Texas
JOHN SHADEGG, Arizona                FRANK PALLONE, Jr., New Jersey
CHARLES W. ``CHIP'' PICKERING,       SHERROD BROWN, Ohio
Mississippi                          BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              KAREN McCARTHY, Missouri
STEVE BUYER, Indiana                 TED STRICKLAND, Ohio
GEORGE RADANOVICH, California        LOIS CAPPS, California
MARY BONO, California                MIKE DOYLE, Pennsylvania
GREG WALDEN, Oregon                  CHRIS JOHN, Louisiana
MIKE ROGERS, Michigan                JOHN D. DINGELL, Michigan
DARRELL ISSA, California               (Ex Officio)
C.L. ``BUTCH'' OTTER, Idaho
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    March 5, 2003................................................     1
    March 12, 2003...............................................   231
    March 13, 2003...............................................   295
Testimony of:
    Aurilio, Anna, Legislative Director, U.S. Public Interest 
      Research Group.............................................   124
    Benjamin, Jeffrey A., Vice President, Licensing and 
      Regulatory Affairs, Exelon Nuclear.........................   131
    Brownell, Hon. Nora Mead, Commissioner, Federal Energy 
      Regulatory Commission......................................    55
    Buccino, Sharon, Senior Attorney, Natural Resources Defense 
      Council....................................................   419
    Douglass, Bill, CEO, Douglass Distributing Company, on Behalf 
      of the National Association of Convenience Stores and the 
      Society of Independent Gasoline Marketers of America.......   444
    Early, A. Blakeman, Environmental Consultant, American Lung 
      Association, on Behalf of Northeast States for Coordinated 
      Air Use Management.........................................   449
    English, Glenn, CEO, National Rural Electric Cooperative 
      Association................................................   329
    Ervin, Sam J., Commissioner, North Carolina Public Utility 
      Commission.................................................   349
    Fertel, Marvin S., Senior Vice President of Business 
      Operations, Nuclear Energy Institute.......................   117
    Gent, Michehl R., President and Chief Executive Officer, 
      North American Electric Reliability Council................   389
    Kanner, Marty, Coordinator, Consumers for Fair Competition...   410
    Keil, Julie, Director of Hydro Licensing and Water Rights, 
      Portland General Electric..................................   248
    Lyman, Edwin S., President, Nuclear Control Institute........   136
    Masonis, Rob, Director, Northwest Regional Office, American 
      Rivers.....................................................   255
    Massey, Hon. William L., Commissioner, Federal Energy 
      Regulatory Commission......................................    47
    McSlarrow, Hon. Kyle, Deputy Secretary, U.S. Department of 
      Energy.....................................................    23
    Meserve, Hon. Richard A., Chairman, U.S. Nuclear Regulatory 
      Commission.................................................    33
    Meyer, Alden, Director of Government Relations, Union of 
      Concerned Scientists.......................................   159
    Moore, W. Henson, President and CEO, American Forest & Paper 
      Association, on Behalf of Electricity Consumers Resource 
      Council and American Chemistry Council.....................   343
    Murphy, Edward, General Manager, Downstream, American 
      Petroleum Institute........................................   431
    Nadel, Steven, Executive Director, American Council for an 
      Energy-Efficient Economy...................................   141
    Norlander, Gerald A., Executive Director, Public Law Project 
      of New York, Chairman, National Association of State 
      Utility Consumer Advocates.................................   398
    O'Hagan, Malcolm, President, National Electrical 
      Manufacturers Association..................................   149
    Olson, Erik D., Senior Attorney, Natural Resources Defense 
      Council....................................................   455
    Owens, David K., Executive Vice President, Business 
      Operations Group, Edison Electric Institute................   308
    Robinson, J. Mark, Director, Office of Energy Projects, 
      Federal Energy Regulatory Commission.......................   242
    Schori, Jan, General Manager and CEO, Sacramento Utility 
      District, on Behalf of Large Public Power Council..........   316

                                 (iii)

  
    Segal, Scott M., Counsel, Oxygenated Fuels Association.......   465
    Slaughter, Bob, President, National Petrochemical & Refiners 
      Association................................................   435
    Szeptycki, Leon, Eastern Conservation Director and General 
      Counsel, Trout Unlimited...................................   263
    Tezak, Christine L., Electricity Analyst, Washington Research 
      Group, Schwab Capital Markets, LP..........................   402
    Twitty, John, General Manager, City Utilities of Springfield, 
      Missouri, on Behalf of American Public Power Association...   319
    Walter, Ron, Executive Vice President, Calpine Corporation, 
      on Behalf of Electric Power Supply Association.............   338
    Wood, Hon. Patrick, Chairman, Federal Energy Regulatory 
      Commission.................................................    38
Additional material submitted for the record:
    Dinneen, Bob, President and CEO, Renewable Fuels Association, 
      prepared statement of......................................   486
    Electricity Consumers Resource Council, supplemental comments   490
    Lyondell Chemical Company, prepared statement of.............   491
    McSlarrow, Hon. Kyle, Deputy Secretary, U.S. Department of 
      Energy, response for the record............................   181
    Rathbun, Dennis K., Office of Congressional Affairs, Nuclear 
      Regulatory Commission, letter dated April 8, 2003, 
      enclosing response for the record..........................   193
    Tezak, Christine L., Electricity Analyst, Washington Research 
      Group, Schwab Capital Markets, LP, supplemental testimony 
      of.........................................................   495
    Walter, Ron, Executive Vice President, Calpine Corporation, 
      on Behalf of Electric Power Supply Association, letter 
      dated March 25, 2003, enclosing response for the record....   493
    Wood, Hon. Patrick, Chairman, Federal Energy Regulatory 
      Commission, letter dated March 31, 2003, enclosing response 
      for the record.............................................   221

                                  (iv)

  

 
                  COMPREHENSIVE NATIONAL ENERGY POLICY

                              ----------                              


                        WEDNESDAY, MARCH 5, 2003

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Cox, Burr, 
Whitfield, Norwood, Shimkus, Wilson, Shadegg, Pickering, 
Fossella, Buyer, Radanovich, Bono, Walden, Issa, Otter, Tauzin 
(ex officio), Boucher, Wynn, Allen, Waxman, Markey, Hall, 
Pallone, Brown, McCarthy, Strickland, Capps, Doyle, John, and 
Dingell (ex officio).
    Staff present: Jason Bentley, majority counsel; Sean 
Cunningham, majority counsel; Dwight Cates, professional staff; 
Andy Black, policy coordinator; Prter Kielty, legislative 
clerk; and Sue Sheridan, minority counsel.
    Mr. Barton. The hearing will come to order. We appreciate 
everybody's attendance. We want to, before we start the opening 
statements, ask for unanimous consent to adopt and enforce a 
version of the new Committee Rule 4(e).
    Under Committee Rule 4(e), the subcommittee chairman and 
the ranking member have the right to, on the opening 
statements, allow the chairman and the ranking full committee 
member and the subcommittee chairman and the ranking 
subcommittee member each get 5 minutes.
    All other members get 3 minutes, unless they wish to defer 
their 3 minutes, in which case they get an extra 3 minutes on 
their question periods, the first question period.
    Congressman Boucher and I have, are going to recommend 
unanimous consent to adopt a version of that, in that the non-
ranking members can have perhaps a 1-minute opening statement 
and they get 2 extra minutes.
    Or a 2-minute opening statement and get one extra minute. 
So that you can have some opening statement, but the time you 
don't use in your opening statement you can have that added to 
your time for questions.
    Is there an objection to that unanimous consent request? 
Hearing none, so ordered. We want to begin today a series of 
hearings, which the series is going to be two. So I should say 
two hearings, on the energy policy of this country.
    I have here, you can't see them all. These are copies of 
the 34 hearings we've done on this while I have been 
subcommittee chairman of this subcommittee.
    So we have done extensive hearings on the general policy. 
We have a draft bill out. And today we are going to hear from a 
series of individuals representing various groups and also 
various agencies of the U.S. Government about this policy.
    We're going to hold another hearing next week on Thursday. 
I want to thank Chairman Tauzin for his leadership on this 
issue. He and I have work with Mr. Boucher and Mr. Dingell for 
the last, really you could say the last 4 years, to try to get 
such a policy in place.
    I also want to thank my good friend, Congressman Rick 
Boucher. He has worked tirelessly making sure that the views, 
not only of himself, but of his party and his region are fully 
aired during these hearings.
    And also full committee ranking member Congressman Dingell. 
If we look at what is happening in the markets, we see several 
things.
    Yesterday the spot price for oil in the New York market was 
$36 a barrel. Last week natural gas got as high as $12 in Mcf 
on the spot market.
    We also, and this is just here in the Virginia, Washington, 
DC region, saw prices of a $1.65 for regular unleaded self-
service gasoline. And I am told that up in New England last 
week a gallon of residential heating oil got as high as a $1.79 
a gallon.
    These are prices that show that our production in this 
country is lagging, so the price signal is going up. The signal 
that while we don't have shortages, some of these materials are 
getting scarcer and scarcer.
    I think this Congress this year needs to enact a 
comprehensive energy policy, focusing across the board on all 
our energy needs.
    Today, we're going to have before us, witnesses from the 
administration and key energy regulators to discuss what they 
think should be done.
    It has been said that Congress does not legislate until 
there is a crisis. I don't think we're in a crisis, but I do 
believe we need to act in this critical time for both the short 
term and the long term.
    Some other numbers that indicate why we should begin to 
act. Last month the Baker Hughes rig count for oil and gas rigs 
in the United States was 854. That is down from last year in 
spite of the price signals that I have just talked about.
    I have been told that somewhere in the neighborhood of 
50,000 megawatts of electricity generation has been canceled 
during the last year because of the crisis of confidence in the 
investor community in our utility industry.
    Now zero is the number of nuclear power plants that have 
been ordered in the last 10 years. I believe that nuclear power 
could take some of the pressure off of coal and natural gas for 
the generation of electricity.
    I could go on and on, but I think the message is clear. 
This subcommittee is going to soon consider legislating. I have 
circulated in the last week, with the support of the full 
committee chairman, Mr. Tauzin, a draft to start discussions.
    I want to emphasize to my subcommittee and this is a draft, 
it is not written in stone. I fully expect to make changes 
based on what members on both sides of the aisle suggest after 
they have reviewed the draft.
    I have also asked that the witnesses before us comment on 
elements of the draft. Some of these elements are very 
familiar. We have been over this ground many, many times. 
Others are new.
    We have tried to come up with some innovative ways to solve 
some of the controversial parts of past energy bills. I look 
forward to working with members of all the subcommittees, 
Republicans and Democrats.
    There are some elements in the draft that we have not had a 
markup on. The electricity title, the assumption that we did 
not mark up in my subcommittee last year.
    I think the electricity title needs to be bi-partisan and I 
hope that it will be. Both my door and Chairman Tauzin's door 
are open to all members on both sides of the subcommittee to 
try to see if we can improve this title of the bill.
    I am going to submit the rest of my statement for unanimous 
consent for the record. My good friend, Congressman Boucher, 
said that I should enforce the rule. So I have stopped my 
statement with 4 seconds over. And I would recognize my good 
friend, Mr. Boucher, for his opening statement.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
also look forward to working with you, with Chairman Tauzin of 
the full committee, with our ranking Democratic member, Mr. 
Dingell, and all members of the subcommittee during the course 
of the 108th Congress as we seek to develop legislation that 
enjoys a broad consensus, that addresses our Nation's energy 
needs.
    The hearing that we are having today and the one that has 
been scheduled for next week, will provide a valuable 
opportunity for subcommittee members to hear from a range of 
witnesses on the various topics addressed in energy policy 
legislation.
    It also provides a useful forum to consider the provisions 
that Chairman Barton has now put before the subcommittee and 
the draft energy legislation that he circulated last week.
    The chairman's draft addresses a number of important energy 
policy topics from authorization of a new clean coal power 
initiative, to new energy efficiency standards for appliances, 
to hydroelectric facilities re-licensing reforms to 
encouragement of the construction of the long awaited natural 
gas pipeline from Alaska to renewal of the Price-Anderson Act.
    The draft legislation makes broad and valuable improvements 
to the Nation's energy laws and policies. Many of the 
provisions in the chairman's draft were agreed to by the 
conferees between the House and Senate last year.
    And I am glad to see these provisions re-emerge in the 
draft that the chairman has now put before the subcommittee. I 
would particularly draw the attention of members to the 
provisions which would foster a new generation of advanced 
clean coal technology.
    Coal is the Nation's most abundant fuel with reserves 
sufficient for the next 250 years. It generates electricity at 
less than one-half the cost of the fuel alternatives. It is 
clearly in the energy security interest of the Nation to use to 
a greater extent this abundant domestic resource.
    And I would note that consumers get the best prices when 
they purchase electricity generated through the combustion of 
coal. The inclusion of the clean coal power initiative 
acknowledges the value to the Nation of coal use and takes 
appropriate steps to assure the protection of air quality in 
those regions where coal is burned.
    I strongly commend these provisions. While not a part of 
the Energy and Commerce Committee's jurisdiction, I would also 
take a moment to call attention to the incentives for the use 
of clean coal technologies that were included in both the House 
and Senate versions of energy policy legislation last year.
    In the near future, I will be joining with our colleagues, 
Mr. Whitfield and Mr. Shimkus and others, in reintroducing our 
legislation to promote the use of coal in both new and 
retrofitted power plants that agree to use advanced clean coal 
technologies.
    We have all urged that this comprehensive coal advancement 
measure be included in any comprehensive legislation considered 
by the house.
    I will also offer a few comments this morning concerning 
the electricity title which is included in Chairman Barton's 
draft legislation.
    The House Energy and Commerce Committee has devoted 4 years 
to a so far elusive quest for consensus of electricity reform 
measures.
    We found no broad agreement on proposals to amend PUHCA or 
PURPA, to alter the merger review authority of the FERC, to 
establish incentive pricing for new transmission line 
construction, to vest the FERC with transmission line sighting 
authority, or to alter legislatively the rules pertaining to 
the management of an access to the transmission grid for 
wholesale market transactions.
    While I appreciate the chairman's inclusion of provisions 
relating to net metering, time of use pricing and transmission 
reliability, I still have a number of concerns related to the 
electricity provisions.
    These are complex matters. And notwithstanding several 
years of review, we have not been able to reach consensus on 
these contentious and difficult issues.
    We have, however, under the Chairmanship of Pat Wood, an 
increasingly active and shall I say imaginative FERC. The 
commission has taken positive steps in order to make the 
wholesale market more reliable and has provoked a spirited 
debate over its proposal for a standard market design for the 
Nation's transmission grid. I have a number of questions 
concerning that proposal which we may be able to address this 
morning.
    Dependency of the SMD rulemaking obviously complicates even 
further the process of seeking consensus on legislation 
relating to the electricity market. Perhaps before adopting 
fundamental electricity law changes, we should carefully 
consider--10 more seconds. We should----
    Mr. Barton. Enforce the rule, somebody said.
    Mr. Boucher. I know I did say enforce the rule and I am 
proud to be the first violator. My view is that we should 
carefully consider how electricity markets should be best 
served.
    Does the statutory law truly stand in need of change or the 
alternative. Can we look with confidence to the FERC to direct 
the future development of the wholesale market using existing 
statutory authority.
    Thank you very much, Mr. Chairman. I appreciate your 
indulgence and I look forward to the testimony of these 
witnesses.
    Mr. Barton. Well, you just gave Markey and additional 42 
seconds. That is what that is going to amount to. And I would 
say that imaginative and creative is good to my FERC.
    There are other things that have been said about what you 
all have been doing, so that is a good start. I would now 
recognize the full committee chairman, the distinguished 
gentleman from Louisiana, Mr. Tauzin, for a 5-minute opening 
statement.
    Chairman Tauzin. Thank you, Mr. Barton. Let me first thank 
the subcommittee. This year, unlike 2 years ago, this 
subcommittee's task is make somewhat simpler.
    We now have the experience of the last 2 years when this 
subcommittee produced the basic frame of the energy bill that 
worked its way through the House and into a conference with the 
Senate.
    And, as I understand, the draft the chairman has circulated 
in built on that frame. On the knowledge we gained in the 
process of working H.R. 4 through the House and a similar bill 
or comparable bill through the Senate.
    It is somewhat more difficult because the chairman has 
engaged the issue of electricity in this title this year when 
it was not engaged in the House on the energy bill last year.
    And so this committee has some especially difficult 
decisions to make regarding that particular title of the bill. 
But I wanted to update you on the progress we made. We came 
within an eyelash of concluding the conference last year.
    We got caught in the last minute politics of the closing 
session and did not finish it. But I want you to know that the 
Senate conferees and the House conferees, all of you who worked 
in the process, deserve a lot of credit for bringing this to 
the point where we almost completed this work in the last 
session.
    And so a lot of the hard work has been done. And I 
particularly want to commend, again, Mr. Boucher who has been 
thanked, I know, by your chairman and Mr. Dingell for the 
extraordinary cooperative spirit in which we worked in the last 
Congress and encourage that same spirit this year.
    It is my intent, I know it is the chairman's intent to work 
with you to make sure that to the extent we can, this is as 
much a bi-partisan effort as we can possibly engage in.
    We will have differences. We will have different 
approaches. And members on either side of our committee who 
have some very different views about how best to draft an 
energy policy for our country and what to stress and what not 
to stress.
    And those differences will be aired in this and other 
hearings and in our final debates. But we're on a fast track. 
And no one should be upset about that. A lot of work went 
through last year.
    We came this close to finishing it. We'll buildupon that 
experience and move as quickly as we can to get an energy 
policy before the House so that Senator Pete Domenici, on the 
Senate side, can begin his process and meet us in a conference 
that he will chair, under our agreements, as quickly as we can 
accomplish that.
    That is in the nature, rather, that is an ingredient of 
America at this particular moment in our history. Now I will 
say early off in this process we will have some great debates 
and great differences of approach.
    Mr. Markey and Mr. Waxman I know will have different ideas 
and emphasis in the bill than perhaps I will or perhaps Mr. 
Barton and others on this committee will have. That is good. We 
ought to have those good debates.
    But we are all joined in this debate for a common purpose 
that is especially true today. I want to hold up a fact sheet 
that was prepared in the last Congress. Details of imports from 
Iraq in the first quarter of the year 2002.
    What this fact sheet indicates is that indirect sales of 
Iraqi oil to America then was requiring Americans to spend, 
indirectly, money which we sent to Saddam Hussein in Iraq to 
the tune of about $12.7 million per day on Iraqi oil.
    But things have changed since then. What has changed is 
that an awful situation has occurred in Venezuela. Imports of 
Iraqi oil have, indirectly again, grown dramatically. And the 
price has changed from $20, yesterday's spot crude price of 
Texas sweet was $36.88, from $20 then to $30 plus today.
    Which means that everyday we are sending to Saddam Hussein, 
every time we fill up our gas tank, every time we fill up a jet 
engine, every time, with jet fuel, every time we buy fuel oil, 
every time we buy any oil derivative product in this country, 
we are helping to send Saddam Hussein better than $20 million 
per day.
    Because of a necessary, unavoidable dependence upon that 
resource. Now whatever path we choose to end that dependence, 
whether it is for conservative or alternative fuels, more 
production in the United States, whatever path we choose, we 
had better make some decisions quickly.
    It is absolutely insane for us to depend today, as our 
troops, our young men and women are preparing perhaps to do 
battle in Iraq, to depend upon that country for such a large 
amount of our oil import.
    And to send Mr. Saddam Hussein $20 million a day to arm his 
troops to kill our young men and women. There is something 
insane about that. And I give back the balance of my time.
    Mr. Barton. Thank you, full committee chairman. We now want 
to recognize Mr. Waxman. Does he wish an opening statement, and 
if so, you have 1 minute, 2 minutes or 3 minutes?
    Mr. Waxman. I have what?
    Mr. Barton. You can have 1, 2 or 3, and whatever time you 
don't use now you get on your question period.
    Mr. Waxman. Thank you very much, Mr. Chairman. Today, the 
committee----
    Chairman Tauzin. Mr. Chairman----
    Mr. Barton. Which do you want----
    Chairman Tauzin. Mr. Chairman, if I can correct the 
chairman. Our rule does not allow that. Our rule says you have 
to choose to either give an opening statement----
    Mr. Barton. We understand that, but we got unanimous----
    Chairman Tauzin. [continuing] and if you don't give it, you 
get 3 extra minutes on questions.
    Mr. Barton. But we, by unanimous consent, agreed to let him 
have part of it. Honest.
    Chairman Tauzin. I wish I had been around to object to it.
    Mr. Barton. You were around.
    Chairman Tauzin. I missed it.
    Mr. Barton. You just didn't object.
    Chairman Tauzin. I wasn't paying attention. I'm going to 
pay better attention.
    Mr. Barton. You need to tell us how much of the opening----
    Mr. Waxman. May I inquire of the chair, if I take 8 minutes 
and forego questions----
    Mr. Barton. No, no, no.
    Mr. Waxman. I think my opening statement will take 3 
minutes.
    Mr. Barton. Three minutes.
    Mr. Waxman. If I succeed in doing it in 1 minute, I'd like 
to reserve the two.
    Mr. Barton. All right, the gentleman is recognized for 3 
minutes.
    Mr. Waxman. Today the committee begins consideration of an 
energy bill for this 108th Congress. And based on legislation 
circulated on Friday, the committee starting point appears to 
be where we left off in the last Congress.
    The legislation that was circulated last Friday, not only 
fails to reflect the energy needs of the 21st Century, it fails 
to reflect even the most dramatic events in the energy sector 
that have occurred since the House finished consideration of an 
energy bill in August 2001.
    I would like briefly to mention some of these important 
issues. The collapse of Enron was one of the more dramatic 
illustrations of the dangers of inadequate government oversight 
of the energy industry.
    But the examples of abuses in the gas and the electricity 
sectors are rampant. Back in early 2001, many of us in 
California believed that energy markets were being manipulated 
to price gouge western families.
    It has now been revealed that our worst suspicions were 
true. Unfortunately, the committee has never held a hearing on 
these abuses.
    For example, El Paso was recently found to have withheld 
pipeline capacity in order to increase gas prices in 
California. Energy traders from Dynagy, El Paso Corporation, 
American Electric Power and Williams Company have all been 
involved with providing false information on gas trades which 
could have had major price impacts on consumers.
    Reliant Energy revealed their coordinated strategy to shut 
down power plants in order to drive up electricity prices. 
Cynically Reliant decided to wage a campaign to blame the Clean 
Air Act.
    We must address the corruption in this industry in order to 
protect consumers and shareholders. We must also look seriously 
at this industry's practices in order to protect the 
environment.
    No longer can the administration turn a blind eye to the 
serious threat of global warming. They are out of step with the 
rest of the world, the American people and even many in the 
industry.
    Although the Senate has done considerable bi-partisan work 
on climate change, this committee has never held a hearing on 
the Senate's extensive legislative work.
    And finally I would like to mention several issues that 
came up in the energy conference last year that have never been 
considered by this committee.
    The Senate proposed a provision placing a moratorium on EPA 
regulation of the practice of hydraulic fracturing. This 
committee certainly should examine this before legislation on 
this issue.
    The majority has also proposed, in the conference, 
protecting MTBE producers from liability for polluting ground 
water and drinking water.
    This issue is highly contentious. It has never been 
examined by the committee. Mr. Chairman, I hope the committee 
can work together in a collegial, bi-partisan fashion on the 
legislation.
    To that end I hope the committee can examine these critical 
energy issues through additional hearings and investigations.
    We have an obligation to responsibly address the energy 
problems facing the nation.
    Mr. Cox [presiding]. Thank you, gentleman. The gentlelady 
from New Mexico.
    Mrs. Wilson. Thank you, Mr. Chairman. I will reserve my 
time for questions.
    Mr. Cox. The gentleman from Michigan, Mr. Dingell.
    Mr. Dingell. Mr. Chairman, I thank you. Last Congress 
Chairman Tauzin asked me to work on a bi-partisan issued bill. 
We did that. Members of both sides worked together to determine 
which topics should be addressed in the committee of energy and 
commerce's bill, and how.
    As a result, the bill was supported by a wide, bi-partisan 
margin. And with few exceptions, was left intact when merged 
with legislation from other committees to be taken up on the 
House floor as H.R. 4.
    Well, veritably we find ourselves in markedly different 
circumstances today. The bill circulated on Friday is not a bi-
partisan bill and the very tight committee schedule with only 
two errors will make it particularly difficult for new members 
of the committee to have an opportunity to fully participate in 
this bill's consideration, or indeed to understand it.
    Indeed, witnesses in today's hearings had little time to 
review the language circulated last Friday, that concerns 
significant areas of energy policy, conservation, and nuclear 
matters, and the controversial topics of electricity and 
hydropower.
    While I appreciate the chairman's cooperation with the 
minority in inviting witnesses, and I thank him for that, I am 
concerned that this scheduled is so compressed as to preclude 
meaningful testimony on the draft bill.
    I note that there seems to be a pattern moving in this 
direction, as we face a similar situation with regard to 
medical malpractice, and I suspect other bills coming before 
us.
    Unlike the bill we recorded in this last Congress. This 
bill would repeal the Public Utilities Holding Company Act, 
PUHCA, and major portions of the Public Utility Regulatory 
Policies Act of 1978, or PURPA.
    It also contains a controversial proposal to allow States 
to override Federal agency's rulings concerning potential 
sighting of new transmission lines on Federal lands.
    This is an extraordinary and altogether new proposal, not 
contained in either the Senate or House bill last year, and is 
likely to prove very troublesome since it can compromise the 
authority of several Federal agencies and disregard a number of 
settled pieces of environmental and other law and regulations.
    I am perplexed at the decision to further deregulate the 
Nation's electricity markets at a time when turmoil in the 
industry, if anything, shows that consumers need more 
protection from naked market forces.
    It seems to me if we must act now, that a better approach 
would be for us to reach agreement on a narrow range of reforms 
that address specific problems in wholesale markets and leave 
controversial restructuring issues, such as PUHCA repeal, PURPA 
repeal, and diminishing FERC's merger authority, to another 
day.
    The committee held its last electricity oversight hearing 
in December, 2001. Much has occurred since then.
    We have learned enough about market manipulation by Enron 
and other high flying marketers with no sense of responsibility 
for the interest of consumers or investors, to know that there 
are probably other shoes yet to drop.
    FERC's own internal investigation into the turmoil in west 
coast markets during the 2001 year is still underway. Criminal 
investigations into Enron and others' behavior is still 
pending.
    In light of what we have learned since our last hearing, 
what we are likely to learn when FERC releases its internal 
investigation, it seems to me to be irresponsible for this 
committee to act to further deregulate the electric utility 
industry.
    It may well be we will want different deregulation, no 
deregulation or a return to more regulation. It is far more 
important to learn what happened and to take time to formulate 
a thoughtful response, than to move legislation on some kind of 
a preordained schedule.
    Furthermore, as the Chair knows, I have a special interest 
in hydropower reform. I was disheartened to learn that the 
carefully crafted bi-partisan House compromise in favor of 
objectionable language developed by the Senate.
    This does not bode well for building support for the 
overall bill. Finally, I would be remiss in not mentioning one 
consumer concern that constantly arises among my constituents.
    That is the continuing volatility of gasoline prices. In 
many areas we have seen prices with more than $2 per gallon. 
While it is important to keep Congress' watchful eye on the big 
picture of energy, I think our constituents all would 
appreciate our attention to this which is a far less than 
theoretical problem. Thank you for your kindness, Mr. Chairman.
    Mr. Cox. Members are obviously aware that there is a vote 
on the floor. There is a vote on the journal. And after 
discussing this with Mr. Boucher, it is our proposal that we 
continue with opening statements and members can come and go 
during the open statements to ensure that they make the vote on 
the floor.
    And if there is no objection, I would go next to a 
gentleman from Oregon, Mr. Walden.
    Mr. Walden. Thank you very much, Mr. Chairman. I have 
prepared statement I will submit for the record and reserve the 
balance of my time for question and answer.
    Mr. Cox. Next, I would like to welcome to the committee the 
gentleman from Maine, Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman. I would like to take 2 
minutes and I will do my best to stay within that. I want to 
thank you for hold this hearing on comprehensive national 
energy policy.
    And I look forward to hearing from the panelists who are 
here today. Electric deregulation in Maine has been accompanied 
by rising electricity costs. The cold winter has reminded us 
how much it costs to heat 19th Century homes, and gasoline 
prices last week reached an all time high.
    National policies of the past have perpetuated an energy 
system dependent on fossil fuels, which has caused serious 
human health problems in our Nation's downwind States, of which 
Maine is one.
    In Maine we have the highest levels in the country of 
methyl mercury within, in our fish. Our adults endure the 
highest rate of asthma in the country, and ozone levels made 
Maine's air dangerous 17 days this past summer.
    I hope that as we go forward we can craft an energy bill 
that will encourage economic growth around this country, that 
will protect the health of our citizens, and will confront the 
looming global environmental challenges that we face.
    I am not convinced that the bill in front of us will do 
that, but I hope in the process of debate and discussion within 
this subcommittee we will make progress to a better product. 
Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Mr. Allen. Mr. Whitfield.
    Mr. Whitfield. Mr. Chairman, there are so many important 
issues that I am going to defer to the length of my question 
period.
    Mr. Barton. Mr. Whitfield defers. Ms. McCarthy. Whoops, we 
have Ms. Capps. Was Ms. Capps before Ms. McCarthy?
    Ms. Capps. Thank you, Mr. Chairman, for holding this 
hearing. Shall I begin my opening statement?
    Mr. Barton. If you tell us how much you are going to use.
    Ms. Capps. The full amount.
    Mr. Barton. All right, 3 minutes. The gentlelady from 
California.
    Ms. Capps. We need a national energy strategy. We need to 
ensure that we have stable and predictable sources of energy.
    There are new technologies to let us use energy more 
efficiently. We need to identify and encourage the development 
of new sources of energy, but I worry that the bill before us 
would not foster these developments.
    It would leave consumers at the mercy of unregulated energy 
companies operating with little oversight. I want to highlight 
a couple of concerns I have about this bill.
    First, it contains many provisions to increase energy 
efficiency and promote conservation, but it leaves out probably 
the single most important step we can take, increasing the fuel 
efficiency of our cars and trucks.
    We all know about the National Academy of Sciences report 
that concludes a significant improvement in the miles per 
gallon performance of cars and trucks over the next 10 years is 
possible.
    One of our witnesses, Steve Nadel, will testify that 
attaining an average fuel economy of one, 41 miles per gallon 
is possible by 2012.
    Such an improvement would result in real fuel savings that 
would benefit consumers and our economy. Perhaps more 
importantly, in light of what Chairman Tauzin noted, it would 
reduce our dependence on foreign oil and increase our national 
security.
    For those who say these improvements are just not possible, 
consider the President's plan to build a hydrogen car. It has 
some rather bold assumptions.
    Reducing the cost of fuel sales by a factor of ten.
    Dramatically lowering the cost of hydrogen by 75 percent. 
Solving expensive infrastructure challenges. Surely if we can 
get a government program to achieve these goals, our private 
companies could meet the challenges of increasing fuel 
efficiency.
    It is likely that hydrogen cars wouldn't have any 
appreciable impact on the market for 20 or 30 years. Increasing 
the efficiency of our cars and trucks can begin very quickly.
    It is the right thing to do. Mr. Nadel notes that there may 
not be the political will to require the kind of increases in 
fuel economy, but perhaps, and I hope and pray that when we go 
to mark up, it will miraculously occur.
    Another major flaw in the legislation is the call for 
national electricity deregulation without any real assurance 
that a repeat of the price gouging that took place in 
California does not happen again.
    With all due respect to our witnesses here today, the FERC 
response has gone from being completely nonexistent a couple of 
years ago, to being inadequate today.
    Energy marketers ripped off Californians, my constituents, 
to the tune of billions of dollars. We said back then the power 
was being withheld from the market and inappropriately, if not 
illegally, driving wholesale prices, power prices through the 
roof.
    FERC did essentially nothing. This committee's reaction was 
halting and grudging. When FERC finally stepped in, the damage 
had been done to California and the western States.
    Over the last couple of years we have seen some documents 
from the energy companies involved in the California heist.
    Enron has outlined some of their schemes, complete with 
catchy names like ``Get Shorty'' and ``Death Star''. Recent 
documents from Reliant Energy catch the traders' illuminating 
discussion about how to jack up wholesale rates by removing 
power from the grid.
    If asked about it, the traders said they would just blame 
the lack of power on the Clean Air Act. I know that FERC still 
has some of these issues under investigation, but I have been 
deeply disappointed in the outcome so far.
    This bill does not address the shortcomings in FERC's 
authority, or its inability or refusal to be the tough cop on 
the beat.
    If national electricity deregulation is enacted, we could 
see the same kind of market gaming strategies that hurt 
California so badly.
    So I look forward to hearing from our witnesses today. And 
I yield back my time.
    Mr. Barton. I thank you. The gentleman from Indiana is 
recognized for 1 minute.
    Mr. Buyer. Thank you, Mr. Chairman. I did not get the 
opportunity to sit through those 34 hearings last year. I am, 
but what I did was I held an energy forum in Indiana, Mr. 
Chairman, and invited producers and consumers.
    We had 4 hours. I want you to know that there was a degree 
of comfort out there between both, with regard to the product 
that you produced last year.
    The inquisitiveness would be on the electricity side, and I 
think there is a pretty good agreement coming out of Indiana 
that they concur with your product last year.
    That we need a broad based and diversified portfolio with 
regard to our energy sources, and that was the goal that you 
had in that bill.
    So complements from Indiana for the product that you had 
put together. I did not know what to expect from all theses 
individuals that came.
    And I look forward to these two hearings and let us have at 
it.
    Mr. Barton. Thank you, gentleman from Indiana. The 
gentlelady from Missouri.
    Ms. McCarthy. I will just need 1 minute, Mr. Chairman.
    Mr. Barton. One minute.
    Ms. McCarthy. It is imperative, as we consider energy 
policy, that we address the environmental ramifications of 
proposals such as carbon emissions, which significantly 
contribute to global climate change.
    And that we establish greenhouse gas emissions reductions 
in our own country by providing for an industry-wide sale of 
carbon allowances by all entities that bring carbon into the 
stream of commerce.
    Our committee should forge policy that will provide for 
reductions and a reasonable compliance time and have a safety 
valve that will ensure no economic injury to our economy, and 
yet move this country toward reducing carbon emissions.
    Mr. Chairman, about two dozen U.S. companies including 
Ford, Dupont and International Paper, and a number of large 
electric utilities are already voluntarily doing this in the 
Chicago area.
    The Chicago Climate Exchange, if it succeeds, could be a 
model for us to use with the rest of the Nation. They are 
struggling in a voluntary program, and I believe what I heard 
in the reports in the news that they think we should move to 
broaden it and to make it something that all companies 
participate in, in our country.
    I yield back what little time I can and I thank you, Mr. 
Chairman, for this recognition.
    Mr. Barton. The gentlelady yields back the time. The 
gentleman from Ohio, Mr. Brown.
    Mr. Brown. Three minutes, Mr. Chairman.
    Mr. Barton. He wants his full 3 minutes.
    Mr. Brown. I will take the full 3. Thank you, Mr. Chairman. 
We should do something on energy policy and legislation, but we 
should employ a process which helps us do more than just 
something, we should do the right thing.
    Mr. Chairman, I have significant concerns about the 
electricity title of the new energy bill. Instead of responding 
to Enron and market power abuses, by strengthening PUHCA, the 
bill would repeal it.
    I am concerned about the transmission siting provision 
which seems to make FERC look more like a Court of Appeals for 
energy companies dissatisfied with State decisions, than a true 
backstop.
    For States like Ohio, which have worked hard to modernize 
their siting laws, the potential for FERC review for every 
siting decision seems a step backward.
    Let me turn to my principal concern for today's hearing, 
price volatility in the retail gasoline market and NRC safety 
oversight.
    Many observers, including AAA, raised concerns about the 
role of oil industry business decisions in recent price 
increases. These concerns are well founded in light of findings 
by the FTC and a Senate committee concerning the oil industry's 
business decision and their effect on price volatility in the 
retail market.
    I would make two requests on these important, this 
important issue. First, Mr. McSlarrow, I would ask that you and 
Secretary Abraham schedule meetings this month with oil company 
representatives to do two things.
    Impress upon them the importance of ensuring adequate 
reserves of gas this spring and summer especially serving areas 
like the midwest and demonstrate its susceptibility to price 
spikes.
    Second, ensure that the spring refinery maintenance cycles 
are completed well in advance of the summer driving season. The 
Energy Department needs to act now to prevent price spikes and 
minimize those that are unavoidable.
    My second request, Mr. Chairman, is that you schedule 
investigative hearings on the issue of retail gas price 
volatility.
    The Senate held hearings last year and this year, but this 
subcommittee has remained silent. Turning briefly to NRC 
oversight, my district is 50 miles from the Davis-Besse Nuclear 
Power Plant.
    My colleagues know a football size crater was discovered in 
the reactor head last year at Davis-Besse. The most alarming 
part of this alarming story was the NRC Inspector General's 
report.
    The IG concluded that the regulators considered the 
financial consequences in making their decision not to order a 
shut down for inspection that would have revealed the reactor 
had erosion months earlier.
    Some observers have pointed the finger of blame at Davis-
Besse operators, others have blamed the senior NRC regulator 
who made the decision.
    The more compelling question for Congress is the 
protectiveness of a regulatory philosophy that defines as 
unnecessarily burdensome any action above and beyond the bare 
minimum necessary for reasonable assurance of safety.
    It has been years since the subcommittee has held an NRC 
oversight hearing. I ask, Mr. Chairman, you schedule oversight 
hearings in this subcommittee concerning the NRC's approach to 
safety and a security regulation.
    Thank you, Mr. Chairman. I look forward to beginning the 
debate on the future of America's energy policy.
    Mr. Barton. We thank you, Mr. Brown. Seeing no other 
members who have not given an opening statement, the Chair is 
going to recess briefly while I go vote.
    When we come back, we will resume opening statements. The 
members right to reserve who had to go vote. I am going to take 
a point of personal privilege before I leave and recognize one 
of my good friends from West Junior High School and Waco High 
School, Mr. Tim Mitchell.
    He was an all-district guard at Waco High while I was kind 
of a has-been, also-ran. He's also been a precinct chairman in 
my congressional district. He is up here with his brother 
attending a conference.
    Tim, why don't you stand up and let everybody recognize 
you. We are going to recess very briefly. As soon as members 
get back, we will resume our opening statements.
    [Whereupon, at 10:44 a.m., the subcommittee recessed, to 
reconvene at 10:59 a.m., the same day.]
    Mr. Barton. The subcommittee will come to order. When we, 
the reason we recessed is we ran out of members to give 
statements. But I promised that we would let everybody give an 
opening statement.
    Congressman Brown of Ohio was the last member to give an 
opening statement, so we would recognize Mr. Norwood.
    Mr. Norwood. Mr. Chairman, I will reserve my time for 
questions.
    Mr. Barton. Mr. Norwood reserves his time. We go to Mr. 
Markey.
    Mr. Markey. Thank you, Mr. Chairman. Mr. Chairman, I would 
like to take up 2 minutes.
    Mr. Barton. Two minutes. Mr. Markey is recognized for 2 
minutes.
    Mr. Markey. Thank you, Mr. Chairman. Mr. Chairman, today is 
Ash Wednesday, which I really think is quite an appropriate day 
to hold a hearing on the Bush Administration's energy plan.
    Ash Wednesday is recognition of the day in which you, as 
Catholic, have to give something up as a sacrifice in our 
religion. Well, today the Republicans have announced that they 
have a plan which essentially gives up energy consumers for 
Lent, and declares every day to be Fat Tuesday.
    Mardi Gras for the energy producing companies across this 
Nation. If the Republican energy plan is enacted into law, the 
big oil companies, the natural gas companies, the coal 
industry, the nuclear industry, the utility industries will all 
be saying let the good times roll as long as they can chow down 
on the huge legislative king cake that is being delivered up to 
them by the Bush Administration and their allies in the 
Republican energy crew.
    And unlike more Mardi Gras king cakes, this bill has a 
little plastic baby prize in every single slice. They will be 
drilling in the arctic refuge and other pristine public lands 
for the oil and gas industries.
    Price-Anderson liability insurance subsidies for the 
nuclear industry. Clean coal subsidies for the coal industry. 
Hydroelectric licensing reform for the dam owners. Higher 
incentive transmission rates.
    Participant funding. PUHCA and PURPA repeal for the utility 
industry, and no meaningful improvement in automobile fuel 
efficiency for the car industry.
    The SUV industry can breathe a sigh of relief. Consumers, 
on the other hand, will be left nursing a legislative and 
regulatory hang over of higher electricity costs, dirtier air, 
disfoiled public lands and ugly--can I take the whole 3? It is 
just such good stuff.
    Mr. Barton. All right. Well, you have the Boucher 42 second 
override anyway.
    Mr. Markey. Thank you, I will just use up the whole three, 
if I could. Disfoiled public lands and ugly transmission wires, 
who's sighting they are preempted from blocking.
    Yes, consumers may have been thrown a few legislative beads 
as the Republican energy crew went by. A net metering program, 
an FTC privacy rulemaking there, with a few new appliance 
efficiency standards over there.
    They are nice, but they are mere baubles compared to the 
pinata of hefty benefits being afforded to the energy-producing 
companies.
    We need a balanced, comprehensive, national energy policy 
that is fair to both producers and consumers. This plan is not 
fair. Mr. Chairman, I look forward to today's hearing.
    Mr. Barton. We knew it was too good to be true. Congressman 
Boucher said, look, it is working, he is only going to take 2 
minutes.
    And I said, he hasn't finished yet. But it is a start. You 
wanted to only do two.
    Mr. Markey. No Irishman has ever given up talking for Lent, 
okay. There is no known instance of that.
    Mr. Barton. All right. The Chair recognizes the gentleman 
from California, Mr. Cox, I believe for 1 minute, is that 
correct.
    Mr. Cox. I think I can get this done in 1 minute.
    Mr. Barton. All right.
    Mr. Cox. Mr. Chairman, I want to begin by commending you 
for assembling this legislation which I hope will deal with our 
country's troubling energy situation. The policy we have had up 
until now, at least in California, is best described as lights 
out.
    And I think we need to do a lot of work to change that. I 
want to just point out to my colleague, Mr. Markey, how happy I 
am that the Price-Anderson reauthorization language in this 
bill includes the Cox-Markey Amendment.
    Beginning in the Clinton Administration, the State 
Department had been giving serious consideration to making U.S. 
taxpayers liable for nuclear actions in North Korean nuclear 
facilities.
    As was first uncovered by the Los Angeles Times, Clinton 
Administration lawyers were trying to contort the Price-
Anderson Act in recovering the costs from Kim Jong-il failed 
nuclear power plants, which was never intended by this 
legislation.
    The Cox-Markey Amendment which has been overwhelmingly 
adopted in this committee and on the floor on multiple 
occasions, makes it clear that U.S. taxpayers cannot be held 
liable for nuclear actions in North Korea or any other 
government, government of any other country that sponsors 
terrorism or engages in the proliferation of weapons of mass 
destruction.
    And I yield back the abundant balance of my time.
    Mr. Barton. All right. We now go to Mr. Wynn of Maryland.
    Mr. Wynn. Thank you, Mr. Chairman, I will defer at this 
time.
    Mr. Barton. Mr. Wynn defers. Mrs. Bono from California.
    Ms. Bono. Thank you, Mr. Chairman, I will submit for the 
record.
    Mr. Barton. She defers. Mr. Pallone of New Jersey.
    Mr. Pallone. Thank you, Mr. Chairman. I am going to ask to 
use my time, the 3 minutes.
    Mr. Barton. The gentleman is recognized for 3 minutes.
    Mr. Pallone. Mr. Chairman, I believe that this country 
would benefit from a comprehensive energy plan, but last Friday 
we received a copy of the majority's energy bill and sadly we 
did not receive a comprehensive plan.
    While the bill is extensive, it contains harmful provisions 
that weaken existing consumer protections that could elicit 
potentially dangerous business practices, including going out 
of its way to repeal PUHCA, at the same time the FERC's merger 
authority is also repealed. The bill also threatens to trample 
on environmental laws by providing overriding authority to 
States and Federal land management agency decisions and FERC 
authority to override a State's decision for transmission 
sighting.
    It also includes no renewable portfolio standard and 
provides only modest provisions for energy efficiency and 
conservation efforts, and I am also concerned about the 
potential inclusion of a renewable fuel provision that would 
mandate the use of ethanol.
    This effort is premature in that there has been no 
independent analysis of the impact of the mandate on consumer's 
gasoline supplies or fuel prices and numerous questions 
regarding the environmental impact of ethanol use remain 
unanswered.
    During the next month, I hope the subcommittee will make a 
concerted effort to address some of these concerns. First, I 
believe it is critically important for us to reach an agreement 
on a renewal portfolio standard. I understand that during last 
year's energy conference, disagreement between the House and 
Senate conferees on the inclusion of an RPS was a significant 
factor in the failure of the energy bill.
    Furthermore, I understand there is a continued disagreement 
between the scope and definition of renewable energy sources as 
well as the percentages and timeframes that were proposed 
during discussions last year.
    I believe that an RPS must be included in any energy bill 
that leaves the subcommittee, especially given the fact that 
language in this bill provides relief for mandatory purchase 
obligations under PURPA without including strong enough 
language to promote further development of small, renewable 
energy facilities and distributed energy sources.
    Finally, I would like to note that I am encouraged by the 
FERC's activities with regard to standard market design. But I 
would add that while the PJM structure works well for my State 
and region, I understand that a complete replica of the system 
may not work for every area of the country.
    I believe that FERC's efforts to create standardized 
markets, while allowing for regional differences can help to 
provide the best certainty for customers. And we need to 
proceed cautiously on SMD, but we should not undermine the 
process with unnecessary and premature prescriptive measures 
while FERC's rulemaking is still being developed.
    There are a lot of issues that need to be addressed. I have 
not mentioned my concern about lack of strong nuclear security 
language, or the failure to include tax incentives for 
purchasers of hybrid vehicles.
    But I hope that through this hearing and subsequent 
hearings we can move ahead and address these concerns that are 
absent from this energy proposal and develop sensible 
legislation that will effectively address current problems of 
the energy industry today, as well as establish a long, forward 
thinking energy plan which I think is so crucial that we try to 
accomplish this year. Thank you, Mr. Chairman.
    Mr. Barton. And thank the gentleman from New Jersey. We 
recognize Mr. Radanovich from California.
    Mr. Radanovich. Thank you, Mr. Chairman. Just to say one 
quick thing that I hope to hear some comment on the hydro 
relicensing section of this bill and I applaud you for your 
efforts on this bill.
    Mr. Barton. So you are going to defer? Okay, Mr. Strickland 
of Ohio.
    Mr. Strickland. I will save my time for questioning, Mr. 
Chairman.
    Mr. Barton. All right. Mr. Shimkus of Illinois.
    Mr. Shimkus. Mr. Chairman, I will defer also, thank you.
    Mr. Barton. Mr. Hall of Texas.
    Mr. Hall. Mr. Chairman, I will be very brief. I just want 
to put an addendum on to what the gentleman of Massachusetts, 
his fine State, that I enjoyed so much, that I have heard so 
many times.
    And I do enjoy him. I want to remind him of the gentleman 
we had come before this committee who was the Railroad 
Commission chairman of Texas. The Railroad Commission governs 
oil and gas in Texas. His name was Jim Nugent.
    And he had made a speech over in Birmingham to the effect 
of let the Yankees freeze and starve in the dark. When asked 
about that here, and I think Mr. Markey had a copy of his 
speech in front of him, he denied making that speech.
    But he told me earlier he was going to deny it and for me 
to ask him exactly what he said. He denied saying let the 
Yankees freeze and starve in the dark.
    And when I asked him to tell Mr. Markey exactly what he 
said, he said let the thieving Yankees freeze and starve in the 
dark.
    But I don't consider them thieving Yankees. We have to have 
an energy policy and we need to work toward it. I yield back my 
time and congratulate Mr. Markey.
    Mr. Barton. I think you cleaned up what he really said. I 
don't think it was thieving Yankees.
    Mr. Markey. What Mr. Hall always forgets is that Red Sox 
fans are constantly saying let the thieving Yankees starve and 
freeze in the dark. We hate them as much as you do.
    Mr. Hall. Maybe he paraphrased.
    Mr. Barton. That's better than your opening statement, Mr. 
Markey. That was good. Mr. Burr of North Carolina.
    Mr. Burr. Though tempted to get into this debate, I will 
defer my opening statement.
    Mr. Barton. Mr. John of Louisiana.
    Mr. John. Unlike Mr. Burr, I can't resist. I thank you, Mr. 
Chairman, for convening this hearing. And I think you for the 
remarks from the gentleman from Massachusetts in sharing with 
us his vast knowledge of the customs of Mardi Gras.
    Although, I seem to have lost it in his frame when he 
talked about pinatas, and so I'm a little confused about 
pinatas and Mardi Gras. But you did well.
    But thanks a lot, I will just be very brief. But there are 
some important things about which I would like to speak. First 
is the fact that as we face a possible war with Iraq and the 
unsettling situation in Venezuela and around the Middle East, I 
think it has never been more appropriate for Congress to enact 
a comprehensive energy policy that will increase our domestic 
energy security.
    If there was an equivalent to the Department of Homeland 
Security's threat level indicator for energy security, it would 
surely be code orange, which is a high alert situation, and 
certainly duct tape and plastic sheeting would not fix this 
problem.
    The spikes in gasoline and natural gas reflect our need to 
increase domestic production and really modernize our national 
distribution system.
    Unfortunately, there is bi-partisan blame to go around for 
locking up the known quantities of oil and gas around the 
country. No more glaring to me than the administration's 
decision to deny developing natural gas, the abundance of it, 
in the large areas of the eastern Gulf of Mexico, and at the 
same time promote a bill in Congress that promotes drilling in 
Alaska.
    I just want to say if it is good for Alaska, why isn't it 
good for Florida, Mr. Chairman? And I look forward to hearing 
from the Deputy Secretary of Energy today to talk about our 
natural gas supply.
    Second, I would like to comment briefly on the recent 
actions by the FERC on SMD, the Standard Market Design, that 
has my Public Service Commission in Louisiana and certainly the 
Governor in Louisiana, to name only a few, concerned about the 
increased costs that may lie with Louisiana consumers and 
residents.
    Unlike my good friends and colleagues from Texas, who will 
think this debate may be only academic, for those of us who 
face the real prospect of increased rates in our States to 
benefit customers in higher cost States, the current SMD 
proposal, in my eyes, is a non-starter.
    I look forward to hearing from Chairman Wood on how he 
intends to address the concerns raised by the southern and 
western States, and what positive impacts and results to low 
cost States, like Louisiana, you can guarantee in the SMD rule.
    So, Mr. Chairman, thank you for calling this hearing. I 
look forward to continue my focus and debate on a national 
energy policy as I did in the last Congress, because I think 
today, more than last year, that it is important that we have a 
comprehensive policy for the energy security of our country. 
Thank you, Mr. Chairman.
    Mr. Barton. Thank you, gentleman from Louisiana. I 
recognize the gentleman from Pennsylvania, Mr. Doyle.
    Mr. Doyle. Thank you, Mr. Chairman, and I will take the 
whole enchilada.
    Mr. Barton. You got it.
    Mr. Doyle. Mr. Chairman, I thank you for the time in 
convening this hearing today. I anticipate an interesting and 
useful discussion on a number of issues involving our national 
energy policy and our efforts to improve and strengthen that 
policy.
    Let there be no mistake that this is one member who thinks 
it is vitally important that we have a national energy policy.
    Improving our energy infrastructure and national policy has 
been a focus of mine since I came to Congress. Two years ago 
when I first joined this committee, and one of the reasons I 
sought that assignment, was that I wanted to continue this 
focus and expand my ability to influence the direction that we 
take.
    I share the frustration that some of us have that for the 
work we did on this issue during the last Congress that did not 
result in the final conference report to become law.
    But of course these are difficult issues and not everything 
happens the first time, so we begin again this year on this 
effort.
    From my perspective, I'll continue to hold true to many of 
the same principles that I brought to this debate in the last 
Congress.
    I continue to believe that it is integral that a national 
energy policy be comprehensive and inclusive. I believe that 
the best way to solidify our long term energy health, that that 
is the best way to solidify our long term energy health.
    I want to see our national portfolio involve and support 
traditional fossil fuels, such as coal, oil gas, as well as 
hydro power and nuclear.
    But it must be in conjunction with a sincere commitment to 
renewable energy sources, such as fuel cells, solar, wind power 
and combined heat and power systems, as well as developing new 
technologies, like the research that is ongoing to extract gas 
from methane hydrates.
    It is only by encouraging a diverse portfolio like this, 
that we can guarantee our future energy independence and ensure 
that we have access to energy that we will need in the years to 
come.
    Now I know it is not an easy task to marry all of these 
forces and competing interests, as you can well imagine, there 
is a lot to cover.
    I hope we can use this hearing to begin to glean a little 
more understanding of the heavy lifting ahead. But there is one 
item that does concern me.
    Considering the variety of issues we need to examine, I am 
concerned that, as I understand it, we only have one additional 
hearing scheduled on these subjects, before I assume we will 
move to a mark up.
    I would add my voice to those suggesting that at least one 
additional hearing would be helpful. From my perspective, 
representing my district in Pittsburgh, Pennsylvania, I can 
attest to the fact that there is great potential in, when we 
talk about an electricity title this session, that there is 
great interest in Pennsylvania, as we have made significant 
strides since we passed our electricity restructuring law 
several years ago.
    According to some recent independent studies, conducted by 
the Pennsylvania public interest organization, consumers in 
Pennsylvania have seen more than $2.82 billion in savings and 
rate cuts of up to 39 percent since Pennsylvania law took 
effect in January 1997.
    It is my understanding that some of the areas I represent 
in Pittsburgh, have seen some of the biggest savings. So, Mr. 
Chairman, I look forward to engaging this debate.
    Being able to include a discussion of the proposed 
electricity title as part of that mix. I am sure we are going 
to have some disagreements along the way, but I am hopeful in 
the end we will be able to achieve some positive results that 
will benefit the country and my constituents in Pittsburgh. 
Thank you, Mr. Chair.
    Mr. Barton. We thank the gentleman from Pittsburgh. All 
members not present who have not made an opening statement will 
have the opportunity to put their opening statement in the 
record.
    [Additional statements submitted for the record follow:]

Prepared Statement of Hon. Vito Fossella, a Representative in Congress 
                       from the State of New York

    Mr. Chairman, thank you for holding this hearing today. Few topics 
are as important as defining and passing into law a comprehensive 
national energy policy. The lack of such a policy to date has caused 
uncertainty in energy markets and highlighted America's severe reliance 
on foreign energy sources. A Venezuelan oil strike, a chilling winter, 
and the potential for war with Iraq among other things have sent oil 
and gas prices soaring to near record highs. These concerns hit home 
for me recently, when an explosion at a storage facility in my hometown 
of Staten Island, New York, sent crude futures skyrocketing. The 
current price of oil puts many Americans in a tough spot when making 
decisions about paying for everything from gas and heating oil to their 
groceries. Given such circumstances, we must take fast, bold steps to 
shed our unnatural dependence on foreign oil.
    Oil prices aren't the only cause for concern in America. The recent 
crisis in California generated great uncertainty in our nation's 
electricity markets and brought to the forefront serious deficiencies 
in America's system of electricity transmission, generation and 
distribution. With energy consumption projected to grow significantly 
by 2025, we must ensure Americans have faith in transparent energy 
markets and receive access to reliable electricity. The Federal Energy 
Regulatory Commission is here today to discuss, among other things, 
it's Standard Market Design. FERC hopes its proposal will, ``provide 
certainty to all market participants, encourage new infrastructure 
investment, promote fair competition and prevent a repeat of the 
mistakes made previously in California.'' I'm am extremely interested 
in learning more about the Commission's plan and how it responds to 
American's concerns.
    While oil independence and strong electricity markets are critical 
goals, they are just two factors among many that need to be addressed 
in sculpting a national energy policy. As we forge ahead with this 
initiative, it is imperative we examine a diverse range of options to 
ensure our country receives reliable energy in a clean environment. 
Enhancing energy efficiency and conservation, the production of 
renewable sources, and modernizing our energy infrastructure are all 
crucial aspects of securing our country's power needs. It is also 
important to look into the future; to plans such as the President's 
proposal to expand the role of clean burning fuel cells in our 
country's energy portfolio. Achieving these goals is essential to 
addressing America's energy needs and allowing our great economy to 
expand and flourish in the 21st century.

                                 ______
                                 
   Prepared Statement of Hon. George Radanovich, a Representative in 
                 Congress from the State of California

    Thank you, Mr. Chairman for holding this hearing, and I applaud 
your efforts to enact energy legislation that will spawn economic 
development around our country.
    The energy issues that continue to impact California and the 
Pacific Northwest have only underscored the importance of the hydro 
electric relicensing legislation included in the energy bill draft, 
which mirrors the Radanovich/Towns Hydroelectric Licensing Improvement 
Act of 2003. This legislation will help repair our broken licensing 
process and will strengthen hydropower's ability to improve quality for 
future generations.
    The emergency surrounding hydroelectric relicensing has not changed 
with the passage of time. In fact, every day that passes, we dig 
ourselves into a deeper hole. As we look at the next 15 years, enough 
non-federal hydroelectric capacity to serve approximately 30 million 
homes must undergo the FERC relicensing process. The relicensing 
process must be modified before our nation's hydropower resources lose 
the ability to provide clean, emissions-free energy to America's energy 
consumers.
    In order for California to have a vibrant energy market, we have to 
address the issue of supply in California. Industry analysts now 
predict the financial situation facing the industry could result in 
electricity shortages beginning in 2004, potentially hampering economic 
recovery. In addition to these problems, insufficient licensing reform 
threatens available hydropower supplies this year. Dependable and 
affordable hydroelectric energy requires a licensing process that is 
efficient and fair in order to accomplish these goals.
    I congratulate FERC on their leadership in developing a policy that 
will resolve many important problems with the licensing process. 
However, legislation is still needed to address the fundamental 
problems that have plagued the licensing process for so long. The fact 
that federal resource agencies mandate restrictive conditions on the 
operations of hydropower projects without either comprehensive analysis 
of their impacts or an independent review of the conditions is 
unacceptable. The FERC rulemaking is not meant to, nor can it, address 
this problem with the licensing process. I believe that greater 
interaction between the resource agencies and the licensees in the 
development of environmental measures, which this legislation would 
encourage, will improve the process.
    In the end, I hope we can work together to forge bipartisan 
legislation that will build on our Committee's progress in the 107th 
Congress and result in continued improvements in the nation's energy 
markets in a time of war.
    Thank you, Mr. Chairman, for holding this hearing today. I look 
forward to the witnesses' testimony.

                                 ______
                                 
Prepared Statement of Hon. Mary Bono, a Representative in Congress from 
                        the State of California

    Mr. Chairman: Thank you for holding this important hearing.
    Prior to commenting on the bill as it relates to the witnesses here 
today, I would like to urge FERC to continue looking into refunds as 
they relate to the California energy crisis. I've always believed that 
it should be up to FERC to uncover the extent of abuse and then 
recommend corrective action. There are several ongoing cases before the 
commission, so I urge you to continue to evaluate them in a thorough 
and timely manner. The actions you take on this matter could very well 
serve to either prevent or encourage future abuses of the system.
    One aspect of the proposed energy bill I support is the 
reauthorization of the Renewable Energy Production Incentive. While I 
continue to work on refining the exact language of this section of the 
bill, I am quite pleased it was included and urge the Department of 
Energy to advocate for full funding of REPI once it is reauthorized. 
Obviously, in these challenging economic times, we have to make 
difficult funding choices. However, providing such an incentive 
benefits both the production and development of alternative fuels which 
is something our country needs to invest in.
    Finally, I would also like to commend the Chairman for including 
the President's Freedom Car provision in the bill. I've had the honor 
and privilege of working on hydrogen fuel cell technology with the 
Sunline Transit Agency, a true leader in this field. I look forward to 
hearing from Deputy Secretary McSlarrow on how we can also use this 
program to assist the development of hydrogen fuel cell technology with 
regards to public transportation. This bill could provide a valuable 
platform to encourage the development of this promising technology in 
both the public and private sectors.
    Thank you Mr. Chairman. I look forward to hearing from the 
witnesses.

                                 ______
                                 
 Prepared Statement of Hon. Greg Walden, a Representative in Congress 
                        from the State of Oregon

    Mr. Chairman, I'm from a hydro rich area of the United States where 
70% of our energy comes from our abundant hydro resources. It is the 
most inexpensive energy there is, and it is renewable. However, we in 
the Northwest region are having a drought, and that coupled with the 
current energy markets in the West is having a devastating effect on 
Oregon's economy and the rest of the Northwest. The situation is 
becoming so severe that large industrial customers that were once 
considered the driving force behind the Northwest economy and provided 
good high-paying jobs are beginning to look elsewhere to see if they 
can't produce their products more efficiently.
    In a year like this when hydrologists are predicting that we will 
have only 73% of our normal water levels, and because 70% of our 
electricity comes from hydro (as compared to 7% nationwide), the 
remaining 30% from coal, nuclear and natural gas fired generation, this 
puts us in a tricky predicament for the upcoming summer.
    I am happy to say that we are looking at a number of new projects 
in Oregon that will be gas fired. Most of these plants are being sited 
in my district because a large natural gas pipeline goes right down the 
center. They are an important part of meeting our region's growing 
generation needs. The Northwest is no longer a region with cheap 
surplus power in abundance like it was just after Bonneville, Grand 
Coulee and the other dams along the Columbia were completed. It is a 
region that must continue to develop alternative sources of generation 
instead of relying on the traditional supply of hydropower to meet its 
ever-increasing energy needs.
    Coming from a district that possesses the windsurfing capital of 
the World, I don't think I need to tell you what potential we have for 
the further development of wind generation. Just last year I toured a 
wind farm in one of my counties, which has generated enough revenue to 
double the property tax base of this county. Let me put it in 
perspective in explaining the economic development potential for my 
district, 15 of the 20 counties have unemployment rates above the state 
average of 7.0% and the state average rate is more than a point above 
the national rate. The continued development of this renewable energy 
source could really turn around some of the failing local economies in 
my district.
    If the administration could continue to support incentives to 
increase the development and production of these alternatives, whether 
it is geothermal, solar or wind, it would help the region plan for its 
future load growth, and like I just said significantly benefit many of 
the communities in my district.
    And finally, Mr. Chairman, I must get my two cents in regarding the 
future of RTO's and the much talked about and equally maligned Standard 
Market Design (SMD). I think it's gross understatement to say that many 
people in my district and in the Northwest are ``concerned'' with the 
prospect of an SMD regime being uniformly applied to the Northwest. 
And, I know my colleagues from other regions of the country are equally 
concerned about the ramifications of its implementation. This proposed 
rulemaking makes no sense whatsoever, particularly when you take into 
consideration the progress that was being made last summer concerning 
BPA becoming integral part, albeit with a list of concerns still to be 
addressed, of an RTO West. In light of SMD, and its potential to 
supercede all the progress that was made during last year's RTO 
discussions, I see no reason why BPA would want to become part of RTO 
West. As BPA owns approximately 70%-80% of the transmission lines in 
the region, I think all of you would agree it would be difficult to 
have an RTO West without its participation.
    I appreciate your being here today, and I look forward to you 
addressing these issues of importance for the Northwest.
    With that Mr. Chairman, I'm anxious to hear what the panels have to 
say and yield back the remainder of my time.

                                 ______
                                 
 Prepared Statement of Hon. Mike Rogers, a Representative in Congress 
                       from the State of Michigan

    Mr. Chairman, thank you for holding this important hearing as we 
begin to move forward on how best to provide for our nation's energy 
needs.
    One issue of concern to me is the Department of Energy's Office of 
Energy Efficiency and Renewable Energy is seeking to change the 
prescriptive criteria for the Energy Star Windows program, and the 
Department has offered two proposals for public comment. I am concerned 
with any proposal that lessens the choices currently available to 
consumers, damages the marketplace for existing manufacturers, and 
ultimately results in lost jobs for workers in the industry. I look 
forward to learning from the Department of Energy the criteria that 
will be used as the Department makes its selection between the two 
proposals.
    Finally, coming from a state that for nearly one hundred years has 
been the world's leader of automotive technology, Michigan is poised to 
develop the next generation of automobiles. Clearly, hydrogen fuel 
cells will be at the forefront of the vehicles of tomorrow. I am 
excited to see the strong commitment of Chairman Barton on this 
critical issue to Michigan and our nation's economy and environment. I 
look forward to learning how the Department envisions the FreedomCAR 
proposal being integrated with current technologies being developed by 
domestic automakers and then with the men and women working on the line 
tasked with making the best cars in the world.
    Mr. Chairman, thank you again for your continued leadership on 
these key issues. I look forward to working with you as we proceed.

    Mr. Barton. The Chair would now recognize and welcome our 
first panel. We have a very distinguished panel. We have the 
Deputy Secretary of Energy, the Honorable Kyle McSlarrow.
    We have the Chairman of the Nuclear Regulatory Commission, 
the Honorable Richard Meserve. We have three of our 
Commissioners from the FERC, including the distinguished 
Chairman from Texas, Mr. Pat Wood.
    We are going to start with our Deputy Secretary from Energy 
and then we will just go with Chairman Meserve and then 
Chairman Wood, and Ms. Brownell and Commissioner Massey.
    The Chair would recognize Deputy Secretary McSlarrow. Do 
you have any idea about how long your statement should take? 
Under 5 minutes, okay, then we will recognize you for 6 
minutes, and let us see if we can do it in under 6 minutes.
    You need to really turn the microphone on and speak into 
it.

   STATEMENTS OF HON. KYLE McSLARROW, DEPUTY SECRETARY, U.S. 
 DEPARTMENT OF ENERGY; HON. RICHARD A. MESERVE, CHAIRMAN, U.S. 
  NUCLEAR REGULATORY COMMISSION; HON. PATRICK WOOD, CHAIRMAN, 
    FEDERAL REGULATORY COMMISSION; HON. WILLIAM L. MASSEY, 
 COMMISSIONER, FEDERAL ENERGY REGULATORY COMMISSION; AND HON. 
  NORA MEAD BROWNELL, COMMISSIONER, FEDERAL ENERGY REGULATORY 
                           COMMISSION

    Mr. McSlarrow. Thank you, Mr. Chairman. I will be brief. I 
am pleased to present the administration's views on the need 
for comprehensive energy legislation.
    First, I would like to compliment you, Mr. Chairman, and 
the entire committee on your leadership in tackling these 
important issues, once again.
    What was true in the beginning of 2001, is still true. We 
had a series of long term energy challenges that require action 
now. These challenges are present along the entire energy 
continuum and affect the environment and economy, the 
generation and transmission of electricity and commodities 
ranging from crude oil and its associated products to natural 
gas.
    The issues that relate to electricity pose their own set of 
challenges and possible policy responses, which I will address 
later. But the other challenges can be summarized by one 
phrase, energy security.
    To be more specific, the United States is increasingly 
dependent on foreign oil and may not be far from the point in 
which we can no longer assume a domestic or even a North 
American supply of natural gas that fully meets our demand.
    These trends are a concern, Mr. Chairman. Quite simply, we 
are at the mercy of events and decisions over which we have 
often limited, sometimes no control. When winters and summers 
are mild, when no refineries or pipelines break down, when 
supply from abroad is abundant and reliable, we do not feel 
this dependency.
    But when almost anything goes wrong, the markets react 
instantly and we confront the higher prices and volatility that 
have become by now an almost reliable, cyclical phenomenon.
    Almost 2 years ago President Bush presented his solution to 
the national energy policy to the American people. I would like 
to take 1 minute to highlight one of his initiatives, and that 
is the hydrogen initiative.
    Hydrogen can be produced from diverse domestic sources, 
freeing us from reliance on foreign imports for the energy we 
use at home.
    Hydrogen emits no greenhouse gas emissions. When hydrogen 
is used to power fuel cell vehicles, it will do so with more 
than twice the efficiency of today's engines.
    If we are successful with the President's hydrogen 
initiative, by 2040, we can reduce oil use in light duty 
vehicles by over 11 million barrels per day. The amount of oil 
that approximates that which American imports today.
    Mr. Chairman, I would like to briefly comment on the draft 
legislation, because we have only had the last few days to 
review the draft, we are not in a position, obviously, to 
provide an administration position on every provision and we 
look forward to working with you and the members of this 
committee on it.
    First, the administration strongly supports completing the 
transition to effective competition in wholesale power markets, 
and believes that much of the electricity title in the draft 
legislation is a strong step in the right direction.
    Well functioning markets will, we believe, lead to lower 
costs for consumers and businesses. But there is more than 
simply the benefit of lower prices.
    A well functioning market brings its own rewards. As 
confidence is gained that the system is reliable and capable of 
coping with high demand for electricity, much needed investment 
is likely to be attracted.
    Investment in new technologies and an improved generation 
in transmission facilities, to produce additional energy and 
environmental benefits.
    When the opposite is true, when uncertainty reigns, when 
reliability is questioned, when prices seem detached from 
market forces, investment vanishes.
    Because the administration supports efforts to ensure open 
access for all generators to grid, we support the open access 
language in section 7021.
    We also support establishing mandatory enforceable 
reliability rules, as found in section 7031. The administration 
agrees that the Public Utility Holding Company Act should be 
repealed and we support reform of PURPA in an innovative and 
competition-friendly manner as contemplated in Subtitle E.
    We also believe that facilitating an effective national 
electric transmission grid for the benefit of consumers, last 
resort Federal sighting authority for high priority 
transmission lines is needed.
    The administration has strongly supported efforts to 
increase energy efficiency and I am pleased to note the 
chairman's inclusion in this draft of agreements reached toward 
this end by the energy conferees in the last Congress.
    The administration strongly supports a renewable fuel 
standard that will increase the use of clean, domestically 
produced renewal fuels, especially ethanol, which will improve 
the Nation's energy security, farm economy and environment.
    However, the administration firmly believes, and I know 
this is a jurisdictional point, but a balanced comprehensive 
energy plan with increased domestic production in order to 
reduce our rising dependence on imported oil and gas.
    And the key to achieving this balance is the President's 
proposal to open a small portion of ANWR to environmentally 
responsible oil and gas exploration and development.
    The administration strongly supports the construction of a 
commercially viable Alaskan natural gas pipeline as a critical 
part of our energy security portfolio.
    And finally, the administration strongly believes that 
comprehensive energy legislation should include long term 
reauthorization of the Price-Anderson Act. And therefore we 
applaud the draft bill's extension of Price-Anderson to 2017.
    And at this point, I will close my statement, Mr. Chairman, 
thank you.
    [The prepared statement of Hon. Kyle McSlarrow follows:]

 Prepared Statement of Hon. Kyle McSlarrow, Deputy Secretary of Energy

    Thank you, Mr. Chairman. I am pleased to be able to present the 
Administration's views on the need for comprehensive and balanced 
energy legislation, and where appropriate, our views on specific 
proposals before this committee.

                            I. INTRODUCTION

    First, I would like to compliment you, Mr. Chairman, and the entire 
committee on your leadership in tackling these important issues once 
again.
    To almost no one's surprise, the turbulent times on the energy 
front continue. From our first week in office, we knew that the United 
States faced an energy crisis long in the making. In addition to the 
California electricity crisis, you will recall that consumers faced 
unparalleled rises in natural gas and gasoline prices, and OPEC was in 
the midst of a series of production cuts that aimed at higher prices 
for crude oil.
    That is why President Bush so quickly directed the completion of a 
comprehensive and balanced national energy policy.

                      II. THE LONG-TERM CHALLENGE

    What was true in the beginning of 2001 is still true: we have a 
series of long-term energy challenges that require action now. These 
challenges are present along the entire energy continuum, and affect 
the environment and economy, the generation and transmission of 
electricity, and commodities ranging from crude oil and its associated 
products to natural gas.
    The issues that relate to electricity pose their own set of 
challenges and possible policy responses, which I will address later. 
But the other challenges can be summarized by one phrase: energy 
security. To be more specific, the United States is increasingly 
dependent on foreign oil and may not be far from the point at which we 
no longer can assume a domestic-or even a North American-supply of 
natural gas that fully meets demand.
    Thus, before I address some of the policy issues before this 
committee and Congress, it is worth analyzing the premise of growing 
dependence on foreign energy. I will use the analysis presented by the 
Department of Energy's independent analytical arm, the Energy 
Information Administration, in its Annual Energy Outlook 2003 (AEO 
2003), and will confine this brief review to petroleum specifically and 
total energy supply and demand.

A. Petroleum Trends
    The historical record shows substantial variability in world oil 
prices, and there is similar uncertainty about future prices. Three 
AEO2003 cases with different price paths allow an assessment of 
alternative views on the course of future oil prices. The three price 
cases are based on alternative assumptions about OPEC oil production 
levels, primarily from the Persian Gulf: lower output in the high price 
case and higher output in the low price case. However, with its vast 
store of readily accessible oil reserves, OPEC is expected to be the 
principal source of marginal supply to meet demand increases in all 
scenarios.
    By 2025, OPEC production is projected to be 61 million barrels per 
day (more than twice its 2001 level) for the ``Reference'' case. Based 
on growth in world oil demand of about 2.0 percent annually, projected 
prices in real 2001 dollars reach about $27 per barrel in 2025. In 
nominal dollars, the reference case price is expected to exceed $48 per 
barrel in 2025.
    In the high world oil price case, OPEC production is assumed to 
only increase to 46 million barrels per day by 2025 (about 25 percent 
less than the reference case) and prices rise by about 3 percent per 
year from 2001 to 2015. Prices remain at about $33 per barrel (in real 
2001 dollars) after 2015 as market penetration of alternative energy 
supplies become economically viable at the higher price and cap oil 
prices.
    In the ``low world oil price'' case, with assumed greater expansion 
of OPEC production to 71 million barrels per day by 2025 (about 15 
percent greater than the reference case), prices are projected to 
decline from their high in 2003, reaching $19 a barrel by 2010 (in real 
2001 dollars), and remain at that level to 2025.
    U.S. petroleum consumption varies, not only with oil prices, but 
the level of economic growth. While projected U.S. petroleum 
consumption varies with the projected price of crude oil, from 28.2 
million barrels per day in the high world oil price case to 30.2 
million barrels per day in the low world oil price case in 2025, the 
largest variation is with different assumptions about the rate of 
economic growth. Total petroleum consumption in 2025 ranges from 26.9 
million to 31.8 million barrels per day in the low and high economic 
growth cases, respectively.
    In the reference case, gross domestic product is expected to 
increase by 3.0 percent per year between 2001 and 2025. In the high 
economic growth case, GDP grows at a faster 3.5 percent per year and in 
the low economic growth case at a slower 2.5 percent per year. However, 
while petroleum consumption varies with each scenario, it increases in 
all cases from today's level.
    In 2001, net imports of petroleum accounted for 55 percent of 
domestic petroleum consumption. Dependence on petroleum imports is 
projected to grow in the reference case, reaching 68 percent in 2025. 
The corresponding import shares of total consumption in 2025 are 
expected to be 65 percent in the high world oil price case and 70 
percent in the low world oil price case.
    The growth in the share of petroleum accounted for by imports has 
received little notice in recent years. Expenditures on petroleum as a 
share of GDP have fallen from a peak of 9 percent in 1980 to only 3 
percent today. The OPEC share of U.S. petroleum imports has fallen from 
a peak of 70 percent in 1977 to 47 percent in 2001. More importantly, 
the share of U.S. petroleum imports originating from the Persian Gulf 
is about 23 percent today versus a peak of 28 percent in the late 
1970s.
    However, as the marginal source of supply, OPEC and, ultimately, 
the Persian Gulf are expected to be become increasingly important for 
future supplies to the United States and the world. By 2025, 53 percent 
of U.S. petroleum supply is expected to come from OPEC, including 26 
percent from the Persian Gulf.
    Although crude oil is expected to continue as the major component 
of petroleum imports, refined products are projected to represent a 
growing share. Growth in domestic U.S. refinery capacity is expected to 
remain constrained by regulations and economics. While total capacity 
is projected to grow by 3 million barrels per day between 2001 and 
2025, all of the growth is at existing refineries. No new grassroots 
facilities are expected to be built over the forecast period.
    Growth in total U.S. petroleum demand in the reference case, from 
20 million barrels per day in 2001 to over 29 million barrels per day 
by 2025, is projected to outstrip U.S. refinery capacity. As a result, 
refined petroleum products are projected to account for a growing 
portion of total net petroleum imports, reaching 34 percent of total 
net imports by 2025 (6.7 million barrels per day) in the reference 
case, up from a 15 percent share of total imports in 2001 (1.6 million 
barrels per day).
    This means that the U.S. will increasingly rely on foreign refinery 
investors to provide not just the volume of petroleum product needed by 
U.S. markets but products that meet the required characteristics (e.g., 
sulfur content, octane levels, etc.) of the U.S. supply slate. This 
decreases the flexibility and direct control that U.S. policymakers 
have in dealing with petroleum supply issues.

B. Total Energy Trends
    Another way to analyze our energy picture is to look at our total 
energy consumption and balance it against our total energy production.
    Total U.S. primary energy consumption is projected to increase from 
97 quadrillion Btu in 2001 to 139 quadrillion Btu by 2025 in the 
reference case, 1.5 percent per year. It is important to note that the 
reference case already assumes continued improvement in energy-
consuming and producing technologies, consistent with historic trends. 
Without these improvements, total primary energy consumption would 
otherwise grow to about 200 quadrillion Btu by 2025.
    The difference between reference case consumption and domestic 
energy production is the level of net imports (all energy types) 
required to meet projected U.S. energy consumption levels. Because of 
slow growth in domestic energy production, total net imports are 
projected to grow from about 26 quadrillion Btu in 2001 to almost 50 
quadrillion Btu in 2025.
    As I mentioned earlier, this already assumes that future gains in 
energy efficiency take place at the same impressive rate as in recent 
years. Nonetheless, the EIA also analyzed what it termed a ``high 
technology'' case, with an even more aggressive decline in energy 
intensity.
    With more rapid decline in energy intensity, total energy 
consumption could be reduced to levels below that shown in the 
reference case. In the high technology case, it is assumed that 
increased spending on research and development will result in earlier 
introduction, lower costs, and higher efficiencies for end-use and 
electric generation technologies than assumed in the reference case. 
Due to a faster decline in energy intensity in the high technology 
case, total primary energy consumption is projected to be 6 percent 
lower in the high technology case by 2025, at 130 quadrillion Btu.
    With lower levels of total consumption, net imports are also 
reduced. However, the reduction in imports is partially offset by lower 
levels of domestic energy production resulting from a decline in the 
energy prices that producers see with lower consumption levels. Net 
energy imports decline to 45 quadrillion Btu by 2025 in the high 
technology case from nearly 50 quadrillion Btu by 2025 in the reference 
case. The result is that even in a case with an accelerated decline in 
energy intensity, the U.S. will still be highly dependent on energy 
imports to meet future consumption needs.

 III. RISING TO THE CHALLENGE: PRESIDENT BUSH'S NATIONAL ENERGY POLICY.

    These trends are a concern. We long ago ceased to fully provide for 
our petroleum needs domestically, and though most of our natural gas 
can be supplied currently by North American production, the trend here 
is also toward a greater share for imported gas.
    Quite simply, we are at the mercy of events and decisions over 
which we have often limited-sometimes no -control. When winters and 
summers are mild; when no refineries or pipelines break down; when 
supply from abroad is abundant and reliable, we do not feel this 
dependency. But when almost anything goes wrong, the markets react 
instantly, and we confront the higher prices and volatility that have 
become by now an almost reliable cyclical phenomenon.
    President Bush recognized that to prevent those problems from 
becoming a permanent, recurring feature of American life, we needed a 
long-term plan for energy security that would promote reliable, 
affordable and environmentally sound energy for the future.
    Almost two years ago, President Bush presented his solution, a 
national energy policy, to the American people.
    The key to the comprehensive plan's approach was the recognition 
that over the next 20 years our country would demand large and timely 
increases in energy in order to keep our economy growing, keep 
Americans working, and keep the nation secure.
    The National Energy Policy helped define six general objectives to 
ensure America's continued growth and prosperity:

-- First, we would aggressively reduce demand by employing energy 
        efficient technologies and encourage sound conservation 
        measures as essential components of our energy policy.
-- Second, realizing that even the most aggressive energy efficiency 
        and conservation programs would not be enough by themselves to 
        bring supply and demand into balance, we resolved to increase 
        energy supply, with an emphasis on domestic supply.
-- Third, to ensure energy security, we would maintain a diversity of 
        fuels from a multiplicity of sources.
-- Fourth, we would dramatically upgrade our national energy 
        infrastructure so as to more efficiently and reliably deliver 
        energy from the source to the consumer.
-- Fifth, we would accomplish our energy production, consumption and 
        conservation goals while building on our successful record of 
        environmental protection.
-- Sixth, realizing that our energy challenges would extend beyond the 
        next two decades, we would provide a vision of the future in 
        which solutions to these challenges would transform our energy 
        future.

                IV. NATIONAL ENERGY POLICY ACHIEVEMENTS

    Above all else, the underlying goal of the National Energy Policy 
was to strengthen America's energy security; and pursuant to this goal, 
the Administration has made significant progress in the past two years.
    This Administration has made great strides toward increasing 
domestic energy supplies and diversifying foreign energy sources. The 
President's decision to move forward on Yucca Mountain, and Congress' 
subsequent approval, will ensure the continued viability of the 
nation's nuclear industry. And the President's Coal Research Initiative 
continues to demonstrate great promise for the development of new 
technologies for cleaning--and potentially eliminating--coal emissions 
and thereby protecting the viability of this nation's most abundant 
energy resource.
    As part of our efforts to modernize and expand the infrastructure 
we have established an interagency Task Force on Permit Streamlining 
that has been instrumental in coordinating the permit process for many 
infrastructure projects, joined with Congress to enact Pipeline Safety 
legislation, and begun construction on the Path 15 transmission line to 
ease electricity congestion in California.
    The Administration's commitment to encouraging conservation, 
boosting energy efficiency, and expanding the potential for the use of 
clean renewable energy is demonstrated in the President's request for 
increased weatherization funding, and the largest request for funding 
for the Department of Energy's Office of Energy Efficiency and 
Renewable Energy in 20 years.
    Our promise to protect the environment for future generations is 
the foundation of proposals such as Clear Skies, which will 
substantially reduce the amount of pollutants resulting from the 
production of electricity and through the Administration's Brownfields 
initiative which seeks to return abandoned industrial properties to 
beneficial use allowing location of combined heat and power facilities 
on remediated lands.

                   V. TRANSFORMING OUR ENERGY FUTURE.

    Of particular significance, however, are two Presidential 
initiatives that I would like to take a moment to highlight. The 
National Energy Policy recommended that the President direct the 
Secretary of Energy to develop next generation technologies, and it 
specifically focused on hydrogen and fusion.

A. Hydrogen.
    The President soon carried out this recommendation by announcing 
the FreedomCAR initiative, a program designed to greatly accelerate the 
pace of development of hydrogen vehicles.
    The potential benefits of hydrogen-fueled vehicles are incredible.

 Hydrogen can be produced from diverse domestic sources, 
        freeing us from reliance on foreign imports for the energy we 
        use at home.
 When hydrogen is used to power fuel cell vehicles, it will do 
        so with more than twice the efficiency of today's engines.
 And hydrogen-powered vehicles would have a tremendous positive 
        impact on the environment, as they would produce none of the 
        harmful emissions that we see with today's gasoline-powered 
        fleet. In fact, the only byproduct of the fuel cell is pure 
        water.
    These factors also led to the development of the President's 
Hydrogen Fuel Initiative, which he announced just over one month ago 
during the State of the Union Address.
    Today's gasoline-powered vehicles are fueled by an infrastructure 
that is the result of nearly 100 years and 1 trillion dollars of 
investment. It is remarkably efficient, and it is everywhere. 
Initially, we won't need a hydrogen station on every corner, and our 
hydrogen production will not need to match gasoline production 
overnight. But we needed a plan for making the necessary research and 
development breakthroughs to enable industry to develop a fueling 
infrastructure that would allow hydrogen vehicles to operate alongside 
their gasoline counterparts, that would be ready when the vehicles are 
entering the marketplace, and that will grow with the use of this new 
technology.
    The President's Hydrogen Fuel Initiative provides this plan for the 
future hydrogen economy, and it has already generated tremendous 
enthusiasm among the energy and auto industries--partners that will be 
integral to transforming our nation's energy future from one dependent 
on foreign petroleum, to one that utilizes the most abundant element in 
the universe.
    As the President has said, his goal is to see to it that the first 
car driven by a child born today could be powered by hydrogen and 
pollution free. Pursuant to the FreedomCAR partnership and Hydrogen 
Fuel Initiative, we propose to focus $1.7 billion over the next five 
years on several significant barriers to hydrogen, fuel cell, and 
advanced automotive technologies:

 First, we will work to lower the cost of fuel cells by another 
        factor of ten. If we were to mass-produce the fuel cell designs 
        we have today, they would cost approximately $300 per kilowatt. 
        The comparable cost of a modern internal combustion engine is 
        $30 per kilowatt, so we have our work cut out for us to make 
        this technology competitive.
 Second, we will endeavor to lower the cost of hydrogen, which 
        is approximately four times more expensive than its gasoline 
        equivalent today. Our 2010 goal is to bring down the cost of 
        the hydrogen equivalent of an untaxed gallon of gas to $1.50. 
        The way to do that is by developing cost effective, efficient 
        means of production and distribution.
 Third, we will undertake research aimed at devising new 
        methods to store sufficient amounts of hydrogen fuel aboard a 
        vehicle, to provide consumers with a driving range of at least 
        300 miles between refuelings.
 Fourth, and most critically, we will work to solve the 
        overarching infrastructure challenges, to develop a hydrogen-
        based delivery and refueling infrastructure like the petroleum-
        based one we now have.
    If we are successful in this endeavor, we estimate that industry 
could make a commercialization decision on fuel cell vehicles, hydrogen 
production, and refueling infrastructure by 2015. A positive decision 
would lead to hydrogen fuel cell vehicles in the showroom by 2020, and 
by 2040, this could reduce oil use in light duty vehicles by over 11 
million barrels per day--an amount of oil that approximates that which 
America imports today.

B. Fusion
    A second element of the National Energy Policy technologies 
recommendation received much attention domestically and internationally 
when President Bush recently announced that the United States would 
make a major commitment to the development of fusion energy.
    Fusion is the process that powers the sun and the stars, and our 
best scientists believe it may become the ultimate energy source for 
earth as well. In the stars, hydrogen atoms combine under extremely 
high temperature and pressure to produce helium and energy. The 
envisioned fusion energy plants would harness this process here on 
earth, relying on an abundant fuel that is readily available to all 
nations: simple seawater. Fusion energy plants would produce no harmful 
emissions, no long-term radioactive waste, and because no fissile 
materials are required in the fusion process, it presents virtually no 
proliferation threat. It promises to be the ultimate safe, clean, 
abundant energy source, and it may be the energy source for the future.
    The great promise of fusion, however, presents great scientific 
challenges, challenges we believe we can meet if we engage the talents 
of experts from around the world. That is why on January 30, 2003, 
President Bush announced that the United States would join with the 
international community to develop the International Thermonuclear 
Experimental Reactor. When built, ITER is expected to achieve the first 
sustained burning plasma, an essential next step in demonstrating the 
feasibility of commercial fusion energy systems. In his announcement, 
the President noted that ITER is ``an ambitious international research 
project'' that will ``advance the effort to produce clean, safe, 
renewable, and commercially-available fusion energy by the middle of 
this century.''
    Both our hydrogen initiative and our fusion energy research program 
will, of course, depend on Congressional funding and approval, and we 
look forward to working with Congress to ensure that these initiatives 
are fully supported.

               VI. PRINCIPLES GUIDING ENERGY LEGISLATION.

    Hydrogen and fusion present a long-term promise, and are primarily 
focused on research and development. But there are a number of 
proposals that can be implemented now. Some require action by the 
Administration-indeed, three-quarters of the National Energy Policy's 
105 recommendations can and are being done by actions in the Executive 
Branch. However, some of the most important actions require legislative 
action.
    Let me outline a few of the principles that the Administration 
believes should guide the development of energy legislation, and the 
goals we think we should achieve.
A. Modernization of Wholesale Electricity Laws
    The Administration strongly believes a comprehensive energy bill 
must include a sound electricity title that modernizes our Nation's 
antiquated wholesale electricity laws.
    Our overarching goal is to ensure that Americans have abundant, 
affordable, clean and secure electricity supplies.
    Developments in the electricity industry in recent years have 
brought the industry to a crossroads. While the move to competitive 
markets has fostered enormous benefits, some serious problems have 
given rise to a significant policy debate, especially over the past two 
years.
    We have three basic policy choices.

 First, go back to comprehensive rate regulation for wholesale 
        power sales. Have FERC set regulated rates for each 
        jurisdictional utility. Abandon reliance on market forces and 
        competition as the underpinning of Federal electricity policy.
 Second, maintain the status quo. Defer making decisions on 
        major policy issues. Continue to straddle the fence.
 And, third, complete the transition to effective competition 
        in wholesale power markets.
    Going back to comprehensive rate regulation is not really an 
option. Too much has happened, and too much has changed. The process of 
change introduced into electricity markets by past Federal and State 
policies is probably irreversible.
    Preserving the status quo is not a real option, either. The status 
quo has meant dramatic price spikes in wholesale power markets in 
California and the West, attempts to manipulate power markets, a 
dramatic expansion of generation by many independent power producers 
and the subsequent challenges some have faced as a result, and stagnant 
investment in an inadequate transmission grid that restricts entry into 
regional power markets.
    The Administration believes that there really is only one viable 
policy choice: completing the transition to effective competition in 
wholesale power markets designed to generate and deliver reliable, 
abundant and affordable electricity.
    The evidence of the price benefits derived from increased 
efficiencies can already be seen. As imperfect as the market has been, 
wholesale power prices declined by 23 % from 1985 to 2000. Even when 
one takes into account the volatile price increases of 2001, the 
decline from 1985 is still 12%.
    Well-functioning markets will, we believe, lead to lower costs for 
consumers and businesses. But there is more than simply the benefit of 
lower prices. A well-functioning market brings its own rewards. As 
confidence is gained that the system is reliable and capable of coping 
with high-demand for electricity, there will increasingly be less need 
for restrictive and prescriptive regulation. And that is the point when 
much-needed investment is likely to be attracted--investment in new 
technologies, and in improved generation and transmission facilities 
that produce additional energy and environmental benefits.
    When the opposite is true--when uncertainty reigns, when 
reliability is questioned, when prices seem detached from market 
forces--investment vanishes.
    What is required to complete the transition is new and aggressive 
reform, and that requires new legislation and new, streamlined 
regulatory regimes.
    The reforms that lead to greater competition are embodied in the 
following principles:

 Prevent market manipulation and market power abuse.
 Promote reliability of electricity service.
 Ensure open access to the interstate transmission grid.
 Eliminate undue discrimination in wholesale power markets.
 Ensure that customers have the ability to respond to price in 
        real-time.
 Encourage investment in new generation and transmission 
        facilities.
 Support transmission policy options, including participant 
        funding, that appropriately allocates costs; and
 Lower barriers to entry to electricity markets.
    The Federal Energy Regulatory Commission has already taken a number 
of steps in these directions. For example, FERC already has begun a 
rulemaking to establish incentive-based and performance-based rate 
treatments to encourage construction of new transmission facilities, 
and has acted to make regional transmission organizations a reality.
    However, legislation still is needed, and the Administration 
believes that much of the Electricity title in the draft House bill is 
a strong step in the right direction. Because the Administration 
supports efforts to ensure open access for all generators to the 
wholesale electricity grid, the open access language in section 7021 of 
the draft House bill is a desirable goal, and we support that goal. The 
Administration also supports establishing mandatory and enforceable 
reliability rules that will reduce the chances for power outages. 
Therefore, we support section 7031 of the bill concerning electric 
reliability.
    The Administration agrees that the Public Utility Holding Company 
Act (PUHCA), an outdated law that restricts utility investment, should 
be repealed, and so we support Subtitle D of the Electricity title in 
the House bill. We also have advocated reform of the Public Utility 
Regulatory Policies Act (PURPA) in an innovative and competition-
friendly manner as contemplated in Subtitle E of the Electricity title.
    The Administration supports FERC's ability to review mergers and 
prohibit abuses of market power. As a result, we oppose section 7101 of 
the bill, which would repeal FERC's authority to review mergers. The 
Administration supports enacting legislation to further protect 
consumers against unauthorized disclosure of personal information, 
unauthorized switching of electricity service, and unethical 
individuals and companies in this industry. As a result, we generally 
support Subtitle H of the draft bill and look forward to working with 
you on some of the details of this subtitle.
    We also believe that to facilitate an effective national electric 
transmission grid for the benefit of consumers, last-resort federal 
siting authority for high-priority transmission lines is needed. 
Therefore, we support the concepts of section 7012 concerning siting of 
transmission facilities. However, we still are reviewing the details 
and legal ramifications of this proposal. We believe the Tennessee 
Valley Authority and the Power Marketing Administrations (PMA) should 
be an integral part of the national grid and relevant authority should 
be included in the bill. We also generally support Subtitle B of the 
draft bill concerning transmission operation, though we do have some 
concerns about the regional transmission organization section because, 
among other things, it does not explicitly provide for Federal cost 
recovery when a PMA joins an RTO, or for preserving prior contracts and 
third-party financing obligations of the PMAs. We look forward to 
working with you to address our concerns.
    Finally, the Administration supports the ban on roundtrip trading, 
the increases in criminal penalties, and the other modifications made 
to the Federal Power Act in Subtitle G of the draft bill. We are still 
studying the provisions of Subtitle F concerning Renewable Energy, but 
it appears that the bill contains much we can support there as well.

B. Energy efficiency and conservation
    A comprehensive energy policy must be balanced, and must include 
initiatives that foster both supply and demand side improvements-and 
importantly, those which increase energy efficiency and energy 
conservation. The Administration has strongly supported efforts to 
increase energy efficiency, and I am pleased to note the Chairman's 
inclusion in his energy legislation of agreements reached to this end 
by the energy conferees of the 107th Congress.

C. Tax Provisions
    Comprehensive energy legislation must increase energy conservation 
and efficiency. Nearly every dollar of the NEP's energy tax proposals 
for FY 2002-2012 would be devoted to increasing efficiency, 
conservation, and renewable energy. For example, the NEP includes a 
consumer tax credit for the purchase of hybrid and fuel cell vehicles. 
Other fiscal incentives include extending and modifying the tax credit 
for producing electricity from environmentally friendly sources, such 
as biomass and wind; providing tax credits for energy produced from 
landfill gas, residential solar energy systems, and investment in 
combined heat and power; and extending the ethanol tax exemption. It is 
imperative that the tax provisions of comprehensive energy legislation 
reflect the President's priorities of environmental protection and 
energy conservation and maintain the fiscal discipline reflected in the 
FY 2004 Budget.

D. Renewable Fuels Standard
    The Administration strongly supports a renewable fuels standard 
that will increase the use of clean, domestically produced renewable 
fuels, especially ethanol, which will improve the Nation's energy 
security, farm economy, and environment. The Administration also 
supports the inclusion of a market-based, national credit trading 
mechanism--such as that included in Section 5052 of the draft 
legislation--that will increase efficiency and reduce costs.

E. Alaska Natural Gas Pipeline
    The Administration strongly supports the construction of a 
commercially viable Alaska natural gas pipeline as a critical part of 
our energy security portfolio, and believes that market forces should 
select the route of the pipeline. Although no such provision appears in 
the House draft, the Administration reiterates its strong opposition to 
a price-floor tax subsidy--and any similar provision--because it would 
distort markets. It is also likely to undermine Canada's support for 
construction of the pipeline, setting back broader bilateral energy 
integration.

F. ANWR
    As I've stated earlier, the Administration firmly believes that a 
balanced, comprehensive energy plan is imperative to the long-term 
strength of our economic and national security. This balance must 
include a recognition that we must also increase domestic production in 
order to reduce our rising dependence on imported oil and gas; and key 
to achieving this balance is the President's proposal to open a small 
portion of the Arctic National Wildlife Refuge (ANWR) to 
environmentally responsible oil and gas exploration and development.
    As you are aware, primary responsibility for managing the vast 
public resources of this nation rests with the Department of the 
Interior. Secretary Norton has set a goal of forging strong 
partnerships with Federal and State agencies, Tribal governments, and 
all of the stakeholders-including the Congress-to create greater 
opportunities for the responsible development of energy resources on 
Federal lands.
    The Department of the Interior has taken several actions to advance 
the goals of the National Energy Policy, including the approval of a 5-
year Oil and Gas Leasing program to ensure that the Outer Continental 
Shelf remains a solid contributor to our nation's energy security; 
completion of the EPCA inventory, which provides an estimate of 
undiscovered technically recoverable resources and proved resources of 
oil and gas; and recent collaboration with the Department of Energy on 
a joint report that identifies and evaluates renewable energy resources 
on public lands. The Bureau of Land Management will use this report's 
findings to prioritize land-use planning activities, and to increase 
the development and use of renewable energy resources.

G. Price-Anderson
    The Administration strongly believes that comprehensive energy 
legislation should include long-term reauthorization of the Price-
Anderson Act. Price-Anderson ensures prompt and equitable compensation 
for the public in the unlikely event of a nuclear accident.
    In the Bob Stump National Defense Authorization Act of 2003, 
Congress extended Price-Anderson for DOE contractors until December 31, 
2004. In the recent omnibus appropriations act, Congress extended 
Price-Anderson for Nuclear Regulatory Commission licensees only until 
December 31, 2003. We need a long-term extension of this important law, 
and therefore we applaud the draft House bill's extension of Price-
Anderson to 2017.
    We have only recently seen the provisions of the draft bill 
concerning financial accountability, safety, security and other matters 
relevant to the nuclear power industry, and look forward to working 
with Congress to ensure that the bill achieves its intended effect 
without detracting from the quality of potential contractors, or 
compromising security, anti-terrorism or non-proliferation efforts.

H. Strategic Petroleum Reserve
    As was demonstrated by the President's decision to fill the 
Strategic Petroleum Reserve to its current statutory capacity, the 
Administration recognizes the tremendous importance of this national 
resource. We applaud the Chairman for including permanent SPRO 
authorization in the legislation.
    The Administration intends shortly to initiate a study to determine 
the optimal size of the reserve. The results of this analysis are 
necessary to determine the full range of impacts on markets and 
national security of any decision to adjust capacity following its 
expected fill in 2005. We believe such an analysis is an important 
first step when considering an expansion of the Reserve above the 
current goal of 700 million barrels.
    At this point, I thank you for the opportunity to testify before 
you today, and I welcome any questions the Committee might have.

    Mr. Barton. Now recognizing the distinguished chairman of 
the Nuclear Regulatory Commission. Tell him how much we have 
enjoyed working with you in your chairmanship and we wish you 
well in whatever future endeavors you incur once you leave the 
commission. Do you know how long your statement is?
    Mr. Meserve. Under 5 minutes.
    Mr. Barton. Well, you all are just doing great. Okay, we 
will recognize you for 6 minutes, also.

                 STATEMENT OF RICHARD A. MESERVE

    Mr. Meserve. Thank you for your generous comments, Mr. 
Chairman. Mr. Chairman and members of the committee, I am 
pleased to be here today to present the Nuclear Regulatory 
Commission's perspective on how nuclear energy fits into the 
national energy policy.
    As the subcommittee knows, the NRC's mission is to ensure 
the adequate protection of public health and safety, the common 
defense and security, and the environment in the application of 
nuclear technology for civilian use.
    The commission does not have a promotional role. Its role 
is to ensure the safe application of nuclear technology if 
society elects to pursue the nuclear energy option.
    The commission, nonetheless, recognizes that the quality, 
predictability and timeliness of its regulatory actions bear on 
licensee decisions related to construction and operation of 
nuclear power plants.
    Currently there are 104 nuclear power plants licensed by 
the commission to operate in the United States in 31 different 
States.
    As a group they are operating at high levels of safety and 
reliability. Indeed the trends over the past decade are very 
favorable, as indicated by the graphs and tables in my 
submitted statement.
    These plants have produced approximately 20 percent of our 
Nation's electricity for the past several years. Because of the 
improved economic performance of the plants, the commission has 
seen a significant increase in the number of requests for 
approval of license renewal that would allow the plants to 
operate beyond their original 40 year term.
    The focus of the commission's review of license renewal 
applications is on maintaining plant safety, with a primary 
concern directed at the effects of aging on important systems, 
structures and components.
    Applicants must demonstrate that they have identified and 
can manage the effects of aging, so as to maintain an 
acceptable level of safety during the period of extended 
operation.
    The commission has now renewed the licenses of plants at 
five sites for an additional 20 years, comprising a total of 
ten units. A thorough review of these applications were 
completed on or ahead of schedule.
    And applications for 20 units from 12 additional sites are 
currently under review. Many more applications for renewal are 
anticipated in the coming years.
    In recent years, the commission has also approved license 
amendments that permit its licensees to undertake power 
uprates.
    The commission takes this step only after determining that 
safety margins can be maintained at the higher power. 
Collectively, these approved uprates supplied the electricity 
equivalent to that from three large power plants, approximately 
3,000 megawatts electric.
    Over the past 17 months, the commission has undertaken a 
comprehensive review of safeguards and security programs, in 
close consultation with the Department of Homeland Security, 
the Department of Energy, and other Federal agencies, and with 
significant involvement by State agencies.
    Out of that review has come a series of interim 
compensatory measures to strengthen nuclear security at power 
reactors and other NRC licensed facilities, as well as in the 
transportation of spent fuel.
    Last August we put in place a five tier threat advisory 
system compatible with the homeland security advisory system. 
We have issued orders to strengthen programs that control 
access at power reactors.
    And have drafted proposed orders to strengthen guard 
training and address guard fatigue. We provided revised design 
based threats for comment to other Federal agencies, the States 
and cleared stakeholders.
    We have been conducting enhanced table-top security 
exercises at our reactor facilities and are resuming the 
conduct of enhanced force-on-force exercises.
    While the improved performance of operating nuclear power 
plants has resulted in significant increases in electrical 
output, increased demands for electricity will need to be 
addressed eventually by construction of new generating capacity 
of some type.
    As a result, industry interest in new construction of 
nuclear power plants has recently emerged. As you know, the 
commission has already certified three new reactor designs.
    The NRC staff is currently reviewing the Westinghouse 
AP1000 design and has six other designs in various stages of 
preapplication review.
    In addition, discussions are taking place in preparation 
for three early site permit applications which are expected in 
2003.
    The commission has a stake in the national energy policy 
and has identified areas where new legislation would be 
helpful. These changes would maintain safety, while increasing 
flexibility.
    Additionally, the commission has long sought additional 
authority in the nuclear security arena. With a strong 
Congressional interest in examining energy policy, the 
commission is optimistic that there will be a legislative 
vehicle for making these changes.
    There are many elements of the proposed legislation before 
this committee that we support and a few that we believe are 
unnecessary.
    Mr. Chairman, we would be very pleased to work with you and 
the committee in addressing matters of mutual concern. Thank 
you for the opportunity to testify today, I would be very 
pleased to take questions.
    [The prepared statement of Hon. Richard A. Meserve 
follows:]

   Prepared Statement of Richard A. Meserve, Chairman, U.S. Nuclear 
                         Regulatory Commission

                              INTRODUCTION

    Mr. Chairman, members of the Subcommittee, I am pleased to submit 
this testimony on behalf of the U.S. Nuclear Regulatory Commission 
(NRC) regarding the NRC's perspective on how nuclear energy fits into 
the U.S. National Energy Policy. As the Subcommittee knows, the 
Commission's mission is to ensure the adequate protection of public 
health and safety, the common defense and security, and the environment 
in the application of nuclear technology for civilian use. The 
Commission does not have a promotional role--the agency's role is to 
ensure the safe application of nuclear technology if society elects to 
pursue the nuclear energy option. The Commission recognizes, however, 
that its regulatory system should not establish inappropriate 
impediments to the application of nuclear technology. Many of the 
Commission's initiatives over the past several years have sought to 
maintain or enhance safety and security while simultaneously improving 
the efficiency and effectiveness of our regulatory system.
    The Commission's primary focus is on safety. The Commission 
nonetheless recognizes that the quality, predictability, and timeliness 
of its regulatory actions bear on licensee decisions related to 
construction and operation of nuclear power plants.

                               BACKGROUND

    Currently there are 104 nuclear power plants licensed by the 
Commission to operate in the United States in 31 different states. As a 
group, they are operating at high levels of safety and reliability. 
Indeed, the trends over the past decade are very favorable.
    These plants have produced approximately 20% of our nation's 
electricity for the past several years and are operated by about 35 
different companies. In 2001, these nuclear power plants produced about 
750-thousand gigawatt-hours of electricity.

Improved Licensee Efficiencies (Increased Capacity Factors)
    The nation's nuclear electricity generators have worked for over 
ten years to improve nuclear power plant performance, reliability, and 
efficiency. According to the Nuclear Energy Institute, the improved 
performance of the U.S. nuclear power plants since 1990 is equivalent 
to placing 23 new 1000-MWe power plants on line. The average capacity 
factor for U.S. light water reactors was 90 percent in 2001, up from 71 
percent just 10 years earlier. The Commission has focused on ensuring 
that safety has not been compromised as a result of these industry 
efforts.

                U.S. Commercial Nuclear Power Reactor Average Capacity Factor and Net Generation
----------------------------------------------------------------------------------------------------------------
                                                                          Average         Net Generation of
                                                           Number of      Annual             Electricity
                          Year                             Operating     Capacity   ----------------------------
                                                           Reactors       Factor      Thousands of   Percent of
                                                                         (Percent)   Gigawatthours   Total U.S.
----------------------------------------------------------------------------------------------------------------
1990...................................................          111            68            577          19.1
1991...................................................          111            71            613          20.0
1992...................................................          110            71            619          20.1
1993...................................................          109            73            610          19.1
1994...................................................          109            75            640          19.7
1995...................................................          109            79            673          20.1
1996...................................................          110            77            675          19.6
1997...................................................          104            74            629          18.0
1998...................................................          104            78            674          18.6
1999...................................................          104            86            728          19.6
2000...................................................          104            88            754          19.8
2001...................................................          104            90            767          20.0
----------------------------------------------------------------------------------------------------------------

         initiatives in the area of current reactor regulation
License Renewals
    Because of the improved economic performance of the plants, the 
Commission has seen a significant increase in the number of requests 
for approval of license renewal that would allow plants to operate 
beyond their original 40-year term. That term, which was established in 
the Atomic Energy Act, did not reflect a limitation that was determined 
by engineering or scientific considerations, but rather was based on 
financial and antitrust concerns.
    The focus of the Commission's review of license renewal 
applications is on maintaining plant safety, with the primary concern 
directed at the effects of aging on important systems, structures, and 
components. Applicants must demonstrate that they have identified and 
can manage the effects of aging so as to maintain an acceptable level 
of safety during the period of extended operation.
    The Commission has now renewed the licenses of plants at five sites 
for an additional 20 years: Calvert Cliffs in Maryland, and Oconee in 
South Carolina, Arkansas Nuclear One in Arkansas, Edwin I. Hatch in 
Georgia, and Turkey Point in Florida, comprising a total of ten units. 
The thorough reviews of these applications were completed on or ahead 
of schedule, which is indicative of the care exercised by licensees in 
the preparation of the applications and the planning and dedication of 
the Commission staff. Applications for twenty units from twelve 
additional sites are currently under review. As indicated by our 
licensees, many more applications for renewal are anticipated in the 
coming years.
    Although the Commission has met the projected schedules for the 
first reviews, we seek further improvements. The extent to which the 
Commission is able to sustain or improve on our performance depends on 
the rate at which applications are actually received, the quality of 
the applications, and the ability to staff the review effort. The 
Commission recognizes the importance of license renewal and is 
committed to providing high-priority attention to this effort. As you 
know, the Commission encourages early notification by licensees, in 
advance of their intentions to seek renewals, in order to allow 
adequate planning so as not to create unmanageable demands on staff 
resources.

Reactor Plant Power Uprates
    In recent years, the Commission has approved numerous license 
amendments that permit its licensees to make power uprates. The 
Commission takes this step only after determining that safety margins 
can be maintained at the higher power. Collectively, these approved 
uprates supplied the electricity equivalent to that from three large 
power plants (approximately 3,000 MWe). In addition, some nuclear 
generators have requested Commission safety review of increasing fuel 
burnup, thereby extending the operating cycle between refueling outages 
and thus increasing nuclear plant capacity factors. Again, such 
approvals are granted only after a thorough evaluation by Commission 
staff to ensure that safe operation and shutdown can be achieved at the 
increased fuel burnup.

Risk-Informing the Commission's Regulatory Framework
    The Commission also is in a period of dynamic change as the agency 
continues to move from a prescriptive, deterministic approach towards a 
more risk-informed and performance-based regulatory paradigm. Improved 
probabilistic risk assessment techniques combined with over four 
decades of accumulated experience with operating nuclear power reactors 
have led the Commission to revise or eliminate certain requirements. On 
the other hand, the Commission is prepared to strengthen our regulatory 
system where risk considerations reveal the need.
    Perhaps the most visible aspect of the Commission's efforts to 
risk-inform its regulatory framework is the new reactor oversight 
process. The process was initiated on a pilot basis in 1999 and fully 
implemented in April 2000. The new process was developed to focus 
inspection effort on those areas involving greater risk to the plant 
and thus to workers and the public, while simultaneously providing a 
more objective and transparent process.

Nuclear Security Enhancements
    Over the past 17 months, the Commission has undertaken a 
comprehensive review of safeguards and security programs, in close 
consultation with the Department of Homeland Security and other Federal 
agencies, and with significant involvement by State agencies. Out of 
that review has come a series of interim compensatory measures to 
strengthen nuclear security at power reactors, Category I fuel cycle 
facilities, decommissioning reactors, research and test reactors, 
independent spent fuel storage facilities, the two gaseous diffusion 
plants, and the conversion facility, as well as in the transportation 
of spent fuel. Last August we put in place a five-tier threat advisory 
system compatible with the Homeland Security Advisory System, and we 
have used that system twice to improve security measures at our 
licensed facilities. We have issued Orders to strengthen programs to 
control access at power reactors. We have drafted proposed Orders to 
strengthen guard training and address guard fatigue. We have provided 
revised design basis threats for comment to other Federal agencies, the 
States and cleared industry personnel. We have been conducting enhanced 
table-top security exercises at our reactor facilities and have just 
resumed the conduct of enhanced force-on-force exercises at these 
facilities. We plan to conduct force-on-force exercises on a thee-year 
cycle and have requested the resources to do this in our fiscal year 
2004 budget. We have defined the actions that we need to take to ensure 
better control of high risk radioactive sources containing radioactive 
isotopes of the most concern for potential use in a radiological 
dispersal device.

                           FUTURE ACTIVITIES

Scheduling and Organizational Assumptions Associated with New Reactor 
        Designs
    While improved performance of operating nuclear power plants has 
resulted in significant increases in electrical output, significant 
increased demands for electricity will need to be addressed by 
construction of new generating capacity of some type. As a result, 
industry interest in new construction of nuclear power plants in the 
U.S. has recently emerged. As you know, the Commission has already 
certified three new reactor designs, pursuant to 10 CFR Part 52, making 
them readily available for new plant orders. These designs include 
General Electric's advanced boiling water reactor, Westinghouse's AP-
600 and Combustion Engineering's System 80+.
    In addition to the three already certified advanced reactor 
designs, there are new nuclear power plant technologies which some 
believe can provide enhanced safety, improved efficiency, lower costs, 
as well as other benefits. The NRC staff is currently reviewing the 
Westinghouse AP1000 design certification application and has six other 
designs in various stages of pre-application review. In addition, pre-
application discussions are taking place in preparation for three early 
site permit applications expected in 2003.
    The staff is also making infrastructure improvements to ensure that 
tools, information, and regulatory processes are in place for the 
efficient, effective, and realistic review of new site and reactor 
applications. For example, the NRC staff has developed proposed changes 
to 10 CFR Part 52 ``Early Site Permits, Standard Design Certifications, 
and Combined Licenses for Nuclear Power Plants'' based on lessons 
learned during the previous design certification reviews and 
discussions with industry representatives on the licensing processes. 
Additionally, the NRC staff has initiated early site permit pre-
application public meetings in the vicinity of expected sites to inform 
the public about the early site permit process and their opportunities 
for participation. It should also be noted that the NRC staff is 
developing options for the efficient review of security aspects of new 
reactor designs and early site permits.
    In order to confirm the safety of new reactor designs and 
technology, the NRC believes that a strong nuclear research program 
should be maintained. The NRC staff is performing a research 
infrastructure assessment for advanced reactors. The assessment 
identifies technology gaps and the means to fill the gaps in the form 
of methods, tools, data and expertise. The Advisory Committee on 
Reactor Safeguards has been briefed and has provided comments and 
recommendations regarding the assessment findings. With the benefit of 
these insights, the Commission expects to undertake measures to 
strengthen our research program for new reactor designs over the coming 
months.

                  NATIONAL ENERGY POLICY IMPLICATIONS

    The Commission has a stake in the national energy policy and has 
identified areas where new legislation would be helpful to eliminate 
artificial restrictions and to reduce the uncertainty in the licensing 
process. These changes would maintain safety while increasing 
flexibility in decision-making. Although those changes would have 
little or no immediate impact on electrical supply, they would help 
establish the context for consideration of nuclear power by the private 
sector without any compromise of public health and safety or protection 
of the environment. Additionally, the Commission has long sought 
additional authority in the nuclear security arena to enhance security 
for these facilities, the need for which has been magnified by the 
events of September 11, 2001.
    Legislation will be needed to extend the Price-Anderson Act. The 
Act, which recently received a one-year extension until December 31, 
2003, establishes a framework that provides assurance that adequate 
funds will be available to compensate the public in the event of a 
nuclear accident and sets out a process for considering nuclear 
liability claims. While our mission is not a promotional one, it is our 
understanding that without the framework provided by the Act, new 
private-sector participation in nuclear power would be discouraged. 
Moreover, the Commission believes it is important to assure that if an 
improbable accident should occur, the means are provided to care for 
the affected members of the public.
    Over the years, the NRC has provided and continues to pursue 
legislative proposals to Congress detailing specific initiatives that 
would further enhance security of NRC-licensed activities. These 
proposals address a wide spectrum of activities. One provision would 
authorize guards at NRC-regulated facilities to use deadly force to 
protect property significant to the common defense and security. This 
would give guards protection from State criminal prosecution for 
actions taken during the performance of their official duties. Another 
provision would allow the Commission, in consultation with the Attorney 
General, to confer upon guards at NRC-designated facilities the 
authority to possess or use weapons that are comparable to those used 
by the Department of Energy's guard forces. Some State laws currently 
preclude private guard forces at NRC-regulated facilities from 
utilizing a wide range of weapons. Another provision would make it a 
Federal crime to bring unauthorized weapons and explosives into NRC-
licensed facilities. The NRC would also make Federal prohibitions on 
sabotage applicable to the operation and construction of certain 
nuclear facilities. The NRC hopes that these and other more recently 
developed legislative initiatives, such as in the area of access 
authorization, will be enacted early in the 108th Congress.
    With the strong Congressional interest in examining energy policy, 
the Commission is optimistic that there will be a legislative vehicle 
for making these changes and thereby for updating the Atomic Energy 
Act. As you know, the Commission has expressed significant concerns 
about several provisions that were contained in H.R. 4 and H.R. 2938 
from the last Congress. We would be pleased to work with the Committee 
in addressing those concerns.

                                SUMMARY

    The Commission has long been, and will continue to be, active in 
ensuring the adequate protection of public health and safety, the 
common defense and security, and the environment in the application of 
nuclear technology for civilian use. The Commission is mindful of the 
need to: (1) reduce unnecessary burdens, so as not to inappropriately 
inhibit any renewed interest in nuclear power; (2) maintain open 
communications with all its stakeholders; and (3) continue to encourage 
its highly qualified staff to strive for increased efficiency and 
effectiveness.
    I look forward to working with the Committee, and I welcome your 
comments and questions.

    Mr. Barton. Thank you, Mr. Chairman.
    We now recognize the distinguished Chairman of the Federal 
Energy Regulatory Commission, Mr. Wood. Do you know how long 
your statement--5 minutes. Okay, we will give you 6 minutes 
also.

                 STATEMENT OF HON. PATRICK WOOD

    Mr. Wood. Thank you, Mr. Chairman and members. Dependable, 
reliable, affordable, competitive wholesale energy markets 
require three key elements. Adequate infrastructure, balanced 
market rules and vigilant market oversight.
    Since I became chairman 18 months ago at the FERC, the 
commission has been aggressively moving forward on each of 
these three elements.
    For example, recently the commission has acted to safeguard 
information about our critical energy infrastructure. We have 
held public conferences across the country to assess 
infrastructure adequacy in the different regions of the 
country.
    We propose to limit the sharing of cash assets between 
regulated and unregulated affiliates in ways that can harm 
utility customers, and, importantly, we formed a new office 
that is focused solely on market oversight and enforcement.
    For wholesale electric energy markets, the commission is 
proposing to adopt a platform of market elements that are 
shared by the best functioning markets in the world.
    We are looking at financial incentives for building new 
transmission or operating transmission independently of 
generation ownership and we are looking at a streamlined 
process to interconnect new generation to the transmission grid 
for that day in the future when supply and demand come closer 
into balance.
    The commission also intends to act soon on the proceedings 
involving the energy crisis of 2000-2001, before Commissioner 
Brownell and I arrived at the commission, which plagued 
California and the west, including the refund proceedings, the 
staff's investigation of evidence of market manipulation in the 
energy markets in the west, efforts to revisit or reform long 
term power contracts, and the alleged withholding of natural 
gas transportation capacity on a major pipeline serving the 
California markets.
    For gas markets itself, the commission has significantly 
expedited its processing of natural gas pipeline construction 
applications, cutting by one-third the environmental and 
sighting and regulatory reviews that existed when I was at FERC 
last in 1992.
    We stand ready to process any applications to bring a 
pipeline of Alaska natural gas into the lower continental 
market. And in addition, the commission has taken steps 
recently to encourage greater development and streamline the 
regulatory approach for liquified natural gas, imported natural 
gas on barges to the United States from other countries or from 
other parts of our country.
    That is a critical part of our long term gas solution. The 
commission has also proposed ways to streamline the processing 
of hydroelectric projects, which are an important part of the 
commission's responsibility under the law.
    Our intent in this process is to craft a more efficient and 
timely process, while balancing the required stakeholder 
interest and improving the quality of decisionmaking.
    In my view, in that light of what the commission is up to, 
to try to accomplish its statutory responsibilities, I would 
envision that there are three critical steps that Congress 
could take.
    The first of which is to clarify FERC's authority to obtain 
the market information necessary for price discovery and 
effective monitoring of gas and electric markets; a lot of 
which is in the bill, a few others are recommended in my 
testimony.
    Second, to increase the civil and criminal penalties for 
violations of both the Federal Power Act and the Natural Gas 
Act. Again, the Power Act issues are dealt with in the 
electricity title.
    And third, to take the steps required to make the Alaska 
Natural Gas Pipeline project a reality in this decade.
    This enormous Alaska Gas project is of national 
significance, and in order to maintain the long term health of 
all the energy markets, it must be built.
    Chairman Barton, your proposed legislation would take a 
number of steps in these various areas, as well as a number of 
others that are really outside the FERC's issues, and I think 
that they will collectively provide strong support for a 
continued evolution of well overseen competitive wholesale 
energy markets to meet the Nation's future electric needs and 
natural gas needs as well.
    [The prepared statement of Hon. Patrick Wood follows:]

   Prepared Statement of Hon. Pat Wood III, Chairman, Federal Energy 
                         Regulatory Commission

                             I. BACKGROUND

    I appreciate the opportunity to testify on the current status of 
energy markets under the jurisdiction of the Federal Energy Regulatory 
Commission (FERC or the Commission). Today, I would like to focus 
particularly on natural gas data reporting, the Alaskan Natural Gas 
Transportation System, wholesale electricity markets and hydroelectric 
licensing.
    Dependable, affordable, competitive wholesale energy markets 
require three key elements--adequate infrastructure, balanced market 
rules and vigilant oversight. Weakness in any one element can harm 
markets, American energy customers, and ultimately the entire U.S. 
economy. The Commission is pursuing a number of initiatives to 
establish the framework needed to spur investment in much-needed 
infrastructure, to support the most efficient and competitive wholesale 
marketplace, and to adequately monitor the marketplace so customers 
continue to derive benefits from energy markets. Achieving these goals 
restores confidence to investors and customers by promoting greater 
transparency and regulatory certainty.
    This FERC's commitment to prevent future market abuses, and to 
remedy past ones, is now a firmly established part of our agency's 
mission, and we will continue to strengthen our present coordination 
with other federal agencies to ensure that we effectively regulate 
energy industries so that customers and investors are fully protected.
    Additionally, the Commission is moving aggressively to take steps 
within its authority to remedy problems in the California and Western 
energy markets. The Commission has learned many lessons from the 
Western energy crisis in 2000-01, which caused unacceptable harm to 
ratepayers and demonstrated the consequences of poorly designed 
wholesale markets. We also have learned lessons from successful 
wholesale market reforms in the East. The Commission remains convinced 
that customers are best served by moving forward to complete the 
transition of the wholesale power business to competition. We are 
drawing from markets that work well to develop a national platform for 
competitive wholesale energy markets.
    While the Commission is taking steps within its authority to 
encourage needed electric and natural gas infrastructure and to bring 
stability and regulatory certainty to energy markets, there are several 
actions that the Congress could take to help us do our job more 
effectively and to ensure adequate protection of energy customers. In 
my view, the three most important steps that Congress can take are 
these: first, clarify FERC's authority to obtain market information 
necessary for price discovery and effective monitoring of natural gas 
and electric markets; second, increase civil and criminal penalties for 
violations of the Federal Power Act (FPA) and Natural Gas Act (NGA) or 
our rules and regulations thereunder; and, third, take the steps 
required to make the Alaska Natural Gas Pipeline project a reality in 
this decade. With respect to the Alaska Natural Gas Pipeline project, 
in particular, I would observe that this enormous project is of such 
national significance that Congress may want to consider focused 
financial support in any legislation. Chairman Barton's proposed 
legislation would take a number of steps in these areas as well as 
provide support for the continued evolution of strong competitive 
wholesale energy markets to meet our future energy needs.

              II. INITIATIVES IN ENERGY MARKETS GENERALLY

    While the natural gas and electricity industries differ in some 
ways, they share many issues. For example, both raise the issue of how 
we can safeguard our energy infrastructure against terrorists. Both 
also raise issues on the need for dependable, transparent accounting 
and the separation of utility operations financed by captive customers 
from unregulated ventures. On these issues and others, the Commission 
has taken a cross-industry approach to protect the interests of our 
Nation's energy customers.
    Critical Energy Infrastructure Information (CEII)--On February 21, 
2003, the Commission issued a final rule to protect the American public 
by safeguarding certain information about the Nation's energy 
infrastructure. Within a month of the terrorist attacks of September 
11, 2001, the Commission began a public proceeding to examine its CEII 
policies. The final rule defines CEII and establishes a timely 
procedure for the public to request and obtain such information, which 
encompasses only a small portion of the information available from the 
Commission.
    Regional Infrastructure Conferences--In the past 20 months, the 
Commission held conferences to address infrastructure concerns across 
the country--California, the Northeast, Southeast, Midwest and West. 
The aim of these conferences was 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 featured informative 
presentations on the state of each region's energy infrastructure 
(electric power plants, fuel sources, hydroelectric facilities, gas 
pipelines, electric transmission system, and other relevant 
information), demographic and energy load forecasts, and were attended 
by state energy regulators as well as industry members and concerned 
citizens.
    Proposed Rules on Regulation of Cash Management Practices--In 
August 2002, the Commission proposed requirements for participation by 
public utilities and natural gas pipelines in cash management programs 
in order to prevent the abuse of such programs. Such abuse could occur 
where cash from Commission-regulated utility subsidiaries is 
transferred to the parent holding company and then used to finance 
unregulated activities by non-utility subsidiaries. The Commission has 
received comments on this proposal and I expect that we will act on 
this matter very soon.
    Proposed Rulemaking on Affiliate Standards of Conduct--In September 
2001, the Commission proposed to revise its restrictions on the 
relationship between regulated transmission providers and their energy 
affiliates. The Commission proposed, for example, to broaden the 
definition of an affiliate to include newer types of affiliates, 
including those operating trading platforms. The proposed standards of 
conduct would rely on three principles to prevent transmission market 
power from being exercised in commodity markets: (1) separating 
employees engaged in transmission services from those engaged in 
commodity marketing services; (2) ensuring that all transmission 
customers, affiliated and non-affiliated, are treated on a non-
discriminatory basis; and (3) prohibiting a transmission provider from 
granting its energy affiliate an undue preference over non-affiliates 
by sharing confidential or transmission information. The Commission 
also proposed to eliminate the differences between the Commission's 
rules for natural gas companies and electric utilities. The Commission 
intends to adopt final rules soon.
    Final Rule on Accounting--In October 2002, the Commission issued a 
final rule on accounting and reporting of financial instruments, 
comprehensive income, derivatives and hedging activities. The final 
rule directs public utilities, licensees, natural gas companies and oil 
pipelines to report changes in the fair value of certain investment 
securities, derivatives and hedging activities. The new rules will 
enhance the transparency of financial information and facilitate a 
better understanding of the nature and extent to which derivatives and 
hedging activities are used by regulated companies and the impact these 
transactions may have on the companies' financial condition.
    Industry Financial Condition Conferences--In January and February 
the Commission hosted two conferences on financial conditions in the 
energy markets. At these conferences, a number of factors were cited as 
causing the current financial problems. FERC is continuing to explore 
solutions to the financial conditions in the energy sector.
    Office of Market Oversight and Investigations (OMOI)--In order to 
better understand natural gas, oil and power markets and to swiftly 
remedy market rule violations and abuse of market power, the Commission 
created the new Office of Market Oversight and Investigations (OMOI). 
In August 2002, OMOI became a formal, functioning office within the 
Commission, reporting directly to the Commissioners. OMOI serves as an 
early warning system to alert the Commission when market problems 
develop, and allows the Commission to analyze and address any problems 
more quickly. OMOI has begun an aggressive program of outreach to a 
wide variety of entities including: other federal, state and provincial 
regulatory agencies, state consumer advocates, industry participants, 
academic institutions and think tanks, financial institutions (such as 
ratings agencies), and Market Monitoring Units (MMUs) at Regional 
Transmission Organizations (RTOs) and Independent System Operators.

             III. INITIATIVES IN THE ELECTRIC ENERGY MARKET

    The Commission has begun or continued work on numerous efforts to 
improve the performance, transparency and oversight of the wholesale 
electricity markets. These efforts, aimed at ensuring that electric 
energy customers receive adequate supplies at reasonable prices, 
include the following.
    Proposed Rulemaking on Standard Market Design--On July 31, 2002, 
the Commission issued proposed rules on a standard market design for 
wholesale electric energy markets, including a comprehensive plan for 
mitigating market power and market manipulation. The proposed rules are 
intended to provide certainty to all market participants, encourage new 
infrastructure investment, promote fair competition and prevent a 
repeat of the mistakes made previously in California. The proposed 
rules would remedy remaining undue discrimination in the use of the 
Nation's interstate transmission grid and also provide a solid platform 
to ensure that wholesale markets produce just and reasonable rates for 
customers.
    Experience in the United States and abroad has shown that 
successful power markets have certain core features in common. These 
include an independent grid operator; a single transmission tariff; a 
long-term bilateral contract market; an available short-term spot 
market with transparent prices; regional transmission planning; 
locational price signals; transmission rights; and, appropriate 
mitigation rules to protect against the exercise of market power.
    This platform of market features works in hydro-based systems like 
Scandinavia, South America and New Zealand. It works in areas where 
generation may be distant from population centers as well as areas with 
highly networked transmission grids. It works with thermal- and 
stability-limited systems. It respects treaties, contracts, and various 
forms of state regulation. It is essentially what has already been 
developed in both the more mature power markets in the Northeast, mid-
Atlantic, Midwest and Texas, as well as in those markets developing in 
the West and South.
    Importantly, this platform leaves plenty of room for regional 
variation. In our RTO dockets, we concluded that certain functions are 
needed to make wholesale power markets work, but they need not be done 
the same in every part of the country. These functions include, for 
example, transmission planning, resource adequacy, mitigation 
techniques, and RTO governance.
    A platform based on these core features includes a strong customer 
protection plan. It checks generation market power through mitigated 
prices when necessary. It solves transmission market power through 
structural separation between transmission owners and generators. It 
fully protects existing wholesale contracts and native load service. On 
the infrastructure side, it encourages and eases entry of new 
generation into the market, facilitates new transmission construction, 
and promotes demand-side bidding as a check on supplier market power.
    The Commission has engaged in extensive public outreach both prior 
to the issuance of the proposal and since that time. We continue to 
listen to all constituencies in developing final rules. The Commission 
anticipates issuing, and obtaining public comment on, a white paper 
reflecting our reaction to the over 1,000 filed comments and 300+ 
meetings we have held since last August. Due to their necessary 
breadth, the proposed rules have received much attention. Getting these 
rules right, and thus increasing the benefits to customers from 
competitive bulk power markets, is a priority for the Commission.
    Proposed Policy Statement on Rate Incentives for Transmission 
Independence and Expansion--On January 15, 2003, the Commission issued 
a proposed policy statement to allow a higher return on equity when a 
utility participates in an RTO, sells its RTO-operated transmission 
asset to an independent company, or pursues additional measures that 
promote efficient operation and expansion of the transmission grid. 
Under the proposal, a utility's return on equity could be increased by 
50 basis points for joining a Commission-approved RTO, 150 basis points 
for selling RTO-operated transmission assets to an independent company 
and 100 basis points for investing in new transmission facilities found 
appropriate pursuant to an RTO planning process. This proposed policy 
would further the Commission's goal of achieving a robust 
infrastructure for the future and bringing lower prices and cost 
savings to all customers. The proposed policy would help encourage 
needed investment in transmission infrastructure and improve grid 
performance. Comments are due early this month. This policy supports, 
and is consistent with, the transmission tax incentives and other 
language in the proposed legislation.
    Information Filing Requirements--Improving market transparency 
requires detailed reporting on transactions. On April 25, 2002, the 
Commission issued a final rule (Order No. 2001) to enhance public 
access to information on public utility services and sales by requiring 
public utilities to electronically file quarterly reports. This final 
rule is intended to equalize reporting requirements for traditional 
utilities and power marketers, making information more easily available 
to the public and helping to streamline compliance with the filing 
requirements of FPA section 205. The data contained in the new Electric 
Quarterly Report will provide greater price transparency, promote 
competition, enhance confidence in the fairness of the markets and 
provide a better means to detect and discourage discriminatory 
practices.
    Proposed Rulemakings on Standardized Generator Interconnections--
The Commission recently has undertaken two rulemakings to standardize 
agreements and procedures for generators seeking to interconnect and 
participate in the wholesale market. The first applies to large 
generators (i.e., those producing over 20 megawatts) and was the 
subject of proposed rules issued April 24, 2002. The second applies to 
small generators (i.e., those producing no more than 20 megawatts), and 
was the subject of an advanced notice of proposed rulemaking issued 
August 16, 2002. Each rulemaking will produce a set of standard 
generator interconnection procedures, which describe the procedural 
steps for studying and securing a requested interconnection, and a 
standard generator interconnection agreement for use by interconnection 
providers and customers. The Commission expects that these rulemakings 
will help ensure that reliability needs will be met, provide greater 
certainty to generators wishing to participate in the wholesale market, 
and, importantly, shorten the time needed to get a project brought on 
line.
    Policy on Conditioning Public Utilities' Issuances of Securities--
To prevent public utilities from borrowing substantial amounts of money 
and diverting the proceeds to finance non-utility businesses, the 
Commission issued an order on February 21, 2003, announcing a policy 
placing conditions on all new issuances of secured and unsecured debt 
authorized by the Commission under FPA section 204. These conditions 
state, for example, that a public utility seeking authorization to 
issue debt secured by utility assets must use the proceeds of the debt 
for only utility purposes. Similarly, if the assets securing such debt 
are divested or ``spun off,'' the debt must ``follow'' the asset and be 
divested or ``spun off'' as well.
    At its core, the policy ensures that any encumbrance of utility 
assets is used for utility purposes. This policy should ensure that 
future issuances of debt are compatible with the public interest and 
will not impair a public utility's ability to perform its duties and 
provide appropriate ratepayer protection. These concerns also lead me 
to believe that FERC should have authority under the Natural Gas Act 
similar to FPA section 204.

               IV. PENDING CALIFORNIA-RELATED PROCEEDINGS

    In addition to the initiatives described above, there are several 
proceedings related to the Western energy crisis in 2000-01 currently 
pending before the Commission. These proceedings are discussed below.
    On February 13, 2002, in Docket No. PA02-2-000, the Commission 
formally announced a fact-finding investigation into whether any entity 
had manipulated electric energy or natural gas prices in the West since 
January 1, 2000. In conducting this investigation, Commission staff has 
coordinated closely with staff from the Department of Justice, the 
Securities and Exchange Commission, the Commodity Futures Trading 
Commission, and the Department of Labor. On August 13, 2002, Commission 
staff released an initial report of its investigation. Based on the 
staff report, the Commission initiated formal enforcement proceedings 
under FPA Section 206 regarding possible misconduct by a number of 
utilities. These proceedings are pending before administrative law 
judges.
    A public written report dealing with all aspects of this staff 
investigation is on schedule to be released later this month. The 
Commission will consider all relevant evidence from this investigation 
once we receive the final report. The Commission also has set up a 
process which has allowed the parties in the California proceedings to 
conduct discovery on market manipulation in the same time period. 
Parties submitted additional evidence and proposed new and/or modified 
findings of fact on March 3, 2003. Reply submissions are due on March 
20, 2003.
    With respect to the California refund proceeding for calculating 
the amount of overcharges from October 2000 through June 2001, the 
Administrative Law Judge (ALJ) issued his proposed findings in December 
2002. The Commission is currently reviewing the ALJ's proposed 
findings.
    The Commission is also currently reviewing the recommendations and 
proposed findings issued by an ALJ regarding whether rates charged for 
spot market bilateral sales in the Pacific Northwest for the period 
December 2000 through June 2001 were unjust and unreasonable. Also, in 
recent weeks, the Commission has received several decisions by ALJs on 
complaints seeking to modify long-term contracts for the sale of 
wholesale power in California or the West. Finally, the Commission is 
reviewing an ALJ's decision on whether El Paso Natural Gas Company and 
its affiliates exercised market power in order to drive up natural gas 
prices at the California border in 2000-01.
    The Commission will act on all of these matters soon. Then, 
customers can receive all appropriate refunds, utilities can have 
regulatory certainty and all of us can focus on the important goal of 
preventing this from ever happening again.

                V. INITIATIVES IN THE NATURAL GAS MARKET

    As with the electric energy markets, the Commission has launched 
numerous initiatives designed to improve the performance, transparency 
and oversight of the natural gas markets. These initiatives include the 
following.
    Liquified Natural Gas (LNG) Facilities--To help meet the Nation's 
increasing demand for natural gas, the Commission in December 2002 
charted a new course for the treatment of LNG facilities. The 
Commission allowed the Hackberry LNG facility in Lake Charles, 
Louisiana, to provide terminalling services without a FERC tariff and 
rate schedules, similar to the approach used for natural gas production 
facilities. The Commission retains authority over all siting and 
environmental aspects of onshore LNG facilities. We anticipate that the 
new policy will stimulate the development of new LNG terminals by 
accommodating various business models and will ultimately result in 
increased gas supplies in the United States. Since issuing the 
Hackberry decision, the Commission has been in various stages of 
discussions and application processing with about ten companies 
pursuing some 20 different LNG import terminal locations with a total 
potential daily send-out of about 12 Bcf. This amount is at least twice 
the projected capacity of an Alaskan gas pipeline.
    Emergency Reconstruction of Pipelines--The Commission has proposed 
rules on emergency reconstruction of interstate natural gas facilities 
when immediate action is required to restore natural gas service due to 
a sudden, unanticipated natural event or a deliberate effort to disrupt 
natural gas service. The Commission is currently reviewing comments 
received in February 2003.
    Reporting on Natural Gas Data--As part of its fact-finding 
investigation on electric energy and natural gas prices in the West 
since January 1, 2000, Commission staff gathered information that 
raised doubts about the accuracy of information reported in many 
wholesale natural gas price indices. Current industry practice is for 
the trade press to gather price information by polling traders. The 
markets cannot function efficiently without accurate wholesale price 
information. Although the industry and the trade press are now taking 
steps to improve the dependability of the natural gas price indices, it 
is unclear whether these steps are sufficient to restore customer, 
investor and counterparty confidence.
    Quicker Processing of Proposals to Build or Expand Pipelines--The 
Commission has improved the efficiency of its pipeline certificate 
process, and we have a number of initiatives underway to achieve even 
greater streamlining. During the period beginning in January 2001, the 
Commission authorized just under 16 Billion cubic feet per day (Bcfd) 
of new pipeline capacity, raising total daily deliverability to 131 
Bcfd. Of these additions, over 50 percent is earmarked for electric 
generation, with the greatest growth in that sector occurring in the 
Southeast and West. On average, these certificate applications took 
about 200 days to process, a marked improvement over the average turn-
around time of nearly 300 days some years ago.
    While our current inventory of pending projects is relatively low 
compared to the recent past, we anticipate increasing activity in the 
future. In preparation, we are pursuing several streamlining 
initiatives that combine early identification and resolution of issues, 
concurrent consideration by other agencies and increased opportunities 
for stakeholder involvement. One such initiative is the National 
Environmental Policy Act (NEPA) Pre-Filing Process, which entails a 
more interactive NEPA process well in advance of the application being 
filed, with earlier, more direct involvement by FERC staff, other 
agencies and landowners, resulting in an overall time savings to obtain 
a certificate.
    Also, in accordance with the President's National Energy Policy, 
which among other things calls for actions to expedite energy-related 
projects, the Commission and nine other federal agencies (the 
Departments of the Army, Agriculture, Commerce, Energy, the Interior, 
Transportation, the Environmental Protection Agency, the Advisory 
Council on Historic Preservation, and the Council on Environmental 
Quality) in August 2002 signed an interagency agreement, providing that 
the Commission will be the lead agency for environmental review of 
interstate natural gas pipelines under the Natural Gas Act, that there 
will be early interagency communication to determine schedules, 
identify issues, and share information, that alternative routes and 
mitigation measures will be developed jointly, and that necessary 
permits will be issued jointly. The agencies completed an 
implementation plan for the agreement in November 2002, and have 
established a working group, chaired by the Commission, to oversee 
implementation.

           VI. INITIATIVES REGARDING HYDROELECTRIC LICENSING

    The licensing of non-federal hydroelectric projects under Part I of 
the FPA is the Commission's original mission, and still a vital aspect 
of the Commission's efforts to ensure workable, competitive energy 
markets. My fellow Commissioners and I are well aware of the need to 
ensure that our licensing processes are in tune with the need of 
today's markets for regulatory certainty and more efficient 
decisionmaking on this important part of the Nation's energy mix. In 
keeping with these considerations, the Commission on February 20, 2003, 
issued a notice of proposed rulemaking presenting a comprehensive plan 
that will result in more efficient and timely processing of 
hydroelectric licenses while also balancing stakeholder interests and 
improving the quality of decisionmaking.
    The proposal, referred to as the ``integrated'' process, would 
become the Commission's primary licensing process, with the existing 
alternative licensing process (ALP) and the traditional process 
remaining as options for applicants in certain situations.
    The highlights of the proposed rule are:

 increased assistance by Commission staff to potential 
        applicants and stakeholders during the development of license 
        applications;
 greater coordination among the Commission and federal and 
        state agencies with mandatory conditioning authority;
 carrying out the Commission's environmental scoping process in 
        conjunction with the applicant's pre-filing consultation;
 increased public participation in the pre-filing consultation 
        process;
 establishing schedules and deadlines for all participants, 
        including Commission staff;
 development of a Commission-approved study plan by the 
        applicant, with informal resolution to study disagreements, 
        followed by mandatory, binding study dispute resolution, if 
        necessary;
 elimination of the need for post-application study requests; 
        and
 creation of a new Commission Tribal Liaison, to be the point 
        of contact for Native Americans' concerns regardless of the 
        proceeding or issue.
    In addition, the traditional licensing process would be modified by 
increasing public participation, and by establishing mandatory, binding 
dispute resolution for necessary studies.
    Before issuing the proposed rule, Commission staff held regional 
forums around the country, as well as drafting sessions in Washington, 
D.C., to discuss the licensing process with stakeholders and to 
collaboratively draft regulatory language. We plan to obtain further 
public input through regional workshops to be held around the country 
in March and April 2003 to discuss stakeholder reaction to the proposed 
rule. A four-day drafting session is scheduled in April in Washington 
to draft language for the final rule.

                 VII. COMMENTS ON THE DRAFT LEGISLATION

    The draft legislation addresses a wide range of energy issues 
confronting our Nation. I will focus on the issues affecting FERC's 
responsibilities. On these issues, the draft legislation takes a good 
approach. I would suggest a few modifications and some additional 
provisions, as described below. If the Committee wishes, I would be 
happy to provide, in writing after the hearing, a detailed technical 
analysis of the legislative language.
    Section 7081, Market Transparency Rules--This section would require 
FERC to issue rules establishing an electronic information system, 
accessible by the public, specifying the availability and price of 
wholesale power and transmission services. I support this section 
because more transparency is needed in energy markets and customers 
should have access to the broadest range of useful market information.
    I note that this section refers to ``markets subject to the 
Commission's jurisdiction,'' but does not explicitly mention natural 
gas markets. I suggest modifying this section to clarify the 
Commission's authority to obtain information on natural gas prices 
(since these are an important factor in wholesale power prices), or 
that a separate section be added to the legislation clarifying FERC's 
authority under the NGA to obtain such information for purposes of 
price discovery.
    Section 7084, Enforcement--This section would significantly 
increase the penalties available under the FPA. I have long supported 
increasing these penalties, and believe the increases proposed here are 
appropriate. I recommend including similar penalties under the NGA.
    Section 7091, Refund Effective Date--This section would eliminate 
the 60-day wait at the beginning of the refund period under the FPA, so 
that refunds would be allowed from the date a complaint is filed, 
instead of only 60 days later. I support this change, and also 
recommend including a similar provision in the NGA.
    Section 7101, Mergers and Other Dispositions--This section would 
repeal FPA section 203, which requires Commission approval of most 
mergers and other dispositions involving public utilities. In light of 
the proposed PUHCA repeal, repealing section 203 without including the 
public interest review standard in another agency's specific duties may 
not be good policy. The Commission deals with the electric industry on 
a daily basis and much more closely than do the federal antitrust 
agencies. Thus, the Commission is better able to identify and remedy 
any harmful effects of mergers and other dispositions and to ensure 
that customers' rates are not adversely affected. Our efforts do not 
duplicate those actually being performed today by other merger 
reviewing agencies. The Commission has used its section 203 authority 
as intended by Congress, and appropriately, to ensure that mergers and 
other dispositions are consistent with the public interest.
    Sections 2001-14, Alaska Natural Gas Pipeline--Over the last 
several years, there has been much renewed interest, in both the 
private and public sectors, in the development of the transportation 
infrastructure needed to bring Alaskan natural gas, including supplies 
from Alaska's North Slope, to markets in the Lower 48 states. The 
importance of Alaskan natural gas supplies is obvious; indeed, it is 
impossible to envision the 30-35 Tcf annual domestic market that the 
Department of Energy has estimated may exist by 2020 without Alaskan 
natural gas. Although there are currently no applications before the 
Commission regarding an Alaska natural gas transportation project, the 
need for Alaskan natural gas in the Lower 48 market is only going to 
increase.
    We will make every effort to process and act upon any applications 
for Alaska gas transportation projects as efficiently as possible, 
working with the applicants, other federal and state agencies, Native 
Americans, shippers, end users, and other interested parties, to ensure 
timely, reasonable decisions. Over the past two years, the Commission 
staff has participated in the Interagency Alaska Natural Gas Task 
Force, along with representatives of the Departments of Energy, State, 
Interior, and Transportation, in order to prepare, to the extent 
possible, for streamlined government action on an application for an 
Alaska gas pipeline.
    I strongly support the goals of this legislation, which provides a 
statutory framework for the expedited approval, construction, and 
initial operation of an Alaska natural gas transportation project. The 
bill helpfully resolves some significant questions with respect to 
potential projects. There are some matters that may benefit from 
additional clarification, such as the extent to which the Commission 
would need to interact with the proposed Federal Coordinator as it 
reviews and acts on any certificate application. I would be happy to 
provide the Committee with more detailed comments on this and other 
provisions of this Subtitle.
    I can assure you that any application ultimately filed with the 
Commission, will be reviewed thoroughly, promptly, and fairly, with the 
public interest firmly in mind, and with a clear understanding of how 
important Alaska natural gas is to our Nation's long-term energy 
security. With respect to the Alaska Natural Gas Pipeline project, in 
particular, I would observe that this enormous project is of such 
national significance that Congress may want to consider focused 
financial support in any legislation.

                            VIII. CONCLUSION

    Events of the past three years have demonstrated the critical role 
that energy plays in our Nation's economic well-being. I appreciate the 
opportunity to contribute to your debate on the best ways to ensure 
that this crucial industry continues to support the many demands placed 
on it by our citizens, and I will be happy to answer any questions you 
may have.

    Mr. Barton. Thank the chairman. We have inadvertently 
seated Commissioner Brownell and Commissioner Massey out of 
order. Mr. Massey is actually senior to Mrs. Brownell.
    So we are going to give Mr. Massey an opportunity to speak 
first, if he wishes to. Would you like to speak before 
Commissioner Brownell?
    Mr. Massey. However you would like to handle it, Mr. 
Chairman.
    Mr. Barton. Well, you are senior, and this was not 
intentional, we just screwed up, to be honest about it and we 
want--since you are the senior member, we are going to 
recognize you for 5 minutes and then we will go to Mrs. 
Brownell to be the clean up hitter.

               STATEMENT OF HON. WILLIAM L. MASSEY

    Mr. Massey. Thank you, Mr. Chairman and members of the 
subcommittee for this opportunity to testify about the 
important energy policy questions that face both this 
subcommittee and the Federal Energy Regulatory Commission.
    There are high prices in energy markets as the much colder 
than normal winter of 2003, lingers, and demand for natural gas 
remains high.
    Natural gas prices in both the production and market areas 
are sharply higher than normal, and unusually volatile. The 
commission must take a hard look at the cause of these dramatic 
price spikes.
    Higher natural gas prices have caused a sharp spike in 
electricity prices as well in a number of markets. These events 
are rippling through the U.S. economy, impacting industrial 
users, businesses and residential consumers.
    In addition, the western energy crisis, coupled with the 
collapse of Enron, have left their wake within the energy 
industry.
    Investor and lender confidence has been shaken by these 
events by a declining national economy, by indictments of 
energy traders, by accounting irregularities, downgrades by 
rating agencies and continuing investigations by the FERC, the 
CFTC, SEC and the Justice Department.
    These investigations are important and necessary and must 
leave no stone unturned. Refunds must be made for customers 
that paid unjust and unreasonable prices.
    And those found to have manipulated the market, should be 
punished. Nevertheless, all of these events have severely 
eroded capital availability for critical infrastructure 
projects, and I am concerned about that.
    In these times it is particularly important for the 
commission to promote clear market rules and structure, 
reasonable and stable regulation of energy transmission and 
comprehensive market monitoring.
    The commission must conduct thorough and forceful 
investigations and oversight to ferret out abuses and our 
remedies must be tough-minded and appropriate.
    In his testimony, Chairman Wood provides a thorough outline 
of the initiatives underway at the commission that are aimed at 
reforming electricity and natural gas markets to ensure just 
and reasonable prices and customer benefits.
    I share his vision of well-functioning markets with 
regulators playing an important role in determining market 
structure, prohibiting discrimination, enforcing transparent 
market rules and engaging in vigilant oversight and monitoring.
    In the electricity title of the draft I agree with the call 
to form regional transmission organizations. The proposal to 
provide the commission with back up authority for transmission 
sighting is an excellent idea.
    I support the authorization to develop an electronic 
information system regarding price and availability of services 
in the market, and the prohibition of round trip trading.
    I urge you to extend these provisions to natural gas 
markets as well. Increasing the level of civil penalties the 
commission may impose is a welcome addition to the tools we 
have to police markets.
    I recommend that the commission be given direct authority 
to mitigate market power in jurisdictional markets. Removing 
the 60 day delay and the refund effective date for complaints 
provides additional customer protection and I support it.
    I cannot support repealing the commission's merger review 
authority under the Federal Power Act. Recent gas price 
volatility is of great concern to me.
    I am deeply concerned about the impact of these high prices 
on customers. The commission would be better able to evaluate 
natural gas price spikes if there were more reliable price 
transparency.
    I would amend section 7081 to extend its information 
availability provisions to natural gas markets. Likewise, I 
would amend the proposed section 7084, to provide the 
commission with authority to impose civil penalties for 
violations of the Natural Gas Act, an authority the commission 
now lacks.
    I fully support measures to facilitate natural gas supply 
projects, such as our light-handed regulation of LNG and 
efforts to streamline processing of natural gas infrastructure 
projects.
    Thank you, Mr. Chairman, I look forward to answering any 
questions.
    [The prepared statement of Hon. William L. Massey follows:]

  Prepared Statement of Hon. William L. Massey, Commissioner, Federal 
                      Energy Regulatory Commission

    Mr. Chairman and members of the Subcommittee on Energy and Air 
Quality, thank you for the opportunity to provide testimony about the 
important energy policy issues facing both this subcommittee and the 
Federal Energy Regulatory Commission.
    There are high prices in energy markets as the much colder than 
normal winter of 2003 lingers and demand for natural gas remains high. 
Natural gas prices both in the production and market areas are sharply 
higher than normal and unusually volatile. Members of Congress have 
asked the Commission to investigate the cause of these dramatic price 
spikes. Higher natural gas prices have caused a sharp spike in 
electricity prices as well in a number of markets. These events are 
rippling through the U.S. economy, impacting industrial users, 
businesses and residential consumers.
    In addition, the western energy crisis, coupled with the collapse 
of Enron, have left their wake within the energy industry. Investor and 
lender confidence has been shaken by these events, by a declining 
national economy, indictments of energy traders, accounting 
irregularities, downgrades by rating agencies, and continuing 
investigations by the FERC, CFTC, SEC and Justice Department. These 
investigations are important and necessary, and must leave no stone 
unturned. Nevertheless, all of these events have an impact on investor 
and lender confidence and have severely eroded capital availability for 
the energy industry.
    In these times, it is particularly important for the Commission to 
promote clear market rules and structure, reasonable and stable 
regulation of energy transmission, and comprehensive market monitoring. 
The Commission must conduct thorough and forceful investigations and 
oversight to ferret out abuses.
    In his testimony, Chairman Wood provides a thorough outline of the 
initiatives underway at the Commission that are aimed at reforming 
electricity and natural gas markets to ensure just and reasonable 
prices and customer benefits. I would like to applaud Chairman Wood's 
leadership. I share his vision of well functioning markets with 
regulators playing an important role in determining market structure, 
prohibiting discrimination, enforcing transparent market rules, and 
engaging in vigilant oversight and monitoring. In the interest of 
brevity, I would like to associate myself with his excellent testimony.
    I will comment on particular issues raised by Chairman Barton's 
draft legislation and by the subcommittee in its letter of invitation 
to testify.

                         I. ELECTRICITY ISSUES

    The development of competitive efficient wholesale electricity 
markets is a highly desirable goal. This is primarily a federal 
responsibility, and achieving this goal will benefit our nation's 
consumers and economy. There are, however, a number of barriers to the 
creation of robust markets, including grid operation influenced by 
merchant interests and a patchwork of markets and rules governing the 
grid. Almost a third of the grid is not subject directly to the FERC's 
open access and nondiscrimination requirements. Necessary grid 
expansion in not keeping pace with the requirements of robust wholesale 
markets. This means that cheaper power cannot always reach the 
customers who want it. The lack of uniformity in generation 
interconnection standards among regions and utilities poses unnecessary 
barriers to entry by generators that could provide cheaper power for 
consumers. Demand responsiveness could act as a brake on price run ups, 
yet is generally absent from electricity markets. Vibrant markets 
require a reliable trading platform, yet there are no legally 
enforceable reliability standards.
    Ensuring just and reasonable prices must be addressed far 
differently as we move to competitive markets than under the monopoly 
structure. It is more complex now. The basic nature of our regulatory 
tasks is changing. We are moving away from reviewing cost-based prices 
charged by individual sellers and toward ensuring good performance by 
markets.

Transmission infrastructure improvement rulemaking
    Section 7011 of the discussion draft submitted by Chairman Barton 
requires the Commission to adopt rules providing for incentive-based 
and performance-based transmission rates. I support such a policy 
direction. The Commission has already taken a step in this direction 
with our proposed policy on incentive transmission rates that provides 
enhanced returns on equity for transmission assets that are operated 
independently from market participants and for new infrastructure 
investment. Transmission will remain a monopoly service in restructured 
markets and will need to be regulated, but a performance-based rate 
approach, while presenting its own significant challenges, shows 
promise as a way to reward efficient behavior while protecting 
customers.
    Section 7011 also requires the Commission to adopt rules allowing 
participant funding for new transmission investment if it is requested 
by an RTO or other Commission-approved transmission organization. I 
support this policy direction. I have strongly supported the 
participant funding provision in the Commission's Standard Market 
Design proposal. It allows participant funding where there is a 
locational pricing regime in place and the grid is managed by an entity 
that is independent of market participants.

Transmission Siting
    Although the Commission is responsible for well functioning 
electricity markets, it has no authority to site the electric 
transmission facilities that are necessary for such markets to thrive 
and produce consumer benefits. Existing law leaves siting entirely to 
state and local authorities. This contrasts sharply with section 7 of 
the Natural Gas Act, which authorizes the Commission to site and grant 
eminent domain for the construction of interstate gas pipeline 
facilities. Exercising that authority, the Commission balances local 
concerns with the need for new pipeline capacity to support evolving 
markets.
    The transmission grid is the critical superhighway for electricity 
commerce, but it is becoming congested because of the new uses for 
which it was not designed. Transmission expansion has not kept pace 
with changes in the interstate electricity marketplace. Adequate grid 
facilities are essential to robust wholesale power markets. I am 
confident that transmission will be built in sufficient quantities if 
siting authority is rationalized, appropriate price signals and 
independent regional grid operation are put in place, and adequate cost 
recovery mechanisms and risk-based rates of return are allowed.
    Proposed section 7012 provides the Commission with backstop siting 
authority to ensure that the necessary transmission facilities are 
built in areas designated as an ``interstate congestion area'' by the 
Secretary of Energy, and grants authority for states to form interstate 
compacts for regional siting coordination. This provision appears to 
provide appropriate respect for the siting prerogatives of the states 
and recognizes the regional nature of today's electricity markets. The 
provision has my support.

One Set of Transmission Rules
    All interstate transmission should be provided under one set of 
open access rules. That means subjecting the transmission facilities of 
municipal electric agencies, rural cooperatives, the Tennessee Valley 
Authority, and the Power Marketing Administrations to the Commission's 
open access rules. These entities control a substantial share of the 
nation's electricity transmission grid. Their current non-
jurisdictional status has resulted in a patchwork of rules that may 
hinder seamless electricity markets. Markets require an open non-
discriminatory transmission network in order to flourish.
    Section 7021 of the discussion draft would allow the Commission to 
require open access service under a comparability standard by entities 
that are currently not covered under our open access rules. I support 
the thrust of this provision.

Regional Transmission Organizations
    The Commission has made substantial progress in forming the 
Regional Transmission Organizations that are critical to the 
competitive market place. I firmly believe that large RTOs consistent 
with FERC's vision in Order No. 2000 are absolutely essential for the 
smooth functioning of electricity markets. RTOs will eliminate the 
conflicting incentives vertically integrated firms still have in 
providing access. RTOs will streamline interconnection standards and 
help get new generation into the market. RTOs will improve transmission 
pricing, regional planning, congestion management, and produce 
consistent market rules. We know for a fact that resources will trade 
into the market that is most favorable to them. Trade should be based 
on true economics, not the idiosyncracies of differing market rules 
across the region.
    I interpret section 7022 of the discussion draft as a clear 
declaration by the Congress that these institutions are in the public 
interest and should be formed. It is my hope that such a clear message 
from Congress will speed the formation of these critical institutions 
in all regions of the nation. But I believe even stronger action may be 
appropriate. I recommend that the Congress clarify existing law to 
authorize the Commission to require the formation of RTOs and to shape 
their configuration. Well structured Regional Transmission 
Organizations are necessary platforms on which to build efficient 
electricity markets. The full benefits of RTOs to the marketplace will 
not be realized, however, if they do not form in a timely manner, if 
they are not truly independent of merchant interests, or if they are 
not shaped to capture market efficiencies and reliability benefits.

Reliability
    Section 7031 of the discussion draft would provide for an Electric 
Reliability Organization that is independent of market participants, to 
develop and enforce mandatory reliability standards subject to 
Commission oversight. I support this provision. We need mandatory 
reliability standards. Vibrant markets must be based upon a reliable 
trading platform. Yet, under existing law there are no legally 
enforceable reliability standards. The North American Electric 
Reliability Council (NERC) does an excellent job preserving 
reliability, but compliance with its rules is voluntary. A voluntary 
system is likely to break down in a competitive electricity industry. 
Mandatory reliability rules are critical to evolving competitive 
markets.

Demand Responsiveness
    Markets need demand responsiveness to price. This is a standard 
means of ensuring good resource allocation decisions and moderating 
prices in well-functioning markets, but it is generally absent from 
electricity markets. When prices for other commodities get high, 
consumers can usually respond by buying less, thereby acting as a brake 
on price run-ups. Without the ability of end use consumers to respond 
to price, there is virtually no limit on the price suppliers can fetch 
in shortage conditions. Consumers see the exorbitant bill only after 
the fact. This does not make for a well functioning market.
    Instilling demand responsiveness into electricity markets requires 
two conditions: first, significant numbers of customers must be able to 
see prices before they consume, and second, they must have reasonable 
means to adjust consumption in response to those prices. Accomplishing 
both of these on a widespread scale will require technical innovation. 
A modest demand response, however, can make a significant difference in 
moderating price where the supply curve is steep.
    Section 7061 of the discussion draft sets out requirements for 
real-time pricing and time of use metering and communications. I 
support these provisions as necessary first steps toward increasing 
demand responsiveness in electricity markets. I regard these provisions 
as a message from the Congress that instilling a significant measure of 
demand responsiveness into electricity markets is in the public 
interest. I recommend that legislation strongly encourage FERC and 
state commissions to cooperate in designing markets that include demand 
responsiveness. This would help to ensure just and reasonable wholesale 
prices and would be an effective market power mitigation measure.

PURPA purchase obligation
    Section 7062 of the discussion draft would remove the purchase 
obligation on the part of utilities for power from a QF facility if the 
QF has access to independently administered day ahead and real time 
markets, if the utility is a member of an RTO, or if the Commission 
otherwise finds the QF has access to a competitive market for 
electricity. I support the policy direction of this section.

Market transparency rules
    Section 7081 of the discussion draft requires an electronic 
information system, under the Commission's oversight, that provides 
information regarding the availability and price of wholesale energy 
and transmission services. I support this measure as providing 
additional transparency to energy markets. Transparency is absolutely 
necessary for good market decisions and to protect against manipulation 
and other abuses. I recommend that Congress broaden the coverage of 
this section to include natural gas markets as well. Natural gas 
markets would certainly benefit from transparency, and natural gas is 
an increasingly important input to electricity production.
    Section 7081 also prohibits what has come to be known as round trip 
trading. I strongly support this prohibition, and recommend that 
Congress also extend this prohibition to natural gas trading.

Civil Penalties and Enforcement
    Section 7084 of the discussion draft significantly increases the 
penalties available to the Commission. I support this provision. If the 
Commission is to be the ``cop on the beat'' of competitive markets, we 
must have the tools needed to ensure good behavior. Refunds alone are 
not a sufficient deterrent against bad behavior. The consequences of 
engaging in prohibited behavior must be severe enough to act as a 
deterrent.
    I believe additional tools are needed for the Commission to ensure 
that markets are structured so that the benefits of competition will 
inure to consumers. The FERC, with its broad interstate view, must have 
adequate authority to ensure that market power does not squelch the 
very competition we are attempting to facilitate. However, the 
Commission now has only indirect conditioning authority to remedy 
market power. This is clearly inadequate. Therefore, I recommend 
legislation that would give the Commission the direct authority to 
remedy market power in wholesale markets, and also in retail markets if 
asked by a state commission that lacks adequate authority. For example, 
such authority would allow the Commission to order structural remedies 
directly, such as divestiture, needed to mitigate market power.

Refunds
    Section 7091 of the discussion draft would expand the refund 
protection under section 206 of the Federal Power Act by eliminating 
the 60-day delay in the refund effective date. I support this provision 
but would recommend additional protections. As we have seen from past 
experience, when market structure and market rules are flawed, or when 
suppliers act in an anticompetitive manner, electricity prices can 
quickly rise to exorbitant levels. During the time that it takes to 
detect the market flaws or misbehavior and to file a complaint, unjust 
and unreasonable rates are charged. The Federal Power Act states that 
such rates are absolutely unlawful. Yet, the weight of court precedent 
strongly suggest that retroactive refunds are impermissible. I 
recommend clear statutory language that would allow the Commission to 
order refunds for past periods if the rates charged are determined to 
be unjust and unreasonable. Limitations may be appropriate on how far 
back in time the Commission can order refunds.

Review of Mergers
    Section 7101 of the discussion draft repeals the Commission's 
authority to review mergers. I do not support this provision. As we 
strive to move toward competitive markets and light-handed regulation, 
the Commission's ability to remedy market power is increasingly 
important. Market power is likely to exist in the electric industry for 
a while. It is unreasonable to expect an industry that has operated 
under a heavily regulated monopoly structure for 100 years suddenly to 
shed all pockets of market power. An agency such as the FERC with a 
broad interstate view must have adequate authority to ensure that 
market power does not squelch the very competition the Commission is 
attempting to facilitate.
    The Commission's authority over mergers is important. While mergers 
can produce efficiencies, they can also increase both horizontal and 
vertical market power. The Commission is particularly well suited to 
evaluate proposed mergers involving electric utilities. The 
Commission's detailed experience with electricity markets and its 
unique technical expertise can provide critical insights into a 
merger's competitive effects. In addition, the Commission's duty to 
protect the public interest is broader than the focus of the antitrust 
agencies and thus allows us to better protect consumers from other 
possible effects of a merger, such as unreasonable costs. As the 
architect of Order No. 888 and Order No. 2000 (the RTO rule), the 
Commission must retain the authority to condition a merger to ensure 
consistency with broader policy goals. And unlike the antitrust 
agencies, the Commission's merger procedures allow public intervention 
and participation in proceedings critical to the restructuring of this 
vital national industry.
    For these reasons, I would not support any weakening of the 
Commission's merger authority. Indeed, to ensure that mergers do not 
undercut our competitive goals, I recommend that the Commission's 
authority over electricity mergers be strengthened in a number of ways. 
The Commission should be given direct authority to review mergers that 
involve generation facilities. The Commission has been upheld in its 
interpretation of the Federal Power Act as excluding generation 
facilities per se from our direct authority. It is important that all 
significant consolidations in electricity markets be subject to 
Commission review. For the same reason, the Commission should be given 
direct authority to review consolidations involving holding companies.
    I am also concerned that significant vertical mergers can be 
outside of our merger review authority. Under section 203 of the FPA, 
our merger jurisdiction is triggered if there is a change in control of 
jurisdictional assets, such as transmission facilities. Consequently, 
consolidations can lie outside of the Commission's jurisdiction 
depending on the way they are structured. For example, a merger of a 
large fuel supplier and a public utility would not be subject to 
Commission review if the utility acquires the fuel supplier, because 
there would be no change in control of the jurisdictional assets of the 
utility. If the merger transaction were structured the other way, i.e., 
the fuel supplier acquiring the utility, it would be subject to 
Commission review. Such vertical consolidations can have significant 
anticompetitive effects on electricity markets. Those potential adverse 
effects do not depend on how merger transactions are structured, and 
thus our jurisdiction should not depend on how transactions are 
structured. Therefore, I recommend that the Commission be given 
authority to review all consolidations involving electricity market 
participants, however structured.

                         II. NATURAL GAS ISSUES

Gas Price Volatility
    We have been following with great interest and concern the sharply 
higher and volatile natural gas prices over the last couple of weeks. 
The sustained cold weather brought prices at the Henry Hub up to the $4 
to $5 range early in the winter, and prices have risen steadily as the 
winter weather has persisted without much letup. In recent days, there 
have been large price increases that we have not seen in some time. 
Since February 21, prices at the Henry Hub have ranged from a low of 
$6.73 to a high of $18.60 on February 25. It is vitally important that 
the Commission investigate this phenomenon to get a clear understanding 
as to what is driving this volatility and to determine whether these 
price spikes are a dramatic response to normal seasonal cycles, or 
other forces are at work.
    This winter has been one of the coldest in years in the Northeast, 
Mid-Atlantic and Midwest states. By some reports, it has been 29 
percent colder in these regions than last year, and demand has 
increased accordingly. Late winter storage is being drawn down more 
rapidly than was expected, and cold weather has led to short-term 
freeze-offs of some sources of supply. As a result of these factors, a 
couple of major interstate pipelines last week instituted operational 
flow orders, which reduce shippers' contractual rights to draw gas from 
storage. Adding to the anxiety is the fact that the weather experts 
believe that the winter heating season will continue at least for 
several more weeks.
    High natural gas prices have sharply increased the price of 
electricity in wholesale markets. Thus, consumers of both natural gas 
and electricity likely will feel the impact of this price volatility. 
The Commission must investigate the causes of the price run-up. I am 
deeply concerned about the impact of these prices on residential 
consumers, businesses and industrial users.

Adequacy of Natural Gas Supply
    Natural gas exploration and production activity, as reflected in 
the number of gas drilling rigs, has increased over time, and will no 
doubt increase more in response to these powerful price signals. Yet, 
it takes time to develop a gas well--up to 18 months from new drilling 
until gas finally flows to market. This puts more pressure on the 
existing pipeline infrastructure, including storage, to meet winter 
demands.
    The Commission recently announced a new policy of light-handed 
regulation for LNG import facilities. The Commission was persuaded that 
its traditional open access requirement for LNG terminals would stifle 
investment in these critical energy supply projects. Hence, the 
Commission's new policy will allow such projects to be developed on a 
proprietary basis. This regulatory approach represents the prevailing 
view that these terminals are more akin to production facilities than 
to interstate pipeline facilities and thus warrant less regulatory 
scrutiny.

Adequacy of Natural Gas Infrastructure
    The Commission has also taken steps to streamline its approval 
process for new pipeline infrastructure. It is axiomatic that where 
pipeline infrastructure is constrained, prices will rise as capacity 
markets tighten. Basin differential price data lead to the conclusion 
that perhaps several regions of the country are now short of natural 
gas transmission capacity: the Rockies, the New York metropolitan area 
and other parts of the Northeast, the Mid-Atlantic Coast, the Southeast 
and Florida.
    Traditionally, the pipeline industry has responded to price signals 
and contracted with shippers to support capacity expansions, but the 
deteriorating health of the industry and sharply reduced capital 
availability is a cause for concern. I note with concern that there are 
only a few significant pipeline construction applications now pending 
at the Commission. Our Office of Energy Projects tells me that there 
are 11 major pipeline certificate applications pending Commission 
approval, totaling 4.0 Bcf/day in new capacity and covering about 783 
miles of new pipeline. By way of comparison, early in the year 2001, 
the Commission had under consideration project proposals for 7.3 Bcf/
day of new capacity and over 2,200 miles of additional pipeline.
    Clearly, constrained areas are more prone to price spikes and to 
market manipulation than are non-constrained areas. This puts a premium 
on the Commission's ability to process expeditiously applications for 
approval of new infrastructure additions, while balancing the need for 
full participation by affected parties in the NEPA process. Our track 
record is solid and getting better. From 2001 to the present, the 
Commission has certificated 4,814 miles of new pipeline infrastructure, 
with a total capacity of 15.8 Bcf/day. The Commission remains committed 
to responding promptly to facilitate the approval of necessary 
infrastructure projects. A vibrant market demands a solid 
infrastructure foundation.
    The draft legislation contains a major initiative that would 
encourage the development of natural gas supplies in Alaska for 
delivery both in that state and the lower forty-eight states. The 
recent natural gas price spikes underscore the need to attach new 
sources of production. Alaskan gas supplies would bolster our domestic 
resource base and will be an essential part of the nation's energy 
future. Our agency is prepared to process an Alaskan pipeline project 
application expeditiously. I stand ready to consider any proposal or 
proposals that are filed.

Shaken Confidence in Price Discovery Methods
    It is clear that market participants must have timely access to 
accurate information about prevailing prices. Price discovery, the 
ability to access this price information, helps customers determine the 
price they should pay for the service or commodity, helps sellers 
determine and recover their investment, and allocates resources to the 
customers who value them most. Over the last twenty years, the trade 
press has created natural gas price indices through the polling of 
market participants. The quality of the indices depends on the 
integrity of the information collected and the number of active traders 
who report. Accurate and credible price indices for natural gas are the 
foundation for natural gas and electric transactions nationwide. 
Unfortunately, the false reporting of price and volume information has 
shaken confidence in these indices. The potential fallout includes the 
nullification of existing contracts pegged to indices, and the 
reluctance of parties to enter into new index-based contracts.
    Accurate price indices are also required by pipeline tariffs. At a 
January 15 Commission meeting, Commission staff pointed to three areas 
of pipeline tariffs that refer to market price data: cash-out 
provisions, penalties and basis differentials. Most major pipelines 
have cash-out mechanisms that allow them to resolve system imbalances. 
Accurate price information is essential if cash-out mechanisms are to 
account for and minimize pipeline imbalances. The Commission has 
approved some pipeline penalty provisions based on market indices to 
deter shipper misconduct that can threaten system reliability. Finally, 
many negotiated rate transactions peg the transportation rate to the 
basis differentials between two or more price index trading points.
    Given the prevalence of price index information in pipeline tariffs 
and contracts, it is imperative that there be trustworthy indices. As a 
first step, the Commission will probably adopt minimum standards for 
the natural gas price indices used in pipeline tariffs or new 
contracts. We will sponsor a technical conference this spring to 
explore price index issues and various proposed remedies.
    The Commission is also analyzing natural gas price index issues in 
its massive ongoing Western market manipulation investigation. This 
investigation has already found significant manipulation of published 
price indices that were used by traders, pipelines, and power 
generators. These indices also had been used by the Commission in 
establishing a formula for determining refunds of overcharges arising 
from the dysfunctional electric western power markets. FERC staff has 
recommended that the Commission modify the refund formula to eliminate 
any reliance on manipulated indices. Hundreds of millions of dollars, 
perhaps billions of dollars, are at stake in that huge refund 
proceeding. This only underscores that reliable price discovery methods 
are an imperative in well-functioning natural gas and electric markets.
    In addition to developing minimum standards for natural gas price 
indices, some have suggested that the Commission take even more 
aggressive actions. Some have suggested that the Commission gather and 
report price data. I have an open mind about how to achieve price 
transparency and facilitate price discovery. However, it is critical 
that the Commission be prepared to take whatever action is necessary to 
restore confidence in the natural gas price indices that undergird 
natural gas pipeline tariffs and negotiated rate contracts.
    Section 7081 of the discussion draft amends the Federal Power Act 
to promote price transparency. FERC is directed to establish an 
electronic information system. As I said earlier, I fully support this 
provision and recommend that it be modified to apply explicitly to 
natural gas markets as well.

Penalties and Refund Effective Date
    Section 7084 of the discussion draft should be modified to provide 
penalties for prohibited behavior under the Natural Gas Act.
    I also recommend that the Natural Gas Act be amended to include the 
refund effective date provisions of Section 7091 (with the further 
modification I recommended earlier).

                  III. HYDROELECTRIC LICENSING ISSUES

    The Commission has recently proposed a rulemaking to streamline the 
hydroelectric licensing process to provide more efficient decision 
making. A new process, an integrated process, is proposed to facilitate 
increased assistance by Commission staff early in the process and to 
promote greater coordination among federal and state agencies.
    The proposed amendments of section 3001 of the discussion draft 
outline a process to ensure that viable alternative conditions are 
given adequate consideration in the licensing process. These amendments 
are worthy of serious consideration by the subcommittee.
    This concludes my testimony. I stand ready to answer questions and 
to assist the Subcommittee in any way. Thank you for this opportunity 
to testify.

    Mr. Barton. Thank you. Before I recognize Commissioner 
Brownell, Congresswoman Capps has 12 students visiting her from 
Santa Barbara from the Congregation of B'nai B'rith. We want to 
welcome you.
    And if you would like to sit at the lower dais, down here, 
you will improve the intelligence of both sides of the aisle. 
And it will be a little bit easier on your knees.
    Let us welcome the students from Congresswoman Capps' 
Congregation. You may not ask questions, though. As soon as 
they get seated we will recognize Commissioner Brownell. And it 
is okay to sit on the Republican side. You are not going to be 
excommunicated.
    And if you have cameras, feel free to have somebody take 
pictures of you doing this. We now would like to welcome 
Commissioner Brownell. And are you a 5-minute statement or a 6-
minute statement?
    Ms. Brownell. Mr. Chairman, with all due respect, and 
consistent with the inclusionary policy of outreach that the 
FERC has undertaken in the last year, we would actually love to 
hear from the students, because we think that they could add 
value to the discussion.
    Mr. Barton. Well, I wish Commissioner, the phantom 
Commissioner, Mr. Kelliher, were here. He's in confirmation 
purgatory over in the Senate. We wish there were four of you 
here instead of just three.
    Ms. Brownell. And we certainly await his arrival as well.
    Mr. Barton. All right, you are recognize for 5 minutes.

              STATEMENT OF HON. NORA MEAD BROWNELL

    Ms. Brownell. Thank you. I am pleased to be here today, Mr. 
Chairman, Mr. Vice Chairman, committee members, to discuss the 
future of our energy sector in this country.
    I certainly join in my colleagues' statements, but I would 
just like to make a few additions. A couple of weeks ago a 
major analyst from Merrill Lynch had this headline in his 
morning commentary: ``Energy sector better than bad.'' And that 
was supposed to be the good news. Indeed, we have seen over 
$200 billion in market cap loss.
    We see congestion and associated prices increasing. We see 
no real innovation or investment in technology. We see an 
increase in power quality disturbances. Power quality 
disturbances that are having an effect on products and on 
company's ability to compete.
    We see market dysfunction and customers paying huge prices 
that they should not have paid.
    We see increased concerns about fuel supply and 
distribution. The picture is quite stark. There may be no 
visible crisis, but there is a slow and silent erosion of the 
strength of this energy sector in our country.
    And there is a cost, sadly, it is largely hidden. And Mr. 
Boucher, the nicest thing that has been said about us recently 
is that we are imaginative.
    But we need to be more than imaginative. We need to be 
innovative. We need to be committed. And we need to be focused 
and courageous to deal with the crisis that we face today.
    The principles that drew us to initiate the restructuring 
10 years ago still hold true. But sadly, we have learned some 
hard lessons.
    Markets just don't happen, they need guidance, transparency 
and structural change. Markets are vulnerable in transition, we 
need to complete the task.
    Markets must have oversight with swift and certain justice, 
and above all, customers must be confident that their needs 
will be met.
    We have begun to transform ourselves at the FERC, as you 
see in all of our testimony, to address those issues. But I am 
pleased that this bill and the work that will go forward, 
indeed, address critical issues to make markets work.
    It addresses accountability for us, for market 
participants, for the reliability organizations on which we 
rely.
    It addresses economic signals. Economic signals to build 
infrastructure, which we so critically need. Economic signals 
to incent new technologies, including renewable technologies.
    It sends the right economic signals to discipline the 
marketplace. It creates structures that will allow us to manage 
the marketplace more effectively and with greater 
accountability.
    So I look forward to working with you because I think the 
economic and moral imperative is essential. I hope that we can 
address these issues quickly with deliberation, but with 
closure and certainty.
    We need to move forward. Thank you.
    [The prepared statement of Hon. Nora Mead Brownell 
follows:]

 Prepared Statement of Hon. Nora Mead Brownell, Commissioner, Federal 
                      Energy Regulatory Commission

                            I. INTRODUCTION

    Thank you for the opportunity to share my thoughts. Chairman Wood's 
testimony summarizes the full range of initiatives we are undertaking 
at the Federal Energy Regulatory Commission (FERC), and I fully support 
his comments on those efforts. I would like to offer observations about 
the state of the energy sector in general and about some of the 
initiatives outlined in Chairman Wood's testimony. My comments on these 
initiatives will address how I believe they support the transformation 
of wholesale energy markets for long-term customer benefit and how the 
FERC is making internal reforms to adjust to changes in the market 
place. Finally, with your indulgence, I would like to provide comment 
on particular portions of the discussion draft provided on February 28, 
2003. Of course, I am happy to answer any questions the Subcommittee 
might have.

                     II. STATE OF THE ENERGY SECTOR

    The state of the energy sector in this country is, at best, 
precarious:

 Power quality disturbances grow--disrupting production lines 
        and calling into question the ability of the energy sector to 
        serve a growing digital economy, adding to customers' costs for 
        goods and services and driving jobs and business from our 
        cities and towns;
 Customers have a profound lack of confidence in corporate 
        America, public policy makers, and regulators;
 Lack of meaningful and transparent prices has led to 
        inefficient generator siting decisions, creating access and 
        transmission problems;
 Increasingly illiquid markets affect forward prices; and
 Questionable trading and reporting practices continue to 
        surface.
    Moreover, we are experiencing a capital crisis in the energy 
sector. Over $200 billion of market capitalization has been lost. 
Uncertainty in the energy sector generated by the lack of clear, 
understandable, enforceable rules, the California energy crisis, the 
collapse of Enron, allegations of false reporting, criminal 
indictments, the closing of trading operations, and federal 
investigations have all undermined investor confidence. Credit ratings 
have been downgraded, access to capital at reasonable rates has been 
limited or cut-off. The result has been a lack of capital available for 
greatly needed investment in infrastructure to reliably deliver energy 
that this country so desperately needs. The near-term impact of this 
lack of investment is cost to customers in terms of congestion, 
security, and missed opportunity. Longer-term, the lack of investment 
threatens the very future of our economy.
    While the electric and natural gas sectors are intertwined, the 
natural gas sector has fared better. For example, stock prices for 
electric utilities declined over 40 percent in 2002 compared to 25 
percent in natural gas pipelines; electric generators' prices declined 
80 percent compared to a 5 percent increase for oil and gas producers. 
I attribute this to a more mature natural gas market with clear, 
standardized rules. The natural gas marketplace has shown itself to be 
remarkably robust and I believe that the issues facing the natural gas 
market are manageable over time.
    I applaud the efforts of this Committee to address these very 
important and difficult issues and bring together a coherent and 
consistent energy policy for this nation's future. We at FERC are doing 
what we can to address the problems facing us in the energy sector. I 
would like to focus now on three particular initiatives: 1) 
restructuring wholesale electricity markets; 2) improving efficiency in 
processing applications for pipeline and hydroelectric projects; and 3) 
increasing market monitoring.

            III. RESTRUCTURING WHOLESALE ELECTRICITY MARKETS

    The FERC has been working actively to restructure the wholesale 
electricity sector into the vibrant, competitive marketplace that 
customers deserve. As we do so, I have been guided by five core 
principles:
    First, customers must benefit. Restructuring markets toward a 
competitive outcome should be a value-added proposition. We are not 
abandoning what works, we are making it better. That has been the 
competitive advantage of the U.S. economy.
    Second, the FERC must ensure independent operation of the nation's 
transmission highway. Such independence is essential to meeting 
Congress' directive in the Federal Power Act of nondiscriminatory 
access to the interstate grid.
    Third, the FERC must promote the development of a robust and 
reliable infrastructure that supports the dispatch of generation on a 
least-cost basis. Until all wholesale generators can compete fairly on 
an economic basis, customers will continue to be deprived of potential 
savings.
    Fourth, the FERC must ensure transparency in the electricity 
markets. A market cannot run efficiently unless the rules are clear and 
there is adequate opportunity for price discovery. We can't assume this 
without an independent system operator and full access to information
    Fifth, the FERC must ensure adequate customer protection against 
unjust and unreasonable rates. This begins with a well-functioning 
wholesale electricity market and also requires vigilant market 
monitoring at all times and mitigation whenever appropriate.
    My decisions to support consideration of modifications to our 
affiliate rule, creation of the new Office of Market Oversight and 
Investigations, issuance of Order No. 2001 requiring detailed reporting 
on transactions, development of standardized procedures for generator 
interconnections, and aggressive investigation of the causes of the 
Western energy crisis were all in furtherance of these five principles. 
However, I continue to believe that creation of Regional Transmission 
Organizations (RTOs) is the single most effective way of achieving 
these five goals simultaneously.
    RTOs that are fully independent of market participants can ensure 
non-discriminatory operation of the transmission facilities under their 
control. RTOs have FERC-approved market monitors, implement FERC-
approved market mitigation plans, and conduct long-range planning all 
for the protection of customers. RTOs can perform economic dispatch 
over large geographic areas that will ensure the selection of least-
cost generators. Finally, RTOs can offer organized markets and one-stop 
shopping that reduce transaction costs, provide transparent market 
rules and allow the opportunity for price discovery.
    I am pleased to announce that the majority of public utilities now 
seem to recognize the value of RTOs--almost every transmission-owning 
public utility has announced its intention to join a specific RTO. The 
FERC recently granted RTO status to the Midwest ISO and PJM 
Interconnection, and has several other RTO filings pending.
    The standard market design rulemaking has been an invaluable source 
of information as the FERC works through the RTO filings. The wealth of 
comments we have received on the proposed standard market design rule 
has given us a much greater understanding of how to create a commercial 
platform within RTOs that will ensure the maximum benefits for 
customers. Regional differences should and are being accommodated in 
RTOs. Nevertheless, market platforms must be consistent in order to 
ensure equity, eliminate barriers to entry, reduce transaction costs, 
and create an environment where gaming is limited, if not eliminated. 
The platform must also ensure that the most appropriate solution, 
whether transmission, generation or demand-side, is implemented. As I 
continue my work at the FERC on wholesale electricity matters, I commit 
to you that I will retain a focus on the five principles I have 
articulated here.

   IV. IMPROVING EFFICIENCY IN PROCESSING ENERGY PROJECT APPLICATIONS

    The FERC has responsibility for authorizing the construction and 
operation of interstate natural gas pipelines and hydroelectric 
projects. We have been improving our processes for handling project 
applications so that our processes do not impede market development, 
and may in fact advance infrastructure.
    Revisions to the pipeline certification processes have resulted in 
reduced processing time from an average of 273 days in 1995 to 195 days 
today. In 2001, the FERC certificated 16 Bcf per day of new capacity.
    More recently, the FERC, after hearing complaints for years about 
the inefficiency of the licensing process for hydroelectric projects, 
has proposed changes to the hydroelectric licensing regulations. 
Hydroelectric projects are a critical component of this nation's energy 
infrastructure, and inefficiencies in FERC's relicensing process add 
unnecessary costs and uncertainties to the detriment of consumers. The 
proposed rule would create a new process in which the current 
duplicative, sequential environmental analyses conducted separately by 
the license applicant, the FERC, and the other agencies is replaced 
with a single ``integrated'' environmental analysis.
    This proposal was the result of work not only by FERC staff but by 
all stakeholders: individual licensees, small and large from all over 
the country; non-governmental organizations (NGOs), including the 
National Hydropower Association, the Hydropower Reform Coalition, and 
individual environmental and recreation groups; the U.S. Departments of 
the Interior, Agriculture, and Commerce; State agencies; and Indian 
tribes. In fact, the proposed rule draws heavily from proposals 
developed by two very different groups--the National Review Group, a 
coalition of licensees and NGOs, and the Interagency Hydropower 
Committee, a federal interagency working group--and reflects a 
remarkable degree of consensus. We estimate that the proposed rule 
would reduce the average time it takes to complete the licensing 
process by 30 months--cutting down 47 months of preparation and 
processing time to 17 months. Further, we estimate that the proposed 
process would reduce the cost of licensing for a project under 5 
megawatts by $150,000 and for a project greater than 5 megawatts by 
$690,000.

                          V. MARKET MONITORING

    The FERC's other relatively recent initiative has been on market 
monitoring and investigations. Much has been said over the historic 
failure of market monitoring and without revisiting history, I believe 
we now recognize that market monitoring must:

 Be the responsibility of everyone;
 Be a continuous proactive process anticipating trends, 
        understanding market dynamics and inter-dependencies;
 Have dedicated resources;
 Develop effective ongoing communications with regional market 
        monitors and state commissioners;
 Clearly understand financial markets and customer needs;
 Co-ordinate effectively with sister agencies; and
 Analyze, inquire and investigate.
    I am pleased to report that we have made substantive changes in 
FERC's market monitoring with the reformation of the Office of Market 
Oversight and Investigation (OMOI). OMOI is charged with the above 
objectives and with nearly a full staff complement is well on its way 
toward meeting them. Are we where we would like to be? No, but for 
large portions of the country we are confident we are close. 
Significantly and importantly, these areas include where we have had 
independent system operators, transparency, organized markets, and 
regional monitors. In other areas of the country that lack independent 
grid operators, developed market rules, and independent market monitors 
with access to information, I am less confident of our ability to 
monitor markets for the exercise of transmission or generation market 
power, discriminatory practices or manipulation.
    OMOI is not only gaining experience with monitoring, but also in 
responding to market conditions in a responsible manner. We have 
recently analyzed gas price indices and continue to monitor the 
situation. We will work with industry as they respond to problems with 
gas indices. Not every inquiry calls for an investigation; I believe 
that OMOI should have a panoply of tools in its tool-box to deal with 
different stages and degrees of development.

                    VI. COMMENTS ON DISCUSSION DRAFT

    I appreciate the opportunity to offer the following thoughts on 
specific provisions on the discussion draft.
Section 7101--Repeal of Section 203
    Section 7101 would repeal Section 203 of the Federal Power Act and, 
thus, leave review of mergers and other dispositions of public utility 
facilities to the Department of Justice and the Federal Trade 
Commission. While I support coordination of federal agency review of 
proposed utility mergers to ensure that such reviews are not 
duplicative or overly time-consuming, I do not believe it is 
appropriate to eliminate FERC review. The FERC has knowledge of the 
electric utility industry that the federal antitrust agencies do not, 
and FERC review is necessary to ensure that mergers and other 
dispositions are consistent with the public interest. The FERC has 
years of expertise with Section 203 matters and such matters may affect 
the ability of the FERC to ensure just and reasonable rates and terms 
and conditions of service as required under the Federal Power Act. I 
believe merger reviews must be disciplined and focused. They are not 
shopping opportunities to extract concessions on issues that add cost 
not value.

Title II--Alaska Natural Gas Pipeline
    This title streamlines the FERC's issuance of a certificate of 
public convenience and necessity authorizing the construction of an 
Alaska natural gas transportation by recognizing the need for such a 
project, setting aggressive time lines for the completion of 
environmental reviews, and designating the FERC as lead agency for 
compliance with the National Environmental Policy Act and for 
coordination with and among federal agencies. Ensuring adequate 
pipeline infrastructure to deliver natural gas supplies is critical to 
the security, health and prosperity of this nation. For several years 
now there has been interest in the development of the transportation 
infrastructure needed to bring Alaskan natural gas to markets in the 
lower 48 states, and yet, for many reasons, there have been no requests 
for certification filed with the FERC. I fully support inter-agency 
cooperation and the streamlining of processes where possible and can 
assure you that any applications ultimately filed with the FERC for an 
Alaska natural gas transportation project will be reviewed thoroughly, 
promptly, and fairly with recognition of the importance of Alaska 
natural gas to our nation's long-term energy security.

Title III--Hydroelectric Relicensing
    The discussion draft would provide applicants for hydroelectric 
licenses the opportunity to propose alternatives to the mandatory 
conditions and fishway prescriptions developed by federal resource 
management agencies. The Secretary of such an agency would then be 
required to adopt the alternative if he concluded, based on substantial 
evidence and giving equal consideration to a wide range of factors, 
that the alternative provided adequate protection of natural resources 
and was either less costly or would result in improved electricity 
generation. I believe this provision is one reasonable approach to 
recognizing the expertise of the resource management agencies while 
still ensuring that such agencies perform an appropriate balancing of 
interests when developing mandatory conditions and fishway 
prescriptions, just as the FERC is required to do when developing its 
license conditions.

Section 7011--Transmission Infrastructure Improvement Rulemaking
    This section would require the FERC to develop regulations on 
incentive- and performance-based rates to encourage transmission 
investment. An improved transmission infrastructure is critical to the 
success of this nation's electricity markets. I support incentive- and 
performance-based rates for transmission investment and note that the 
FERC has recently issued a proposal on incentive pricing for 
transmission expansion. This section would also require that the 
regulations provide for participant funding of transmission upgrades 
upon the request of an RTO or other FERC-approved transmission 
organization. I support the concept of participant funding of 
transmission upgrades provided that an independent transmission 
organization, which can ensure nondiscriminatory access and rate 
treatment, is operating and planning expansions of the grid, and this 
provision appears to meet that standard.

Section 7012--Siting of Interstate Electrical Transmission Facilities
    I support granting the FERC backstop authority to site interstate 
transmission lines. As I have stated previously to this Subcommittee, 
state-by-state siting of such transmission superhighways is an 
anachronism that impedes transmission investment and slows transmission 
construction. This section, which grants the FERC such authority to 
site transmission in Department of Energy-designated ``interstate 
congestion areas'' where states have been unable or unwilling to do so, 
is one potential approach to this problem. I also believe new models 
may respond to siting issues in a way that recognizes state concerns 
while accepting the reality that electricity planning and operations 
are regional in nature.

Section 7021--Open Access Transmission by Certain Utilities
    This section would grant the FERC the authority to require all 
transmitting utilities (not just those that constitute ``public 
utilities'' under the Federal Power Act) to offer open access 
transmission service, unless they sell no more than 4 million megawatts 
of electricity per year. I support the intent of this provision to 
ensure a properly functioning and transparent transmission grid, and 
understand the concerns of parties not now subject to open access. We 
must work to ensure that their rights are protected.

Section 7041--Public Utility Holding Company Act (PUHCA)
    I support the repeal of PUHCA. PUHCA was necessary to address 
abuses that existed a half-century ago. However, that statute has not 
only outlived its usefulness, it is actually thwarting needed 
development of our electricity resources by subjecting registered 
utility holding companies to heavy-handed regulation of ordinary 
business activities and to outdated requirements that they operate 
``integrated'' and contiguous systems. One of PUHCA's perverse effects 
is that it causes foreign companies to buy here and U.S. companies to 
invest overseas. Nevertheless, I appreciate the concerns of those, like 
the rural electric cooperatives, who have opposed elimination of 
certain safeguards that PUHCA provides against market power. The FERC 
is aware of the concerns of the cooperatives and of the problems with 
market power in general, and we are engaged in an overhaul of our 
efforts at market monitoring and market power protection. I believe 
that the discussion draft strikes an appropriate balance by replacing 
PUHCA with increased access by the FERC and state regulators to certain 
books and records.

Section 7062--Public Utility Regulatory Policies Act (PURPA)
    I support the draft's prospective elimination of the forced sale 
provision of PURPA. In my view, the discussion draft appropriately 
recognizes the vital role of organized markets in facilitating sales 
while providing appropriate transitions rules to recognize the rights 
and obligations of parties. PURPA was enacted out of concern over 
dependence on oil for electric generation. Now, a quarter of a century 
later, when a gas-fired generator can be on-line in less than two 
years, and many advances are being made in distributed generation, 
PURPA's subsidies for certain types of generation are no longer 
appropriate.

Section 7084--Enforcement
    The FERC must have an expanded role in monitoring for, and 
mitigating, market power abuse. The enabling statutes of the Securities 
and Exchange Commission and the Federal Communications Commission 
provide for a range of enforcement measures, such as civil penalties. I 
believe that providing FERC with similar authority would send a 
powerful message to electricity market participants that we take 
violations of the Federal Power Act just as seriously. Therefore, I 
support the draft's increase in the level of penalties available under 
the Federal Power Act.

Section 7091--Refund Effective Date
    I support allowing refunds from the date a complaint is filed, as 
opposed to 60 days after the filing. This proposed change will better 
protect customers.

                            VII. CONCLUSION

    I appreciate the enormous commitment of time, energy, and 
leadership that the Chairman and the other members of this Subcommittee 
have made to address the issues facing our energy markets. I thank you 
for the opportunity to share my thoughts with you, and look forward to 
continuing to work with you on these matters.

    Mr. Barton. Thank you. The Chair is now going to begin the 
questioning period. The Chair wants to announce that the order 
of the questions is in order to seniority as of, when the gavel 
was tapped and in order of appearance after the gavel was 
tapped.
    Now that is kind of confusing, but we checked with both 
staffs and we think we have it properly. If you deferred, you 
get an additional 3 minutes. Some of you only used one or 2 
minutes, so we are going to have a very, separately timed 
question period, which is good.
    So the Chair would recognize himself for 5 minutes, since I 
did take a 5-minute opening statement. Chairman Wood, I am told 
that in the last several weeks, the Commonwealth of Virginia 
passed a State law that prevented a private utility from 
joining an RTO until a date certain.
    Could you comment on that and would you also give us your 
comments on how you think that affects the ability to create 
the RTOs that most people think need to be created?
    Mr. Wood. A little background on that, Chairman Barton. 
There are two large regional transmission organization, one 
that is serving where we are today and then on over to really 
the entire midwest of the country up to Saskatchewan, Manitoba 
down to Oklahoma, Texas panhandle, all the way back over to 
Indiana.
    That is the Midwest Independent System Operator, MISO and 
PJM. The AEP Company, out of Ohio, a 7-State company, of which 
part of it is in Virginia, is really at the cross wires between 
those two RTOs.
    Those RTOs came forward last summer with a plan to 
integrate their markets into one large energy market where a 
customer or a supplier could really have a one-stop shop, kind 
of transparent, uniform approach toward business rules, 
software, a lot of the stuff that we are looking at in the 
standard marketing design, they are moving ahead and doing it 
voluntarily.
    The utilities, the stakeholders, the State commissioners in 
that region are a real model for kind of, you know, working 
together across State boundaries to make this market work and 
deliver significant benefits. The cost benefit study from that 
integrated energy market was quite pronounced. I think 
something, I remember it being north of, let's see, $7 billion 
over the next 10 years.
    That was a cost benefit study done in July of this past 
year. So that was really moving forward to have that integrated 
energy market on the ground and operating by October 2004.
    A lot of time lines to meet, very important. In the past 2 
months this, my new home State legislature passed a bill which 
I do not believe the Governor has yet signed, that would, in 
fact, not allow AEP to join this RTO as it had planned to do 
and as the FERC had already approved it doing back 5 years ago 
when it had a merger condition in its merger with Central 
Southwest from our home State.
    That they made a commitment to joining an RTO, one, exists, 
they joined it. They are moving forward on that. And then the 
State legislature in Virginia passed a bill that basically said 
you can't join that until after July 2004.
    Which is going to really, in fact, make the October 2004, 
day not happen. So that is unfortunate. The other States in the 
area have, you know, been concerned about that, including some 
from some of the different members here have expressed a 
concern to us at the commissioner's meeting last week.
    We are in discussions now trying to determine what is the 
best way to move forward, but it does show how important it is 
that when you do have an interstate grid that is in multiple 
States, and when you have utilities that are spread over 
multiple States, as we have throughout the country, it is very 
important to kind of have a uniform regional approach that, in 
this case, 26 States or 25 States and a couple of provinces are 
moving forward and one who said no and it, in fact, does stop 
it for all 26. So that is a little background on that.
    Mr. Barton. Okay. Chairman Meserve, correct me if I am 
wrong, but nuclear power plants that are already in the grid, 
when we have a price spike like we have had in natural gas the 
last several months, because of the cold winter, do the prices 
that are generated by nuclear power plants for electricity, do 
they go up also?
    Mr. Meserve. Mr. Chairman, we don't regulate the power 
plants in terms of their economic conditions, only their safety 
conditions.
    I believe it varies by the plant as to their economic 
relationship to the grid. Some plants have long term contracts 
and their power goes out at agreed upon rates.
    And others have an opportunity to sell into the market. But 
let me emphasize, this is not an area that is subject----
    Mr. Barton. I know that the commission does not regulate 
it, but what I was hoping you would say is that if we had more 
nuclear power plants, when we have fuel shortages in other 
areas, the nuclear power plants generally maintain their price 
structure because they are regulated at the State level and 
their prices are not allowed to go up. That is what I would 
hope you would say.
    Mr. Meserve. Well, let me say that the regulation does vary 
state-by-state. But let me emphasize that nuclear power plants 
are base load and at the moment the average cost of production 
from nuclear power plants is less than that from coal or from 
natural gas, which are the principal competitors.
    Mr. Barton. That is a better answer. All right. My time is 
expired and I would recognize the gentleman from Virginia for 5 
minutes.
    Mr. Boucher. Thank you, Mr. Chairman, and thanks to each of 
the witnesses for the very informative testimony here today.
    Mr. McSlarrow, let me begin with you. I have a number of 
concerns about the electricity provisions that are contained in 
the draft legislation that has now been circulated, and you 
addressed a number of the matters.
    I was very pleased to read in your prepared testimony that 
the administration does not favor a repeal of the FERC's merger 
review authority.
    I share your opposition to that provision. I am concerned 
that particularly when teamed with a repeal of the Public 
Utility Holding Company Act, which in and of itself will 
generate a large amount of industry consolidation, that this is 
really not a very good time to be taking away this key consumer 
protection by repealing the merger review authority of the 
FERC.
    My view is it is probably going to be more needed in the 
future that it is even today, particularly if this 
comprehensive electricity provision passes and PUHCA is 
repealed.
    I wonder if you would like to take the opportunity to 
comment on the administration's rationale for not supporting 
the repeal of the FERC's merger review authority?
    Mr. McSlarrow. Well, I can hardly put it better than you 
just did. There are really two goals. One, is as you put it, 
consumer protection, and we would like to ensure that someone, 
and FERC has the authority now and has been doing the job, will 
judge mergers on their public interest standard.
    And No. 2, we want to ensure that we can increase 
investment into an industry that is, to put it mildly, ailing. 
And so therefore, we think we ought to repeal PUHCA.
    But as you pointed out, if you are going to repeal PUHCA, 
it is even more important that someone have that kind of 
regulatory oversight.
    Mr. Boucher. Thank you. The second question I have for you 
is on an entirely different topic, but one that you also raised 
during the course of your testimony.
    I share the administration's enthusiasm for the advent of 
commercially available hydrogen-fueled vehicles. And I want to 
applaud the administration for making that one of its 
priorities.
    The big challenge that I think we face in realizing 
commercial availability of fuel cells is the source of 
hydrogen. And I wonder if you could comment to the subcommittee 
this morning on where you see the sources of hydrogen being and 
what specific steps we in the Congress need to take in order to 
make sure there are reliable hydrogen sources so that we can 
achieve this commercial availability?
    Mr. McSlarrow. I would be glad to. The good news is that 
almost everything you can imagine as an energy source is also 
something that can be made to work to produce hydrogen.
    Whether you are talking about renewables, fossil fuels, 
natural gas, coal, nuclear energy. Across the board, we already 
know how you do it and how to produce hydrogen. The trick and 
what the research and development is focused on right now, is 
how to bring the cost down.
    Because, candidly, it is not where it should be in order to 
competitively produce hydrogen. Last week or maybe the week 
before, the President announced a new initiative on a coal 
gasification plant, which we are calling FutureGen.
    And it is a very exciting project that we are hoping to 
have international collaboration on. About a billion dollars 
and it will be constructed over the next 10 years.
    But the idea is to produce or to construct a coal 
gasification facility that will simultaneously produce 
electricity and produce hydrogen.
    And do so in a way where, because of the mechanics of the 
plant, any greenhouses gases, and in particular carbon dioxide, 
come out in a discrete stream that makes it even easier to 
sequester that carbon.
    And so there are huge environmental benefits too, and it 
will allow us, we hope, to really tap into what is our greatest 
natural abundance, energy source, coal.
    Mr. Boucher. Well, thank you very much for that answer. And 
I enthusiastically endorse that proposal and I would love to 
have that plant in my congressional district. We will have some 
discussions, maybe, about that.
    I have a number of questions I want to propound to the 
commissioners from the FERC. And Mr. Chairman, I hope we will 
have a second round during which we can do that.
    Let me, while I have the floor, ask Mr. Meserve a question 
that intrigues me. Last year, when we have representatives of 
the nuclear industry here, there was discussion about the 
possibility of a new generation of nuclear reactors called 
pebble bed reactors.
    I think that there were even plans to build a prototype in 
South Africa. I have not heard much about that lately. Do you 
happen to know whether those plans are still active and whether 
anyone intends to go forward with this new generation of 
facilities that might lead to the first new construction of a 
nuclear plant in the U.S.?
    Mr. Meserve. Sir, I did mention very briefly in my 
testimony that we do have a process for certifying designs, 
advanced designs. And we have one design for which the review 
is underway which is an outgrowth of the existing fleet of 
plants, and six more that are in the discussion phase.
    Some of those are quite radically different designs than 
our current fleet. The pebble bed reactor was one that an 
American company was interested in, but decided not to pursue 
because that company concluded that its mission was different 
and that the pebble bed reactor was not an appropriate business 
line.
    The South Africans are still pursuing the pebble bed idea, 
and have not yet made any final decisions, but there is great 
interest in that reactor.
    Mr. Boucher. And there are designs other than pebble bed 
that are new and different than what we have today?
    Mr. Meserve. Definitely. There are passively safe designs 
that people are pursuing.
    Mr. Boucher. Thank you very much. Thank you, Mr. Chairman.
    Mr. Barton. The gentleman's time has expired. The next on 
the list is Congresswoman Wilson of New Mexico. She is in a 
meeting. Then the next would be Mr. Buyer of Indiana for 7 
minutes.
    All right, then on to the next would be, on our side, Mr., 
he is not here? No. Mr. Norwood for 8 minutes. Oh, wait, wait, 
Mr. Whitfield is here.
    Mr. Whitfield, did you reserve at the beginning? So, Mr. 
Whitfield for 8 minutes.
    Mr. Whitfield. Thank you. Mr. Norwood was getting ready to 
take advantage of me. Mr. McSlarrow, I think all of us are very 
much aware that new refineries have not been built in the U.S. 
in some time, and I would like to ask you what do you consider 
the main reasons that new refineries have not been built?
    Mr. McSlarrow. As you point out, the last major refinery 
that was built in this country was built in 1976, in Garyville, 
Louisiana.
    The last major expansion took place in 1983, and that was 
actually the peak of our refinery capacity, about 18.5 million 
barrels a day, and we are under 17 today.
    There are a lot of factors. There is no question that this 
is an industry where a huge capital investment up front is 
required.
    The refining margins are not very great, typically. The 
regulatory regimes that govern refinery operations are 
critically important.
    When the administration did a review about refinery 
capacity, as part of a national energy policy, we discovered 
that most of what we were getting, now this is anecdotal, but 
most of what we were getting from investors and talking through 
how we expand capacity, made very clear that no one was willing 
to step forward for the huge capital costs up front with 
environmental rules that really could, in some ways, cripple 
the ability to expand capacity.
    And so what you have seen over the last, really, 10, 15 
years, is rather than build new plants, there have been 
incremental additions to capacity of existing ones.
    But there is no question that in the future demand is going 
to outstrip our refinery capacity and more and more we are 
going to import, not just crude oil from foreign sources, we 
are going to import increasingly refined products from abroad, 
which is going to be, I think, probably a real challenge.
    Because it is hard enough for our own refineries to figure 
out the boutique fuels problems and all those associated 
challenges.
    And one wonders how the foreign suppliers are going to meet 
that.
    Mr. Whitfield. In your testimony you talked about the fact 
that no grass root facilities are expected to be built. Now, 
were you referring to refineries when you said that?
    Mr. McSlarrow. Yes, sir.
    Mr. Whitfield. Okay. Does the Department of Energy have any 
strategic plan or suggestions on ways to provide incentives to 
try to build more refineries?
    Mr. McSlarrow. The, it is not directed at refineries, per 
se. But there is no question that we believe that a more 
sensible regulatory environment, whether it is at the State or 
Federal level, to ensure that we are meeting environmental 
protection goals, principally, is one that at least, as I said 
before, the investors tell us is what they need to see before 
they have the certainty they require before they make the 
investment.
    Now that is an across the board problem. And it affects 
more than just refineries. But that principally is the best way 
for us to move forward. And in fact EPA has made proposals 
along those lines.
    Mr. Whitfield. Okay. I might just make one comment also. 
Kentucky is a relatively large coal State and I think it is 
imperative that when we consider a national energy policy that 
coal play a vital role in that.
    And I know we are going to be taking up maybe clean air 
reauthorization this year, and I think we need to keep that in 
mind.
    I would also say that as a part of the energy bill that 
passed the House and went to conference with the Senate, there 
were provisions in there, through the Department of Energy, 
with grants regarding clean coal technology, which I think we 
need to continue to do.
    And I might add that Congressman Boucher and Shimkus and 
others of us are introducing a bill within the week that would 
provide additional R&D funds for developing newer clean coal 
technology and tax credits for the use of clean coal technology 
in producing electricity.
    I think that it is imperative that we remember that we do 
have over a 200 year supply of coal, and I hope that the 
Department of Energy will certainly keep that in mind as we 
move forward.
    I would also express my concerns, I guess this would be 
relating more to Mr. Wood, about the proposed rule for standard 
market design.
    And in the discussions that I have had with retail 
customers as well as the public utility people in Kentucky--
Kentucky is one of those fortunate States that does have very 
low rates.
    In this proposed SMD rule you are taking away the 
jurisdiction of State regulators and placing it all in 
Washington. And I would like for you to just elaborate briefly 
on why you think that that is the best way to go at this time?
    Mr. Wood. Thank you, Mr. Whitfield. The commission actually 
has done something much lesser than that. And it has, as the 
Federal Power Act allows, the jurisdiction over both 
transmission and interstate commerce and over wholesale sales 
of power.
    And so those two things together really define the energy 
markets. We are not asserting to regulate the retail rates or 
the retail service of customers in any state.
    Quite frankly, our jurisdiction is not even close to that. 
But we do think it is important that all the transmission be 
looked at together so that it can be most efficiently utilized.
    Mr. Whitfield. I was familiar that you were not doing the 
retail, and the transmission is specifically what we are 
concerned about.
    Mr. Wood. Yes, sir. Yes, sir.
    Mr. Whitfield. Can you tell me what is wrong with the 
regulatory approach that Kentucky has right now about 
transmission?
    Mr. Wood. I think what we have got, what we envision is 
that each State will continue to regulate as they have done for 
many years.
    That the interstate uses of transmission, which are, the 
electrons don't stop at the border of Virginia or Kentucky or 
any other state. They move in interstate commerce.
    And so what some of the concerns that have happened, as we 
have seen competition try to take root in our country over the 
past 10 years since Congress passed the 1992 Policy Act, is 
that there is a, kind of a second tier class of service.
    You have got the transmission that is used for local 
service being treated one way. And the transmission that is 
being used for service between utilities, neighboring 
utilities, both within a State and across the State boundaries, 
at a growing inferior grade of service.
    And so we are really trying to bring up the second grade, 
not bring down the first grade, but bring up the second grade 
so that transmission service for all can really tie together 
the region.
    I think Kentucky, as you mentioned, and I think as we have 
seen with gas prices over the recent weeks, as Mr. McSlarrow 
testified, coal is going to be an important resource for this 
country for many years to come.
    Mr. Whitfield. But you know we have always maintained that 
the native load electric customers should have the preferential 
use of these transmission systems.
    Your proposed regulation is moving the opposite direction 
of that, and it is a dramatic change.
    Mr. Wood. Well, to be clearer about that from our 
perspective, what we want to do is ensure that that preference 
is maintained through the allocation of the rights to use the 
system on day one.
    Clearly that is something that the State commissions, 
including Mr. Huelsmann, who is chairman of the Kentucky 
commission, and made a clear point to us that they want to make 
sure that the use of that system today is the same as it is 
tomorrow.
    And we don't have an issue with that. I think it is just a 
question of then what happens the day after tomorrow? Will 
there be investment in the grid? Will there be sufficient 
signals being sent to generators to build in the right spot?
    This is an issue we have got more to the south of Kentucky, 
but generators right now are not building in the right spots, 
if they are building at all.
    And really investing in the overall grid, that is the kind 
of platform that we are setting. It is not really to rejumble 
what we have got today, but to take what we have got today and 
set clear rules for going forward so that there are clear 
signals about where investment is needed, where it is not 
needed. Where people need to build.
    Mr. Barton. Okay, the gentleman's time has expired. 
Commissioner Wood has Senate potential. You give great long 
answers. They are good but long. We want to thank our students 
for coming by and hope they gained from it.
    Unlike the rest of us, they get to leave early. As soon as 
the clear the room, we will recognize Mr. Allen. Congresswoman 
Capps, do you want to say anything to your students before they 
exit the premises? Okay. The Chair would recognize the 
gentleman from Maine for 6 minutes.
    Mr. Allen. Thank you, Mr. Chairman. This question is really 
for Mr. McSlarrow and also Mr. Wood. I understand that ISO New 
England has successfully launched a standard market design on 
March 1.
    And in New England we have really been moving toward a 
market-driven utility system for some years, but it has 
included significant and varied oversight by regulators.
    But what has not seemed to happen is, has not seemed to 
lead to a reduction in the price of electricity. I sat with a 
company yesterday who said the affect of deregulation for them 
in Maine was a 30 percent increase in the price of electricity.
    Can you, first question, can you explain what you think has 
happened, to what extent has the price not gone down and what 
kinds of factors do you think are responsible?
    And then a second question, I will give it to you now, 
unrelated to that. It has to do with the draft bill. And as I 
read the transmission provisions, it seems to say that States 
that say no to a transmission project that the Secretary of 
Energy considers vital to solve interstate congestion areas, 
will lose their right to say no in the future.
    That is it looks as if that section, and I am not sure 
which of you could speak to this, it looks as though that 
section essentially strips States of their right to determine 
where to place transmission lines.
    Two unrelated questions. Either one, however you want to 
begin.
    Mr. McSlarrow. First, on the New England ISO. I don't know 
the specifics about the data, and I would have to get back to 
you on that.
    I will say this. What is generally true in the analyses 
that we have conducted is that competition, wholesale 
competition has led to lower prices, and that is true in every 
region in the country.
    What is also the case, is that in most of the country it 
has been a partial move toward wholesale competition. And so I 
think that the answer is that the successes that we have 
already seen lead us to believe that regional markets, properly 
constructed, ought to lead to lower prices.
    But I don't think that is something that we can make a 
judgment about today. On the siting authority, I believe that 
you are correct.
    The administration has supported the idea of granting FERC 
a last resort back stop authority, as we call it, in those 
cases where the Department of Energy has identified what we 
call national interest bottlenecks.
    And I would imagine there would only be a handful really 
that would rise to that level in the country. And then it would 
establish a process that would look first, and hopefully in 
almost every circumstance, to States and multi-state entities 
working together to figure out the transmission.
    But that if you had a situation at the end of the day, 
after an extended period of time, where a transmission line 
that was a national interest transmission line, that was 
critical to reliability nationally, that FERC would ultimately 
have that authority to site that line.
    As I read the draft it looked very much like that and we 
are very supportive of that principle.
    Mr. Allen. Was that provision inserted to deal with any 
past experience, any problem that you have had?
    Mr. McSlarrow. There are a number of, I can't cite them to 
you today. We did an analysis called the Transmission Grid 
Study, which identified some, and I would be happy to send that 
to your staff.
    Mr. Allen. I would appreciate it. Chairman Wood?
    Mr. Wood. As to the first issue, Mr. Allen, the, I was with 
the Maine commissioners 2 weeks ago, two of them, they are from 
all three parties, so it is a nice balanced commission.
    My general impression is they are pretty pleased with how 
the more competitive market has worked to benefit customers up 
there.
    I think the changes in electric prices may be tied back to 
the fuel that is used. There is certainly some oil-burning 
plants that are mostly now moving over to gas. A tremendous 
amount of new investment in gas-fired plants, which due to the 
fortunate discovery of gas off of Nova Scotia, has made Maine a 
lot like some of the States around the Gulf of Mexico, pretty 
fortunate to be close to.
    But what has resulted is a lot of generation is built 
there. It is trapped behind transmission, so it can't really 
get out. So there are some issues there.
    But that has generally resulted in a pretty glutted market. 
And so your supply is well in excess of your demand there. So I 
think it is driven by the fundamental, the cost of the 
underlying fuel.
    And with oil, of course, at $37 a barrel and gas up high 
due to the cold winter, I do think that I would be surprised if 
a customer saw a bill lower this year than last.
    But I think it would have been true under a regulated 
environment as well. I am not that expert on the, I don't 
really have much more to add on the transmission issue, that 
Kyle didn't already cover.
    So in light of my admonition, I will just be quiet.
    Mr. Allen. Thank you very much. I yield back, Mr. Chairman.
    Mr. Barton. Thank you. The gentleman from Georgia. Mr. 
Norwood is recognized for 8 minutes.
    Mr. Norwood. Thank you very much, Mr. Chairman. I want to 
thank you for this hearing. It is critical in my mind that this 
country have a national energy policy and I thank you for your 
discussion draft, first round of the first bill.
    I have to say that I am more than a little peeved that as 
many important things as there are that we need to deal with, 
with a National Energy Bill, I end up coming back every time 
talking about the same thing.
    One of the most contentious parts of the bill, which is the 
electricity title. And it is time to legislatively put that to 
bed, and quit waiting on the Federal Government and the 
executive branch to write rules and regulations.
    Either we do it or they do it. And if we omit anything from 
our bill, they are happy to do it through rule and regulation.
    Let me go to where I always go. Pat, same old subject. 
Incidentally, I noticed your comments on native load that came 
back to Mr. Whitfield.
    You implied, at least, from what you said, you thought that 
was a good thing, and it certainly is State law in many cases 
where a local utility really has to take care of their local 
customers first.
    Be good enough to write me a letter as to why your 
commission keeps referring to that as discrimination. You know, 
that just sort of sets folks up when they first start.
    It appears to me, and I know that you have said to me that 
you have a desire to correct the inefficiencies in order to 
ensure reliability and maximum efficiency across the 
electrician transmission grid.
    You have said that directly to me in our office. And what I 
have concluded over the last year or so, not so much about what 
you have said, but sort of the actions, your actions and the 
committee's actions.
    If I catch on to this at all, it appears to me you want to 
Federalize the transmission grid and control costs because, in 
your view, that is the only way that you are going to ensure 
reliability and maximize efficiency.
    Now I didn't come to that conclusion overnight. This has 
been going on, as you know, for a good while. But that is where 
I think you are, regardless of what is being said.
    That seems to me is to what your commission wants to do. We 
will take over. We can do it best. How can we possibly be 
efficient unless we do it from Washington, and by the way, we 
will control the prices in the process for that.
    Now, those of us from the southeast, that causes us 
problems. And I want to back this up with just a little history 
and see if you can remember some of our previous encounters.
    When we met here in the committee in December 2001, you and 
I had a discussion about, new language to me, supply margin 
assessment, known as SMA. Which basically the purpose of which 
is to force a few companies and mandate a few companies into 
RTOs. Do you remember that carrying on we had in December?
    Mr. Wood. I do.
    Mr. Norwood. You know we weren't on the same page, as you 
may recall. In fact, we disagreed a lot that day. And it seems 
to me that the SMA, this supply margin assessment, has sort of 
disappeared.
    At least it seems to have been pulled back or at least it 
certainly hasn't been implemented. But those of use who are on 
constant alert for what might come from you guys next, know 
that it is still out there.
    I asked you what affect an SMA might have on the electric 
rate of my constituents. And I do have interest in that. I know 
it may surprise you, but I do.
    And you told me that no study had ever been performed to 
determine what affect an SMA would have on our constituents. 
And, I am sure you recall, I took great issue with you on that 
subject.
    Now, stay with me just a minute because I am trying to make 
a point of where we have been. Let us fast forward just a 
little bit to last fall.
    My staff comes to me and says that now the commission has 
decided since they aren't going to use SMAs, that there is a 
notice of proposed rulemaking about an SMD. That reminds me 
that maybe you didn't give up on the SMAs, you just want to 
force everybody into a mandatory RTO.
    Now just so you don't take this personally, because I don't 
want you to, I despise, at every level, heavy handed tactics of 
a Federal agency, which show little or no regard for the 
respect of the legitimate, repeated, over and over, Mr. 
Chairman, repeated concerns of an entire region of the country.
    It doesn't matter to me whether you call this darn thing an 
SMA or a QRP or an SMD, I have got a big problem with you 
trying to affect proposals that affect my electric rates in 
Georgia, my constituents that I don't think are going to be 
very positive at all.
    I think that you can, if you are not very careful, that you 
are going to compromise the reliability of transmission that we 
do have.
    Now I am sorry everybody doesn't have reliable 
transmission. I am sorry everybody doesn't have rates that you 
think they ought to have. But do you know what? We are not 
unhappy about ours.
    And we are going to be real unhappy with anybody who messes 
with the reliability of the rates in the southeast and the 
prices in the southeast.
    Do you agree that southeasterners, from the Carolinas to 
Louisiana, enjoy the delivery of low cost, reliable 
electricity?
    Mr. Wood. Yes, sir, I think it could be lower.
    Mr. Norwood. Say again?
    Mr. Wood. I think it could be lower. There was a study done 
by----
    Mr. Norwood. But do you agree that we already enjoy pretty 
good rates and great reliability?
    Mr. Wood. I think the rates are good and the reliability is 
good, yes, sir.
    Mr. Norwood. Me too. Do you know how many States, State 
commissions and Governors that have opposed your standard 
market design?
    Mr. Wood. Yes, sir, and I have visited with the head of 
that group in Kentucky right after that resolution came out.
    Mr. Norwood. Well, so that means something to you that all 
of them seem to be against that. Mr. Chairman, with unanimous 
consent, I would like to submit this letter of February 21, a 
letter to Chairman Wood from the Southeastern Association of 
Regulatory Utility Commissioners about standard market design.
    Mr. Barton. We would have to show it to the minority, but I 
am sure that they will clear it and we will put it in the 
record.
    Mr. Norwood. I hope they will. I suspect some of them 
would, anyway.
    Mr. Barton. All right.
    [The letter follows:]

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    Mr. Norwood. The point here is you are aggravating a pretty 
large section of the country. What specific--what do we got, 27 
second. Pat, we will continue this in round two, if we could.
    Mr. Barton. If the gentleman will yield, Mr. Boucher says 
he has seen the letter and thinks it is a good letter. So 
without objection, it is going to be put in the record.
    Mr. Norwood. Thank you, Mr. Boucher.
    Mr. Boucher. Well, I didn't say it was a good letter. I 
said it was okay to put it in the record. Let me modify that 
comment slightly.
    Mr. Barton. All right.
    Mr. Norwood. That is a long letter, have you read it all? 
Well, it appears to be over. Just try not to forget any of that 
so we can pick right back up.
    Mr. Barton. All right. The Chair recognizes Mr. Waxman for 
5 minutes.
    Mr. Waxman. Thank you, Mr. Chairman. I listened carefully 
Mr. Norwood's comments and I wanted to indicate that in our 
part of the country we also have some concerns about the SMD, 
and perhaps we can talk this through and work together, because 
I think we share that issue.
    Mr. Norwood. I hope they will highlight this, Henry, we 
have agreed on something.
    Mr. Waxman. Mr. McSlarrow, I would like to ask you about 
Subtitle B of Title V of the majority's draft legislation. This 
provision is entitled Freedom Car and Hydrogen Fuel Program.
    Is it accurate that this is the hydrogen program the 
President spoke of in the State of the Union Address?
    Mr. McSlarrow. Yes, sir.
    Mr. Waxman. And the Energy Information Administration's 
annual energy outlook only makes predictions about oil demand 
as far out as 2020. EIA predicts that by 2020, the Nation's oil 
consumption will grow by as much as 9 million barrels per day.
    Is there anything in the President's hydrogen proposal that 
will decrease oil consumption by the U.S. before 2020, and if 
so, by how much?
    Mr. McSlarrow. Yes, there is. Even though, of course, the 
really exciting focus of the hydrogen initiative is on the 
hydrogen fuel cell vehicles themselves.
    The truth is the funding proposal that we have sent 
Congress, that will be $1.7 billion over the next 5 years, 
envisions a need to work on near term technologies.
    Particularly alternative fuel vehicles, hybrid vehicles, 
electric----
    Mr. Waxman. Excuse me, I really want to get very, very 
specific, because I have so little time and a lot of questions.
    Is there anything that you can point to that will decrease 
oil consumption by the U.S. before 2020?
    Mr. McSlarrow. The greater use of hybrid and alternative 
vehicles, which I am saying that we are pushing, would do it.
    We are proposing a tax credit in the President's budget for 
greater use of hybrid and fuel cell vehicles. That will do it.
    Mr. Waxman. The President has said, under his hydrogen 
plan, we can reduce our demand for oil by over 11 million 
barrels per day by the year 2040. You testified to this affect 
as well.
    To put the President's statement in context, how much oil 
does this prediction assume we will consume in 2040?
    Mr. McSlarrow. I will have to get back to you on that.
    Mr. Waxman. Okay, I would like the record held open for 
that. And what CAFE standard does the administration assume is 
in place between now and 2040 in making this projection?
    Mr. McSlarrow. The analysis the EIA has done doesn't assume 
a CAFE standard, but as you know, the NHTSA has actually 
recently proposed an increase in fuel economy for light duty 
trucks.
    Mr. Waxman. So is there an assumption that that would be 
the standard in projecting the----
    Mr. McSlarrow. If it is finalized it will be, but I don't 
think the assumptions that go into it assume a fuel economy 
standard, so hopefully the savings will be even greater.
    Mr. Waxman. So the assumptions assume a CAFE standard at 
the present level?
    Mr. McSlarrow. I believe so.
    Mr. Waxman. The draft legislation states that the program's 
goal is to enable a decision by auto makers no later than the 
year 2015, to offer safe, affordable and technically viable 
hydrogen fuel cell vehicles into commerce.
    I am concerned that under the President's proposal, the 
U.S. would provide hundreds of millions of dollars to the auto 
industry year after year and they could simply decide in 2015, 
that they don't want to make these vehicles.
    Is that accurate? Under the President's proposal could the 
auto makers simply decide that they don't want to produce these 
vehicles. Could oil companies decide they simply don't want to 
install the infrastructure necessary to supply hydrogen?
    Mr. McSlarrow. The truth of the matter is that today these 
companies are spending billions of dollars in investment. Now 
they can always walk away from it, that is true.
    There is no guarantees in any initiative like this. But the 
money that we are spending is on R&D that will have its own 
rewards, with or without the oil or energy or automobile 
companies.
    Mr. Waxman. The taxpayers are going to be putting in 
hundreds of millions of dollars. I would hope there would be 
some guarantee of a return on their investment.
    If Congress had applied this approach to CAFE, the Clean 
Air Act, the Clean Water Act, or other important policies, in 
all likelihood we would never have made the progress we have 
already seen.
    Chairman Wood, I would like to ask you about the Reliant 
transcripts that FERC recently released. These transcripts 
revealed that as early as June 2000, Reliant managers, traders 
and plant operators all worked together to shut down power 
plants in a deliberate effort to increase market prices, and in 
fact, they did increase market prices.
    The transcripts are clearly outrageous. I am concerned that 
FERC has only released 2 days of transcripts when market 
manipulations could have gone on for months or even longer.
    I am also disturbed that Reliant wants to blame the Clean 
Air Act for shutting down their power plants. Will you seek and 
release the rest of Reliant transcripts for 2000 and 2001?
    Mr. Wood. We have, yes, when the filings from the 
California parties came in Monday we began processes to 
declassify all the documents that we have in our investigation, 
and that were provided by the parties.
    Under our rules, that takes a couple of weeks, but yes, 
sir, we will have that out.
    Mr. Waxman. Thank you very much. Mr. Chairman, my time has 
expired.
    Mr. Barton. The gentleman's time has expired. We would 
recognize Mr. Burr for 8 minutes.
    Mr. Burr. Thank you, chairman. Let me take this opportunity 
to welcome all of our panelists. I was in the ante room 
listening to the questions as they came through.
    And when Mr. Norwood asked you, Mr. Wood, about the SMD as 
it related to south, I think you started to respond to him that 
there was a study that was done.
    And in that study there was a scenario that basically said 
that if everything were perfect, including participatory 
funding, that there might be as much as a 1-percent savings to 
those areas in the south.
    And I guess my question to you was, in that answer to him, 
were you also going to say that there were eight scenarios in 
addition to the one that showed no savings or a cost to the 
south, on that same study?
    Mr. Wood. I was actually not going to say that. I think the 
study, the eight scenarios are in fact ones that I think are 
very unlikely to be the scenarios that go forward.
    So the one they modeled, in fact that's a good reason why 
you model, is to find out what market characteristics should we 
have in the south so that customers can get the greatest 
benefit from efficiently dispatched markets.
    Mr. Burr. Well, I am sure everybody should go out and read 
that study, because they may come to a different conclusion as 
to which one of the nine scenarios is in fact closer to the 
reality of what the market place might look like.
    Let me ask you also, I think this was clear and I am not 
sure in your testimony, but certainly in responses to questions 
that I have asked you before.
    Can you ever envision that there is a point in time where 
FERC would ask for expanded jurisdiction on international sites 
that companies, that through mergers, where you would have 
jurisdiction to regulate those international points?
    Mr. Wood. I don't think we would ask for that, sir. I 
think, as you heard, our plate is full. But, you know, there 
may be a move somewhere from the SEC or from the investor 
community to have a regulatory view of that.
    Mr. Burr. But you don't see FERC's expansion overseas to be 
an effort that you are supporting or encouraging and 
suggesting?
    Mr. Wood. I think our expansion of recent months has got me 
in enough hot water, so I think I will leave it at that.
    Mr. Burr. Let me ask Mr. McSlarrow, as DOE. Do you ever see 
a point where the Department of Energy would actually suggest 
that FERC have this jurisdiction outside of the country?
    Mr. McSlarrow. No, I don't.
    Mr. Burr. Would DOE's position on the current merger 
authority of FERC be that it is sufficient and they would not 
expect or ask for further merger authority than the current 
provisions that are provided?
    Mr. McSlarrow. I believe it is sufficient. And, as I 
testified earlier, we would encourage keeping it.
    Mr. Burr. Let me, once again, thank the witnesses for their 
willingness to be here today. It seems like this is always an 
important annual thing for us to get into and I hope that I 
will encourage all members to go back and remember the answers 
and the questions that we have gone through today.
    But I would also encourage those who sit at the witness 
table, to go back and read the questions and the answers and 
let us all remember it for the next 12 months.
    I thank you, once again, and Mr. Chairman, I yield back.
    Mr. Barton. Does the gentleman yield back?
    Mr. Burr. Yes.
    Mr. Barton. Oh, my. Mrs. Capps is recognized for 6 minutes.
    Ms. Capps. Thank you, Mr. Chairman. Mr. Wood, Chairman 
Wood, I would like to follow up on my colleague, Mr. Waxman's 
query of you regarding the disclosure of information.
    You said that FERC would declassify documents from the 
California parties. And I want to ask are these all the 
documents that FERC has that might show market manipulation?
    And if I could read you just a statement from a local 
newspaper, the Ventura County Star, one of my papers, a 
columnist this morning has a piece under the title, ``A Snake 
Under Every Rock, U.S. Keeps Evidence of Price Gouging 
Secret.''
    Mr. Tim Hurt says. ``Every Californian who pays a utility 
bill has been ripped off. An agency of the Federal Government 
has in its hands evidence that identifies who did it and how. 
For now, however, that evidence remains a secret.'' I was a co-
signer with Mr. Waxman of a letter and to make you understand 
that there are many of us who really do feel our constituents 
are deserving of more information.
    So I want to press for answers to this long, sordid chapter 
in energy history in California that is still being paid for by 
the State.
    And is there more. What can we expect from you?
    Mr. Wood. Well, first of all, since having spent a lot of 
time before this committee, one of the main reasons I was 
interested in this job was to clean up that mess.
    Ms. Capps. Thank you very much.
    Mr. Wood. I think it was a disastrous chapter in energy 
history of recent years and not only hurt your State and a 
number of others out west, particularly.
    Ms. Capps. Yes.
    Mr. Wood. But significantly, about the efficiency and 
workability of markets. The information, there are two kind of 
pots of information I think that are before the commission that 
are both done under a, were information that were collected 
under protective orders.
    One was a process we began a year ago in February 2002, to 
investigate the manipulation in the power markets and in the 
gas markets out west in 2000-2001.
    Much information has been collected in that process, 
including information with other agencies, the Securities and 
Exchange Commission, Department of Justice, CFTC, are the 
principle ones, there are a few others.
    They have been doing joint depositions, etcetera, with 
those agencies and they are pursuing their own remedies that 
they have under their laws. Some of which are ongoing.
    So it is important as we go through our declassification of 
the data that we have collected, which is separate from the 
data that came in Monday, from the California----
    Ms. Capps. Right.
    Mr. Wood. [continuing] there is significant overlap from my 
initial read. It is a lot, but from what I can tell there is a 
lot of overlap.
    But there are some issues that both, that both sets of 
evidence have brought in that don't overlap. It is important 
for us to make sure that on the ongoing prosecutions, 
particularly of a criminal nature, that we make sure that that 
type of information is retained by the Department of Justice, 
for example.
    And that it is not basically put out there yet so that the 
trials are thwarted. Other than that, however, we have begun 
our process that is required under our rules to undo a 
protective order, to contact the parties to let them know this 
specific information is going to be released. To hear back from 
them why they would protest that. In fact, they may not. They 
may want the full story out and hope that they do. And that is 
going through our process, which is relatively abbreviated.
    And I think in the next couple of weeks, 3 weeks, perhaps, 
we will have that from both camps.
    Ms. Capps. And thank you, because now I understand that you 
will let us know, not only what you are going to share, but 
also kind of a time line so that people can expect that, 
granted that in the beginning you needed to protect some of the 
information with interdepartmental issues, but now we can 
expect such and such and such and on a time line.
    But now I have a further question, and that pushes it back. 
In addition to disclosure, and as a part of disclosure, then 
Californians are going to want to know what you are going to do 
with this information and the knowledge of the wrongdoing that 
is there.
    Part of your task, on our behalf, is to gather the data, 
and you certainly have a lot of it. And we now, we have got 
certain phrases that just really hurt as we understand how we 
were manipulated as a state.
    And it is the taxpayers that have been manipulated. FERC 
has an obligation to ensure that rates are just and reasonable.
    And when flagrant abuses just receive a slap on the wrist 
and have to pay a fine, but with the amounts being what they 
are, it is hardly a penalty.
    And these companies are allowed to go right on, it doesn't 
help the confidence that we seek. And also we want redress. I 
mean we have a State with a huge budget problem in California 
now.
    Some of it is other issues, but a lot of it is because of 
the burden that was placed upon the State as a governing 
agency, but also citizens in the abuse of power that these 
companies put upon us.
    Can you be specific about what sanctions you can impose. 
How can we know that FERC really has a regulating arm to it?
    Mr. Wood. Well, we do have, and that is, I think, you have 
probably heard from all three of us, we could use some more 
penalty authority. And the Senator for your State has put that 
forward, as well.
    But we do have some existing remedies which we will pursue 
to the maximum extent that we can.
    Ms. Capps. So you want some guidance from us----
    Mr. Wood. Actually we just need increased authority under 
both the Gas Act and Power Act to have greater penalty 
authority than we do today.
    We can get, we can get the refunds----
    Ms. Capps. And one final question. Oh, I am sorry.
    Mr. Wood. We can get the refunds, we can required 
disgorgement of profits from past activities that violated the 
law or the rules. And we will do that. That is what we are set 
up in the proceeding to go back an identify where violations 
happen and force a disgorgement of the profits from those 
transactions.
    That is the most we can do. We cannot assess additional 
penalties for punitive or of a nature like that. We can, and 
have considered, yanking certificates, basically saying you are 
not in business anymore.
    Ms. Capps. Can you do that?
    Mr. Wood. Yes. And that is certainly----
    Ms. Capps. Will you do that?
    Mr. Wood. We will. If merited by the facts, we will do 
that. We have got, in fact, from our August report, which was 
an interim report to the public, set up, I believe, four or 
five proceedings from parties that we found earlier on that had 
violated the rules.
    And that was one of the remedies we put forth in the trial 
before the Judges was to basically yank or amend significantly 
their certificates for operating.
    But that is, those are really the two. Disgorgement of 
profits, i.e., refunds, or yank the certificates.
    Ms. Capps. And revoking market rates would have helped as 
well.
    Mr. Barton. The gentlelady's time has expired. The Chair 
would recognize the gentleman from Illinois, Mr. Shimkus, for 8 
minutes.
    Mr. Shimkus. Thank you, Mr. Chairman, I have four different 
items that I want to try to get covered in the time I have 
available.
    First of all, just a point for the Deputy Secretary 
McSlarrow. The Clean Coal Institute at SIU, Carbondale, does a 
tremendous amount of work in clean coal technologies and DOE is 
a major partner in that and I want to encourage you to continue 
in that vein.
    I toured the facility last week and I guess what amazed me 
was the ability to, the initial separation of the coal and the 
microscopic analysis of what is actually good to be used and 
what is not to be good.
    And early separation might address a lot of the problems. 
And also the, I mean there is just a lot of good research done 
there.
    The other thing they brought about was in the hydrogen 
debate, I was on tv with my colleague, Tom Allen, early this 
morning for the chairman. And the people who were on prior to 
it, I think it was Shell Hydrogen.
    And I don't know the automobile maker, but they are 
announcing today at a Shell Gas Station that they are going to 
place a hydrogen fueling pump there and have a hydrogen cars 
in, running around in DC.
    So, this is not a farfetched proposal. This is around the 
corner and we think it really addresses a lot of the concerns. 
Hydrogen cars also need fuel. And fuel will come from a lot of 
different locations.
    There is some neat research, again, going on at SIU 
University, Southern Illinois University at Carbondale at the 
Clean Coal Institute where, of course, coal could be a major, 
the major commodity for hydrogen production.
    So I want to encourage that research and development and 
that partnership with the University. The second thing, well 
another thing, I do appreciate the chairman's draft.
    It moves us forward and we are going to move an energy bill 
and there is some contentious issues. But the chairman is 
showing leadership and we are going to move on it.
    So any comments we can have from all the stakeholders is 
going to be, we are all going to appreciate. This great debate 
on the standard market design I think is important.
    There are transmission constraints across the country. 
Illinois is a perfect example of a State that over produces, 
but because of some transmission issues cannot get the 
overproduced energy to other States.
    A good case study is the power line from Chicago to 
Wisconsin that is, it has been constrained for years. There has 
to be, this is interstate commerce. And it is commerce going 
across State lines.
    So somehow we need to bring the parties together to get 
commerce flowing and there has to be a good cop on the beat. So 
I want to applaud this debate.
    I am looking forward to the white paper in April. And I 
would encourage all the stakeholders to take a good look at 
that.
    Maybe there is less to be feared in that proposal once it 
gets published than what we are hearing right now. So I want to 
encourage that addition.
    Now for Secretary McSlarrow, this is another issue. The 
Department of Energy was sued by environmental groups over the 
Federal Government's failure to meet the goals in EPAct. And I 
have a long, since my memo to Congress, my first bill that I 
passed, signed into law, dealt with EPAct.
    And our ability for alternative fueled vehicles to reduce 
our dependence on foreign oil. A Judge ended up ruling against 
the Federal Government and with the environmental community.
    In essence saying we are not meeting the law requirements. 
The Judge gave DOE dates to which they were supposed to submit 
reports on the progress that the Federal Government was making 
and whether or not to include private and municipal fleets in 
the EPAct program.
    Can you give me an idea of where DOE stands on these 
issues?
    Mr. McSlarrow. Certainly. My recollection is that the 
district court ordered that we produce a notice of proposed 
rulemaking by February 27. We did, under EPAct.
    The determination that was before us was whether or not to 
extend a mandate on fleet requirements to local governments and 
private fleets, or as we did actually choose in the notice of 
proposed rulemaking, to make a determination that that was not 
necessary because in the Department's view doing so would not 
appreciably contribute to the goal of replacement fuel 
vehicles.
    And that should be in the Federal Register today or 
tomorrow.
    Mr. Shimkus. And we will take a look at that. We, I have 
been involved, along with Congressman McCarthy, on the soy 
diesel issue. And again, that first piece of legislation, by 
giving a 50 percent tax credit, really increased the use of 
biodiesel from what was then a 500,000 gallons to almost near 
25 million gallons of use.
    So I think the increase in the use of the product has a 
great affect on the legislation. If we were able to get that 
increase in demand based upon the 50 percent tax credit, do you 
expect that we would have similar numbers if we would move to 
100 percent tax credit, as was debated in the last energy bill, 
and may be addressed in this energy bill somewhere down the 
line?
    Mr. McSlarrow. I am not prepared at this time to say what 
the difference would be between 50 and 100 percent. 
Intuitively, it strikes me that the problem we have is the 
infrastructure and surrounding in terms of availability.
    But as you know, the administration has been very 
supportive and we have enjoyed working with you on promoting 
these kinds of products because we think it is vital that they 
be part of the energy mix in the future.
    Mr. Shimkus. And I would just say, for just the sake of our 
discussions, that the infrastructure needs for biodiesel is 
very limited.
    And we actually have biodiesel pumps now in major gas 
stations and diesel stations across Illinois. The mixing is 
simple. So there is no large capital outlay.
    And we have seen a great use by governmental fleets and the 
like using the tax credit to fuel their vehicles on biodiesel.
    And so I would like you to also look at the benefits on how 
you affect the EPAct problem by the 100 percent credit, as this 
debate moves forward.
    And with that, Mr. Chairman, I have addressed my four 
issues and I yield back the balance of my time, Mr. Chairman. 
Not bad, 45 seconds left.
    Mr. Barton. The gentleman yields back his time. The Chair 
would recognize Mr. John of Louisiana for 5 minutes.
    Mr. John. Thank you, Mr. Chairman. As I said in my opening 
statement, I think that now is really a critical time in this 
country, in this Congress, revolving around homeland security.
    And obviously a huge piece of the puzzle of homeland 
security must be energy security. America is so dependent and 
addicted to fossil fuels.
    So I think we cannot speak about homeland security in the 
same breath or we must speak about it in the same breath with 
energy security.
    So I was listening very intently and curiously to everyone 
on the panel that was talking about natural gas, in one respect 
or another.
    But I repeatedly heard, whether it was from Commissioner 
Brownell, who said it is a slow, silent erosion, or Chairman 
Massey who talked about the reliance and the importance of 
natural gas; its infrastructure, supply and availability.
    The chairman talked about connecting Alaska down to the 
lower 48s with a natural gas pipeline. I believe that should be 
part of this bill.
    And of course the Under Secretary talked extensively about 
natural gas and its importance. But what is curious to me is 
what I said in my opening statement--is that everyone at the 
table is in agreement that increasing the domestic supply of 
natural gas today is where we need to go.
    And therein lies the problem and the hang up that I have. 
We are pursuing opening up ANWR for oil and gas, and 
constructing a pipeline, which I am supporting, have supported, 
and been on record as supporting.
    But I don't understand what makes Alaska so special or a 
silver bullet standpoint, compared to the eastern Gulf of 
Mexico.
    It doesn't make any sense. I think I know the answer to 
that. But the election is over. And I really believe that we 
should look beyond that.
    So I ask Mr. McSlarrow, do you believe that we can get 
natural gas from the eastern Gulf of Mexico into the domestic 
market before we have built a pipeline from Alaska down?
    Mr. McSlarrow. Certainly.
    Mr. John. Yes. So, again, I think I know the answer to that 
and I am going to continue on that road to continue to talk 
about, you know, the huge reserves in the Destin Dome.
    We have an infrastructure and a pipeline that connects into 
Tampa, or is building toward there, to supply natural gas which 
seems to be the fuel of choice in a lot of areas because of its 
environmental friendliness.
    And I am going to continue my quest in making sure that we 
open up the eastern Gulf of Mexico, because, I mean, obviously, 
Louisiana is poised and ready, along with Alabama and 
Mississippi to service that area.
    The infrastructure is there today and I think we are 
missing it as a big part of the big picture. If we know natural 
gas is part of our solution today, and the demand is going to 
be through the roof, in the future, then that has to be part of 
any comprehensive energy plan.
    And we will continue to work on that piece. Second, as a 
plan, we passed an energy bill in the House, as you well know, 
that did not have an electricity title.
    This bill, is a comprehensive energy bill with an 
electricity title, and is a little bit different from previous 
legislation.
    The chairman, Mr. Barton, had a separate electricity title 
last year, that we discussed a little bit in this subcommittee. 
But I am a little bit concerned about this issue. And I am 
slowly educating myself and having to see how it all fits 
together.
    But what I would like Commissioner Wood to respond to is 
the issue Chairman Barton alluded to in Virginia and the 
legislative initiative over there that passed and that is going 
to prohibit an energy company from joining an RTO.
    If we don't continue to work with the States, individual 
States, I think you are going to see legislatures in Mr. 
Norwood's State, from what I heard, Mr. Burr's State, and 
certainly in Louisiana take action.
    We are going to continue to have either legal battles or 
legislative problems and hurdles that we will have to address 
or we are not going to get anywhere.
    So I want to encourage the commission to continue to work 
with the legislatures in those States that have most at risk. 
And I yield the balance of my time.
    Mr. Barton. I share the gentleman's frustration and we will 
work with him on some of those issues. Chairman Meserve of the 
Nuclear Regulatory Commission has an airplane to catch.
    So we are going to release you from duty. Everybody else is 
smiling and saying they wish they had airplanes to catch too. 
But we appreciate your service.
    This is probably the last time we will have you before our 
subcommittee and we wish you the very best in your future 
endeavors.
    Mr. Meserve. Thank you, Mr. Chairman, I very much 
appreciate that. I very much enjoyed working with you and the 
committee.
    And I would be very pleased to respond to any questions for 
the record.
    Mr. Barton. We will have questions in writing if members 
who have not yet asked questions, wish to ask you questions.
    Mr. Meserve. Good, thank you.
    Mr. Barton. Thank you.
    Mr. John. May I be recognized, Mr. Chairman?
    Mr. Barton. Mr. John.
    Mr. John. Mr. Chairman, I just have a quick request. Since 
I only, I took up all of my 5 minutes on my own questions, I 
didn't get an opportunity for any of the panelists to answer 
any of my questions.
    Mr. Barton. We noticed that.
    Mr. John. Okay, so I just gently request maybe some time a 
little later on?
    Mr. Barton. I think----
    Mr. John. For the panel, not for me.
    Mr. Barton. [continuing] we are going to do a second round. 
We are going to give them a personal convenience break and then 
do a second round with this group. Mr. Shadegg is recognized 
for 5 minutes.
    Mr. Shadegg. Thank you, Mr. Chairman, and I appreciate you 
holding this hearing. I also very much appreciate the 
attendance of the witnesses.
    Mr. Wood, I want to begin by focusing on an issue that you 
are working on, but I don't know that we are getting anywhere.
    Unlike some of the other questioners here today, I strongly 
favor your efforts, the commission's efforts and the 
President's efforts to move this industry from a monopoly 
structure into a competitive market structure.
    I think that needs to be done and I think that over time it 
will produce dramatic cost savings. I know of no place where 
competition effectively initiated, has not produced cost 
savings.
    Having said that, I guess I must say that at least for me 
in the west, you are making my life difficult. You have managed 
to get my public utility, my investor-owned utility and all of 
the Governors of the west united in their concern about SMD.
    All of them, even though they have diverse interests, are 
saying that SMD does not work. The Western Governors 
Association has written you and said SMD will not work in the 
west.
    Both the IOUs and public utilities in the west have 
expressed to me and I presume to you, and I have seen documents 
that have been sent to you that SMD does not appropriately fit 
in the west.
    I note that it appears, and I think it is pretty well 
acknowledged that the elements of your standard market design 
proposal have been extrapolated largely from the Pennsylvania, 
New Jersey, Maryland area, a very dense market without lengthy 
transmission lines.
    And it seems to me that in their criticism, the western 
Governors have pointed out that Arizona is quite different. I 
also note that your own staff has acknowledged that the 
infrastructure in the west is very different.
    For example, on July 17, of this year, I guess of last 
year, your staff said energy infrastructure in the west, this 
is a quote, is insufficient relative to projected energy 
demand, and additional infrastructure as expansions are needed 
to support a competitive market.
    You said recently at a speech you made within the last few 
weeks, that recognizing the differences, east to west, market 
to market, that perhaps SMD could be, and the words I am 
reading from, phased in regionally rather than requiring 
adoption nationwide at the same time.
    My first question of you is have you heard of Edmund Burke 
and understand his theory on gradualism?
    Mr. Wood. I was an engineering major, so I will say I have 
heard of him, but I can't----
    Mr. Shadegg. Well, he was not an engineering major, he was 
a philosopher. And one of this theories was that in bringing 
about change, particularly social change in society, one ought 
to look at a model of gradualism, making a change gradually.
    And I think I would urge that upon you. I would hate to see 
rejection of SMD bring about the defeat of competition in the 
long run in the energy market.
    When you said that you thought perhaps it could be phased 
in over time, one of my concerns would be, that then raises the 
question, well, would you continue to propose that SMD be 
adopted as the rule for the country and leave it in your 
discretion to decide where it gets phased in, or are you open 
to a proposal under which SMD is adopted for a region of the 
country where it might work well, and other regions of the 
country are left to have it phased in for them at a later point 
in time on a basis other than your discretion?
    Mr. Wood. I think what I meant in that statement that you 
quoted so accurately, was that there could be different time 
tables for different parts of the country to be phased in.
    I think it depends on the underlying nature of the 
infrastructure, what the retail regulatory structure is in the 
markets. Really, where are the markets today.
    So, I mean, when we adopted kind of an October 2004, 
timeframe, at that time all the forming and working regional 
transmission organizations in the country indicated that they 
expected to be there by the end of 2004.
    So we did not feel like that was really a push to do that. 
But, I think there is a realization that we have got to work 
with existing RTOs that are there. The one in Arizona is one we 
have given conditional approval to.
    And the one in the northwest is another. California is 
existing. But we cannot ignore that problem. I mean, as I 
mentioned to Ms. Capps, there was a significant bad event that 
happened out there before we got on the commission, and we 
would be remiss in our duties if we did not take steps to make 
sure that that never happened again.
    Mr. Shadegg. I understand that and I greatly appreciate 
that answer and I think it will be very helpful. Let me ask you 
one other question. A great deal of the concern in the west and 
among our corporation commissioners, who have written you about 
SMD, is they believe they are making progress toward voluntary 
RTOs already.
    One of my questions is what would be objectionable to a 
structure in the west where you had a voluntary RTO and if it 
was not functioning to allow true competition giving FERC the 
authority to impose to, A, investigate it, and B, impose severe 
penalties if in fact that RTO was not effectively promoting 
true competition?
    Mr. Wood. Let me make sure I got that. It was a lot of 
interesting thoughts that I haven't really digested before. The 
voluntary RTO in the southwest is moving forward.
    In fact, the big Salt River project is not under FERC 
jurisdiction anyway. So they have got to voluntarily join. And 
without them and without western, WAPA, it is just not going to 
be an effective grid. That is a big part of the regional grid.
    Mr. Shadegg. SRP is already in, though, they are 
voluntarily in.
    Mr. Wood. And WAPA hopefully will get there. I mean 
fundamentally that has got to be the platform on which it is 
built.
    So I think, as I indicated, we already conditionally 
approved that. What we are really focusing on now is making 
sure the three in the west actually work well together.
    Because the fact there were big dislocations in the market 
design out there led to a lot of the manipulation that we have 
pointed out and that we are reviewing now.
    So that is really the course making sure that what they 
look at in the desert southwest works well with the northwest 
and with the California market.
    So I think we can get there. It is awkward because there is 
no one really in charge out there to make kind of a corrective 
decision. But I think our work with Governor Hull, who is just 
the immediate past President of the Governor's Association out 
there, was a good platform to build on that.
    And I expect that we will continue work through the 
Governors and through the State Commissioners out there----
    Mr. Barton. The gentleman's time----
    Mr. Shadegg. My time has expired. I appreciate the openness 
and I would like to discuss alternatives as we go forward.
    Mr. Wood. I would be glad to.
    Mr. Barton. All right, we are going to recognize Mr. John, 
I mean Mr. Doyle, for 5 minutes.
    Mr. Doyle. Thank you, Mr. Chairman.
    Mr. Barton. No, no, Mr. Doyle.
    Mr. Doyle. I know we look a lot alike Mr. Chairman, thank 
you. Mr. McSlarrow, welcome. I have a question. It is widely 
recognized in industry that, even in the automotive industry, 
that the path to transportation fuel cell applications is 
through stationary fuel cells.
    And most of the experts that I have talked to tell me that 
there are at least two types of stationary fuel cells, solid 
oxide and molten carbonate, that are commercially deployable in 
the very near future.
    We are talking maybe 2 or 3 years. So my question to you is 
why are we putting so much money, and I don't necessarily have 
a problem that you are putting money into the hydrogen program, 
but why are you putting all this money into that program that 
we are talking about 15 to 20 years from now.
    And at the same time in your 2004, budget, you are cutting 
by over $16 million the line item for the stationary fuel 
cells.
    You know, it seems to me that if we want to get these 
vehicles on the road sooner rather than later, and start saving 
all of this oil that we talk about saving by getting these cars 
on the road, why aren't we putting more resources into the 
technologies that are going to be commercially deployable in 
the next couple of years, rather than picking winners and 
losers.
    You know, I am just curious what your thought is on that?
    Mr. McSlarrow. No, it is a tough question. And the 
interesting thing is it is precisely because things are so 
nearly deployable that we will move money away from that.
    It is a philosophical choice the administration has made. 
And we do it across the board. But we are, as you said, making 
great success from solid oxide fuel cells.
    We think they have a big future in terms of the stationary 
sites. But across the board we have made a commitment to 
investing in long-term R&D where the risks are going to be the 
greatest and potentially the reward will also be the greatest.
    We think that is the appropriate way to direct the R&D. So 
the nearer our technology comes to actually going to 
commercialization, the more likely you are to see that we are 
going to shift resources to another place.
    Mr. Doyle. Listen, I am a great supporter of funding long 
term R&D too, I think that is very important. It just seems to 
me that if the goal here is energy independence, and that seems 
to be, you know, a front burner issue now because of all that 
is going on around the world.
    And, you know, we are getting ready to try to drill oil up 
in Alaska because we have got to be energy independent because 
we are in a crisis right now.
    Why, you know, if we are in a crisis and we can deploy a 
technology that is environmental sound, safe, and doesn't 
pollute and could save us hundreds of millions or barrels of 
oil, and we are 2 to 3 years away from doing that, why are we 
cutting the funding to that?
    It just doesn't make any sense in the world. And I would 
just ask you to go back to DOE and talk with your people there.
    These programs, stationary fuel cells, have been 
historically underfunded. And this is a real area that has 
promise in the next couple of years.
    I mean, heck, this could even happen during the Bush 
Administration. What did I say, 3 years? Maybe not. But it 
could happen soon, and I don't know why the President wouldn't 
want to see something happen on his watch than 15 or 20 years 
down the road when we don't know who is going to be President 
then.
    I understand this philosophy as you get close to 
commercialization, you start to pull the money back. That is 
fine under normal times and when everybody is fat and happy.
    That is not where we are at right now. We are in a crisis 
right now. The President keeps telling the American people we 
are in a crisis, we have to become energy independent so we are 
not being held hostage in the Middle East all the time.
    And I would just ask you, go back to DOE and put some more 
money in these stationary fuel cells. It is just the good, 
right thing to do for the country and we are in a crisis.
    So I want to bring that to your attention and we will leave 
it at that. To the FERC commissioners, welcome. I just have one 
question, and maybe you can all take a shot at that.
    But we know there is strong support at FERC for formation 
of the RTOs, and that a significant portion of the country is 
currently being serviced by these entities.
    One of the concerns I have, as we move into RTOs, is that 
we preserve and in fact enhance the future ability of non-
traditional generation sources easy access to connect to the 
grid through these RTOs.
    For instance, I am thinking of the advances we are making 
in fuel cell technology and the growth of combined heat and 
power systems.
    What steps do we need to take legislatively or do you need 
to do through regulatory action, to ensure that these 
innovative generation systems will be available to 
interconnect.
    I think Commissioner Massey, that in your testimony you 
stated that you think the RTO formation will streamline 
interconnection standards and help get new generation into the 
market.
    When you say this, do you have types of new and developing 
sources in mind? And I would repeat, that any of you that want 
to answer this question, what steps can we take in the future 
to ensure access for these types of generation?
    Mr. Barton. This will have to be your last question.
    Mr. Doyle. You know, I got that right in under the mark.
    Mr. Barton. You all, everybody is really good at right in 
under the buzzer here.
    Mr. Doyle. Don't forget, more money in those stationary 
fuel cells, too.
    Mr. Barton. But at least you asked it to Mr. Massey, and I 
know he will give a shorter answer than Chairman Wood would 
have given. He says the commission shares your goal.
    Mr. Doyle. It is a right wing conspiracy, Massey. There you 
go. Give this guy a microphone.
    Mr. Massey. I am not sure, oh, this one is working. 
Actually the standard market design is also aimed at 
interconnecting and providing a market for the kinds of 
resources you are talking about with a day ahead market and 
locational marginal pricing, which the distributed generation 
organizations and distributed generators strongly support.
    No. 2, we have an interconnection rulemaking underway which 
would streamline the interconnection processes and rules for 
small generators.
    And we hope to finalize that soon. And I also believe that 
the RTOs will streamline interconnection because they won't 
have any incentive to delay the interconnection process.
    I believe that they will seek to interconnect these 
generators as quickly as possible.
    Ms. Brownell. Can I just add something because Mr. Doyle 
and I come from the same State where we had an ISO, now an RTO.
    And, in fact, what we saw was the introduction of new 
technologies because market forces could speak, investors knew 
that they had a fair shot at getting interconnected, and 
customers expressed, both at the wholesale and the retail 
level, some choice in being innovative.
    We saw the growth of wind farms in Pennsylvania. So I think 
that is a classic working laboratory, albeit, perhaps, based on 
regional differences, the very fact that there are wholesale 
markets where choices can be expressed and investors can have 
confidence in the equity of the rules, will attract just the 
very kinds of innovation that you are talking about. And has. 
We know that.
    Mr. Barton. All right, the gentleman's time has expired. 
The Chair recognizes the gentlelady from New Mexico, Mrs. 
Wilson, for 8 minutes.
    Mrs. Wilson. Thank you, Mr. Chairman. I wanted to thank all 
of you for joining us today. I am also one of those that 
believes we need a balanced long term energy policy for the 
country that includes both increases in production and an 
emphasis on conservation and new technologies.
    There are some things that I wanted to focus on as far as 
questions are concerned. I wanted to associate myself with Mr. 
Shadegg's comments about the standard market design, as a 
western legislator.
    And Mr. Wood, I wonder if you could expand a little bit on 
which elements of this standard market design are most 
important to you, so that we can figure out how we can work 
with you to alter the approach that FERC is taking here?
    Mr. Wood. Actually, let me see if I can make that simple, 
because I did put that in my testimony, Representative Wilson.
    The, and I will just call reference to that, if you want to 
look it up later. On Page 7 at the bottom. But I will just go 
in those, independent grid operator, single tariff. In other 
words, everybody plays by the same rule.
    A long term bilateral contract market, which is not 
imposed, it just is what it is. A voluntary short term spot 
market with transparency.
    Regional transmission planning, so it is bigger than just 
one utility looking after its plan. Locational price signals 
and transmission, basically property rights, so people have a 
defined property right.
    And appropriate mitigation so that you don't have repeats 
of what happened out west. Those would be the eight, kind of 
the core eight that I have been talking about in recent 
public----
    Mrs. Wilson. Of your core eight, which ones are the core of 
the core eight. I mean that is a pretty long list. What is the 
most important to you? What are the top things we are talking 
about here?
    Mr. Wood. The independent operator, which is the RTO, which 
is what has been proposed in your home state. The spot markets.
    Mrs. Wilson. Okay.
    Mr. Wood. The transmission rights.
    Mrs. Wilson. That is three.
    Mr. Wood. And the market monitoring.
    Mrs. Wilson. Thank you. Mr. McSlarrow, I wonder if you 
could summarize the position of the Department of Energy and 
efforts you have underway to reinvigorate the nuclear power 
generation capacity in this country? And I wonder if you could 
expand on that a little.
    Mr. McSlarrow. I would be glad to. As you know, nuclear 
energy provides about 20 percent of our electricity generation.
    From the President's National Energy Plan forward, we have 
made very clear working with you and others that we believe 
that nuclear energy is important and has to be part of the 
energy mix for the future.
    Now we are approaching that several different ways, because 
there is no question that nuclear energy brings with it its own 
challenges.
    One of those, obviously, is what do you do about nuclear 
waste. Now Congress has answered that and moved us down the 
road a good bit by the suitability and determination and then 
the selection of Yucca Mountain.
    And we are going to have to move forward with the license 
application. Another is what does it take to convince those 
people, investors, principally, to front the capital necessary 
to build these kinds of projects so that we don't have the kind 
of horrific examples with Shoreham and WAPA and other classic 
cases that happened in the last 30 years.
    And so we are working with the NRC and Chairman Meserve to 
move forward with what we call early site permitting processes 
designed to speed up and provide more certainty with the 
regulatory process.
    In addition, we are trying to focus on the future of 
nuclear energy in terms of advanced fuel cycle and advanced 
reactor concepts.
    And I know you are personally very familiar with all of 
this, but briefly, one of the things we are doing is a 
collaboration called Generation IV, which is a collaboration 
with nine other foreign countries on future reactor types.
    And then, most recently in the 2004 budget request from the 
President, we have asked for $63 million for a program we call 
advanced fuel cycle initiatives.
    And that is designed to produce technology that will allow 
us to reduce the waste in the first instance, reduce its 
toxicity and also to make any of the waste from nuclear energy 
more proliferation resistant.
    And so if you attack all of those things, waste, 
proliferation, investor certainty, we believe you can get to a 
point whereby 2010, which is another program we have, we can 
actually build our first nuclear plant in a long time.
    Because, as I said, it is, we believe it is vital for our 
future.
    Mrs. Wilson. Thank you. Mr. Wood, I have a question about 
the gas price indices. As you know, there has been recent 
information that the data that is given by the companies that 
do submit data is false or manipulated.
    And there are companies that rely on those indices in their 
contracts to set prices, and I think you also use them for some 
pipeline tariffs.
    Mr. Wood. Yes, ma'am.
    Mrs. Wilson. What is the solution to this? What are you 
looking at for getting a more reliable index or what are your 
answers?
    Mr. Wood. We have had a couple of workshops lately focused 
on actually other issues and this issue has crept into it as 
well.
    We got a report from the Committee of Chief Risk Officers, 
which is a group of energy industry, you know, executives that 
were trying to figure out the best way to get past the mess 
that the financial books are in right now.
    And, among other things, looking at accounting fixes. But 
one of the issues that they have focused on and proposed some 
solutions to last week, was the gas index and how that ought to 
be dealt with.
    On the other hand, the current providers of those indices 
are a number trade journals, publications. They have also 
proposed revisions to their own collection methodologies.
    At the end of the day, though, there is a question. If 
everybody doesn't have to play, in providing data, how do you 
know you are really getting the right universe of information 
to report an accurate price.
    You know, by and large everybody that wants to trade AT&T 
stock, trades it through the New York Stock Exchange or one of 
the publicly traded exchanges and you have got that range and 
that average on the information from everybody.
    We have nothing like that in the gas industry. We have got 
more like that in the electric industry, but it is pretty new. 
It is something that we just installed last year.
    We don't have authority to do this fix on the gas side. We 
are going to have a conference, we have announced that we are 
doing one in April, once we get past all the California dockets 
and the important things we have to resolve there, to focus on 
this answer.
    So if I could maybe beg off a month and give you a good 
answer after we hear from the industry what, and the parties 
and the customers, what is really the smart thing to do.
    But it needs probably a little bit more attention.
    Mrs. Wilson. Okay, thank you. And finally, Mr. McSlarrow, 
and this is not something you can probably answer here, but I 
would like to see the answer probably as a follow up to our 
discussion here today.
    I understand the department is changing its criteria for 
the EnergyStar windows program. And I wonder if the department 
could provide me with the criteria the department will be using 
as it makes a selection between the two proposals.
    And if you could take that back and get us an answer, I 
would appreciate it.
    Mr. McSlarrow. I would be glad to.
    Mrs. Wilson. Thank you, Mr. Chairman.
    Mr. Barton. Mr. Markey, you are recognized now.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Barton. For 4 minutes and 1 more minute to go over.
    Mr. Markey. Thank you, Mr. Chairman. First I would like to 
congratulate the Nuclear Regulatory Commission. They may not 
have an emergency evacuation plan for around nuclear power 
plants, but the definitely had one to get out of this committee 
to escape the full questioning and I want to congratulate them. 
Mr. McSlarrow----
    Mr. McSlarrow. They left me holding the bag.
    Mr. Markey. You have got the cleanest face here, Mr. 
McSlarrow. Today's Washington Post reports that some in the 
administration, as well as some in South Korea and Japan, have 
decided to give up on trying to stop North Korea from getting 
nuclear weapons.
    Except the fact that they are definitely going to have 
dozens of nuclear weapons instead of possibly having one or 
two, and focus instead on trying to prevent North Korea from 
transferring nuclear technology to other countries.
    Mr. McSlarrow, I received a letter from Secretary Abraham 
yesterday, responding to a letter which I sent him in October.
    In this letter the Secretary acknowledged that in May 2001, 
he extended authorization for 5 years to Westinghouse to 
transfer nuclear technology to North Korea. This is in May 
2001.
    He reveals in the letter that, ``to date approximately 
3,200 technical documents have been reviewed for export control 
concerns. Of these, roughly 3,100 were approved for release to 
North Korea, with the stipulation that they only be transferred 
when needed and the balance denied.
    ``Roughly 300 documents have been transferred to North 
Korea.'' The Secretary then goes on to say, again, ``recent 
actions taken by North Korea clearly violate its international 
non-proliferation obligations.''
    The administration is now considering appropriate courses 
of action, possibly to include suspension or revocation of the 
May 2001 Bush Administration authorization to transfer nuclear 
technology to North Korea.
    First, Mr. McSlarrow, how long have you been considering 
the cancellation of this nuclear agreement between the Bush 
Administration and North Korea?
    Mr. McSlarrow. The--I can't give you a precise date. It is 
as long as everybody is aware by reading the papers when this 
crisis first erupted on the front pages is about when 
discussion took place within the administration as to what the 
appropriate steps are.
    And we are trying to pursue this through multilateral, 
diplomatic negotiations.
    Mr. Markey. So did you begin reconsideration of this 
agreement immediately after learning of the secret or 
confirmation by the North Koreans of their secret nuclear 
weapons program?
    Mr. McSlarrow. We did. But there is also less there than 
meets the eye Congressman. I mean this is not nuclear 
technology in the sense that most people would understand it.
    This is licensing and safety procedures. We have always 
followed a policy of not transferring nuclear technology and we 
are following that policy and we won't make a----
    Mr. Markey. But this is an agreement to transfer to two 
nuclear power reactors to North Korea.
    Mr. McSlarrow. Correct.
    Mr. Markey. And my question is why haven't you already 
revoked the authorization to sell two nuclear power plants to 
North Korea? What are you waiting for?
    Mr. McSlarrow. We are waiting for, to allow the process to 
unfold.
    Mr. Markey. What else do they have to do before you would 
revoke the sale of two nuclear power plants to a homicidal 
sociopath?
    Mr. McSlarrow. Well, there is not transfer taking place 
right now, so revoking it or suspending is irrelevant to that 
point.
    What is relevant is the Secretary of State is trying to 
pursue this diplomatically and I am not going to say, at least 
in an open session, of what the steps are----
    Mr. Markey. I don't think, no, the Secretary of State is 
not advancing this diplomatically. The Secretary of State has 
yet to take this to the United Nations. It is 6 months.
    The Chinese and the Japanese and the South Koreans are 
basically holding our coat, you know, while we do this alone. 
And they have not done anything diplomatically. What is holding 
up the Department of Energy from canceling this agreement, Mr. 
McSlarrow?
    Mr. McSlarrow. We are not going to make a decision without 
consulting with the rest of the administration. This is a very 
delicate issue with North Korea.
    Mr. Markey. This is very----
    Mr. McSlarrow. As I know you are very well aware.
    Mr. Markey. This is very scary.
    Mr. McSlarrow. We did actually go to the United Nations. We 
asked the International Atomic Energy Agency to go to the 
United Nations Security Council, which they did.
    They referred it to experts. But we are pursuing it in 
multilateral ways.
    Mr. Markey. I think you are holding this up to reserve the 
right to still transfer the two nuclear power plants to North 
Korea. That is what I think the Bush Administration is going to 
do.
    I think if this was happening in Iraq, and you were still 
considering sending two nuclear power plants to Saddam Hussein, 
you would charge those who supported it with appeasement.
    I am not saying that here, but what I am saying is that 
this is a very serious issue. It is sending the wrong signal 
around the world that we are not, with all this evidence about 
Kim Jong-il, not just canceling these two nuclear power plants.
    And I don't care if Westinghouse wants it, I don't care who 
wants it. There is something more important than private 
commerce. And it should just be ended.
    And we should square up our policy in North Korea with 
Iraq, or else the rest of the world is going to think that we 
are hypocritical on this nuclear issue.
    And it is just time for us to end it, once and for all. And 
Bush Administration has to take the lead now.
    Mr. Barton. The gentleman's time--I agree with the 
gentleman from Massachusetts. I want to associate myself with 
what you said. I will give the Deputy Secretary a chance to 
respond and then we are going to go Mr. Otter.
    Mr. McSlarrow. It is a factual dispute. When this first 
erupted and news of what we found out about the uranium 
enrichment program took place we halted the oil shipments to 
North Korea. No meaningful work is being done on the light 
water reactors.
    You can quibble with whether or not the agreed frame work 
that was agreed to by the Clinton Administration was good 
policy or not.
    The fact is when we found out what was going on in North 
Korea, things have changed, nothing is happening except a 
diplomatic initiative to figure out a resolution.
    And we are not at the end of that process yet.
    Mr. Markey. Does the State Department oppose cancellation?
    Mr. McSlarrow. No decision has been made on that.
    Mr. Markey. They don't oppose cancellation?
    Mr. McSlarrow. No decision has been made.
    Mr. Barton. We are going to have to continue this at a 
later--we have got two more members on the Republican side. We 
have got a series of three votes that are going to start in the 
next 20 minutes.
    I am going to ask these two gentleman to do their questions 
and then I am going to give the panel a chance to have a very 
brief personal convenience break.
    We will start a second round if we can start it before the 
series of votes. But if we have to go vote, then I am going to 
have to release the panel, because we won't be back over here 
until after 2 o'clock, and we have an entire second panel with 
seven witnesses.
    So, I know that is a little convoluted. If we are quick, we 
can get some second questions in, if these two gentleman ask 
their questions in 5 minutes or less.
    I will recognize Mr. Otter for 5 minutes and then Mr. Issa 
for 5 minutes.
    Mr. Otter. Well, thank you, Mr. Chairman, and I appreciate 
Mr. McSlarrow and the commission for being here today and 
responding to our inquiry.
    I would like to get back to the genesis which provided the 
opportunity, I guess, the reasons for us to be here today. And 
let us go back to the energy crisis of 2000.
    And primarily, where it really focused, the greatest 
distortion was on the west coast, the southwest coast, if you 
will, which caused ripples everywhere else.
    Coming from the pacific northwest, I saw some things 
happening in the lower southwest that were--I can say 
California--thank you, Mr. Issa.
    The lower southwest that were very disturbing because they 
were running under the guise of deregulation. And, in fact, 
although I am new to this committee, I am not new to the issue, 
because we held several hearings in the Government Reform 
Committee over regulatory agencies.
    And what we found was basically that California had 
released the wholesale price but set the retail price. And then 
were alarmed or disturbed that there wasn't any conservation in 
the process.
    Had they released, do either one of you gentleman or 
anybody on the panel, know of any study that was conducted by 
either the Department of Energy or FERC, to find out how much 
conservation would have in deed taken place had the market 
place allowed to work its magic and floated to a level which 
would have got a certain amount of conservation.
    And how much conservation would of we in fact gotten in 
California?
    Mr. Wood. It wasn't a FERC-initiated study, but the 
subsequent summer which was, of 2001, which is when California 
did implement a number of conservation measures, actually is a 
number of non-governmental types were reviewing that.
    But I think the data are pretty clear. I mean if there is a 
clear price signal in basically either a carrot or a stick, but 
one of them, that there is a pretty clear response. A flat rate 
clearly I think your point is correct.
    The flat rate just continuing as usual does not send a 
signal to a customer as my natural gas bill sent a signal to me 
last night to really watch and conserve and cut down the 
thermostat or up as it may be.
    Mr. Otter. Well, one of the concerns, obviously, that I 
have is how much additional information, or I guess I should 
say regulatory authority that FERC is asking for through either 
your own agency or through the Department of Energy.
    And it seems like we are asking to override the States. We 
are asking to override regional producers, investor-owned 
producers of energy.
    We are asking to even municipal energy producers. And yet, 
we haven't gone back and said we are never going to engage in 
this kind of market manipulation.
    If there was ever any serious market manipulation that was 
engaged in, as far as I am concerned, the reason we gave relief 
to those who may have engaged in that later on was the fact 
that we released the wholesale price and set the retail price, 
therefore allowing, not allowing the market place itself to 
work.
    But I notice that you didn't ask for any regulatory 
authority over allowing folks to do that, which I think was the 
very genesis of the problem in the first place.
    Let me just run through several very serious questions that 
we would have in the pacific northwest and in particular Idaho.
    Obviously the transmission contracts under the transmission 
authority and organizations that you are asking for, concern me 
because it appears that all of our long term transmission 
contracts that we are already engaged in, are no longer going 
to be allowable under the new rule. Am I wrong?
    Mr. Wood. The existing contracts, in fact, we have already 
approved in the context of RTO West, which is a filing of Idaho 
Power and others that the existing contracts can either choose 
to convert to the new service or stay with the old service 
until the contract runs out.
    So that was actually, yes, sir, we have approved that in an 
order about, in the fall.
    Mr. Otter. So if we have got a 20 year contract on 
transmission----
    Mr. Wood. Then that stays and we work around that.
    Mr. Otter. Then how would you provide for the standard 
market?
    Mr. Wood. Well, it is harder. It is just a long transition. 
But we, as we did in the gas industry, it was the view of us 
that we do not need to abrogate existing contracts to make this 
work.
    That we work through it over a longer period of time.
    Mr. Otter. Well, my time is about out and I appreciate your 
response. But, I just want you to know that in my country, in 
Idaho, almost everything that we produce in Idaho is a value-
added product.
    And every value-added product has a large contingent of 
energy in it. Either driving brand new technology or driving 
natural resources into a form that the world wants to consume. 
And so energy is, not just important in our lifestyle, it is 
important in our economy.
    It is important to our ability to produce, whether it is on 
the farm or in the factory. And our ability to live no matter 
where that is. Thank you, Mr. Chairman, I yield back.
    Mr. Barton. The gentleman yields back. We recognize Mr. 
Strickland of Ohio for 8 minutes.
    Mr. Strickland. Thank you, Mr. Chairman. Mr. Chairman, I 
have a question that I was wanting to direct toward Chairman 
Meserve and I was wondering if I could submit that? I will get 
back to that.
    Mr. McSlarrow, if the papers are right, and if we are 
prepared to accept North Korea as a nuclear power and basically 
move on from there, it seems fairly outrageous to me that we 
would accept that without first of all engaging in bilateral 
discussions with this country to see if we could prevent that 
awful conclusion from becoming a reality.
    But I want to thank you for issuing the Department of 
Energy's Physician's Panel Rule for the Energy Employees 
Occupation Illness Compensation Program Act.
    From hearings held in this committee and others, we know 
that workers were placed in harms way at many of DOE sites 
under the pressures of the cold war. And at least we can 
provide some assistance for these workers who have been harmed.
    I am pleased that the Department included many 
recommendations from the bipartisan congressional group on both 
sides of the Capitol.
    But today the Energy Department has received approximately 
14,000 requests for assistance under DOE's program for claims 
related to State worker compensation or Subtitle D of the law.
    Your staff indicates that a mere seven claims have been 
processed through the Physician's Panel in the 6 months since 
the Physician's Rule was issued.
    That is seven claims in 2\1/2\ years since the bill became 
law. By comparison, the Department of Labor has been tasked 
with reviewing claims for cancer, beryllium disease and 
silicosis, under this same program.
    And to date the Department of Labor has received over 
39,000 claims, recommended decisions on over 16,000 claims and 
issued $483 million in payments to 6,700 claimants since July 
2001.
    In deed, DOL began paying claims 9 days after the deadline 
for accepting claims and processed and paid thousands of claims 
in the first 6 months.
    And the question that I have is how long will it take for 
DOE to work through its backlog of claims?
    Mr. McSlarrow. First, let me just be clear. The policy of 
the United States is for nuclear weapons free Korean peninsula. 
I don't believe everything I read in the papers, and that 
hasn't changed.
    Second, I appreciate your question about the Physician's 
Panel and the law and appreciate your leadership on all of 
that.
    First, I do want to at least claim some credit. DOL could 
not have processed its claims, as you well know, without DOE 
having gathered the records in the first instance.
    We did that, it was the first phase of the program. And we 
think it is great that they are doing a terrific job on that.
    The Rule for our part, that we are monitoring, as you know, 
did not go final until September 2002. We have barely gotten it 
off the ground, that's correct.
    But the good news is that we are now at a point of 
processing claims where we gather all the records about a given 
site or location or contractor.
    The hard case is the first one. Once you do it then you 
start moving right through it and the rejections, I can't give 
you a final date, I will try to give you one for the record.
    But I do know that in short order, going from seven or 14, 
is actually what I think we are at today, we are going to be 
going through hundreds a week.
    Mr. Strickland. Just a follow up, if I may. It is my 
understanding that DOE has contracted out the claims processing 
to a private entity called SEA. How have they been unable to 
move these claims very quickly, as we know.
    I further understand that SEA still doesn't have final 
claims processing procedures written up and available to 
claimants. And I am just asking, would you be willing to take a 
hard look at this to see if SEA is going to be able to do this 
in an appropriate, expeditious manner?
    And, if not, take appropriate action?
    Mr. McSlarrow. I would be glad to.
    Mr. Strickland. Mr. Chairman, you weren't paying attention 
to me earlier, but I had asked if I could submit a question to 
Mr. Meserve since he had to leave.
    Mr. Barton. Without objection.
    Mr. Strickland. Thank you so much. And I yield back my 
time, sir.
    Mr. Barton. The Chair thanks you for yielding back your 
time. The Chair would recognize Mr. Issa for 5 minutes.
    Mr. Issa. Thank you, Mr. Chairman. Chairman Wood, I guess, 
although this is a FERC general question, it probably falls to 
your broad shoulders primarily.
    As my colleague alluded to in non-specific terms, perhaps 
not fully understanding that California goes considerably north 
of some portions of Idaho, maybe he doesn't believe so, but in 
either case the pacific coast, dominated by the State of 
California, did experience market opportunism or market 
manipulation.
    But that is open for some debate. But there is no question 
that suppliers of energy took full advantage of the opportunity 
to get exorbitant rates from the people of California.
    And as my colleague, again, loosely alluded to, it was our 
own damn fault for having a system that just didn't make any 
sense.
    and then when we discovered that is was dysfunctional, we 
didn't do anything about it for a very long time. Now the part 
that is open to debate going forward. When we are looking back 
at 2000-2001, I understand that you are in the process of 
figuring out the amount of unfair compensation that was 
received.
    And I would like you to explain for myself, for the record, 
and hopefully for the people of California, because I think it 
is very important, the difference between our State 
administration, the Governor's interpretation of what we are 
entitled to in the way or repay and your interpretation.
    And I will just be simplistic for a moment. Our Governor 
believes that everything over and above the rock bottom rate 
that you would have paid if you had long term contracts and you 
hadn't deregulated and what was actually paid, is the amount 
that the State of California is entitled to.
    That is my interpretation. And then I would like you to 
explain how you are going to arrive at whatever figure you are 
going to arrive at based on the criteria of something else as 
to what the wholesale price should have been fairly.
    Mr. Wood. When we, last year, voted a mitigation plan in 
place to keep the, basically set the price where a competitive 
market would have set it. That became the bench mark.
    Wherever the competitive market, working on supply and 
demand, had set the price. So you look at what plants would 
have run. What does it cost to run the most, the marginal plant 
that is setting the price.
    And that is, a big part of that price is what was the gas 
price at the time. So that is really a very key driver here, 
and just kind of keep that thought out there.
    What we have done, and it took longer than we had hoped, 
but it took a while to calculate that amount because you are 
looking at every hour, actually every 10 minute segment of an 
hour over an 8-month period in the California market with, you 
know, numerous power plants and power customers and the like.
    The difference between what was charged in that hour and 
what this formula would calculate is really where we have gone 
forth and sent the calculators off to do.
    That, in fact, came back with a number, that is before the 
commission for review now as to whether it was right or wrong 
or high or low or just right on, of $1.8 billion.
    There was a question raised about the use of the gas price 
in that number. And if a different gas price is used, that 
number could change notably.
    One of the, I think, largest issues that we have already 
ruled under our law, we can't do, is to go back before the date 
that the complaint was filed and do this same calculation going 
backwards.
    And I think that is just an issue where our Federal Power 
Act is pretty clear that a refund obligation can start as early 
as 60 days after a complaint is filed.
    Now the Chairman's mark goes back and gets rid of the 60 
days so that you haven't lost those 2 months, going forward.
    But the law we have got to work with today does make that, 
going back, and I think that is probably a big part of the 
difference between where the Governor and some of the State 
officials have talked about on refunds and what the commission 
has done on the same issue is the building to go backward.
    Mr. Issa. I appreciate that. And I think that will help the 
people of California understand how a fair price was realized. 
One quick follow up question or separate question.
    The use of public lands for transmission lines in 
California. Can you briefly State the administration's position 
and how we and the Congress, when delineating potential lines 
should approach that?
    Mr. McSlarrow. Our position is that the Federal Government 
has to do its fair share. We can't, on the one hand, talk about 
the need for more transmission capacity and just expect to go 
in the west where there is such huge areas under Federal 
ownership that somehow it is going to get around that.
    I know the Department of Interior and the land management 
agencies themselves, working with DOE and FERC and some others 
who have some signing authority, whether it is for gas 
pipelines or electricity transmission grids, have been working 
together to try to streamline ensuring that we can make those 
available.
    Mr. Issa. Thank you, Mr. Chairman.
    Mr. Barton. We have a vote, three votes on the floor. We 
are going to recognize Mr. Wynn for 5 minutes, and then we are 
going to recess.
    And then we will ask you folks to come back. Can you all 
come back about 2:15? Anybody that has tremendous heartburn? I 
don't think the second round of questions are going to take 
that long.
    We do have another panel after you. So, I recognize Mr. 
Wynn for 5 minutes. Then we are going to recess until 2:15, and 
begin our second round of questions at 2:15.
    So Mr. Wynn is recognized for the last question period of 
the first round.
    Mr. Wynn. Thank you, Mr. Chairman. Mr., excuse me, 
Secretary McSlarrow. Right now our strategic----
    Mr. Barton. Mr. Wynn has 8 minutes. You have 8 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. Right now strategic 
petroleum reserve is down 100 million barrels below capacity.
    Is it your expectation that we will be replenishing this in 
the near future?
    Mr. McSlarrow. Yes. Right after September 11, President 
Bush directed us to fill the strategic petroleum reserve to its 
full capacity of 700 million barrels.
    We began to do that. It is now at 599 million barrels, it 
is the highest point ever in its history. Over the last 4 
months we have deferred putting oil into the petroleum reserve 
because of the crisis in Venezuela in order to ensure that we 
minimize any additional price pressure on crude and on gasoline 
and home heating oil.
    But it is our full intention to get back on track and fill 
the reserve by the end of 2005 to the full capacity of 700.
    Mr. Wynn. By the end of 2005.
    Mr. McSlarrow. Yes, sir.
    Mr. Wynn. So that anticipates a likely increase as a result 
of our activities in Iraq?
    Mr. McSlarrow. It is impossible to anticipate what is going 
to happen there. What I do know is that by deferring the oil 
that was supposed to go in the last 3 months, we actually get a 
premium, is that we get more oil later.
    So we should still be on track.
    Mr. Wynn. Okay. The other issue you talked about was the 
hydrogen vehicle and again our dependency on foreign oil. And 
the target that I seem to hear you saying is 2020, based on the 
very modest investment of $1.7 billion the President is 
recommending.
    I guess my question is somewhat rhetorical, but why can't 
we put more money into this if it is in fact a priority.
    And why can't we move that up with a major commitment to 
make it in 2010 rather than 2020, given the fact that after 
Iraq we are likely to see a much more volatile situation with 
respect to foreign oil and given the instability in Venezuela?
    Mr. McSlarrow. Originally when our department studied what 
it would take to produce a hydrogen economy, if you will, the 
road map showed us, even with high expenditures, not being able 
to accomplish these same kinds of decisions that you were just 
referencing until like 2035 or 2040.
    The Secretary and the President came back to our analysts 
and said tell us how fast you can move this up and then tell us 
how much it will cost?
    The answer came back that we could make a commercialization 
decision by 2015, with the idea of mass penetration by 2020.
    And it turns out, working with the scientists who have been 
working on this, this is one of those things that you just 
can't spend more money and speed it up.
    There are things that are sequential in nature that 
prevents----
    Mr. Wynn. So that is the administration's position that 
additional funding would not change the timeframe?
    Mr. McSlarrow. Not based on what we know right now. 
Obviously, if we find out differently down the road, we would 
be interested in trying to move up the schedule.
    Mr. Wynn. All right. Is there, let's see, Mr. Wood. Do you 
support the reliability language introduced in Barton-Tauzin?
    Mr. Wood. Yes, sir, I think that language looks fine.
    Mr. Wynn. Okay. And the other question, and any of the 
three commissioners may want to respond to this. It says, it 
proposes three conditions for PURPA relief.
    And I don't understand, because they all seem to be relying 
on a competitive market, how a competitive market addresses a 
problem of expanding utilization of renewable energy.
    It seems to me, and I could be way off the mark, but it 
seems to me that just the opposite would be the case. If the 
renewables were more expensive and less profitable that there 
would be a competitive dis-incentive to use renewables.
    So maybe I am looking at this wrong, but could you explain 
how those three provisions in Barton-Tauzin would work?
    Mr. Wood. All right, this is in Section 7062(m)1(a). The 
first is, I think to cut to the chase, I think the issue is 
that, and I remember this amendment from last year, Senator 
Carper, I think, introduced it on the Senate side.
    I am pretty sure this is language that mirrors that. Is 
that if there is a sufficiently competitive market to sell 
into, then the requirement from the 1978 law that the only 
person to sell to at that point was the local utility, so they 
had to take the power, is that the competitive market is 
enough.
    Now if there is a resource, such as maybe some renewable 
resources or others, may be more expensive, then the clearing 
price of the market, I think that would be a problem.
    I think there would be perhaps an inability to profitably 
generate that power. I don't honestly think that in most of the 
competitive markets there is an open retail State, there is a 
lot of customers who are interested in renewable power.
    I am not sure that that would work out in reality to be a 
problem, but theoretically, I think, you know, it could be.
    Mr. Wynn. So the plan would be for you to make a 
determination with regard to the competitiveness of the market 
place.
    And if you found competitiveness, you are saying that you 
would then allow PURPA relief. Is that----
    Mr. Wood. That is what the provision says, yes, sir. That 
we have got to make one of these three findings, not all three 
together.
    You have either got a real market to sell into or something 
that resembles that or an RTO. Which would be hopefully a 
competitive market to sell into.
    So I think A, B or C, really, basically is the same thing. 
Do you have an alternative or alternatives to sell to other 
than the utility that you have been selling to for 20 years?
    And if the answer to that is yes, then the PURPA relief 
would happen.
    Mr. Wynn. All you need is one alternative? I mean do you 
make a determination of----
    Mr. Wood. It actually does say competitive market, so it 
doesn't just say you have got one other one, but do you have a 
competitive market. Which, in, I think, our understanding, 
would be certainly more than one alternative.
    Mr. Wynn. All right. I relinquish the balance of my time. 
Thank you very much.
    Ms. Brownell. Mr. Wynn, could I just add that we are about 
wholesale choice, but in Pennsylvania where we had retail 
choice, 20 percent of the customers who exercised that choice 
chose green power, often at a higher price.
    Mr. Wynn. Now when you say green power, are you referring 
to clean coal or are you referring to renewables?
    Ms. Brownell. I am referring to renewables.
    Mr. Wynn. Okay, all right, thank you.
    Mr. Pickering [presiding]. Thank you, we are closing in on 
the time where we have a vote and we will recess. But I do want 
to welcome Mr. McSlarrow, an old friend, to the committee. I 
thank you for your testimony.
    I do have a number of questions that I would like to ask 
the panel and specifically Commissioner Wood, Chairman Wood. As 
you know, we in the southeast are very concerned about your 
work on SMD.
    I think we have made progress on trying to perfect the 
wholesale markets. Your efforts and the industry's efforts on 
regional transmission organizations has made tremendous 
progress.
    But I do caution you, and as you go forward on the SMD, 
that there is a rule, not only in the market place, but in the 
political market place, that if you get too far out, it can be 
overturned.
    And we need to be very careful that as you go forward that 
there is a consensus in my region and in other regions as to 
how these costs are going to be possibly transferred and what 
possible economic harm could be done.
    I do want to submit to the record some questions. But, Mr. 
Wood, let me ask--people have talked about the concept of 
socializing costs when an IPP connects to a transmission grid.
    Do you believe that there should be a socialization of 
cost?
    Mr. Wood. I think it depends on really where the load is 
serving. I know there has been a concern in the south that a 
lot of that IPP generated power is being exported from the 
region so there is nobody benefiting from it being there.
    I think we have embraced that, that that should actually 
not be born by the local ratepayers because they are not 
getting benefit. But I think it should be focused on where the 
benefits are.
    In many cases across the rest of the country the IPPs are 
building near where their load is so putting the transmission 
costs in the pot with everybody else's is not objectionable.
    But I understand, from hearing back from a lot of the 
people you reference, our State colleagues and some of the 
customer groups down there that they are concerned that the use 
of that power for export really does benefit someone else and 
that someone else ought pay the price.
    I think we are looking forward to a response from the 
filing utilities down there, Entergy, Southern and the others 
in the Seatrans proposal for a voluntary RTO to define exactly 
how we would determine that beneficiary.
    Mr. Pickering. I have some specific questions about the 
recent action that you took that could retroactively apply some 
of the new interconnection policy agreements to the contractual 
agreements that were reached in my region.
    And so I want to understand your thinking as to why you 
reopened some of those contractual agreements and how you want 
to look at participant funding.
    But we are out of time today, and I will follow up with 
some questions. I thank you and all of you who have spent a 
good bit of your day here and for your testimony.
    We will recess until 2:15. At that time we will be hearing 
from the second panel and continuing the--oh, I'm sorry. The 
second, not the second panel, your second round.
    So that will start at 2:15. Thank you very much.
    [Whereupon, at 1:48 p.m., the subcommittee recessed, to 
reconvene 2:19 p.m., the same day.]
    Mr. Barton. If we could have our panel reassemble. We 
concluded our first round of questions, we are going to start 
the second round with members present and any members that show 
up.
    As we begin, we are going to recognize the ranking member, 
Mr. Boucher, for 5 minutes.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. And 
my thanks also to our witnesses for their willingness to remain 
with us for what is proving to be a very lengthy day.
    Mr. Wood, I would like to take a few moments to discuss 
with you the standard market design proposed rulemaking which 
you presently have underway.
    It strikes me as a somewhat complex mechanism. I have 
reviewed it carefully and I have a number of questions about 
just how the mechanics of it would work.
    And let me just raise with you some of the questions that 
have been brought to my attention and give you an opportunity 
to respond.
    Reference was made earlier, in the course of this hearing, 
to the action taken by the Virginia General Assembly, that in 
essence says that investor-owned utilities may not place their 
transmission in a regional transmission organization for a 
period, I think, of 1 year from the effective date of that 
measure. I can tell that what generated that proposal and the 
concern that gave fuel to it as it was considered in our 
State's legislature, was the provision in your notice of 
proposed rulemaking that would say that electric utilities 
would no longer be in a position to favor their native load.
    That they in effect would be placed in a bid in the market 
for transmission access, in competition, perhaps, with 
unaffiliated generators. And that the result of their having to 
bid for access to their own transmission lines, might be an 
increase in the cost of electricity for consumers, occasioned 
by an increase in the transmission component of that charge.
    And so my question, my first question to you is, how valid 
is that concern? Do you think there would be opportunities or 
occasions where the price of electricity for consumers might 
increase on account of what I have described?
    Or would there be offsetting savings coming from lower 
generation components for that charge based upon the presumed 
freer flow of unaffiliated generation into the service 
territory?
    How do you balance that and what do you say to those who 
have concerns that the price for electricity for consumers will 
increase because of this provision?
    Mr. Wood. We certainly heard those concerns, Congressman 
Boucher, in response to the commission's initial proposal. And 
I expect that we will make very clear how current utilities and 
current customers can be held harmless on day one.
    But what we are really looking after is a longer term plan. 
And I think it is important to think of the cost that you are 
paying of generation, inefficient generation, which is what we 
call congestion, and I just put that as a little small bar on 
top, and then transmission.
    The rate of transmission is set. Generation, the broader 
the market and the more efficient it is, certainly the pressure 
is downward on generation is where we expect the bulk of the 
savings will come.
    But this part in here that we are paying today, is for the 
inefficient dispatch of the power grid because of congestion. 
Because of the current lack of investment in the grid itself.
    And if we can identify that and isolate that out, as our 
pricing policies would do, and then allow that to be competed 
down and competed away, either through construction of better 
sited generation or through demand response.
    Or through even renewables, as I heard some of the members 
mention. Or through new transmission investment. Those kind of 
things can really get that inefficiency, that cost of 
congestion whittled down and whittled away.
    What we were not clear enough about, and I understand the 
concerns. And again, the three of us have heard this in 
excruciating detail. Is we want the ability to preserve what we 
have today.
    And we have committed to doing that in a number of 
implementation orders of the RTOs, which really is the same, 
really a broad agenda as the SMD.
    The SMD is to give some rational frame work for the RTOs. 
But, yes, sir, I think we have heard that and we full expect to 
address that and hopefully address it fully for the people who 
raise those concerns, because I would have them as well.
    Mr. Boucher. Did you say there might be some mechanism to 
hold harmless consumers so that they would not experience price 
increases as a consequence of this rule going into effect?
    Mr. Wood. Correct. And one of the things that we have 
indicated that we are looking at, and I think we have put in a 
couple of orders, but certainly we have talked about 
informally, that would be in the white paper, is the ability to 
have that day one cut over of your rights today are this, your 
rights tomorrow are the same thing if not better.
    And then going forward, those rights get in the broad 
market place with everybody else's.
    Mr. Boucher. I will await with interest your further 
illumination on that point. Let me quickly ask one other 
question. I just have some doubts about how the mechanism works 
for the disposition of the receipts from the bid for congestion 
rights in those instances where congestion exists, who actually 
gets the money when a bid is made and money is paid for the 
right of access during times of congestion?
    And then secondarily, at the end of 4 years you are 
proposing that the entire congestion receipt mechanism be 
eliminated and that there be an auction of the congestion 
rights.
    Who would get the receipts? Upon the completion of that 
auction, where would that money go?
    Mr. Wood. The receipt, to take the latter question, I 
expect that we will be looking at the 4 year, it just was kind 
of an absolute standard.
    That we did admittedly indicate after the 4 years we could 
just keep continuing what we have. But a lot of people just 
viewed that the 4 years, it would be over with.
    But none, notwithstanding that, we anticipate clarifying 
how the rights will be allocated up front. And I think a lot of 
the State commissioner colleagues have indicated they would 
like a role in allocating those up so that the current uses of 
the grid are maintained.
    And I think we are probably pretty comfortable with that. 
On the other issues, when congestion is----
    Mr. Boucher. So the answer is for an auction at the end of 
4 years of the congestion rights, you are not entirely sure you 
are going to maintain that structure?
    Mr. Wood. Right. But where we do have auctions, the 
revenues that are generated at auction are credited back to the 
customers or the utilities serving the customers that are 
paying the cost of transmission.
    So, in other words, the folks in the area that are paying 
the access charge to use the grid today. Which are mostly the 
local utility customers would be credited back with the auction 
revenues.
    Mr. Boucher. All right, that is very clear. And the other 
question?
    Mr. Wood. When you dispatch out of merit, basically you go, 
this inefficient dispatch of the, because of congestion I am 
having to turn on the unit here as opposed to this one here 
which would have been the smarter one.
    This is $35, this is $55. That $20 delta is going to be 
paid for by the person who does not have transmission rights. 
Just unprotected, unhedged rights. He, that customer will, that 
required that extra power, will pay that $20 increment to that 
generator.
    So that is how the congestion works. Is to make sure that 
the person who is causing the congestion is the one who is 
paying the bill. As opposed to spreading it across the entire 
grid and making everybody pay, even though they didn't cause 
congestion.
    Mr. Boucher. And tell me again who gets that $20?
    Mr. Wood. The generator who has dispatched out a merit, who 
cost $55 to run as opposed to the market clearing price of $35, 
that all generators were getting at the time.
    Mr. Boucher. Okay. Well, thank you. It is a very complex 
mechanism. I am going to send a letter to you asking for a 
statement of the problem that you see, on a national basis, 
that this very complex mechanism is designed to address.
    And that will give you an opportunity to describe at some 
length, exactly why this kind of structure is necessary. Lots 
of questions remain about it.
    I am sure you are going to be hearing them. I am hearing 
them every day and hopefully we will have further opportunities 
to discuss this prior to your putting a rulemaking into effect.
    And thank you very much, Mr. Wood, and Mr. Chairman, thank 
you.
    Mr. Barton. I just have one question. Mr. Wood, do you 
still expect to issue your final rule in April?
    Mr. Wood. No, sir. We are doing a white paper, which is 
really our first kind of collective response to the comments 
that we have heard, you know, 1,000 comments. Really we have 
gotten three rounds of comments on the rule in November, 
December and February.
    And then a number of probably 300 meetings between, that 
either we have had or the staffs have had with parties that are 
interested.
    So there has been a lot of good debate and actually a lot 
of refinement on the issue. But the April white paper will be 
our response to, here is what we said, here is what we have 
heard, here is where we are today.
    Mr. Barton. So what is your expectation if you issue a 
rule, a final rule, when would that, when would the earliest 
that would occur?
    Mr. Wood. I have gotten burned by making that commitment in 
the past. I certainly think late summer at the earliest.
    Mr. Barton. Okay. The Chair recognizes Mr. Markey for 5 
minutes.
    Mr. Markey. I thank the Chairman very much. Mr. McSlarrow, 
I just wanted to put on the record that I am very impressed 
with the confidence the Department of Energy has that they can 
construct a Star Wars system to knock down incoming ballistic 
missiles on a couple of minutes notice.
    And that they can develop that technology. And I am also 
very impressed that they have the confidence that they can 
develop a hydrogen car 15 or 20 years from now. But I am 
extremely disappointed that they can't figure out how to use 
off-the-shelf technology today to improve the fuel economy 
standards of SUVs, and that is an available technology.
    The other technologies are speculative at best. They may or 
may not ever develop, and I would just encourage you to 
continue to try to move along that front.
    Chairman Wood, it is now 3 years since electricity price 
spikes afflicted California and the pacific northwest. And 3 
years ago your predecessor, Chairman Hebert, told this 
subcommittee that these price spikes were just the result of 
natural market forces supply and demand.
    We now know differently. We now know that Enron, Reliant, 
El Paso and others were engaged in a wide array of abusive, 
deceptive and manipulative trading practices that helped drive 
up prices in the western market.
    The FERC staff, State regulators and others have been 
investigating these manipulations and hopefully these actions 
will result in refunds being given to those victimized by these 
frauds.
    My concern is that if these refunds are granted, that it 
will, at best, be a posthumous victory for those utilities and 
consumers that were harmed.
    I think that you need to have stronger regulatory tools in 
your quiver, than the mere threat of denying market based rates 
or seeking a refund for unjust, unreasonable and unduly 
discriminatory or preferential rates.
    As I understand it, the Federal Power Act does not have a 
basic anti-fraud, anti-manipulation provision with civil and 
criminal penalties.
    The gentleman from Michigan and I crafted an amendment last 
year which we offered in the Energy Conference, which would add 
such a provision to the Act.
    We also introduced this as a free-standing bill. It is 
based on the anti-fraud provisions and the Federal securities 
laws.
    Would you support that kind of power?
    Mr. Wood. It certainly sounds appropriate, sir. I would 
have to pull that bill, I don't remember from last year. But, 
yes, sir, I think, to be sure, one of the items that we are 
doing now may be challenged later in court if this provision is 
not included, is to include that in the standard market design 
rulemaking.
    And we have got a list of the seven deadly sins and we are 
going to basically put that in FERC regulation. But it may be 
challenged if we don't have sufficient statutory authority for 
it.
    I think we do, but in case we don't, I would certainly 
appreciate any buttressing from the Congress.
    Mr. Markey. Commissioner Massey and Commissioner Brownell, 
do you, would you accept that additional set of powers for you 
to act in the manipulation and fraud area?
    Mr. Massey. I would, Congressman, and I think it is an 
excellent idea.
    Mr. Markey. Thank you. Commissioner Brownell?
    Ms. Brownell. I would happily do so. Markets do not work 
where there is a lack of confidence and a lack of 
accountability. So I would applaud your efforts in that regard.
    Mr. Markey. Okay. Now, Chairman Wood, the discussion draft 
that Chairman Barton circulated last Friday contains a 
prohibition against round tripping or wash trades. Is this the 
only type of abuse in trading activity that the FERC staff 
identified in its investigation into Enron and California 
electricity markets?
    Mr. Wood. No, sir, there are others. And, again, they are 
included in our deadly sins in the----
    Mr. Markey. Do you think, in other words, the point I guess 
I am getting at is do you believe that all abusive and 
manipulative trading practices should be prohibited or just 
that, just the couple that are mentioned?
    Mr. Wood. I think they should be. I think it is important 
to define clearly, as I think that particular sin was defined 
pretty clear as to what it is so people know what counts and 
what doesn't count.
    But conceptually, yes, sir.
    Mr. Markey. Okay. Let me turn to an issue which of great 
concern to many of us in New England. Recently ISO New England 
submitted its standard market design proposal to the FERC.
    One part of that plan would designate eastern Massachusetts 
and the Greater Boston area as a designated congestion zone. As 
a result, electricity generators or marketers in the zone, 
would be given a safe harbor, allowing them to charge higher 
prices.
    A step which the ISO claims is needed in order to 
incentivize new generation and transmission. However, we have 
been building new generation in Massachusetts.
    I have two new gas plants coming on line in Everett and I 
have been told that efforts are being made to relieve 
transmission constraints in and around Boston.
    Here is my concern. Some utilities in my district and some 
of their customers have expressed a fear that the proposed safe 
harbor could become a pirate's cove for trading abuses, similar 
to that which occurred in California.
    Specifically the fear that allowing generators to avail 
themselves of the proposed safe harbor, even in periods where 
there is no actual congestion.
    Can you alleviate my concerns about this, Mr. Chairman?
    Mr. Barton. This will have to be the last question and then 
we will go to Mr. Waxman.
    Mr. Markey. Okay, thank you.
    Mr. Wood. Certainly the designated control area, safe 
harbor issue, is one that is raised before our commission. We 
have ruled on it.
    It is an attempt to identify congestion and make it, you 
know, focused on the areas where it happens. I do note that 
just this week the ISO New England filed, just to make sure it 
had the authority to yank that without having to go through the 
60 day process at FERC if they find that it is not working as 
intended.
    Now that is something that they just filed and asked for 
from us. But I think it is looking at California so they don't 
have to wait for 30 or 60 days to make changes to their system.
    I think in the past week that there has been this new 
mechanism in place, there hasn't been congestion on the system 
at all.
    So the market clearing price in Maine and Connecticut and 
Boston and all the areas, congestion or not, have been the 
same. So I don't think that in the times when it is not 
congested, that this safe harbor will in fact be and issue at 
all.
    Because I think the market clearing price will be certainly 
probably below it.
    Mr. Markey. Shouldn't we be able to get ourselves off the 
list, if there is not congestion.
    Mr. Barton. Okay, the gentleman's time has expired.
    Mr. Markey. Thank you.
    Mr. Barton. We have another member that wishes recognition. 
Mr. Waxman is recognized for 5 more minutes.
    Mr. Waxman. Thank you, Mr. Chairman. Mr. McSlarrow, I want 
to follow up on your answers regarding the President's hydrogen 
program.
    First, I would like for you to submit for the record the 
administration's projections on how much oil the Nation will 
consume in 2040, and also explain how this projection was 
calculated and what assumptions about fuel economy and oil 
production were used.
    If we can get that for the record. Just so it is clear on 
the record, I understood you to say that hydrogen cars, under 
the President's hydrogen proposal, would not significantly 
reduce the Nation's oil consumption before 2020, however R&D 
and tax incentives for new technology would help. Is that 
right?
    Mr. McSlarrow. What I answered was whether or not there 
were any other technologies that could reduce it before that 
time, and I said yes.
    The tax credits for hybrid vehicles being one example.
    Mr. Waxman. Okay. Can you give the committee an estimate of 
how much projected oil consumption will decrease as a result of 
these new policies and other alternatives? You can do that for 
the record, if you don't have it off hand.
    Now, you talked about tax incentives. It appears to me that 
the President's budget is much more committed to luxury SUVs 
than it is to hybrid vehicles.
    For example, a Hummer H2 is reported to get 11 miles per 
gallon, while a Toyota Prius can achieve over 50 miles to the 
gallon while meeting the most rigorous air emission standards, 
without question encouraging the purchase of vehicles such as 
the Prius over the H2 would help meet the dual goals of clean 
air and decreased oil dependence.
    Unfortunately, the Bush plan increases incentives for 
vehicles such as the H2 instead of energy efficient vehicles 
like the Prius.
    If the Bush plan were adopted, a small business could 
deduct the entire price of the $55,000 H2 in the first year it 
is put into service.
    The business could only deduct about one-half of the 
$20,000 Prius in the first year and the Prius would remain 
subject to the luxury car tax. Is this an inaccurate summary of 
the President's tax proposal?
    Mr. McSlarrow. The tax provision that I am familiar with on 
the hybrid vehicles is fairly straightforward and would not, in 
my view, drive you toward a vehicle that is a larger 
consumption vehicle.
    I would be glad to give you an analysis of it, in detail, 
for the record.
    Mr. Waxman. I would appreciate that and I would like to 
submit for the record, Mr. Chairman, a recent article from the 
Wall Street Journal, that discusses how city policy forces 
around the country are buying significant quantities of hybrid 
vehicles.
    This articles suggests that when the market isn't distorted 
by tax incentives, there is a good market for hybrid vehicles.
    Mr. Barton. So ordered.
    Mr. Waxman. As I understand the President's proposal, I 
think it gives the wrong incentives, but I would be interested 
in your further analysis.
    Has the administration analyzed how its tax proposal might 
discourage or encourage the purchase of hybrid vehicles by 
businesses that otherwise would have an economic reason to buy 
one?
    Mr. McSlarrow. I know we have done an analysis, I don't 
know the results of it. But, again, we will get that to you.
    Mr. Waxman. You will get that for us. Okay, thanks. To 
follow up with you, Mr. Wood, in the last round of my questions 
you indicated you would lift the protective order in California 
refund case and make evidence submitted by the California 
parties available to the public.
    As you may know, a bipartisan group of members from 
California wrote to you yesterday requesting this. However, I 
am interested in knowing if FERC will also seek and release 
Reliant transcripts for 2000 and 2001, so that the public can 
be assured that FERC hasn't missed anything?
    Mr. Wood. I will have to see if that is in the body 
evidence that we are in the process of declassifying now. If it 
is, then that would be released.
    If not, I will communicate that back to you in writing.
    Mr. Waxman. Okay, well I would hope it is going to be made 
public. Because if we are going to have faith in FERC's 
investigation, I think all the activities ought to take place 
with public scrutiny.
    If there ever were a reason to withdraw market based rate 
authority, this would seem to be the appropriate situation.
    In fact, on July 15--so anyway, I would like that 
information made public and let us know. But on July 15, 2001, 
the California PUC petitioned FERC to withdraw the Reliance 
market based rate authority.
    Why did FERC never act on these petitions and why didn't 
FERC withdraw Reliant's market based rate authority?
    Mr. Wood. We are as, I think a question from Mr. Norwood 
pointed out, we are in a process of revising our market screen.
    It was the supply margin assessment. We put that on hold 
because there was significant concern if that was the right 
screen or not.
    We have gotten a lot of comments on that in the past years. 
So there was not just Reliant and some other companies, but 
probably about 60 companies now that we are waiting to move 
forward on.
    It is a policy issue that we have not resolved as to what 
standards for----
    Mr. Waxman. And I am interested in further information for 
the record. But if this didn't warrant withdrawal of market 
based rates, I would like you to provide the committee with an 
example that would warrant such action. Thank you, very much, 
Mr. Chairman.
    Mr. Barton. The gentleman's time has expired. We are going 
to release this panel. You all have been more than gracious 
with your time and your answers, your input and your written 
testimony.
    There may be members that wish to submit written questions 
for the record and we would hope that you would reply 
expeditiously to those written questions.
    But thank you for your time and you now are excused. Let us 
welcome, as soon as the first panel vacates the premises, the 
second panel.
    We have Mr. Marvin Fertel with the Nuclear Energy 
Institute. Mrs. Anna Aurilio with the U.S. Public Interest 
Research Group.
    Mr. Jeff Benjamin with, the Vice President for Licensing 
and Regulatory Affairs with Exelon. Dr. Edwin Lyman who is the 
President of the Nuclear Control Institute.
    Mr. Steven Nadel, Executive Director for the American 
Council for an Energy-Efficient Economy. Dr. Malcolm O'Hagan 
who is the President of National Electrical Manufacturers 
Association.
    And Mr. Alden Meyer who is Director of Government Affairs 
for the Union of Concerned Scientists. Welcome lady and 
gentleman.
    Your testimony is in the record in its entirety and we are 
going to start with Mr. Fertel. We will give you 5 minutes and 
we will just go right down the line, 5 minutes each. And then 
we will have some questions. Welcome to the committee.

   STATEMENTS OF MARVIN S. FERTEL, SENIOR VICE PRESIDENT OF 
 BUSINESS OPERATIONS, NUCLEAR ENERGY INSTITUTE; ANNA AURILIO, 
  LEGISLATIVE DIRECTOR, U.S. PUBLIC INTEREST RESEARCH GROUP; 
 JEFFREY A. BENJAMIN, VICE PRESIDENT, LICENSING AND REGULATORY 
  AFFAIRS, EXELON NUCLEAR; EDWIN S. LYMAN, PRESIDENT, NUCLEAR 
 CONTROL INSTITUTE; STEVEN NADEL, EXECUTIVE DIRECTOR, AMERICAN 
   COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY; MALCOLM O'HAGAN, 
 PRESIDENT, NATIONAL ELECTRICAL MANUFACTURERS ASSOCIATION; AND 
    ALDEN MEYER, DIRECTOR OF GOVERNMENT RELATIONS, UNION OF 
                      CONCERNED SCIENTISTS

    Mr. Fertel. Thank you, Mr. Chairman. Chairman Boucher, 
Ranking Member Boucher, on behalf of Nuclear Energy Institute I 
commend you for your leadership in both the last Congress and 
this Congress on pursuing legislation to implement a 
comprehensive national energy strategy.
    I would also like to commend the committee for its 
leadership last year in supporting the President's decision on 
the Yucca Mountain repository site, which was a tremendous step 
forward in energy policy matters.
    Today I will offer a few key points on the proposed 
legislation, but I would be remiss if I did not first comment 
on the security at our nuclear power plants.
    The nuclear industry had extensive and robust security 
prior to the tragic events of September 11. Since then, the NRC 
has imposed additional requirements.
    And during the past 18 months, the nuclear industry has 
invested an additional $370 million in security related 
improvements, including hiring about a third more security 
officers, bringing our total to about 7,000.
    The State of our security was recently demonstrated as part 
of a study by the Center for Strategic and International 
Studies that looked at the vulnerability of our Nation's 
critical infrastructure to terrorist actions.
    At the end of that assessment, CSIS recognized the 
effectiveness of nuclear plant security and acknowledged our 
plants as the best protected industrial facilities in the 
Nation.
    The legislation passed in the last Congress by this 
committee and reintroduced in the discussion draft this year, 
contains a number of provisions directed at studies and 
programs the NRC should implement to improve security at 
commercial nuclear plants.
    Given both the enhanced security requirements imposed by 
the NRC, since September 11, and the extensive requirements for 
threat and vulnerability analysis contained in the legislation 
creating the Department of Homeland Security, we conclude that 
those provisions in Section 4012 are no longer necessary and 
respectively suggest that they be deleted from the discussion 
draft.
    We will, of course, continue to implement every sensible 
sound approach as we can for security, drawing on industry 
resources and enforcement agencies and national defense forces, 
in what we would expect to be a seamless integration of 
response to any potential terrorist threats.
    Let me turn now to energy policy. Energy drives our 
Nation's economy and diversity of energy supply and technology, 
as well as demand side management efficiency and conservation 
are all necessary.
    Nuclear energy is a major part of our Nation's energy 
diversity, providing electricity for one in every five homes 
and businesses.
    The industry's average capacity factor last year was a 
record 91.5 percent, the most efficient among all types of 
power plants.
    And when all the data are in, we estimate that total 
electricity production from nuclear energy last year, will 
reach 778 billion kilowatt hours, which is another record.
    That is more electricity than is used in total by all but 
three other countries in the world. America's nuclear plants 
are essential to meeting our air quality policy goals.
    Nuclear energy produces no air pollution and in fact will 
play a major role in helping meet the President's goal for 
reducing greenhouse gas emissions.
    A comprehensive national energy policy should take full 
advantage of the benefits of nuclear energy. To accomplish 
this, legislation actions are needed in the following areas.
    Congress should, as soon as possible, renew the Price-
Anderson Act, and we would propose it be done indefinitely.
    It is a proven frame work that has worked for over 45 
years. Congress should also move forward and amend the Atomic 
Energy Act, to remove statutory requirements that are no longer 
necessary because of changes in time and the responsibilities 
of other agencies.
    To address the infrastructure investment crisis we face as 
a Nation, we have proposed the Secretary of Energy be 
authorized to provide financial incentives, such as loans, that 
would be paid back, to a limited number of nuclear projects.
    We have proposed that is probably also true for any large 
capital investment, like coal plants or transmission lines.
    Congress should continue to support nuclear energy research 
and development programs at DOE, including the Nuclear Energy 
Research Initiative, the Nuclear Energy Plant Optimization 
Program and Nuclear Power 2010.
    Updated tax treatment should reflect today's business 
environment. As such, reform of the treatment of 
decommissioning funds, as proposed in the House version of H.R. 
4 that passed last year, should also be reenacted.
    And in order to stimulate continued investment in our 
critical energy infrastructure, the depreciation period of 
nuclear plants and other large energy related capital projects 
should be made equitable for with that for other industrial 
investments.
    Finally, Congress should ensure that money paid into the 
nuclear waste fund by America's consumers is fully available to 
support the Yucca Mountain project.
    We encourage the committee to support the administration's 
proposal to adjust the nuclear waste fund's discretionary 
spending cap and to work with the administration on a longer 
term permanent fix.
    In conclusion, America's economic strength depends on a 
strong, reliable energy supply. Nuclear energy is a vital 
component of that supply.
    Any prudent national energy policy must include provisions 
for expansion of the nuclear energy industry for the benefit of 
all Americans. Thank you for your time.
    [The prepared statement of Marvin S. Fertel follows:]

Prepared Statement of Marvin S. Fertel, Senior Vice President, Nuclear 
                            Energy Institute

    Chairman Barton, Ranking Member Boucher and distinguished members 
of the subcommittee, I am Marvin Fertel, senior vice president at the 
Nuclear Energy Institute (NEI). On behalf of NEI, I would like to 
commend you for focusing the 108th Congress' attention today on 
legislation to implement comprehensive national energy policy.
    NEI is responsible for developing policy for the U.S. nuclear 
industry. NEI's 270 corporate and other members represent a broad 
spectrum of interests, including every U.S. electric company that 
operates a nuclear power plant. NEI's membership also includes nuclear 
fuel cycle companies, suppliers, engineering and consulting firms, 
national research laboratories, manufacturers of radiopharmaceuticals, 
universities, labor unions and law firms.
    The nuclear industry continues to play an important part in 
addressing the issues that face this country in meeting our energy 
needs. Nuclear energy already is a vital part of our diverse energy 
portfolio, producing electricity--safely and cleanly--for one of every 
five U.S. homes and businesses. Our nation's comprehensive energy 
policy must ensure an affordable, reliable supply of energy, and 
nuclear energy provides one of the solutions to several policy 
challenges that our nation faces. Among these policy challenges are:

 generating reliable and affordable electricity to meet 
        projected increases in consumer demand over the next two 
        decades
 protecting our nation's air and ecological quality through the 
        emission-free generation of electricity at nuclear power plants
 providing secure national energy supplies that are not 
        susceptible to price spikes or disruptions because of global 
        politics.
    I will speak to each of these points briefly. Before doing so, 
however, I feel that I must comment on the readiness of our nation's 
nuclear energy facilities in the wake of the events of Sept. 11, 2001.
    We support to the fullest the president's creation of the 
Department of Homeland Security, and we commend the leadership of the 
House of Representatives in supporting his efforts. We believe that a 
central organization is essential to provide the necessary integration 
of intelligence information, vulnerability and threat assessment and, 
ultimately, to assure the availability of necessary government 
resources to protect our critical infrastructure.
    The nuclear industry's goal is to develop a seamless integration of 
private and public capabilities to protect vital facilities within our 
country's infrastructure, including nuclear energy facilities. This 
integration should coordinate response capabilities of industry, state 
and local entities, national defense and homeland security. The nuclear 
industry is working diligently with the Nuclear Regulatory Commission 
and other federal entities to achieve this comprehensive response 
capability.
    Since Sept. 11, 2001, the nuclear energy industry has been on a 
high state of alert. The defense-in-depth inherent in the robust design 
of our plants has been reassessed and augmented. During the past 18 
months, our industry has invested an additional $370 million in 
security-related improvements, including stronger perimeter security; 
improved background checks; and tighter access control at our plants. 
As part of this effort, the nuclear energy industry has added about 
one-third more security officers, for a total of 7,000 well-trained, 
heavily armed security officers at 67 sites.
    The industry will continue to make these investments and 
improvements to comply with the Nuclear Regulatory Commission's 
requirements.

                      INCREASED NUCLEAR PRODUCTION

    With assured security, the industry's 103 operating reactors will 
continue to provide safe, affordable and reliable electricity for the 
nation. U.S. nuclear power plants generated a record 778 billion 
kilowatt-hours of electricity 1 last year and the industry's 
capacity factor--a measure of efficiency at power plants--was a record 
91.5, well above any other type of power plants in the United States. 
The industry will continue to increase the amount of electricity 
generated by nuclear power by relicensing current reactors, continuing 
to improve efficiency and implementing new technology to ``uprate'' 
reactors. We also are pursuing major initiatives leading to building 
advanced nuclear power plants over the next two decades.
---------------------------------------------------------------------------
    \1\ Nuclear Energy Institute estimate for 2002.
---------------------------------------------------------------------------
    Nuclear energy is the second largest source of electricity in the 
United States. The industry has reached record levels of safety, 
reliability, efficiency and output in the United States.
    Nuclear energy is the least expensive source of baseload power in 
the United States, with very stable forward pricing. It therefore 
provides stability to the entire country's electrical supply system and 
plays an important role in sustaining our nation's economy.
    Nuclear energy's contribution to U.S. electricity supply is 
essential to sustain economic growth, meet the electricity needs of our 
increasing population, and meet growing U.S. electricity demand for 
today and the future. The Energy Information Agency anticipates a 1.8 
percent electricity growth rate through the next two decades, requiring 
the addition of 400,000 megawatts of new electricity capacity. The 
nuclear industry's Vision 2020 strategic plan has set a goal of 50,000 
megawatts of additional nuclear generation by 2020, which is required 
simply to maintain the nation's current level of electricity production 
from emission-free sources, such as hydropower, nuclear and renewable 
energy. We must have new sources of energy for economic growth, but we 
also must maintain our commitment to improving our air quality and our 
environment. With nuclear energy, we can do both.
    To satisfy this growing electricity demand, the nuclear industry is 
implementing a three-part program:

 maintaining the energy production of existing reactors through 
        license renewal
 expanding output from the existing reactors by continuing to 
        improve efficiency and reliability, and by investing the 
        capital required to increase the capacity of the reactors
 laying the groundwork for construction and operation of new 
        nuclear plants.
    Several of America's nuclear generating companies, working with 
NEI, are implementing a broad-based plan to create the business 
conditions necessary for construction of new nuclear power plants. The 
plan includes:

 initiatives to reduce the initial capital cost of new nuclear 
        power plants
 programs to create a stable licensing regime and reduce 
        regulatory uncertainties, including industry programs to 
        demonstrate the new NRC processes for siting and licensing new 
        nuclear plants.
    The 1992 Energy Policy Act significantly improved the licensing 
process for new nuclear plants. All design, safety and site-related 
issues are resolved with full public participation before capital is 
invested. The chairman of this subcommittee, Mr. Barton of Texas, was a 
principal author of this major improvement to the NRC licensing 
process.
    The new approach allows the NRC to:

 ``certify'' a standardized nuclear power plant design. 
        Certification is a formal rulemaking process. It requires a 
        substantial up-front investment to prepare a reactor design--
        complete and detailed enough to satisfy the NRC that the design 
        meets all NRC safety standards.
 evaluate and pre-approve a prospective site for a new nuclear 
        plant
 issue a single license to construct and operate a new nuclear 
        plant if a company uses an NRC-certified design and a pre-
        approved site.
    Three reactor designs--a 1,300-megawatt advanced boiling water 
reactor, a 1,300-megawatt pressurized water reactor, and a 600-megawatt 
pressurized water reactor--have been certified by the NRC. Two advanced 
boiling water reactors have been built in Japan. Taiwan is building two 
more. And South Korea is building variants of the large pressurized 
water reactor. A design for a 1,000-megawatt advanced pressurized water 
reactor is undergoing certification review, and five other designs are 
in varying stages of certification.
    Private companies would only undertake investments of this size if 
new nuclear power plants are competitive in the marketplace with other 
sources of electricity and if there is stability in the regulatory 
process to license the facilities. Few policy initiatives, however, now 
exist to stimulate companies to invest in new nuclear plants sooner 
than they otherwise would. Though the Department of Energy is working 
with the industry to demonstrate the new plant licensing concepts, 
larger initiatives do not exist to reduce the investment risk 
associated with a large capital project, such as the construction of 
new nuclear power plants.
    The policy initiatives necessary to stimulate construction of new 
nuclear generating capacity include:

 continuation of the Energy Department's ``Nuclear Power 2010'' 
        initiative, which is a government/industry partnership to 
        pursue two short-term objectives: resolving technical and/or 
        economic issues associated with new nuclear plant designs, and 
        validating the new NRC licensing process--verifying that it 
        works as intended and that it will not place private sector 
        investment at risk. This initiative requires relatively modest 
        federal investment in nuclear energy research and development.
 new authorization for the secretary of energy to provide 
        financial assistance through loans, loan guarantees and lines 
        of credit for a limited number of new nuclear projects
 changes to the tax laws to treat depreciation of investment in 
        critical energy infrastructure--such as nuclear power plants--
        equitably with other large capital investment projects. 
        Additionally, incentives through investment tax credits may be 
        desirable.

     NUCLEAR PLANT SAFETY LAYS GROUNDWORK FOR EXTENDING OPERATIONS

    The excellent safety record of U.S. nuclear power plants lays the 
groundwork for refining regulatory oversight of these plants for 
extending the federal licenses of the reactors for an additional 20 
years, to a total of 60 years of production.
    Through the NRC's revised nuclear plant oversight process, 
regulators now focus their attention on areas that are most significant 
to safety at the plant, rather than treating all areas as if they were 
of equal significance to safety.
    In addition, America's nuclear energy plants represent the gold 
standard for industry safety. Working in a nuclear power plant is safer 
than working in the banking industry, according to safety statistics 
from the Bureau of Labor Statistics.
    In addition, the agency has put in place an efficient process for 
renewing the licences for today's plants. The average nuclear plant 
today is about 18 years old, far from the expiration of its original 
40-year operating period established in NRC licenses. The 40-year 
license term reflects both the amortization period generally used by 
electric utility companies for large capital investments and the 
licensing approach used for radio stations. However, as some of the 
plants built in the 1970s approach the end of their original license 
periods, experience demonstrates clearly that reactors can generate 
electricity safely much longer than their original 40-year license.
    As computer systems, instrumentation and other technologies have 
advanced, whole systems have been replaced in nuclear power plants. In 
many of these areas, nuclear power plants are virtually new, and they 
are safer and more efficient than ever.
    Ten U.S. reactors already have been approved for 20-year license 
renewals, and about half of the nation's 103 nuclear power plants have 
filed or announced plans to submit license renewal applications to the 
NRC during the next few years. NEI expects that nearly all of the 
nation's reactors will eventually apply for license renewal.

                      USED NUCLEAR FUEL MANAGEMENT

    The industry safely manages used nuclear fuel today at nuclear 
power plant sites. There has never been any health or environmental 
impact to the public from used nuclear fuel management.
    Federal law has mandated the development of a centralized geologic 
repository for long-term stewardship of used fuel from nuclear power 
plants and the radioactive byproducts of the federal government's 
nuclear programs. The Nuclear Waste Policy Act of 1982 and its 1987 
amendments require DOE to locate, build and operate a deep, mined 
geologic repository for used nuclear fuel. The 1987 amendments 
designated Yucca Mountain, Nev., as the site to be studied for a 
potential repository.
    President Bush last year approved Yucca Mountain as the site to 
develop a federal repository and the decision was upheld by the 107th 
Congress. I want to thank this committee for its leadership in moving 
the Yucca Mountain resolution in Congress. The next step in that 
process is the NRC's licensing the repository site and granting 
construction authorization. DOE expects to file a license application 
with the NRC by December 2004. It is imperative that DOE meets its 
milestones for licensing so the repository can be built and operating 
by 2010.
    To pay for the repository, the Nuclear Waste Policy Act established 
the federal Nuclear Waste Fund. Since 1983, consumers of electricity 
generated at nuclear power plants have paid a tax of one-tenth of a 
cent per kilowatt-hour of nuclear-energy-generated electricity they use 
into the fund, which now totals some $22 billion in payments and 
interest. More than $6 billion from the Nuclear Waste Fund has been 
used for scientific and engineering studies.
    Congress must ensure that the program is adequately funded through 
the annual appropriations process. Budget restrictions and processes 
that unnecessarily prohibit use of the Nuclear Waste Fund for project 
development must be removed. The nuclear energy industry supports the 
administration's proposal to adjust the fund's discretionary spending 
cap. We encourage the committee to support that proposal, but we 
recognize that a more permanent fix is needed to ensure that funds 
collected for the waste program are allocated as needed to that 
project.

       NUCLEAR ENERGY'S PROVEN ROLE IN PRESERVING OUR ENVIRONMENT

    Nuclear energy is the only large source of electricity that is both 
emission-free and readily expandable. Its exemplary safety record, 
outstanding reliability, low operating costs and future price stability 
make nuclear energy a vital fuel for the future.
    Nuclear energy accounts for three-fourths of all U.S. emission-free 
electricity generation. The Bush administration has established a 
proposal to cut U.S. greenhouse gas emissions by 18 percent by 2012 
through a voluntary approach that is compatible with economic growth. 
The administration clearly believes that nuclear energy is a key to the 
plan's success. Secretary of Energy Spencer Abraham recently said of 
nuclear energy, ``It's obvious to me that an energy source capable of 
supplying a significant proportion of the world's power with no 
greenhouse gas emissions should be at the center of the debate.''
    The electric utility industry and DOE have established a voluntary 
partnership called Power Partners to develop and implement voluntary 
greenhouse gas reduction activities that will also sustain economic 
growth. Power Partners' actions are guided by the principles of 
improved energy efficiency, increased investments in research and 
development, technological innovation, market-based initiatives, and 
cost-effective reductions in carbon emissions.
    The nuclear energy industry will play a significant role in the 
Power Partners program. The U.S. nuclear industry can increase its 
output by about 10,000 megawatts of capacity by 2012, resulting in 
incremental reductions of 22 million metric tons of carbon equivalent. 
The additional electricity production at nuclear power plants would 
come from power uprates, improved productivity and plant restarts.
    As a result, the nuclear energy industry could meet one-fifth of 
the president's goal of reducing greenhouse gas emissions by 18 percent 
in the next 10 years, building upon the nuclear industry's clean-air 
accomplishments during the past four decades.
    Looking beyond 2012, the nuclear energy industry is prepared to 
play a major role in sustaining the president's commitment to reduce 
the greenhouse gas intensity of the U.S. economy, as the industry 
pursues its goal of building 50,000 megawatts of new nuclear energy 
capacity in the United States by 2020. This additional 50,000 megawatts 
would reduce U.S. greenhouse gas emissions by approximately 100 million 
metric tons of carbon equivalent. At the same time, nuclear energy 
avoids emissions of sulfur dioxide and nitrogen oxide.

                   PUBLIC SUPPORT FOR NUCLEAR ENERGY

    Protecting our environment and improving U.S. energy security are 
among the reasons why two out of three Americans favor nuclear energy 
as one way to generate electricity.
    Another reason for the public's steady support for nuclear energy 
is that the public views nuclear energy as a fuel of the future.
    In an October 2002 survey, a record high 73 percent of college 
graduates registered to vote favored the use of nuclear energy. Those 
who ``strongly support'' the use of nuclear energy outnumbered those 
who ``strongly oppose'' by an increasingly wide margin--three to one.
    Nearly two-thirds of the general public favored nuclear energy, and 
the gap between those who strongly favor (30 percent) and strongly 
oppose (15 percent) nuclear energy is the largest that it has been 
during the past two decades. The trends among the general public over 
the years have paralleled those among college graduates who are 
registered to vote--but the more educated and politically active group 
always has been more favorable toward nuclear energy.
    Record numbers of college graduate voters--88 percent--also 
supported renewing the licenses of nuclear power plants that meet 
federal standards, and 77 percent strongly agreed we should keep the 
option to build more nuclear power plants in the future. Fifty-nine 
percent of college graduate voters and 55 percent of all adults agreed 
that we should ``definitely build more nuclear power plants.''

                    COMPREHENSIVE ENERGY LEGISLATION

    NEI believes that diversity of supply and technology are the 
strength of our electrical system. With regard to nuclear energy's role 
in a comprehensive energy policy, NEI encourages the committee to 
support the following recommendations:
    Renewal of the Price-Anderson Act. Congress should renew the Price-
Anderson Act as soon as possible. The Price-Anderson Act of 1957, 
signed into law as an amendment to the Atomic Energy Act, provides for 
payment of public liability claims related to any nuclear incident. It 
is a proven framework that has worked for nearly 45 years. Given this 
proven record, Congress should renew it indefinitely. If needed, 
Congress can reopen the law--as it can any law--at any time if 
modifications are needed. In addition, Congress can request periodic 
updates on the status of Price-Anderson Act implementation from the NRC 
in order to provide a basis for change if necessary.
    In its 1998 report to Congress, the Nuclear Regulatory Commission 
said that the Price-Anderson Act has ``proven to be a remarkably 
successful piece of legislation'' that has grown in depth of coverage 
and that proved its viability in the aftermath of the Three Mile Island 
accident.
    Amendments to the Atomic Energy Act. The Atomic Energy Act should 
be amended so that the NRC is positioned to meet the energy challenges 
of the 21st century. Recommended amendments to the law include:

 Removing the statutory requirement that NRC conduct antitrust 
        reviews of applications to build new nuclear plants. This 
        review already is being done by other federal agencies that 
        have the core competencies to perform it.
 Removing the statutory prohibition of foreign ownership of 
        U.S. commercial nuclear power plants. The NRC would have the 
        responsibility to ensure that their actions are not inimical to 
        our national security.
 Ensuring that smaller, modular nuclear reactors are not 
        subjected to inappropriate liability under the Price-Anderson 
        Act's secondary financial protection provision.
    The secretary of energy should be authorized to provide financial 
assistance through loans, loan guarantees and lines of credit to a 
limited number of new nuclear projects.
    Tax treatment updated to reflect today's business conditions and to 
enable sustained private sector investment in, and large-scale 
commercial deployment of critical energy infrastructure, particularly 
large capital projects--such as nuclear projects. Also, reform is 
needed for tax treatment for decommissioning funds, as in the House 
version of H.R. 4 that was passed last year.
    Authorization for nuclear energy research and development should 
include:

 Funding for government/industry activities, including the 
        Nuclear Energy Research Initiative, aimed at the development of 
        new reactor technologies; the Nuclear Energy Plant 
        Optimization, focused on the optimization of existing reactors; 
        and the Energy Department's ``Nuclear Power 2010'' initiative, 
        with an objective of building a new reactor within this decade.
 Authorization to support enhanced university nuclear science 
        and engineering programs to ensure ample nuclear professionals 
        for the future.
 Funding demonstration projects using nuclear energy to produce 
        hydrogen, both at existing nuclear energy plants and through 
        new advanced reactors. NEI urges supporting a demonstration 
        project for using new reactor designs in this effort at a 
        national laboratory. This would provide a dramatic boost to the 
        president's Clear Skies initiative to promote the use of this 
        clean fuel for the future.
 Providing increased predictability for the introduction of 
        uranium from U.S. government inventories into the commercial 
        marketplace. Market participants must be able to plan prudently 
        for the introduction of this uranium into the market, and to 
        avoid adverse affects on the domestic uranium mining, 
        conversion or enrichment industries.
 Elevating the Office of Nuclear Energy at the Department of 
        Energy to assistant secretary status, thereby assigning the 
        appropriate level of focus to nuclear energy within the 
        nation's energy policy.
 Creating an Office of Used Nuclear Fuel Research within the 
        Energy Department.

                               CONCLUSION

    Nuclear energy provides clean, affordable and reliable electricity 
to one of every five U.S. homes and business and has been a vital 
partner in meeting clean-air requirements since passage of the Clean 
Air Act. As our country's electricity demand continues to rise, nuclear 
energy will be even more important to American consumers. A prudent 
national energy policy must include provisions for expansion of the 
nuclear energy industry. One of the most fundamental elements of 
America's economic strength is the diversity of energy supply that 
drives our economy. Nuclear energy is a critical component to preserve 
our diverse energy supply, to continue to lessen our dependence on 
volatile foreign energy, and to meet new requirements for emission-free 
electricity.
    Thank you for this opportunity to share the nuclear energy 
industry's perspective on the important policy issues this subcommittee 
is considering. NEI encourages the subcommittee to give full 
consideration to the policy recommendations the industry has outlined 
in this testimony.

                    STATEMENT OF ANNA AURILIO

    Ms. Aurilio. Good afternoon, Mr. Chairman, Congressman 
Boucher and others. Thanks for the opportunity to testify.
    My name is Anna Aurilio, I am the Legislative Director for 
the U.S. Public Interest Research Group. We are the national 
lobbying office for the State PIRGs, which are non-profit, non-
partisan, good government, environmental and consumer advocacy 
groups active across the country.
    Now we have a long history in working for clean energy and 
against dirty energy of which nuclear energy certainly has to 
be probably the No. 1.
    Our vision of the future is a clean energy future. We 
propose to increase renewable energy production so that it 
results in a fifth of our energy electricity production by 
2020.
    We proposed to reduce oil consumption in vehicles by a 
third, by 2020. We propose to increase consumer protections, 
not repeal things like PUHCA, so that electricity consumers are 
protected.
    And finally, of course, if we do the renewable energy and 
energy efficiency policies that we know are possible, we won't 
have to drill in places like the Arctic National Wildlife 
Refuge or other special wilderness areas.
    Let me focus on nuclear power and the draft legislation 
which we got on Friday. Our basic position is that nuclear 
power is unsafe, uneconomic, unreliable and it generates waste 
for which there is no sound solution.
    Unfortunately, this legislation is a recipe for nuclear 
disaster. It proposes more subsidies, more bail outs. It 
actually rolls back a two decades long non-proliferation 
policy, and it fails to address basic and major safety concerns 
that have been raised both before and after September 11.
    Let me go into some specifics. Consumers, myself included. 
I couldn't believe it when I opened my gas bill this month, 
were faced with skyrocketing energy bills.
    Yet this legislation promotes the most expensive 
electricity source. I know you have heard different facts and 
figures about the cost of nuclear power, but you have to strip 
away the subsidies.
    So, first and foremost, for existing nuclear power plants, 
you need to understand that in almost every State where 
deregulation has happened, the nuclear power plant owners got 
their mortgages paid off through stranded cost bail outs.
    So any forward going costs that they are proclaiming right 
now, is because rate payers have already paid. And our estimate 
is in 11 States alone, rate payers paid an extra $112 billion 
as a cost of deregulation.
    So you have to face reality there in terms of what the 
actual costs of those nuclear power plants are going forward. 
There is no reason then to continue to subsidize the existing 
plants.
    Policies like the Price-Anderson Act were intended to be 
temporary. In 1957, when the legislation was passed, it was 
supposed to be for 10 years until the industry could stand on 
its own.
    Time for the industry to stand on its own. We are gratified 
that this legislation at least contains some of the amendments 
that the House Energy and Commerce Committee put on to address 
nuclear terrorist threats, address contractor accountability, 
etcetera.
    But, so I am stunned to hear Mr. Fertel say that he doesn't 
like those because those are about the only provisions we 
approve of there.
    But we see no justification for continuing Price-Anderson 
anyway. If the nuclear industry is safe, there is no reason to 
limit the liability of nuclear power plants.
    Second, we have also seen a plea for more money to develop 
new nuclear power plants by 2010. My testimony has footnotes 
that will drive you to DOE's website where they have 
commissioned a company called Scully Capital, to look at what 
it would actually take to build a new nuclear power plant by 
2010.
    Again, don't believe the numbers that you hear. This is a 
financial analyst organization that says that the Federal 
Government would have to create even more subsidies than 
already exist in order to build new nuclear power plants by 
2010.
    Including potentially entering into power purchasing 
agreements at 50 percent or more above market price. This is 
not an energy source that the Federal Government should be 
investing in.
    Next point. While Americans are being asked to sacrifice to 
prevent rogue nations from using nuclear weapons, this 
legislation actually rolls back important non-proliferation 
policies.
    The sections which deal with advanced fuel recycling 
policies, basically roll back a policy the U.S. has had against 
extracting plutonium from commercial fuel.
    Plutonium is the problem. Getting it out of the commercial 
spent fuel will make it easier for wrong-doers to get their 
hands on it. And certainly, as some documents on DOE's website 
suggest, to start a commercial nuclear fuel cycle, based on 
plutonium, seems to me the silliest thing I have ever heard in 
this day and age.
    Finally, we have aging nuclear power plants around the 
country. In Ohio, the Davis-Besse plant, which several people 
actually referenced in their opening statements, is a clear 
example of where the Nuclear Regulatory Commission is not 
adequately regulating.
    Where a company begged and kicked and screamed, according 
to NRC Inspector General transcripts of interviews with NRC 
employees, and basically convinced the regulators to not shut 
down the plant for 3 additional months, even though there was 
very, very convincing evidence that there was something wrong 
at the plant.
    Now I thank God that nothing happened there, but basically 
there was an eighth of an inch of stainless steel left by the 
time the plant was finally shut down and checked.
    So I think we need to and Congress and this committee in 
particular, which has oversight of the NRC, needs to do a 
couple of things.
    One is it needs to demand that NRC enforce its own safety 
regulations. And two, it needs to demand that NRC actually send 
a report to Congress, every month, like it does on other NRC 
issues and report on the progress of that enforcement.
    I think my time is up, but I just want to make one more 
plea, which is States rights. A lot of Governors and a lot of 
folks in the States are realizing that the evacuation plans 
which are only ten mile evacuation plans, when we know that if 
there is an accident there could be harm in a greater area than 
that, are realizing that they are very, very inadequate to 
protect public safety.
    And I think we should give Governor's the rights to, one, 
veto evacuation plans. Shut down plants if they serve an 
unreasonable risk. And veto the sighting of any new plants if 
they are an unreasonable risk to public health and safety. 
Thank you.
    [The prepared statement of Anna Aurilio follows:]

 Prepared Statement of Anna Aurilio, Legislative Director, U.S. Public 
                        Interest Research Group

    Good morning, my name is Anna Aurilio and I'm the Legislative 
Director of the U.S. Public Interest Research Group, or U.S. PIRG. U.S. 
PIRG is the national office for the State PIRGs, which are 
environmental, good government and consumer advocacy groups active 
around the country. Thank you for the opportunity to speak today.
    The state PIRGs have a long history of working for a clean 
affordable energy future. Our goal is shift from polluting and 
dangerous sources of energy such as nuclear and fossil energy to 
increased energy efficiency and clean renewable energy sources.
    Nuclear power is unsafe, unreliable, uneconomic and generates long-
lived radioactive wastes for which there is no safe solution. All 
aspects of the nuclear fuel cycle pose a risk to humans and the 
environment. It should be phased out as soon as possible and should not 
be encouraged as a future energy source.
    Since the late 1970's, the PIRGs have worked to protect the public 
from unsafe, expensive nuclear reactors. PIRGs successfully opposed the 
construction of several nuclear power plants because of cost, safety 
and nuclear waste concerns. For example, in 1982, litigation by 
MASSPIRG helped cancel the proposed Pilgrim 2 nuclear power plant. In 
1983, NJPIRG helped cancel the proposed Hope Creek nuclear power plant. 
CoPIRG worked for the creation of the Office of Consumer Counsel (OCC) 
in 1984. The OCC was key in protecting ratepayers from being burdened 
with ``stranded costs'' in the St. Vrain nuclear power plant case.
    During the last reauthorization of the Price-Anderson Act, the 
PIRGs successfully advocated for lower taxpayer liability in case of a 
nuclear accident. From 1993 through 1995, PIRG helped shift more than 
$500 million in nuclear and fossil R&D spending to efficiency and 
renewable programs. During that time, we helped convince Congress to 
eliminate funding for two extremely expensive advanced reactor 
programs, the gas-cooled reactor and the breeder reactor known as the 
Advanced Liquid Metal Reactor, saving taxpayers at least $5.6 billion. 
In 2002, the PIRGs helped defeat a nuclear-subsidy laden energy bill in 
House/Senate conference.
    Today I will be addressing nuclear energy issues, especially 
focusing on policies that should and shouldn't be included in energy 
legislation. Overall we are dismayed that the draft legislation 
developed by this subcommittee takes us in the wrong direction. By 
extending and increasing nuclear subsidies, reversing decades of 
nuclear non-proliferation policy, and failing to address major safety 
concerns, this legislation is a recipe for nuclear disaster, not a safe 
energy future.
    Uranium mining threatens public health. Uranium mining and 
enrichment has caused sickness and death in workers and has generated 
tons of mining and enrichment wastes, which continue to threaten nearby 
communities. Current uranium mining practices include ``in-situ'' 
leaching, which pollutes precious aquifers in the arid West. We are 
particularly disappointed to see that the draft legislation circulated 
by this subcommittee contains a subsidy for ``in situ'' leach mining 
(Section 4029). This section authorizes the Department of Energy (DOE) 
to spend $10 million annually for fiscal years 2004, 2005, 2006 to 
identify, test and develop ``in situ'' leach mining technologies. This 
uranium mining technology, whereby mining companies inject millions of 
gallons of chemical solutions into the groundwater to extract uranium 
from the host rock, pollutes groundwater in the West. We are concerned 
that a three-year, $30 million subsidy will serve to prop up a failing 
industry that has a terrible environmental track record. We are 
particularly concerned that this type of subsidy could allow a disputed 
project in New Mexico to go forward, threatening a pristine water 
supply for the Crownpoint Navajo Nation.1
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    \1\ U.S. PIRG, ``Polluter Payday'', November 2001, p. 33. http://
www.newenergyfuture.com/polluter__payday__11__8__01.pdf
---------------------------------------------------------------------------
    Nuclear power plants threaten nearby communities. Nuclear power 
plants are very complex and contain enormous amounts of potential 
energy in the fuel at the core of the reactor. The most tragic example 
of the dangers posed by this technology is the 1986 accident at the 
Chernobyl reactor in the Ukraine. The explosion and core meltdown at 
Chernobyl released radiation that generated a plume encompassing the 
entire Northern Hemisphere 2. Here in the U.S., in addition 
to the partial core meltdown at Three Mile Island in 1979, which forced 
the evacuation of nearly one hundred fifty thousand people, there have 
been four other nuclear accidents in the U.S. involving at least 
partial core meltdown.3
---------------------------------------------------------------------------
    \2\ OECD Nuclear Energy Agency report ``Chernobyl Ten Years On, 
Radiological and Health Impact', November 1995.
    \3\ Public Citizen website http://www.citizen.org/Press/pr-
cmep84.htm
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    The potential consequences of a serious accident are staggering. A 
1982 study by the Sandia National Laboratories found that a serious 
accident at a U.S. nuclear reactor could cause hundreds to thousands of 
deaths in the near term.4 In 1985, in response to a question 
posed by Representative Markey, an NRC commissioner responded that 
there was a 45% chance of a severe nuclear accident in the following 
twenty years.
---------------------------------------------------------------------------
    \4\ Union of Concerned Scientists, Nuclear Plant Safety: Will the 
Luck Run Out? December 15, 1998
---------------------------------------------------------------------------
    Nuclear power plants are not secure. The tragic events of September 
11, 2001 have raised serious concerns about safety and security at 
nuclear facilities in this country. Many facilities cannot even meet 
the current security requirements widely considered to be inadequate. 
Nearly half have failed to repel small groups of intruders on foot in 
``force-on-force'' exercises conducted by the Nuclear Regulatory 
Commission. Researchers at Princeton University found that an attack on 
irradiated fuel stored at nuclear power plants could cause 
contamination problems 8 to 70 times worse than those caused by the 
1986 meltdown at the Chernobyl nuclear power plant.5
---------------------------------------------------------------------------
    \5\ http://www.noradiation.org/hazards/spent__fuel__pre-
print__1__311.pdf
---------------------------------------------------------------------------
    Even before September 11, we were very concerned about the safety 
of nuclear reactors currently operating in this country. We are 
encouraged to see that the draft legislation maintains amendments added 
by Rep. Markey and Waxman in last year's markup (Sections 4012, 4013). 
However, these requirements are not enough to guarantee adequate 
protection from the radiation released in case of terrorist attacks or 
accident.
    For example, Dr. Ed Lyman of the Nuclear Control Institute 
estimates that a terrorist attack on the Indian Point 3 nuclear power 
plant resulting in core melting and containment breach would result in 
an 1500 fold increase in childhood thyroid cancer for children living 
35 miles downwind.6 Despite these and other risks, the 
Nuclear Regulatory Commission (NRC) has insisted that the NRC does not 
have to consider the environmental impacts of terrorist attacks on 
licensing new and existing facilities since the threat is 
``speculative.'' Despite studies that show harmful impacts beyond 
current evacuation zone boundaries, NRC insists on limiting emergency 
evacuation zones to only 10 miles.
---------------------------------------------------------------------------
    \6\ Statement of Dr. Edwin Lyman, Nuclear Control Institute before 
the Committee on Environmental Protection, New York City Council, 
February 28, 2003.
---------------------------------------------------------------------------
    This committee should require that NRC be obligated to consider the 
risk of a terrorist attack on licensing new facilities and extending 
the license on existing facilities. The NRC should increase emergency 
evacuation zones to fifty miles and re-evaluate the adequacy of 
existing evacuation plans to take into account the threat of attacks. 
Finally, Congress should restore states' rights and give governors the 
right to veto the siting or license extension of facilities that pose a 
significant public safety risk.
    NRC does not adequately regulate the ongoing safety of nuclear 
power plants. There is a consistent pattern and history of lax NRC 
enforcement and oversight ranging from fire prevention to worker 
fatigue. The agency is focused on increasing the industry's 
profitability, not protecting humans and the environment.
    We are concerned that utility deregulation and new ownership of 
reactors may increase risks of accidents because of increased pressure 
to run the plants closer to the margin. This risk is heightened by the 
fact that the 103 operating reactors around the country are 
deteriorating with age more quickly than expected. Even Vice President 
Cheney acknowledged the aging problem on the television show 
``Hardball'' (March 21, 2001): ``[T]oday nuclear power--produces 20 
percent of our electricity, but that's going to go down over time--
because some of these plants are wearing out.'' Despite industry's 
claims that nuclear power is ``safe'', at least ten existing reactors 
have experiencing aging-related shutdowns since January 
2000.7 One aging-related problem is reactor embrittlement. 
Cracks in the reactor vessel caused by constant neutron bombardment 
could lead to a meltdown. When problems were found, the Nuclear 
Regulatory Commission (NRC) simply changed the safety margins and 
allowed the utilities to recalculate their compliance. The recent 
events at a reactor in Ohio expose a serious problem in NRC's 
management culture and decision-making.
---------------------------------------------------------------------------
    \7\ Union of Concerned Scientists, ``Aging Nuclear Plants and 
License Renewal,'' Issue Brief, May 22, 2001
---------------------------------------------------------------------------
    In November of 2001, the NRC allowed FirstEnergy, the owner of the 
Davis-Besse plant in Ohio to ignore warning signs, then delay a 
shutdown for three months. Inspectors found a six-inch hole in the 
reactor cover that had only millimeters left until it breached the 
cover. According to interviews with NRC personnel, the agency backed 
down from issuing a safety-related shutdown order after FirstEnergy 
argued vigorously against a shutdown at that time because they didn't 
want bad publicity nor a drop in their financial ratings. At least one 
NRC employee felt that the company withheld important information about 
evidence of serious corrosion.8 The NRC's decision to let 
the plant operate and rake in profits a few months longer even with 
evidence of serious problems jeopardized the health and safety of the 
surrounding communities.
---------------------------------------------------------------------------
    \8\  Nuclear Regulatory Commission Inspector General Interviews on 
Davis-Besse http://www.ucsusa.org/clean__energy/nuclear__safety/
page.cfm?pageID=1123
---------------------------------------------------------------------------
    Steam generators are also susceptible to premature degradation. The 
failure of as few as ten tubes can lead to a reactor meltdown, yet the 
NRC has inadequate steam generator tube standards. For example, the 
Indian Point 2 nuclear power plant is located 35 miles north of New 
York City, along the Hudson River. It had been scheduled for steam 
generator tube replacement in 1993, yet this never happened thanks to 
increasingly lax NRC requirements. On February 2, 2000, a tube 
ruptured, releasing radioactive steam.
    We are astonished that the industry and the regulatory agency have 
been lobbying for an even greater relaxation of safety standards and 
oversight and limiting the public's access to these processes. This 
committee should exercise its oversight over NRC's operations. It 
should demand that the commission fully enforce its own safety 
regulations and report to Congress monthly on its progress.
    Nuclear power is unreliable. Complex and often mis-managed nuclear 
power plants are subject to frequent fires, leaks and other accidents. 
For example in 2001, the Nuclear Energy Institute's website boasts that 
``Increased Nuclear Output Would Satisfy California's Residential 
Demand.'' 9 It failed to mention a February 3 fire at the 
San Onofre Nuclear Generating Station that shut the plant for weeks and 
was a key factor in rolling blackouts in California.
---------------------------------------------------------------------------
    \9\ http://www.nei.org/doc.asp?docid=724
---------------------------------------------------------------------------
    Nuclear power is uneconomic. Nuclear power would not exist in this 
country today if it weren't for enormous subsidies paid for by 
ratepayers and taxpayers. Originally touted as being ``too cheap to 
meter'', nuclear power plants are still too expensive for America. The 
nuclear industry has received the vast majority of energy research and 
development funding, a special taxpayer-backed insurance policy known 
as the Price Anderson Act, unjustified electric rates from state 
regulators, enormous and unwarranted bailouts in state deregulation 
plans, taxpayer-funded cleanup of uranium enrichment sites plus a 
giveaway of the Uranium Enrichment Corporation, and an ultimately 
taxpayer-funded nuclear waste dump. Many of the issues I raise here are 
described in more detail in the Green Scissors report 
(www.greenscissors.org) released by U.S. PIRG, Taxpayers for Common 
Sense and Friends of the Earth.
    It is incredible that the nuclear industry shamelessly revises 
history to pretend that it has transformed itself into a cost effective 
energy source. This is an industry that is addicted to government 
handouts, like an addict, it continues to ask for more handouts.
    Congress should oppose nuclear research and development funding. 
According to the Congressional Research Service, nuclear research and 
development has gotten more than 60%, or $66 billion in energy research 
and development funding from 1948-1998. Led by Representative Markey, 
Mark Foley and others, Congress wisely killed funding for the gas-
cooled reactor and the breeder reactor, saving taxpayers at least $5.6 
billion.
    Now proposals to revive research programs to develop these 
uneconomic and dangerous reactors are creeping into the Department of 
Energy's budget. We are extremely disappointed that the subcommittee 
draft legislation includes authorization of nearly $2 billion in 
commercial nuclear research and development subsidies. These programs 
are pure corporate welfare for an industry that has never paid its own 
way. DOE's own studies (referenced in the draft legislation) 
10 show that new reactors developed through taxpayer-funded 
programs such as Generation IV and Nuclear Power 2010 are not cost-
competitive. Private utilities are not interested in building new 
nuclear plants. Despite DOE's squandering taxpayer dollars on the gas-
cooled reactor known as the Pebble Bed Modular Reactor, the project's 
lone U.S. supporter, Exelon has pulled out of the project. This reactor 
design remains uncompetitive despite the fact that its developers 
propose cutting costs by not building containment.
---------------------------------------------------------------------------
    \10\ http://www.nuclear.gov/nerac/ntdroadmapvolume1.pdf
---------------------------------------------------------------------------
    DOE commissioned a report by Scully Capital called ``Business Case 
for New Nuclear Power Plants,'' 11which concludes that 
existing taxpayer backed insurance (known as the Price Anderson Act), 
federal research and development funds and ultimately federally-funded 
nuclear waste program are not enough to make these new reactors cost-
competitive. Instead it recommends a mind-boggling suite of new 
subsidies including: a federal energy credit program, low interest 
loans, power purchase agreements (at up to 50% more than market 
rates!), emissions credits and additional insurance. This report 
estimates that the federal government would have to spend at least $1.5 
to 2.75 billion in subsidies to bring down the capital costs of five 
new nuclear plants. This estimate does not include any additional 
subsidies for nuclear waste disposal, siting and permitting the new 
plants.
---------------------------------------------------------------------------
    \11\ http://www.nuclear.gov/home/bc/businesscase.html
---------------------------------------------------------------------------
    Congress should oppose programs, which increase the threat of 
nuclear proliferation. Plutonium, an element that can only be produced 
in nuclear reactors, is the material of choice for nuclear weapons. All 
reactors produce it, but it must be separated from highly radioactive 
irradiated fuel before it can be used in weapons. This separation 
process is known as ``reprocessing.'' For at least two decades, the 
United States has had a policy against reprocessing waste from 
commercial nuclear reactors and not allowing plutonium to be used as 
fuel in nuclear reactors to prevent the proliferation of weapons-usable 
material. There are several DOE projects and provisions in the draft 
legislation that violate this common-sense policy or otherwise increase 
the risk of nuclear proliferation. At a time when U.S. citizens are 
asked to sacrifice to reduce the risk of rogue nations deploying 
nuclear weapons, these programs will make the world an even more 
dangerous place.
    Section 6431, the Advanced Fuel Recycling Program specifically 
reverses the decades-long U.S. policy against reprocessing commercial 
nuclear waste. It advocates reprocessing commercial nuclear fuel and 
using several types of reactors, including breeder reactors, to 
allegedly reduce the volume and toxicity of the waste. Nuclear 
``breeder reactors'' can be configured to produce plutonium. Congress 
wisely killed the U.S. breeder reactor program in 1994, citing economic 
and non-proliferation concerns. The breeder reactor supporters ignore 
the dismal failure of France's breeder reactor program and the chance 
of a reactor explosion if the coolant (usually highly reactive sodium) 
leaks.
    A January 2003 report, entitled ``Report to Congress on Advanced 
Fuel Cycle Initiative: The Future Path for Advanced Spent Fuel 
Treatment and Transmutation Research, admits that this costly program 
will not obviate the need for a geologic repository. Further it 
contradicts itself with regard to nuclear non-proliferation. First, it 
claims that the program can ``destroy'' plutonium thus reducing the 
risks of this material falling into the wrong hands.12 On 
the same page, however, it touts the potential for a commercial nuclear 
fuel cycle based on the plutonium separated from existing irradiated 
fuel--a program that would dramatically increase the risk of weapons 
materials falling into the wrong hands by putting separated plutonium 
into commercial nuclear reactors!
---------------------------------------------------------------------------
    \12\ Report to Congress on Advanced Fuel Cycle Initiative: The 
Future Path for Advanced Spent Fuel Treatment and Transmutation 
Research, DOE, January 2003, p. II-6.
---------------------------------------------------------------------------
    Congress should phase out the Price Anderson Act. We oppose 
extension of the Price Anderson Act, which expired in August 2002, and 
then was reauthorized for one year in the recently passed Omnibus 
Appropriations bill. This insurance program is an unwarranted taxpayer 
subsidy to the nuclear industry that has no parallel in any other 
industry. This law, passed in 1957 and amended in 1988 provides 
taxpayer-funded insurance for the nuclear industry in the event of an 
accident. In case of an accident at a nuclear power plant, the industry 
gets a guarantee of limited liability while the public gets no 
guarantee of full compensation. This confers a substantial annual 
subsidy to the nuclear industry in terms of foregone insurance 
premiums. The Price-Anderson Act also provides blanket indemnity to 
Department of Energy contractors, even in cases of intentional 
misconduct and gross negligence. While we are encouraged by some of the 
House-passed provisions that would: re-evaluate nuclear security 
measures, require consultation with the Department of Homeland Security 
and allow for civil penalties in the case of intentional misconduct by 
a DOE contractor, this committee should reject Title IV, Subtitle A 
which reauthorizes the Price Anderson Act. Not only does this section 
reauthorize the Act for an additional fifteen years, it allows new, 
untested ``modular'' reactors to pay less money in case of an accident. 
If nuclear power is as ``safe'' as its proponents claim, there is no 
need for a limit on industry liability.
    Protect citizens from unjustified rate increases and bailouts at 
the state level. We oppose the draft legislation's repeal of the Public 
Utility Holding Company Act of 1935, one of the only laws still on the 
books that protects electricity consumers. In analyzing current 
electricity problems, it is important to recognize the magnitude of the 
ratepayer subsidies enjoyed by this industry and the role these 
subsidies have played in blocking competition and propping up 
economically marginal nuclear power plants.
    In the 1980's, the PIRGs successfully blocked unjustified rate 
increases for nuclear power mismanagement. As states across the country 
restructured their electricity markets, the promise to consumers was 
that these changes would provide competition among electricity 
providers. Instead, utilities lobbied, and for the most part received, 
an unjustified ratepayer-funded bailout of their uneconomic 
investments, usually nuclear power plants. The PIRGs, free market, and 
other consumer and environmental groups in several states fought back 
against these requests for ``stranded cost'' recovery. We argued that 
these bailouts were unjustified and unfair to consumers and would 
hamper efforts to shift towards clean energy. According to a report 
released in 1998 with the Safe Energy Communication Council entitled 
``Ratepayer Robbery'' we estimated these bailouts could total more than 
$112 billion for just eleven states. There is strong evidence that 
without these bailouts, almost half of the nuclear power plants would 
have shut down. Instead, aging plants have been given a new lease on 
life, are in some cases, still shielded from market forces. Some have 
been sold at rock-bottom prices to new owners who have every incentive 
to run them close to the margin. Instead of repealing electricity 
consumer protection laws, the subcommittee should strengthen consumer 
protections and block the continued bailout of the nuclear industry 
through ``stranded cost'' provisions.
    Curb taxpayer costs for nuclear waste and index the fee to 
inflation. The nuclear industry is the only industry that we are aware 
of which has a government program to guarantee disposal of lethal 
waste. We agree with the industry that the DOE has mismanaged the 
program. However, our solution is stop spending money on the program 
and insure that enough money is collected now to adequately cover 
future costs of a sound waste disposal program. A 1998 financial review 
commissioned by the State of Nevada concluded that the funding 
shortfall for the program would range from $12 to $17 billion in 1996 
dollars. We urge that the Nuclear Waste Fund Fee be indexed to 
inflation so that there will be adequate funds to cover the ultimate 
cost of nuclear waste disposition.
    There is no current sound solution for the nuclear waste problem. 
Nuclear waste is one of the most dangerous substances created by 
humans. This waste remains dangerous for at least a quarter of a 
million years (based on the decay of Pu-239). One would expect that 
policies for dealing with this lethal material would be based on sound 
science and protecting public health. Instead nuclear waste policies in 
this country have been based on political expediency. The incredible 
problems faced by citizens living near former DOE weapons sites, such 
as Hanford, Washington should be a lesson to those who want to ignore 
science and public health. Irradiated fuel from nuclear reactors is 
perhaps the most toxic material generated by humans. Unshielded, it 
delivers a lethal dose of radiation within seconds. According to the 
Department of Energy, 95% of the radioactive waste (by radioactivity) 
in this country has been generated by commercial nuclear reactors.
    We believe that the current project should be stopped, as the 
proposed dump site at Yucca Mountain cannot meet current standards for 
containing the waste. In 1998, PIRG and more than one hundred 
environmental, consumer and safe energy organizations petitioned then-
Energy Secretary Richardson to disqualify Yucca Mountain because it 
would not meet current standards for containing the waste. Instead, DOE 
weakened the site guidelines, a clear case of changing the rules when 
science gives the answer that is not wanted.
    Last year, Congress ignored serious safety concerns including the 
risk of transporting this waste across the country, and overrode the 
State of Nevada's veto to designate Yucca Mountain, Nevada as the 
nation's nuclear waste dump. The Bush Administration's 2004 budget 
proposal would reserve funds specifically for the Yucca Mountain 
project within discretionary cap adjustments for 2004 and 2005. This 
proposal would inappropriately limit the discretionary authority of 
appropriators to balance various budget priorities, essentially 
granting the DOE a blank check for Yucca Mountain spending. The General 
Accounting Office reported last year that, ``DOE currently does not 
have a reliable estimate of when, and at what cost, a license 
application can be submitted or a repository can be opened.''
    We urge this committee to re-examine nuclear waste policy and 
develop a public, fair process based on sound science and protecting 
the public for deciding the ultimate fate of this extremely dangerous 
material. No country in the world has a permanent solution to this 
problem. The U.S. should reject its current mismanaged program that 
relies on changing the rules when the science isn't favorable to the 
industry's solution. Instead, we should show leadership by developing a 
solution focused on sound science and protecting the public.

                               CONCLUSION

    Nuclear power is unsafe, uneconomic, unreliable and generates waste 
for which there is no sound solution. It is a failed technology of the 
past and would not exist were it not for enormous and unjustified 
government subsidies and policies. The U.S. should do everything it can 
to protect the health and safety of the public as well as our 
pocketbooks. Nuclear power should be phased out as quickly as possible 
and replaced by energy efficiency and clean renewable energy.

                STATEMENT OF JEFFREY A. BENJAMIN

    Mr. Benjamin. Chairman Barton, Ranking Member Boucher and 
members of the subcommittee. My name is Jeff Benjamin, Vice 
President of Licensing and Regulatory Affairs for Exelon 
Nuclear.
    I have also led our company's efforts to respond to the 
security issues following the tragic events of September 11, 
2001. My background includes working at four different reactor 
sites over the past 17 years, including as a Site Vice 
President at Exelon's LaSalle generating station.
    Exelon is the largest operator of nuclear plants in the 
United States. We own and operate 17 reactors at 10 sites in 3 
States, which represents approximately 20 percent of the 
commercial industry here in the United States.
    I am particularly grateful for the opportunity to discuss 
the matters before you today regarding legislation to define 
and implement the comprehensive energy policy for this country.
    Mr. Chairman, throughout my career in the nuclear power 
industry, safe operation of our plants and the safety of the 
public has been job one.
    We recognize that operating our plant safely is essential, 
both from a public confidence standpoint and as a matter of 
good business economics.
    The safe operation of our plants also includes providing 
effective security to protect the public from radiological 
sabotage. Since September 11, the nuclear industry has taken 
numerous and comprehensive steps to further strengthen security 
at our sites.
    We have discussed these steps before you previously and 
maintain those improvements today. Suffice to say, with these 
improvement in place, we have added real security over the past 
17 months.
    Security measures that complement the pre-existing robust 
security that we had in place prior to September 2001. Recently 
the Nuclear Regulatory Commission provided the industry with an 
opportunity to comment on the staff view of adversary 
attributes for radiological sabotage.
    This staff document contains a proposed change to the 
design basis threat which defines the nature of threats against 
which we are responsible for defending against.
    The current NRC proposal contains several significant 
changes, that if implemented, present a number of considerable 
policy and legal challenges.
    Challenges that also translate to other critical 
infrastructure. The issue at the heart of these challenges is 
improperly defining the division of responsibility between a 
civilian guard force and government, largely law enforcement 
and the military.
    We have asked the NRC to resolve these issues, in full 
consultation with the Department of Homeland Security and 
Congress prior to proceeding with a revised design basis 
threat.
    The NRC seems intent on issuing a revised design basis 
threat prior to resolving these issues. But the steps we have 
taken to strengthen security to date, we have the time to do 
this right.
    We also feel that the creation of the Department of 
Homeland Security has defined the appropriate structure for 
threat assessment, response and recovery and has obviated the 
need for any additional legislation in these areas.
    Much of what is included in Section 4012 of your bill has 
been overtaken by events and should be reconsidered. I would 
now like to discuss Exelon's view on the viability of nuclear 
option going forward.
    Our company has a consistent standard for operating our 
nuclear plants. We will only operate them if they are both 
economical and safe.
    I would like to start by addressing the notion that our 
industry is heavily subsidized. First of all, and I believe 
this is unique from other fuel sources, our industry pays for 
the cost of being regulated by the NRC, through the NRC's 
collection of fees.
    Second, we pay for the existence of an industry watch dog 
group, the Institute of Nuclear Power Operations, who's main 
focus is plant safety and the sharing of best practices.
    And third, and again, unlike the other forms of generation, 
we prepay our ultimate environmental clean up costs through 
decommission funds and the payments to the Nuclear Waste Fund.
    Last year alone Exelon paid close to $119 million into the 
Waste Fund. Collectively, this prevents future generations from 
inheriting the burden of radiological decommissioning and waste 
disposal after our plants have shut down.
    Our position on new reactors is simply that we believe that 
nuclear power is an option that must be maintained. We also 
believe that any new nuclear investment must be based on 
rigorous financial and risk evaluations that reflect the 
reality of a deregulated market.
    Exelon has also been aggressive in upgrading the output of 
our units. And we have done that safely. Since 1998, in 
Illinois alone, we have added nearly 800 megawatts of capacity 
to our existing plants at a cost of just under $300 per 
installed kilowatt.
    This compares roughly to $600 to $650 per installed 
kilowatt for a new combined cycle gas turbine and roughly 
$1,000 to $1,100 an installed kilowatt for a new coal plant.
    Over the past 4 years, concurrent with installing these 
upgrades, we have operated our plants more efficiently and 
safely than ever before. Exelon has also submitted an 
application to the NRC to extend the licenses for Peach Bottom, 
Quad Cities and Dresden, for an additional 20 years.
    The preparation of the Peach Bottom submittal alone 
involved over 30 man years of engineering effort to meet NRC 
application requirements and to assure the plant can operate 
safely for another 20 years.
    We are expecting approval of our Peach Bottom submittal in 
May. The cost of this effort equates to less than $10 an 
installed kilowatt, for another 20 years of 2,300 megawatts of 
generation.
    As a final point regarding the overall economics of our 
plants, in the year 2002, we operated our nuclear fleet at a 
capacity factor of 92.7 percent.
    Our production costs, which includes our operating and 
maintenance costs and fuel, was 1.3 cents a kilowatt hour. Our 
all end costs for 2002, which includes everything from 
operating and capital expense to fuel, our property taxes and 
our mortgage, was 2.01 cents per kilowatt hour.
    These costs remain relatively steady even with cold 
weather. Fuel is not a major driver to our costs. Our costs are 
driven by operating and maintenance expenses.
    One simply needs to compare these generation costs with 
recent volatility in the spot electricity prices to recognize 
the stable yet cost-efficient role of nuclear power.
    In summary, we recognize the special importance placed on 
our industry to operate our plant safely. However, we also feel 
that nuclear has an appropriate an important role in assuring 
the energy security of America in the future. Thank you.
    [The prepared statement of Jeffrey A. Benjamin follows:]

 Prepared Statement of Jeffrey A. Benjamin, Vice President, Licensing 
               and Regulatory Affairs, Exelon Corporation

    Mr. Chairman and Members of the Subcommittee: I am Jeff Benjamin, 
Vice President of Licensing and Regulatory Affairs for Exelon Nuclear, 
a subsidiary of Exelon Corporation.
    Thank you for the opportunity to share Exelon Corporation's views 
on the nuclear energy provisions of Chairman Barton's draft 
comprehensive energy legislation being considered by the Subcommittee.
    Exelon Corporation is one of the largest electric suppliers in the 
United States, with major interregional operations in generation, 
transmission, distribution and marketing. Our two utilities, 
Commonwealth Edison of Chicago and PECO Energy of Philadelphia, serve 
approximately 5.1 million retail customers, the largest customer base 
in the country. Exelon and our affiliates own or control generation 
totaling over 40,000 megawatts, the largest generation portfolio in the 
country. Our wholesale power marketing division, known as the Power 
Team, markets the output of our generation portfolio throughout the 
lower 48 states and Canada with a perfect delivery record.
    Exelon Nuclear owns the nation's largest fleet of commercial 
nuclear plants, operating 17 reactors at 10 sites in Illinois, 
Pennsylvania, and New Jersey. These plants--with 17,800 net megawatts 
of total operating capacity--represent roughly 20 percent of the 
nuclear capacity in the United States.
    During 2002, Exelon's fleet of nuclear plants operated at an 
average capacity factor of over 92 percent and produced 118.7 million 
megawatt-hours of electricity, about 3 percent of all the electricity 
generated in the United States last year. All of this electricity was 
generated without emitting any criteria air pollutants or greenhouse 
gases. In fact, Exelon's nuclear fleet avoided the emissions of over 
119 million tons of CO2 during 2002.
    Exelon achieved this performance while refueling 11 reactors in a 
record average of 22 days and completing the year without a single 
lost-time or restricted-duty injury at 9 of our 10 plant sites.
    As Congress considers changes to America's energy policy, it is 
important to recognize the role of nuclear power and to make changes to 
Federal policy that will promote a diversity of generation technologies 
in the future. Exelon firmly believes that nuclear power will continue 
to play a valuable role in providing the nation with a safe, 
affordable, and environmentally-friendly supply of electricity, and I 
encourage the committee to move forward with many of the nuclear 
energy-related proposals included in Chairman Barton's draft 
legislation.

                          COMMENTS ON TITLE IV

Subtitle A. Price-Anderson Act Renewal
    Subtitle A of Title IV would renew the Price-Anderson Act, 
legislation that ensures that the public is quickly compensated in the 
event of a radiological event at a commercial nuclear reactor. Exelon 
supports Price-Anderson renewal, both to continue the operation of our 
current fleet of nuclear plants with contractor support and to provide 
an essential prerequisite to the potential construction of new nuclear 
plants.
    While the draft legislation includes the Price-Anderson provisions 
approved by the House of Representatives last year, Exelon would 
encourage the committee to support the Price-Anderson renewal language 
for commercial nuclear facilities that was agreed to last year by House 
and Senate conferees to H.R. 4 during conference committee 
consideration of that legislation.
    One section of the draft proposal that was not included in last 
year's conference agreement (Section 4012) addresses the issue of 
nuclear facility threats. This section of the bill would direct the 
President, in conjunction with the Nuclear Regulatory Commission (NRC) 
and other federal, state and local agencies and private entities, to 
assess the types of threats faced by commercial nuclear facilities. The 
provision would also direct the President to assess the nature of any 
threat posed by enemies of the United States and to classify threats as 
being the primary responsibility of the Federal government or NRC 
licensees.
    Much of what is included in Section 4012 has been overtaken by 
events, namely the creation of the Department of Homeland and the NRC's 
current effort to develop a revised Design Basis Threat. However, 
Exelon believes that it remains critical for all relevant agencies of 
the Federal government--in conjunction with state and local agencies 
and private entities--to fully examine the new threat environment 
facing the nation's critical infrastructure industries and to classify 
threats as being the primary responsibility of either the government or 
private industry. This should be done prior to the issuance of a new 
Design Basis Threat.
    Additional comments on the issue of nuclear security are included 
later in my testimony.

Subtitle B. Miscellaneous Matters
    Subtitle B includes a number of miscellaneous provisions to amend 
the Atomic Energy Act.
    Section 4021 would clarify that the 40-year license period for 
commercial nuclear reactors begins once the reactor commences 
operation, not upon approval of the license. Exelon supports this 
change, which codifies existing Commission policy.
    Sections 4022 through 4025 address miscellaneous NRC-related issues 
that have been requested by the Commission. Exelon has no objection to 
these provisions.
    Sections 4026 through 4028 include provisions requested by the NRC 
to address security-related issues. Exelon has no objection to these 
provisions.

                            NUCLEAR SECURITY

    Protection of the health and safety of the public and our employees 
is of paramount importance to the nuclear power industry. The industry 
has worked closely with a variety of Federal, state and local officials 
to identify safeguards and resources necessary to respond to potential 
threats to plant security, and we are fully supportive of taking all 
reasonable and necessary steps--whether they be by licensees or the 
government--to ensure that nuclear plants are able to withstand an 
attack by terrorists.
    Commercial nuclear power plants are regarded by many to be the most 
well-protected industrial facilities in the United States today. 
Indeed, many other industries are turning to the nuclear industry as a 
model for providing security at a variety of commercial facilities. For 
example, in addition to unique physical protections employed at 
commercial nuclear facilities, the nuclear industry is alone among 
critical infrastructure industries in using the Federal Bureau of 
Investigations to run criminal background checks on applicants for 
positions at sensitive facilities.
    Since September 11, 2001, the nuclear industry has undertaken 
extensive measures to enhance security at the nation's 72 commercial 
nuclear reactor sites, including actions to harden site access, 
increase security resources, and improve operational readiness.
    To harden site access, Exelon has:

 established armed owner control area checkpoints for all 
        vehicles entering the site;
 implemented additional vehicle pre-screening and control of 
        all on-site deliveries upon entry to the owner-controlled area;
 positioned barriers to prevent access at alternate Owner 
        Controlled Area entrances;
 restricted visitor access to those required for essential 
        plant work;
 extended background checks for all personnel with temporary 
        unescorted access; and
 checked employee databases against FBI watch lists of 
        suspected terrorists from all known terrorist organizations.
    To increase security resources, Exelon has:

 increased the number of security officers at each site;
 procured additional weapons and upgraded armaments;
 added armed security posts at key plant locations;
 increased security presence at the site entrance; and
 posted local law enforcement and, at times, National Guard 
        units at site entrances.
    To enhance operational readiness, Exelon has:

 enhanced plant procedures and operator training for use during 
        an attack or credible threat;
 implemented a fleet-wide threat assessment procedure to 
        respond to threat situations;
 elevated attention to security and fire protection related 
        equipment; and
 established protocol for augmented federal and state law 
        enforcement assistance and intervention.
    Mr. Chairman, I want to stress the multiplicity of concrete actions 
we have taken since September 11, 2001, to respond to the increased 
security needs of our Nation and to further enhance our already 
substantial preparedness.

Revision of the Design Basis Threat
    Since shortly after September 11, the Nuclear Regulatory Commission 
has been engaged in a top-to-bottom review of the Design Basis Threat 
(DBT), which defines the nature of threats against which nuclear plant 
operators are responsible for defending, to reevaluate its adequacy. As 
an interim measure, the Commission issued Orders on February 25, 2002, 
that impose significant additional requirements on licensees pending 
the completion of a more comprehensive review of safeguards and 
security program requirements.
    On January 2, 2003, the NRC provided the nuclear industry an 
opportunity to comment on the ``Staff View of Adversary Attributes for 
Radiological Sabotage.'' This staff document contains a proposed change 
to the Design Basis Threat. The NRC proposal contains several 
significant changes that, if implemented, present a number of 
considerable policy and legal challenges. These challenges must be 
addressed by the NRC, in formal consultation with the Department of 
Homeland Security, other relevant Departments of the Administration, 
state and local responders and Congress, prior to moving forward with 
changes to the current DBT.

                      THE FUTURE OF NUCLEAR ENERGY

    I would now like to discuss Exelon's view on the viability of the 
nuclear option going forward. Exelon has had a consistent standard for 
operating our nuclear plants--we will only operate them if they are 
economical and safe. Opponents of nuclear power frequently claim that 
the nuclear industry is heavily subsidized. Yet, unlike other 
generation sources, the nuclear industry incurs several costs unique to 
electric generators. First, our industry pays for the cost of being 
regulated by a Federal entity (the Nuclear Regulatory Commission) 
through the payment of NRC user fees. Second, the industry funds an 
``industry watchdog'' group--the Institute of Nuclear Power 
Operations--whose main focus is plant safety and the sharing of best 
practices. Third, the industry fully prepays our ultimate environmental 
cleanup costs through plant-specific decommissioning funds and the 
Nuclear Waste Fund. This prevents future generations from inheriting 
the burden of radiological decommissioning and waste disposal after our 
plants have shut down.
    With regard to new nuclear plants, Exelon strongly believes that 
nuclear power is an option for the future that must be maintained. We 
also believe that any new nuclear investment must be based on rigorous 
financial and risk evaluations that reflect the reality of a 
deregulated market.
    We are one of three companies pursuing approval of an Early Site 
Permit (ESP) from the NRC. We are seeking an ESP for our Clinton site 
in central Illinois with the objective of ``banking'' the site for 
potential use in the future (the permit would be good for 20 years). 
Importantly, this process will serve to test the NRC's process for 
determining site adequacy. We are also working with the NRC through NEI 
to develop improved licensing processes for the consideration of new 
plants. All of these efforts are focused on ensuring that when new 
plants are built there is a well-defined and predictable regulatory 
process in place.
    Even without the addition of new plants, the industry is 
dramatically increasing the amount of electricity generated from the 
nuclear sector. Exelon has been a leader in uprating the output of our 
existing units. In Illinois alone, we have added nearly 800 megawatts 
of capacity to our plants since 1998 at a cost of just under $300/
installed kilowatt. This compares to roughly $800-1000/installed 
kilowatt to build a new gas or coal plant. Coincident with these 
uprates, our plants are running more efficiently and safely than ever 
before.
    The industry has also been active in pursuing the renewal of 
operating licenses for existing plants. Exelon has submitted an 
application to the NRC to extend the licenses for Peach Bottom, Quad 
Cities, and Dresden for an additional 20 years. The preparation of the 
Peach Bottom submittal alone involved over 30 man-years of engineering 
effort to meet the application requirements and to assure the plant can 
operate safely for another 20 years. We are expecting approval of our 
Peach Bottom submittal in May.

                               CONCLUSION

    Mr. Chairman, thank you for the opportunity to discuss these issues 
with you. Exelon looks forward to working with you and members of the 
subcommittee as you consider energy legislation this year.

                   STATEMENT OF EDWIN S. LYMAN

    Mr. Lyman. I would like to thank Chairman Barton and the 
other distinguished members of the subcommittee for the 
opportunity to present the views of the Nuclear Control 
Institute on the role that nuclear power should play in a 
comprehensive national energy policy.
    In the post-September 11, era, this issue merits most 
careful consideration. The Nuclear Control Institute is not an 
anti-nuclear organization. However, we do believe that the 
nuclear industry and its regulator, the NRC, have an 
extraordinary obligation to ensure that this inherently 
dangerous technology is used as wisely, safely and securely as 
possible.
    We also believe that the Department of Energy has a 
responsibility to respect longstanding U.S. non-proliferation 
policy in considering the development of new nuclear 
technologies, both in its domestic and international 
cooperative research programs.
    We cannot afford to repeat the mistakes of the early 
promoters of nuclear energy, who's lack of foresight has 
contributed in no small measure to real and growing threat of 
nuclear and radiological terrorism that Americans face today.
    Unfortunately, the lackluster response of the NRC to the 
urgent nuclear security concerns after September 11, calls into 
question is credibility as a responsible regulator.
    And DOE's misguided plans to revive spent fuel reprocessing 
and plutonium recycling in the U.S., and to encourage it 
abroad, albeit under the guise of proliferation resistant 
technology, will only increase the threat of nuclear 
proliferation and nuclear terrorism in the world.
    It is therefore up to Congress to ensure that any nuclear 
component of a national energy policy be fully consistent with 
the fundamental objectives of Homeland Security and non-
proliferation.
    This requirement raises difficult issues. It is becoming 
increasing apparent that effective Homeland Security cannot be 
brought on the cheek.
    It may turn out that the cost of measures needed to protect 
Americans from nuclear and radiological terrorism will be too 
great for the nuclear industry to bear and remain economically 
viable.
    But if the security of nuclear facilities can be guaranteed 
only with public subsidy, Congress should assess how its 
constituents feel about using their tax money for this purpose.
    If public reaction is negative, Congress needs to 
reconsider the role of nuclear energy in the future and whether 
efforts should be directed toward technologies that present 
less tempting terrorist targets.
    I would now like to discuss a few specific objectives I 
think are necessary for responsible nuclear energy policy. If 
nuclear power is to have a continuing role in the Nation's 
energy mix, there has to be a fundamental change in our 
approach to protecting nuclear plants and materials from being 
used as terror instruments.
    Nearly 18 months after September 11, NRC is still dragging 
its heels in putting into place a new frame work for nuclear 
facility protection.
    The industry is bitterly resisting any new security 
requirements that will cost it money, and policymakers appear 
no closer to resolving a crucial issue.
    And I agree with Mr. Benjamin. This is crucial. Who should 
have responsibility for protecting nuclear facilities against 
September 11 scale threats?
    Congressional action is needed to break these logjams and 
the section on nuclear facility threats in the draft energy 
bill is a step in the right direction.
    The draft legislation would authorize a Presidential review 
of threats to nuclear facilities in consultation with NRC and 
other appropriate agencies. I believe that this review is 
needed.
    Because the current decision, a revised design basis 
threat, is being made entirely within NRC, including closed 
door consultations with the industry on the impact of the 
revision on its financial bottom line.
    This isn't appropriate. The magnitude of today's threat 
should be based on the best intelligence information, something 
utility executives are not in a position to assess.
    And the decision on where the responsibility in the 
industry stops and that of the Federal Government begins, 
definitely deserves a wider range of discussions.
    Now a related issue is the private sector is having 
difficulty providing security forces that are flexible enough 
to adjust rapidly to changes in the homeland security threat 
status.
    Utilities are unwilling to hire new security guards to meet 
the greater demands associated with an increase in the status 
if it appears the alert will only last for a short time.
    But this means the existing guard forces are being burdened 
with excessive over time in exactly the times they need to be 
at peak levels of alertness.
    Federal and other public resources, such as a reserve force 
of nuclear responders may be needed to smooth out these 
transitions.
    Other issues that should be considered are the impact of a 
jet attack on a nuclear plant and what defenses maybe 
necessary, which again would be a responsibility we believe of 
the Federal Government.
    Also, the draft bill's provisions to establish and 
operational safeguards response evaluation program are needed 
because the current program, even though NRC is putting into 
place, still have a number of weaknesses, including it is going 
to remain a voluntary program for at least another year.
    And I think that they need to have enforcement and NRC 
should have the ability to choose the plants that it wants to 
test. We shouldn't wait for the industry to come forward and 
put their best foot forward.
    Finally, other issues, such as new plant design approval, 
license renewal, new plant siting, should take into account the 
potential for terrorism.
    For instance, for plant siting, there should a required 
assessment of the desirability of plant locations as terrorist 
targets from the standpoint of symbolic value, consequences, 
and inability to evacuate the area.
    This would help to avoid ill-advised siting decisions, such 
as the one that allowed Indian Point to be built only 30 miles 
from New York City.
    Many of these issues could be addressed in NEPA 
proceedings, but the NRC has recently ruled that out as far as 
its own NEPA activities goes.
    And so I believe Congress should mandate the NRC carry out 
homeland security impact assessments for all significant agency 
actions.
    In summary, we need to solve today's outstanding security 
problems affecting the nuclear industry before we can guarantee 
a long term role for nuclear power in our country. Thank you 
very much.
    [The prepared statement of Edwin S. Lyman follows:]

   Prepared Statement of Edwin S. Lyman, President, Nuclear Control 
                               Institute

    I would like to thank Chairman Barton and the other distinguished 
members of the Subcommittee for the opportunity to present the views of 
the Nuclear Control Institute on the role that nuclear power should 
play in a comprehensive national energy policy. In the post-September 
11 era, this issue merits most careful consideration.
    The Nuclear Control Institute is not an anti-nuclear organization. 
However, we do believe that the nuclear industry and its regulator, the 
Nuclear Regulatory Commission, have an extraordinary obligation to the 
American people to ensure that this inherently dangerous technology is 
used as wisely, safely and securely as possible. We also believe that 
the Department of Energy has a responsibility to respect long-standing 
U.S. nonproliferation policy in pursuing the development of new nuclear 
technologies, both in its domestic and international cooperative 
research programs. We cannot afford to repeat the mistakes of the early 
promoters of nuclear energy, whose lack of foresight has contributed in 
no small measure to the real and growing threat of nuclear and 
radiological terrorism that Americans face today.
    Unfortunately, the lackluster response of the NRC to the urgent 
nuclear security concerns that arose after the September 11 attacks 
calls into question its credibility as a responsible regulator of the 
U.S. nuclear energy infrastructure. And DOE's misguided plans to revive 
spent fuel reprocessing and plutonium recycle in the U.S. and to 
encourage it abroad--albeit under the guise of ``proliferation-
resistant'' technology--will only increase the threat of nuclear 
proliferation and nuclear terrorism in the world.
    It is therefore up to Congress to ensure that any nuclear component 
of a comprehensive national energy policy be fully consistent with the 
fundamental objectives of homeland security and non-proliferation. This 
requirement raises difficult policy issues. It is becoming increasingly 
apparent that effective homeland security cannot be bought on the 
cheap. It may turn out that the cost of measures needed to provide the 
American people with adequate protection from nuclear and radiological 
terrorism will be too great for the nuclear industry to bear and remain 
economically viable. If the security of nuclear facilities can be 
guaranteed only with public subsidy, Congress should assess how its 
constituents feel about using their tax money for this purpose. But if 
public reaction is decidedly negative, Congress needs to reconsider 
whether nuclear energy should have a significant role in the future or 
whether efforts should be directed toward technologies that present 
less tempting targets to terrorists.
    I would now like to discuss a few specific objectives that are in 
our view essential elements of a responsible nuclear energy policy.
    If nuclear power is to have a continuing role in the nation's 
energy mix, there must be a fundamental change in our approach to 
protecting nuclear power plants and materials from being used as 
instruments of terror. Nearly 18 months after the September 11 attacks, 
NRC is still dragging its heels in putting into place a new framework 
for nuclear facility protection, the nuclear industry is bitterly 
resisting any new security requirements that will cost it money, and 
policymakers throughout the government appear no closer to resolving 
the crucial issue of who should have responsibility for protecting 
nuclear facilities against September 11-scale threats. Congressional 
action is needed to break these logjams, and the section on ``Nuclear 
Facility Threats'' in the draft energy bill under discussion is a step 
in the right direction.
    The draft legislation would authorize a Presidential review of 
threats to nuclear facilities, in consultation not only with NRC but 
with other appropriate agencies. This review would take into account 
realistic assessments of the post-September 11 terrorist threat, and 
would identify an appropriate ``design basis threat'' (DBT), 
establishing the dividing line between the level of protection that is 
the responsibility of NRC licensees and the level that is the 
responsibility of the Federal Government. This question raises complex 
policy issues requiring high-level consideration and full interagency 
involvement, including the appropriate role of Federal assets in 
protecting commercial nuclear facilities.
    This review is needed because right now the decision on a revised 
DBT is being made entirely within NRC, including closed-door 
consultations with the industry on the impact of the revision on its 
financial bottom line. This is inappropriate. The magnitude of today's 
terrorist threat should be based on the best intelligence information, 
something that utility executives are not in a position to assess. And 
the decision as to where the responsibility of the industry stops and 
that of the Federal Government begins should obviously involve a wider 
group than just the NRC and the industry it regulates.
    A related issue that needs to be addressed is that the private 
sector is having difficulty providing security forces flexible enough 
to adjust rapidly to changes in the homeland security threat status. 
Utilities have proven to be unwilling to hire new security guards to 
meet the greater demands associated with an increase in the threat 
status if it appears that the higher alert will only last for a short 
time, as has been the case so far. But this means that the existing 
guard forces are being burdened with excessive overtime at exactly the 
times that they need to be at peak levels of alertness and performance. 
Federal or other public resources--such as a reserve force of nuclear 
plant responders--may be needed to smooth out these transitions.
    Moreover, more general Federal assistance to nuclear plant guard 
forces may also be appropriate. To remedy the wide variations in 
qualifications, fitness and training among private security forces, the 
U.S. could standardize the process for hiring, training and retraining 
guards by instituting a Federal academy for this purpose. Graduates of 
this course would be certified to work as nuclear plant armed 
responders, subject to periodic recertification.
    Broader government involvement and interagency expertise are also 
needed in considering how to deal with the ultimate September 11 threat 
of a jet aircraft attack on a nuclear plant. Although anti-aircraft 
weapons are now guarding the skies around Washington, the NRC continues 
to scoff at suggestions that it seriously consider requiring such 
protection at nuclear plants. Unsupported industry claims that nuclear 
power plants are essentially invulnerable to a jet attack are of little 
comfort to people who know that these plants remain undefended from the 
air.
    The draft bill's provision to establish an ``operational safeguards 
response evaluation'' program for periodic force-on-force testing of 
nuclear facility security is also needed. But this provision would be 
strengthened if establishment of the program were put on a fast track 
and made more specific to addressing the deficiencies in NRC's own 
program. Although NRC finally appears to be resuming force-on-force 
testing after an 18-month hiatus, it is commencing with only a 
voluntary ``pilot program'' in which the exercises will not be graded 
on a pass-fail basis and no enforcement actions will be taken in the 
event of poor performance. At a time when America is facing the threat 
of terrorist reprisals in response to the imminent war in Iraq, we do 
not have the luxury of engaging in a drawn-out experimental program, or 
being patient if nuclear plant security forces prove unable to protect 
their facilities from a terrorist-caused meltdown. The NRC should 
immediately start formally testing the security at nuclear plants of 
its choosing, utilizing credible adversary characteristics (for both 
outsiders and insiders), and sanctioning plants that fail.
    Finally, Congress should ensure that, if nuclear power is to remain 
an option in the United States, the regulatory processes for license 
renewal, new plant design approval and new plant siting should take 
into account the potential for deliberate acts of malice in addition to 
spontaneous accidents. The growing yet unpredictable threat of 
catastrophic terrorism has thrown a monkey wrench in NRC's traditional 
regulatory decision-making process, which is predicated on the 
assumption that the most severe accidents are the most infrequent and 
hence require far less consideration. But today, NRC should be required 
to seriously assess the potential for severe radiological releases 
resulting from a terrorist attack.
    For emergency planning, NRC should determine all who are at risk 
from a terrorist attack and ensure that they can be protected, using 
methods grounded in science rather than public relations. Such an 
effort should result in the designation of emergency planning zones far 
larger than the 10-mile radius zones in place today. According to 
calculations I have performed using NRC-approved codes, these zones may 
have to extend more than a hundred miles downwind. If such zones are 
impractical and the residents cannot be adequately protected, then 
there must be a clear regulatory mechanism for shutting down plants 
that pose unacceptable risks.
    For license renewal and new plant siting, there should be a 
required assessment of the desirability of plant locations as terrorist 
targets from the standpoint of symbolic value, potential consequences 
and inability to evacuate the area at risk. This would help to avoid 
ill-advised siting decisions, such as the one that allowed the Indian 
Point nuclear plant to be built only thirty miles from New York City.
    And for new plant designs, resistance to terrorist attack should be 
a fundamental design requirement--in contrast to the current generation 
of nuclear plants, which are vulnerable to common-mode failures that 
terrorists can induce with a minimum of effort.
    Many of these issues could be addressed in National Environmental 
Policy Act (NEPA) proceedings. However, the NRC recently ruled that the 
consequences of terrorist attacks need not be considered in 
Environmental Impact Statements because ``the possibility of a 
terrorist attack . . . is speculative and simply too far removed from 
the . . . consequences of agency action to require a study under 
NEPA.'' Congress should mandate that NRC carry out ``homeland security 
impact assessments'' for all significant agency actions.
    In summary, we need to solve the outstanding security problems 
affecting our nuclear industry today before we can guarantee a long-
term role for nuclear power in our country. I would point out that in 
an interview last September 11, Khalid Sheikh Mohammed said that al 
Qaeda decided to omit nuclear facilities from its list of targets ``for 
now.'' As terrorists become increasingly desperate and dangerous, it 
would be foolish to expect that U.S. nuclear facilities will remain off 
that list much longer.
    Now I would like to briefly comment on the Department of Energy's 
Advanced Fuel Recycling and Generation IV programs. The Nuclear Control 
Institute is opposed to spent fuel reprocessing on proliferation 
grounds, and believes that the U.S. moratorium on reprocessing, the 
outcome of a review begun in the Ford Administration, is sound policy. 
It allowed the U.S. to avoid the cost and risk associated with the 
accumulation of large stockpiles of separated civil plutonium, in 
contrast to countries that did not follow our lead, including the 
United Kingdom, France, Russia and Japan. It also gave the U.S. the 
moral authority to block the transfer of reprocessing technology to 
countries like South Korea.
    Therefore, in our view, the desire of the White House and the 
Department of Energy to overturn this policy and pursue research, 
development and deployment of new reprocessing technologies is deeply 
troubling. This shift will send the wrong signal to the rest of the 
world, giving a boost to countries like Japan whose own plutonium 
recycling programs are in disarray, and removing the brakes on the 
ambitions of many other nations to reprocess their spent fuel. This 
will increase the risk of theft or diversion of plutonium at a time 
when the threat of nuclear terrorism has never been as great.
    DOE's claim that the technologies it will develop are 
``proliferation-resistant'' gives little reassurance. There is nothing 
new about these concepts that would change the conclusion reached by 
numerous analyses in the 1970s that the proliferation risks associated 
with reprocessing cannot be fixed with technical means. Unless the most 
rigorous safeguards and physical protection measures are applied to 
nuclear material during processing, transport, storage and utilization, 
plant insiders or suicidal attackers will be able to defeat the modest 
deterrent effect of the ``proliferation-resistant'' fuel cycles that 
DOE has proposed. And diversion of plutonium will be even harder to 
detect in ``proliferation-resistant'' facilities than in conventional 
reprocessing plants because the ability to make precise measurements 
would be diminished.
    DOE's advanced fuel recycling research is not likely to win any 
converts among nations that already operate conventional reprocessing 
plants, such as France, but it is likely to give encouragement to 
countries that do not now reprocess but would like to, such as South 
Korea. The net effect of this program will be to increase the quantity 
of poorly safeguarded and protected nuclear weapon material in the 
world.
    DOE's January 2003 report to Congress on its Advanced Fuel Cycle 
Initiative failed to answer nearly all of the questions that it was 
required to address for the technologies under study, providing no 
information on waste streams, life cycle costs, proliferation 
resistance or facility siting strategy. Before spending a penny more on 
this wasteful and dangerous program, Congress should demand and receive 
substantive answers to these questions.
    Thank you for your attention.

                    STATEMENT OF STEVEN NADEL

    Mr. Nadel. My name is Steve Nadel, I am here representing 
the American Council for an Energy Efficient Economy. We are a 
non-profit research organization that has been working on 
energy efficiency technology and policy issues for more than 20 
years.
    I am going to be commenting on the energy efficiency 
aspects of the bill and there are quite a few energy efficiency 
aspects scattered among the five out of the ten titles in the 
draft Barton bill.
    First, I wanted to note that energy efficiency has been a 
major resource for the United States. Since 1973, the U.S. has, 
through efficiency, reduced energy use more than 25 percent. So 
that makes it a very large resource.
    Our analyses, also analyses by DOE, indicate that we can 
continue that trend and save an equivalent amount of energy 
over the next 20 or so years.
    We think it is very important that the Unites States do so. 
It will help reduce oil imports. It will help with economic 
development.
    It will provide downward pressure on prices. Prices are 
peaking now and they depend on the balance between supply and 
demand. If we can moderate demand, we can also moderate prices.
    Finally, energy efficiency policy is part of a, I call it a 
no regrets policy toward climate change. These are things that 
are cost-effective that we can all agree on today that will 
help reduce emissions while we are figuring out what other 
steps, if any, to take.
    Title I of Representative Barton's bill is the heart of 
energy efficiency. We wanted to praise Representative Barton 
for including this. There are a lot of good provisions in this 
Title.
    It began with, in 2001, with the initial House energy bill, 
which had some useful provisions for energy efficiency. The 
Senate had a lot more time to work on things and expanded the 
energy efficiency provisions quite significantly on a bi-
partisan basis.
    Last year the House conferees accepted many of those 
provisions. We had consensus. Representative Barton has really 
picked up where this discussion left off last year and included 
a lot of good provisions in Title I.
    In particular, we would note that Title I includes a 
variety of consensus efficiency standards. We worked with Dr. 
O'Hagan and other associations to negotiate consensus 
agreements in terms of new efficiency standards or in some 
cases provisions that DOE would set new standards.
    There are some very significant savings from these 
provisions. There is also some very useful work dealing with 
Federal Energy Management Program, helping to improve that 
program and helping to save a lot more energy in the future 
building on its past successes.
    A good provision dealing with industrial voluntary 
programs. Some very useful provisions dealing with State energy 
programs. A lot of good provisions, and we hope that Title I 
will be enacted.
    We are also working with Dr. O'Hagan and other people to 
look at some possible consensus modifications, additions to 
this. Those discussions are still ongoing, but hopefully we 
will have consensus and some recommendations to share with you 
shortly.
    I would also note that Title V includes lots of useful R&D 
activities. Advanced lighting, combined heat and power, many 
useful programs there. So that's a good Title.
    Title V includes a section on hydrogen R&D, both for 
vehicles and for the infrastructure. Again, some very useful 
sections that we support.
    We particularly support the fact that in Title V it 
actually sets some concrete goals for hydrogen vehicles. And 
these were discussed in the first panel.
    In terms of decisions to produce vehicles by 2015 and 
actually start selling these vehicles by 2020. We think some 
concrete targets really will help to focus some of these 
efforts.
    Title X of the bill deals with automobile fuel economy. It 
has a provision to authorize the Department of Transportation 
to set new fuel economy standards. We think this is helpful.
    We also like the fact that the bill, unlike the 2001 bill, 
does not include an extension of the dual fuel credit for fuel 
economy.
    This was a very well-intentioned provision to help 
encourage use of alternative fuels. While we support use of 
alternative fuels, that particular mechanism hasn't worked.
    Research by the Department of Transportation indicates that 
99 percent of the dual fuel vehicles actually just burn 
gasoline. But that provision effectively is allowing all 
vehicles to burn more gasoline because it reduces fuel economy, 
and it is not really resulting in any alternative fuel use.
    So we think that section either needs to be reformed or 
dropped. And we praise Chairman Barton for not including it and 
hope that will continue as the bill moves forward.
    Electricity is a major provision in the bill. One of the 
aspects that we work on from an efficiency point of view is 
combine heat and power plants.
    These have enormous potential to save a lot of energy 
because they can be up to twice as efficient as separate 
boilers and separate power plants.
    Currently there are quite a few obstacles toward these 
plants in terms of the utility regulations, in terms of hook up 
requirements, back up power prices, etcetera.
    We recommend that FERC be given the authority, subject to, 
commensurate with their existing authority, to help us guide 
buy-back rates, interconnection requirements.
    We know that several members of this committee are actually 
thinking of introducing legislation shortly on this and we hope 
you will include it.
    I guess to summarize, I would note that in our estimation 
the provisions, particular in Title I, will reduce U.S. energy 
use, we figure, by about 2 percent by 2020.
    That is fairly significant. We are talking on the order of 
40,000 megawatts of power reduction. It is equivalent to about 
130 power plants, 300 megawatts each.
    So some very significant savings there. But some of the 
additions that we suggest could increase these savings many 
fold and we hope you will buildupon the solid foundation that 
is in the bill and add a number of these new provisions. Thank 
you.
    [The prepared statement of Steven Nadel follows:]

   Prepared Statement of Steven Nadel, Executive Director, American 
                Council for an Energy-Efficient Economy

                              INTRODUCTION

    ACEEE is a non-profit organization dedicated to increasing energy 
efficiency as a means for both promoting economic prosperity and 
environmental protection. We were founded in 1980 and have contributed 
in key ways to energy legislation adopted during the past 20 years, 
including the Energy Policy Act of 1992 and the National Appliance 
Energy Conservation Act of 1987. I appreciate the opportunity to appear 
again before this Committee.
    Energy efficiency improvement has contributed a great deal to our 
nation's economic growth and increased standard of living over the past 
30 years. Energy efficiency improvements since 1973 accounted for 
approximately 25 quadrillion Btu's in 2002, which is about 26% of U.S. 
energy use and more energy than we now get annually from coal, natural 
gas, or domestic oil sources. Consider these facts which are based 
primarily on data published by the federal Energy Information 
Administration (EIA):

1. Total primary energy use per capita in the United States in 2002 was 
        almost identical to that in 1973. Over the same 29-year period, 
        economic output (GDP) per capita increased 74 percent.

2. National energy intensity (energy use per unit of GDP) fell 43 
        percent between 1973 and 2001. About 60% of this decline is 
        attributable to real energy efficiency improvements and about 
        40% is due to structural changes in the economy and fuel 
        switching.1
---------------------------------------------------------------------------
    \1\ Murtishaw and Schipper, 2001, Untangling Recent Trends in U.S. 
Energy Use. Washington, D.C.: U.S. Environmental Protection Agency.
---------------------------------------------------------------------------
3. If the United States had not dramatically reduced its energy 
        intensity over the past 29 years, consumers and businesses 
        would have spent at least $430 billion more on energy purchases 
        in 2002.

4. Between 1996 and 2002, GDP increased 21 percent while primary energy 
        use increased just 2 percent. Imagine how much worse our energy 
        problems would be today if energy use had increased 10 or 20 
        percent during 1996-2002.

    Even though the United States is much more energy-efficient today 
than it was 25 years ago, there is still enormous potential for 
additional cost-effective energy savings. Some newer energy efficiency 
measures have barely begun to be adopted. Other efficiency measures 
could be developed and commercialized in coming years, with proper 
support:

 The Department of Energy's national laboratories estimate that 
        increasing energy efficiency throughout the economy could cut 
        national energy use by 10 percent or more in 2010 and about 20 
        percent in 2020, with net economic benefits for consumers and 
        businesses.2
---------------------------------------------------------------------------
    \2\ Interlaboratory Working Group, 2000, Scenarios for a Clean 
Energy Future. Washington, D.C.: Interlaboratory Working Group on 
Energy-Efficient and Clean-Energy Technologies, U.S. Department of 
Energy, Office of Energy Efficiency and Renewable Energy.
---------------------------------------------------------------------------
 ACEEE, in our Smart Energy Policies report, estimates that 
        adopting a comprehensive set of policies for advancing energy 
        efficiency could lower national energy use from EIA projections 
        by as much as 11 percent in 2010 and 26 percent in 
        2020.3
---------------------------------------------------------------------------
    \3\ Nadel and Geller, 2001, Smart Energy Policies: Saving Money and 
Reducing Pollutant Emissions Through Greater Energy Efficiency, 
Www.aceee.org/ energy/reports.htm. Washington, DC: American Council for 
an Energy-Efficient Economy.
---------------------------------------------------------------------------
 The opportunity for saving energy is also illustrated by 
        experience in California in 2001. Prior to 2001 California was 
        already one of the most-efficient states in terms of energy use 
        per unit gross state product (ranking 5th in 1997 out of 50 
        states 4). But in response to pressing electricity 
        problems, California homeowners and businesses reduced energy 
        use by 6.7% in summer 2001 relative to the year before (after 
        adjusting for economic growth and weather) 5, with 
        savings costing an average of 3 cents per kWh, 6 far 
        less than the typical retail or even wholesale price of 
        electricity.
---------------------------------------------------------------------------
    \4\ Geller and Kubo, 2000, National and State Energy Use and Carbon 
Emissions Trends. Washington, DC: American Council for an Energy-
Efficient Economy.
    \5\ California Energy Commission, 2001, Emergency Conservation and 
Supply Response 2001. Report P700-01-005F. Sacramento, CA.
    \6\ Global Energy Partners, 2003, California Summary Study of 2001 
Energy Efficiency Programs, Final Report. Lafayette, CA.
---------------------------------------------------------------------------
    Unfortunately, a variety of market barriers keep these savings from 
being implemented. These barriers are many-fold and include such 
factors as ``split incentives'' (landlords and builders often don't 
make efficiency investments because the benefits of lower energy bills 
are received by tenants and homebuyers); panic purchases (when a 
product such as a refrigerator needs replacement, there often isn't 
time to research energy-saving options); and bundling of energy-saving 
features with high-cost extra ``bells and whistles.''
    Furthermore, recent developments indicate that the U.S. needs to 
accelerate efforts to implement energy-efficiency improvements:

 Oil, gasoline and natural gas prices have been climbing 
        steadily in recent months. Energy-efficiency can reduce demand 
        for these fuels, reducing upward price pressure and also 
        reducing fuel-price volatility, making it easier for businesses 
        to plan their investments. Prices are determined by the 
        interaction of supply and demand--if we seek to address supply 
        and not demand, it's like entering a boxing match with one hand 
        tied behind our back. For example, the Smart Energy Policies 
        study referenced above used the Department of Energy's (DOE's) 
        National Energy Modeling System to assess the impacts of 
        energy-saving policies and found that these policies could have 
        a large impact on natural gas prices, reducing average prices 
        in 2020 from $3.10 per million Btu's in the EIA basecase 
        projection to $1.90 per million Btu's if a comprehensive set of 
        efficiency policies is implemented.
 The U.S. is growing increasingly dependent on imported oil, 
        with imports accounting for about 60% of U.S. oil consumption 
        in 2000 of which nearly half came from OPEC and nearly a 
        quarter came from the Persian Gulf.7 Energy-
        efficiency can slow the growth in oil use, allowing a larger 
        portion of our needs to be met from sources in the U.S. and 
        neighboring friendly countries.
---------------------------------------------------------------------------
    \7\ Energy Information Administration, 2001, Annual Energy Review 
2001. Washington, DC: U.S. Dept. of Energy.
---------------------------------------------------------------------------
 The U.S. economy has been in the doldrums for more than two 
        years. Energy-efficiency investments often have financial 
        returns of 30% or more, helping to reduce operating costs and 
        improve profitability. In addition, by reducing operating 
        costs, efficiency investments free up funds to spend on other 
        goods and services, creating what economists call the 
        ``multiplier effect'', and helping the economy broadly. A 1997 
        study found that due to this effect, an aggressive set of 
        efficiency policies could add about 770,000 million jobs to the 
        U.S. economy by 2010.8
---------------------------------------------------------------------------
    \8\ Alliance to Save Energy et al., 1997, Energy Innovations: A 
Prosperous Path to a Clean Environment. Washington, DC: American 
Council for an Energy-Efficient Economy.
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 Emissions of gases contributing to global climate change 
        continue to increase. Early signs of the impact of these 
        changes are becoming apparent in Alaska. Energy-efficiency is 
        the most cost-effective way to reduce these emissions, as 
        efficiency investments generally pay for themselves with energy 
        savings, providing no-cost emissions reductions.
    Energy-efficiency also draws broad popular support. A nationwide 
poll conducted for the Los Angeles Times found that when people were 
asked how to meet our energy needs, ``15% called for greater 
conservation efforts, 17% supported development of new supplies and 61% 
said they favored both steps in equal measure''.9 Similarly, 
in a May 2001 Gallop Poll, 47% of respondents said the U.S. should 
emphasize ``more conservation'' versus only 35% who said we should 
emphasize production (an additional 14% volunteered ``both''). In this 
same poll, when read a list of 11 actions to deal with the energy 
situation, the top four actions (supported by 85-91% of respondents) 
were ``invest in new sources of energy,'' ``mandate more energy-
efficient appliances,'' ``mandate more energy-efficient new 
buildings,'' and ``mandate more energy-efficient cars.'' Options for 
increasing energy supply and delivery generally received significantly 
less support.10
---------------------------------------------------------------------------
    \9\ Barabak, Mark, 2001, ``Bush is Criticized as Environment 
Weighed,'' Los Angeles Times, April 30, p. A1.
    \10\ Moore, David, 2001, ``Energy Crisis: Americans Lean toward 
Conservation over Production,'' www.gallup.com/poll/releases/
pr010515.asp. Princeton, N.J.: The Gallup Organization.
---------------------------------------------------------------------------
    Furthermore, increasing energy efficiency does not present a trade-
off between enhancing national security and energy reliability on the 
one hand and protecting the environment on the other, as do a number of 
energy supply options. Increasing energy efficiency is a ``win-win'' 
strategy from the perspective of economic growth, national security, 
reliability, and environmental protection.
    We are not saying that energy efficiency alone will solve our 
energy problems. Even with aggressive actions to promote energy 
efficiency, U.S. energy consumption is likely to rise for more than a 
decade, and this growth, combined with retirements of some aging 
facilities, will mean that some new energy supplies and energy 
infrastructure will be needed. But, aggressive steps to promote energy 
efficiency will substantially cut our energy supply and energy 
infrastructure problems, reducing the economic cost, political 
controversy, and environmental impact of energy supply enhancements.

          COMMENTS ON THE DRAFT ``ENERGY POLICY ACT OF 2003''

    In the bulk of my testimony, I want to comment on the energy-
efficiency sections in the draft ``Energy Policy Act of 2003'' released 
by Chairman Barton last week. Five of the bill's titles address energy 
efficiency in some fashion including Titles I (Energy Conservation), V 
(Vehicles and Fuel), VI (DOE Programs), VII (Electricity), and X ( 
Automobile Efficiency).
    Overall, with the exception of Title VII, these provisions 
represent modest but significant steps to improve energy efficiency in 
the U.S. These provisions are also a significant improvement over the 
efficiency related provisions in the energy bill passed by the House in 
2001.

Title I--Energy Conservation
    Most of the efficiency gains are contained in Title I. This title 
is based almost entirely on the energy efficiency title negotiated last 
summer and fall by House and Senate energy bill conferees of both 
political parties. We support this title and recommend that it be 
included in the final House bill.
    Most of the savings in this title come from Subtitle C on Energy-
Efficient Products. This section includes consensus energy-efficiency 
standards negotiated by ACEEE and industry to improve the efficiency of 
various products used in homes and businesses. In cases where there was 
clear consensus on what the new standard should be, the specific 
standard is included in the bill. Placing these standards in the bill 
speeds up implementation (saving the three years for a typical DOE 
rulemaking) and also provides clear direction for manufacturers on the 
products they need to produce (with a rulemaking, manufacturers face 
uncertainty until a final rule is published). In cases where such 
consensus was lacking, the bill directs DOE to set standards by rule. 
Overall, we estimate that these standards will have a benefit-cost 
ratio of about five to one (energy bill savings will be about five 
times greater than the incremental cost of the more efficient 
equipment).11 This Subtitle also includes a useful provision 
directing the Federal Trade Commission to review and improve the Energy 
Guide label that now is displayed on many types of appliances. The 
current label is ineffective at educating and motivating consumers and 
needs updating.
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    \11\ Kubo and Nadel, 2001, Opportunities for New Appliance and 
Equipment Efficiency Standards: Energy and Economic Savings Beyond 
Current Standards Programs. Washington, DC: American Council for an 
Energy-Efficient Economy.
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    We do have a few small changes to suggest to this section. Most of 
these are too small and technical to mention here (we will instead note 
them in a separate letter to staff), but one item is worth mentioning. 
In the energy bill passed by the House in 2001, there was a provision 
directing DOE to consider efficiency standards furnace fans (these are 
the fans that circulate heated air through the ducts and into the 
living space). The Senate did not include this provision because 
furnace manufacturers argued (with ACEEE accent) that DOE already had 
this authority and should consider furnace fans as part of a current 
rulemaking on furnace efficiency. Recently DOE counsel has questioned 
whether DOE in fact has this authority. We recommend that the House 
bill clarify that DOE does in fact have authority to regulate the 
efficiency of furnace fans as part of rulemakings to set new furnace 
efficiency standards.
    We are also talking with industry about a few possible additional 
consensus standards, such as a standard for compact fluorescent lamps 
that would be based on the present Energy Star specification for these 
products. As soon as these negotiations are completed we will bring our 
recommendations to Committee staff so that members may consider them.
    Subtitle A addresses Federal Leadership in Energy Conservation. It 
is important for the federal government to continue to lead the nation 
in energy efficiency by setting an example of energy use in its own 
buildings. Few federal programs have been as cost-effective as DOE's 
Federal Energy Management Program (FEMP). At an average cost of only 
$20 million per year, FEMP has cut federal building energy use by 
nearly 21% from Fiscal Year 1985 to Fiscal Year 1999--a reduction that 
now saves federal taxpayers roughly $1 billion each year in reduced 
energy costs. The draft Energy Policy Act of 2003 includes an agreement 
from last year's Conference Committee on provisions to update and 
strengthen FEMP efforts including: (1)updating agency energy reduction 
targets; (2) extending and expanding Energy Savings Performance 
Contract (ESPC) authority; (3) requiring cost-effective metering; (4) 
increasing performance standards for new federal buildings; (5) 
strengthening federal procurement requirements; and (6) increasing 
federal fleet fuel-economy requirements. We fully support these 
provisions. This Subtitle also includes a useful new program to 
encourage and assist industry to make voluntary reductions in 
industrial energy intensity.
    Subtitle B authorizes several new state and local energy-saving 
programs. These could be useful programs if funding is provided, but 
absent new funding these sections will probably have little impact.
    Overall, preliminary estimates by ACEEE are that Title I will save 
about 18.5 quadrillion Btu's of energy (``quads'') over the 2004-2020 
period, including about 2.8 quads in 2020. These savings are nearly 1% 
of predicted U.S. energy use over this period, and about 2% of 
predicted energy use in 2020. Most of these savings will be in 
electricity, eliminating the need for about 130 new power plants (300 
MW each) by 2020.

Title X--Automobile Efficiency
    This section, according to the summary released by Committee Staff, 
authorizes the National Highway Transportation Safety Administration 
(NHTSA) to conduct fuel-economy rulemakings and also directs the 
National Academy of Sciences to conduct another fuel-economy study. 
What is most useful about this section is that is does not contain 
provisions from the 2001 House energy bill that extend the dual-fuel 
credit and that set overly modest goals for new efficiency standards. 
We hope that these omissions are permanent.
    The dual-fuel credit was a well-intentioned effort to increase use 
of alternative fuels by giving a fuel-economy credit to manufacturers 
for producing cars that can use both gasoline and alternative fuels. 
However, this provision has resulted in little use of alternative fuels 
and instead has increased gasoline consumption by allowing the entire 
fleet of vehicles to decrease average fuel economy by up to 1.2 miles 
per gallon. According to a recent joint report by U.S. Department of 
Transportation (DOT) and other agencies, dual fuel vehicles use 
gasoline 99% of the time.12 The draft bill does well not to 
extend the dual-fuel credit. This action could save up to 55 million 
barrels of oil annually, which is more than the oil-savings target in 
the 2001 House energy bill. In addition, we recommend the further step 
of reducing the 0.9 mpg dual-fuel credit that DOT has proposed for 
model years 2005 to 2008. Alternatively, the dual fuel credit could be 
extended, but the amount of credit based on actual use of alternative 
fuels by dual-fuel vehicles (as determined by DOT). Such a provision 
would encourage manufacturers and alternative fuel providers to work 
together to increase the use of alternative fuels by these vehicles.
---------------------------------------------------------------------------
    \12\ DOT, DOE, and EPA, 2002, Report to Congress, Effects of the 
Alternative Motor Fuels Act CAFE Incentives Policy, March. Washington, 
DC: U.S. Dept. of Transportation.
---------------------------------------------------------------------------
    The 2001 bill also included a fuel savings target of 5 billion 
gallons of oil savings over the 2004-2010 period. While this number may 
sound significant, it's really a ``fig leaf'' and represents a fuel-use 
reduction of only 0.5% over this period. In fact, this target only 
captures modest fuel economy improvements that manufacturers have 
already announced, and that are also covered in a proposed NHTSA 
rule.13 For a fuel-savings target to be useful, it needs to 
be significant. If a target is added to the bill, we would suggest 1 
million barrels per day of oil savings by 2010. This level of savings 
is about 30% more than the U.S. imported from Iraq in 2001and would 
represent a 22% average improvement in vehicle fuel economy by 2010 
(e.g. from the current 24 mpg under the EPA test procedure to 29 mpg).
---------------------------------------------------------------------------
    \13\ NHTSA, Dec. 16, 2002, ``Light Truck Average Fuel Economy 
Standards Model Years 2005-07.'' Washington, DC: National Highway 
Transportation Safety Adminstration.
---------------------------------------------------------------------------
    Ultimately, the U.S. needs much larger improvements in fuel economy 
in order to substantially reduce our reliance on oil imports. The last 
study by the National Academy of Sciences (NAS) found that a 
significant and cost-effective increase in mpg is possible over the 
next ten years.14 Analysis by ACEEE has found that an 
average fuel economy of 41 mpg is possible and cost-effective by 
2012.15 Furthermore, both NAS and ACEEE have found that the 
largest percentage improvements in fuel economy can be achieved in SUVs 
and other light trucks, indicating that it is possible to improve fuel 
economy and still sell these types of vehicles. We recognize that there 
may not be the political will today to increase fuel economy 
significantly, and therefore that Congress is unlikely to take any 
significant action on this issue. However, such a course has a price--a 
price at the pump (since increased demand for gasoline tends to 
increase prices) and also a price in terms of the long-term 
competitiveness of the U.S. auto industry (if U.S. manufacturers pay 
less attention to fuel economy than foreign manufacturers, U.S. 
manufacturers will be at a competitive disadvantage when fuel supplies 
inevitably tighten up at some point in the future).
---------------------------------------------------------------------------
    \14\ National Research Council, 2002, Effectiveness and Impact of 
Corporate Average Fuel Economy Standards. Washington, DC: National 
Academy Press.
    \15\ DeCicco, An and Ross, 2001, Technical Options for Improving 
the Fuel Economy of U.S. Cars and Light Trucks by 2010-2015. 
Washington, DC: American Council for an Energy-Efficient Economy.
---------------------------------------------------------------------------
Title's V and VI
    Title VI authorizes DOE energy-efficiency programs for the next 
five years. By and large this title contains a variety of useful ideas 
(we particularly support the work on lighting and distributed energy 
systems). However, the impact of this title will primarily depend on 
future appropriations. Title V also includes specific authorization for 
the Freedom Car and Hydrogen Fuel programs. We think these are useful 
programs, and the draft bill improves upon DOE's formulation of the 
program by setting real-world goals for the introduction and 
performance of fuel cell vehicles. However, it will be at least 2030 
before these vehicles have any significant impact. For example, Title V 
sets a goal of 2015 for production decisions and 2020 for selling 
vehicles that will be accepted by consumers. Since most new 
technologies only gradually penetrate the market, it will be at least 
2030 before these vehicles have a significant presence on the road. In 
the interim, increased efforts will be needed to improve the efficiency 
of gasoline-powered vehicles. Also, it is far from certain that efforts 
to develop a hydrogen economy will be successful, so that rather than 
putting all of our ``eggs'' in the hydrogen basket, we recommend that a 
diverse range of advanced high-efficiency technologies be pursued.

Title VII--Electricity
    In times of increasing energy costs, combined heat and power (CHP; 
sometimes also called cogeneration) represents one of the most 
important opportunities available for improving efficiency, the 
environment and economic competitiveness. With fair rules, 50,000 MW of 
CHP capacity can be added by 2010 and an additional 95,000 MW added by 
2020, reducing the fuel needed to generate electricity by up to 
50%.16 A recent ACEEE study identified utility practices 
toward CHP and other distributed generation technologies as the most 
significant barrier to their expanded use.17 However, in 
many utility territories, due to these utility practices, current PURPA 
provisions represent the only opportunity to make such facilities 
viable.
---------------------------------------------------------------------------
    \16\ Nadel and Geller, 2001, Smart Energy Policies: Saving Money 
and Reducing Pollutant Emissions Through Greater Energy Efficiency, 
Www.aceee.org/ energy/reports.htm. Washington, DC: American Council for 
an Energy-Efficient Economy.
    \17\ Brown, Scott and Elliott, 2002, State Opportunities for 
Action: Review of States' Combined Heat and Power Activities. 
Washington, DC: American Council for an Energy-Efficient Economy.
---------------------------------------------------------------------------
    Subtitle E removes the mandatory purchase and sale requirements 
under Section 210 of PURPA once a competitive market is present. While 
we support this concept in principle, we are concerned that the actual 
provisions in the bill are not sufficient to protect new and existing 
qualifying facilities (QFs) from predatory behavior by utilities. To 
make the PURPA provisions in the bill workable, more explicit 
requirements are needed to ensure that a functioning market exists, 
where facilities can be interconnected at reasonable cost and in a 
reasonable timeframe, where excess power can be sold at fair prices, 
and where backup and supplemental power can be purchased at fair rates. 
In addition, we are disappointed that the bill does not include 
provisions that would address these underlying market problems 
directly, providing an orderly transition from the current PURPA QF 
structure to one in which distributed generators participate in a fair 
market place that values their benefits and prices services in a truly 
competitive manner. We understand that several members of this 
Committee are now attempting to craft language that would provide 
protection for distributed generation from predatory practices by 
utilities. We urge the Committee to give such provisions serious 
consideration. If a provision cannot be crafted that assures fair 
protections for distributed generation facilitiess, the existing 
protections afforded by PURPA are preferable to the current draft bill.
    We also recommend that a provision be added to establish an Energy 
Efficiency Performance Standard (EEPS) to establish energy-savings 
targets for electricity suppliers. Such a program was established in 
Texas as part of electricity restructuring legislation and appears to 
be working well.18 A federal EEPS should require savings 
from efficiency programs of about 1% per year, starting in 2005 (in 
order to permit time for programs to start-up), thereby requiring 5% 
savings in 2010, 10% savings, in 2015, etc. Such a program should 
permit trading, so that utilities that save more than their target can 
sell savings credits to utilities that fall short of their savings 
targets. Trading would also permit the market to find the lowest-cost 
savings nationwide.
---------------------------------------------------------------------------
    \18\ Kushler and Witte, 2001, A Revised 50-State Status Report on 
Electric Restructuring and Public Benefits. Washington, DC: American 
Council for an Energy-Efficient Economy.
---------------------------------------------------------------------------

                               CONCLUSION

    Energy efficiency is an important cornerstone for America's energy 
policy. Energy-efficiency has saved consumers and businesses billions 
of dollars in the past two decades, but these efforts should be 
accelerated in order to:

 save consumers and businesses even more money;
 change the energy supply and demand balance and put downward 
        pressure on energy prices;
 decrease reliance on imported oil;
 help with economic development (since savings from energy 
        efficiency generates jobs); and
 reduce carbon emissions, helping to moderate growth in the 
        gases that contribute to global climate change.
    The provisions in the draft Energy Policy Act of 2003 take modest 
steps in this direction, particularly the section establishing new 
appliance and equipment efficiency standards. We are also happy to see 
that the bill does not extend the gasoline-wasting credit for dual fuel 
cars. Overall, we estimate that this bill will reduce U.S. energy use 
by about 2% by 2020.
    But much more can and should be done. We recommend that Congress 
include provisions:

 Clarifying in Title I that DOE can address furnace fan energy 
        use in its current rulemaking for a new residential furnace 
        efficiency standard;
 Adding other new efficiency standards in Title I when and if 
        negotiations with industry are successfully completed;
 Setting a fuel-savings goal in Title X of 1 million barrels 
        per day of oil savings by 2010 for future passenger vehicle 
        fuel-economy rulemakings (an increase of about 5 mpg, thereby 
        displacing imports from Iraq);
 Encouraging combined heat and power and other distributed 
        generation systems by adding provisions to Title VII that would 
        provide an orderly transition from the current PURPA structure 
        to one in which distributed generators participate in a fair 
        market place that values their benefits and prices services in 
        a truly competitive manner;
 Including an Energy Efficiency Performance Standard in Title 
        VII, modeled after a program now operating in Texas.
    These provisions would increase the savings under the bill by more 
than a factor of five. Failure to take these steps now will make it 
more likely that Congress will have to address energy problems in the 
not very distant future.
    This concludes my testimony. Thank you for the opportunity to 
present these views.

                  STATEMENT OF MALCOLM O'HAGAN

    Mr. O'Hagan. Good afternoon, Mr. Chairman, Congressman 
Boucher, my name is Malcolm O'Hagan, I am President of the 
National Electrical Manufacturers Association.
    NEMA applauds the leadership of your committee in 
addressing the energy needs of our Nation, and we are fully 
supportive of Chairman Barton's bill.
    The 400 members of NEMA manufacture all of the products in 
the electricity supply chain, from the generator at the power 
plant to the outlet in your home.
    We also manufacture the products that consume most of this 
electricity, namely lighting and electric motors. NEMA strongly 
supports the enacted of the comprehensive energy bill.
    This year, in fact, we had hoped that it would pass last 
year. Electricity has become an essential part of our economy, 
powering industry, commercial sector and our homes, as well as 
becoming essential to public health and safety.
    However, we could use electricity a lot more efficiently 
without any, without in any way compromising our lifestyle. Let 
me offer a few examples of how we could realize large savings.
    The use of high-efficiency distribution transformers, 
meeting the industry consensus standard, NEMA TP-1, could save 
an average of 5 to 10 billion kilowatt hours per year.
    Upgrading commercial buildings to meet or exceed the 
consensus standard ASHRAE 90.1 would result in substantial 
savings in electricity demand for lighting and air 
conditioning.
    The installation of high efficiency electric motors, both 
to industry standard NEMA premium, could save 5,800 gigawatt 
hours of electricity and prevent the release of 80 million 
metric tons of carbon per year.
    Replacing incandescent bulbs with compact fluorescent 
lamps, would reduce electricity consumption by 75 percent for 
the same level of lighting.
    Market based incentives and solutions should be the primary 
vehicle to enhance energy efficiency and conservation. However, 
NEMA acknowledges that on a case-by-case basis there is value 
in other interventions such as targeted incentives and 
standards.
    We are pleased to see that the bill relies on standards 
which I just cited. Market based incentives include EnergyStar, 
and we support making this a statutory program.
    NEMA also recommends that the legislation include energy 
conservation standards for medium-based compact fluorescent 
lamps, which is not currently the case.
    Although tax provisions will be added later in the energy 
legislation process, I would like to point out that NEMA and 
the National Resources Defense Council strongly supported the 
provision in the last Congress which will spur significant 
energy savings.
    This provision has wide support on both sides of the aisle. 
The proposal would provide $2.25 per square foot tax deduction 
for commercial buildings with efficiencies 50 percent over 
ASHRAE 19.1 standard.
    This tax benefit would flow to the building owner, who is 
the one bearing the cost, an important principle of incentives.
    NEMA believes that the Federal Government should lead by 
example by upgrading its own facilities to the highest 
efficiency standards.
    NEMA supports the revision and upgrading of Federal 
building energy efficiency performance standards. We also 
advocate that the Federal Government procure NEMA premium 
motors.
    Finally, Mr. Chairman, NEMA is a member of the High Tech 
Energy Working Group. Its members are the Association of Home 
Appliance Manufacturers, the Air Conditioning and Refrigeration 
Institute, the Gas Appliance Manufacturers Association, the 
Electronic Industries Alliance, the Consumer Electronics 
Association, the Association for Competitive Technology and the 
Information Technology Association.
    All of these organizations have concerns regarding the 
issue of standby power and the recent proliferation of State 
energy efficiency standards.
    In the case of standby power, we support the compromise 
reached by the conferees last year and applaud its inclusion in 
the current bill.
    In the case of proliferation of standards in the States, we 
urge you to work with stakeholders to draft effective 
preemption legislation that will result in nationwide energy 
efficiency and labeling standards.
    Federal standards should preempt State standards for the 
same products. Thank you, Mr. Chairman, for the opportunity to 
testify this afternoon.
    [The prepared statement of Malcolm O'Hagan follows:]

 Prepared Statement of Malcolm O'Hagan, President, National Electrical 
                       Manufacturers Association

                              INTRODUCTION

    Good morning Chairman Barton and members of the Subcommittee on 
Energy and Air Quality. I am Dr. Malcolm O'Hagan and I am President of 
the National Electrical Manufacturers Association (NEMA). NEMA is the 
leading trade association in the United States representing the 
interests of electroindustry manufacturers. Founded in 1926 and 
headquartered near Washington, D.C., our 400 member companies 
manufacture products used in the generation, transmission and 
distribution, control, and end-use of electricity. Domestic shipments 
of electrical products within the NEMA scope exceed $100 billion.
    NEMA strongly supports the enactment of comprehensive energy 
legislation this year. Our national energy policies must be updated to 
reflect technological advances and changes in energy markets. A 
comprehensive national energy policy must address and balance important 
goals such as electricity conservation, energy production, and the 
widespread deployment of new technologies that promise greater 
efficiency and environmental protection. Moreover, the Subcommittee has 
recognized and addressed the need for energy efficiency in the 
electrical transmission grid.
    We commend you for your initiative in beginning the debate this 
year through your draft legislation, the ``Energy Policy Act of 2003.'' 
We very much appreciate this opportunity to offer testimony on Title I, 
the energy efficiency proposals, contained in your draft proposal. 
These proposals reflect much of the hard work done by the members of 
the House and Senate conference committee on H.R. 4 last year, and 
provide, we believe, a very solid foundation for moving forward this 
year. These proposals will achieve meaningful reductions in energy 
usage and greater energy efficiency in a variety of important areas.
    My testimony today will highlight:

 The role of NEMA products and services in achieving energy 
        efficiency and conservation and helping to meet out national 
        energy needs--a role we are very pleased to say is acknowledged 
        in several of the provisions of the draft legislation;
 Specific provisions of Title I of the draft legislation that 
        are of great significance to NEMA members; and
 Other provisions that we believe should be included in 
        comprehensive energy legislation.

     NEMA ELECTRICAL ENERGY AND ENERGY EFFICIENCY POLICY PRINCIPLES

    NEMA has crafted a set of electrical energy and energy efficiency 
principles for your guidance and consideration as you and your 
colleagues proceed on a comprehensive national energy policy. Let me 
take this opportunity to highlight the three main points from our 
principles:

1. A comprehensive electrical energy policy should rely on affordable, 
        proven technology to address energy supply and demand;

2. Second, it is critical to understand that energy efficiency and 
        conservation don't mean sacrifice and reduced access, but 
        rather doing more with existing capacity by achieving reduction 
        in energy usage through the use of more efficient products and 
        systems; and

3. Third, market-based incentives and solutions should be the primary 
        vehicle to enhance energy efficiency and conservation. However, 
        NEMA acknowledges that, on a case-by-case basis, there is value 
        in other interventions such as targeted government research and 
        development, incentives and standards.

    With regard to energy efficiency issues, NEMA specifically proposes 
the following concepts as guidelines:

 NEMA believes market forces to achieve energy efficiency and 
        conservation. The litmus for efficient products and control 
        systems is technological feasibility, economic justification, 
        energy savings and commercial availability.
 NEMA acknowledges the key role the federal government should 
        play in fostering public use of energy efficient products and 
        systems. Specifically, NEMA believes that the federal 
        government should promote user education on energy efficiency; 
        support energy efficient upgrades through programs such as the 
        Federal Energy Management Program; encourage performance-based 
        incentives in the private sector; and promote the use of 
        economically sound energy efficient products and systems.

NEMA MEMBER COMPANY PRODUCTS AND SERVICES ACHIEVE ENERGY EFFICIENCY AND 
                              CONSERVATION

    NEMA recognizes that a comprehensive national energy policy 
requires a mix of conservation and production, and the promotion of new 
technologies that promise greater efficiency and environmental 
protection. NEMA member products are at all stages of the electrical 
energy process, from generators, transformers, wire and cable, to 
lighting, motors, and switches at the consumer and end-user points. As 
an intriguing example of how technology can save energy, NEMA 
manufacturers have developed technology and products for Intelligent 
Transportation Systems (ITS), a project under the auspices of the 
Department of Transportation. This project is a highly cost effective 
means of reducing transportation fuels consumption, associated air 
pollution, and also reduces the non-productive time workers spend 
commuting. As you will see in our recommendations, these and other NEMA 
products serve to make the system work better and faster without 
compromising availability. NEMA members are able to do this by taking 
the best of industry technology and standardizing those products so 
that they are available globally, delivered locally, competitively 
priced, able to perform predictably and are safe and environmentally 
sound.
    Members of NEMA produce the products that will enable increases in 
energy efficiency. From Fort Wayne, Indiana (where Rea, Superior Essex 
and Phelps Dodge produce magnet wire, one of the keys to increased 
energy efficiency in motors) to California, NEMA members are on the 
front line of the battle to increase energy efficiency. NEMA-member 
software products, such as ABB Energy Interactive's Energy Profiler 
Online TM, facilitate energy load management for commercial 
and industrial customers, and have been used in California and 
elsewhere to manage a variety of mandatory and voluntary utility load 
curtailment programs.

  KEY PROVISIONS OF TITLE I OF THE DRAFT ``ENERGY POLICY ACT OF 2003''

    We see the energy efficiency title of the draft Energy Policy Act 
of 2003 as particularly valuable because it represents a consensus of 
views on steps that can be taken beginning now to make real 
improvements in energy efficiency. NEMA believes that energy efficiency 
should be evaluated and rewarded on an energy savings and systems 
basis. When creating incentives, the beneficiary of the cost incentive 
should be the investor in the equipment. Very simply put, if a building 
owner makes the capital investment, that owner should get the benefit. 
This approach can be applied in the public sector as well, as proposed 
in the draft legislation, which would allow federal agencies to retain 
the savings they achieve through energy efficiency improvements.
    While the technology exists to achieve broad cost savings through 
energy efficient devices and controls, there is a lack of awareness of 
the benefits of a systems and control based approach. This is opposed 
to a piecemeal component approach, to achieve the maximum level of cost 
effective energy efficiency. To that end, NEMA proposes that the 
federal government move from strictly encouraging products or 
components, to promoting the implementation of systems and controls to 
efficiently manage energy on a wider basis. For example, California 
enacted legislation that would provide energy efficient upgrades for 
lighting systems. California recognized the large efficiency gains that 
would be realized by encompassing lighting controls, occupancy sensors, 
and luminaires added to any upgrade. Similar efficiency gains can be 
achieved at the commercial level with industrial and automated 
controls.
    Industry and government both strive to achieve the best 
performance. But for too long, the hopeful and anticipated approaches 
of both camps have been belied by the unintended consequences of 
mandated standards. Voluntary, consensus-driven codes and standards 
will achieve the greatest level of cooperation and distribution of 
energy efficient technology in the marketplace. Already, the 
marketplace recognizes industry-driven standards to achieve efficient 
products. In particular, the NEMA Premium TM Motor program 
recognizes efficient motors above the standards contained in current 
law. The same can be said for distribution transformer consensus 
standards represented by NEMA TP-1. Industry believes that industry 
consensus building codes can be a valuable part of ensuring that 
cooperative goals are achieved and efficiency gained. We are 
particularly grateful that the energy efficiency provisions in the 
draft legislation build on these consensus agreements.
    NEMA believes that technological solutions combined with industry 
consensus and proven results will lead to enhanced energy efficiency. 
This formula is made even stronger if the cooperative efforts of 
industry and policymakers are joined. We see this happening in the 
energy legislation, and look forward to supporting the bill as it moves 
through the legislative process.
    We offer the following specific comments on the proposals contained 
in Title I:

Provisions to Assert Federal Leadership in Energy Efficiency 
        Improvements (Sections 1001-1004)
    NEMA believes that the federal government can set the standard--and 
a good example--for energy efficiency by starting with the public's own 
facilities. NEMA urges that the Federal government emphasize the 
implementation of systems approaches, not merely component replacement, 
to achieve energy reduction requirements, along with the adoption of 
new technology, such as NEMA Premium TM motors and 
distribution transformers that comply with the NEMA TP-1 standard, as 
discussed below.
    We are pleased that the draft legislation requires the Federal 
government to take a leadership role in expanding the use of energy 
efficient technologies. Section 1001 appropriately requires that 
Congress start with itself, by adopting energy and water savings 
measures in Congressional buildings. In my past testimony before this 
Subcommittee, I noted that the lighting used in this very hearing room 
is perhaps a bit less than the most efficient on the market. The 
initiatives proposed in your legislation will speed the updating of 
these important public facilities.
    Section 1002 proposes energy management goals for Federal agencies, 
calling for progressive reductions in energy consumption per gross 
square foot through 2013. As the President and Congress have 
recognized, the federal government is a major consumer of energy. NEMA 
has long supported an approach of establishing performance standards, 
rather than prescriptive requirements for specific technologies, which 
encourage the selection of the most appropriate technologies and 
systems approaches in the areas of lighting, controls, and heating, 
ventilation and air conditioning. A program to require energy efficient 
upgrades of building systems in existing federal buildings offers the 
potential for significant energy savings. NEMA supports the approach in 
section 1002, which does not require adherence to a rigid standard, but 
rather provides flexibility to agencies to adopt the most efficient 
systems that meet their needs.
    Section 1003 would require the metering of energy use in all 
Federal buildings. Advanced metering technologies are an important tool 
in the energy efficiency arsenal, and offer a cost-effective means to 
identify energy savings potential. We endorse this provision, and look 
forward to participating in the development of the guidelines called 
for under proposed NECPA section 543(e)(2).
    NEMA supports the revision and upgrading of Federal Building Energy 
Efficiency Performance Standards. Section 1004 of the draft seeks to 
achieve energy savings in new facilities based on the industry 
consensus ASHRAE 90.1 standard. NEMA recommends, however, that you 
consider setting the level of required improvement over the ASHRAE 
standard at 10%, not 30% as in the current draft. Achieving an 
efficiency level 30% above the ASHRAE standard for energy improvements 
would require custom designs that would greatly increase costs and 
could actually discourage the deployment of energy efficient 
technologies in new Federal buildings.

Procurement of Energy Efficient Products by the Federal Government 
        (Sec. 1005)
    Executive Order 13123 sought to encourage the acquisition of energy 
efficient products by the federal government. In addition, programs 
such as the Federal Procurement Challenge encourage agencies to buy 
energy efficient products. However, while the Executive Order and the 
Federal Procurement Challenge have resulted in many efficient upgrades, 
many agency heads have not had their feet held to the fire to comply 
with such orders. Many opportunities still exist in federal agency and 
Congressional offices to achieve energy efficiency.
    NEMA believes that provisions to require the procurement of highly 
efficient products by the Federal Government, as proposed in section 
1005, are vitally important. It is fully appropriate to use the 
purchasing power of the Federal government to build the market for 
highly efficient products. Aligning these Federal procurement efforts 
with voluntary industry efforts to mark and market the most highly 
efficient products promises great rewards.
    Section 1005 generally relies on Energy Star and FEMP product 
designations, which is appropriate. The opportunity is also available, 
as the draft recognizes, to take advantage of voluntary industry 
efforts to improve product efficiencies. With respect to electric 
motors of 1 to 500 horsepower, we believe that the procurement standard 
for such motors should be based on the existing NEMA Premium 
TM standard. Specifying NEMA Premium TM will 
ensure accurate and real conformance with a proven consensus standard 
without delay.
    By way of background, the NEMA Premium TM motor program 
is a collaborative effort with the Department of Energy, motor 
manufacturers and electric utilities. It is an excellent model of how 
voluntary industry standards can improve efficiency thereby providing a 
benefit to consumers and the environment. The NEMA Premium 
TM standard has been endorsed by the Consortium for Energy 
Efficiency, manufacturers, utilities and several states. NEMA Premium 
TM is used widely to distinguish the most energy efficient 
motors.
    The NEMA Premium TM motor program expands high 
efficiency motors standards beyond current requirements. The program 
covers a broader range of motors than do minimum federal energy 
efficiency standards (up to 500 horsepower, whereas Federal energy 
conservation standards apply only up to 200 hp), and it is a more 
exacting standard. In fact, Department of Energy analyses shows that 
the NEMA Premium TM motor program, including commercial and 
agricultural applications, would save 5,800 gigawatt hours of 
electricity and prevent the release of nearly 80 million metric tons of 
carbon into the atmosphere in the next ten years. Electric-motor-driven 
equipment consumes about 60% of all the electricity produced in the 
country, according to the Department of Energy.
    The NEMA Premium TM motor program has significant real-
life impact. The Cummins Engine Company's Columbus Engine Plant in 
Columbus, Indiana retrofitted energy efficient motors on to existing 
machining and transfer lines and installed the most efficient motors 
available onto the new lines. Cummins saw a 2.75 percent reduction in 
total energy costs for the Columbus plant, which was hailed by company 
executives as a significant savings. The Department of Energy indicated 
that if every plant in the United States integrated motor system 
upgrades to the extent that Cummins did, American industry would save 
an estimated one billion dollars annually in energy costs. This would 
be the equivalent of the amount of electricity supplied to the State of 
New York for three months.
    We are hopeful that in performing the duties required under 
proposed section 1005, the Secretary of Energy would take advantage of 
the NEMA Premium TM standard in designating appropriate 
energy efficient motors for procurement pursuant to the legislation. 
Doing so would enable all new equipment acquisitions to be based on 
current energy efficiency standards with the dual result of energy 
savings to the government and widespread market penetration of the most 
highly efficient technologies in energy-intensive equipment. It would 
also serve as a valuable demonstration of energy efficient savings to 
the private sector. Government should recognize these industry-led 
efforts to increase energy efficiency and provide for the most rapid 
possible integration of technologies meeting the latest efficiency 
standards into federal facilities. Increasing the deployment of these 
technologies throughout the Federal government offers a ready means to 
significantly reduce energy consumption in Federal facilities.
    NEMA recommends further that the federal government should use NEMA 
TP-1 transformers in its purchase specifications and be required to 
replace failed transformers with new units meeting TP-1 efficiencies. 
Acquisition of distribution transformers that meet the NEMA TP-1 
standard will improve distribution transformer efficiency over the low 
first cost transformers that are typically selected for government 
procurement.

Energy Saving Performance Contracts (Sec.1006)
    The extension of energy savings performance contracts proposed in 
section 1006 is also an important element to enable Federal leadership 
in energy conservation programs. The extension of the program to 
include replacement facilities is important to greatly expand the reach 
of this initiative. NEMA members Honeywell and Johnson Controls make 
extensive use of this program to help Federal agencies save energy.

Voluntary Commitments to Reduce Industrial Energy Intensity (Sec. 1007)
    Greater attention must be focused on the reduction of energy use in 
the industrial and commercial sectors. The potential for energy savings 
is significant, but cost barriers and lack of information too often 
prevent the adoption of new energy efficiency technologies and systems 
in industrial facilities and businesses of all sizes. NEMA encourages 
the Committee to explore additional means of supporting the deployment 
of highly efficient new technologies through programs targeted 
specifically to the industrial sector. Consideration might be given, 
for example, to a program modeled on the highly successful 
Weatherization Assistance Program but targeted to small businesses.

Weatherization Assistance Program (Sec. 1021)
    The Weatherization Assistance Program has been an important element 
in the nation's effort to assure that the burdens of high energy costs 
do not fall disproportionately hard on those least able to afford them. 
Including electricity efficiency retrofits as an element of the 
Weatherization program would have long term benefits for residents and 
property owners. For example, the State of California made upgrades to 
major systems, such as the installation of high efficiency air 
conditioners and high efficiency water heaters, as well as other 
efficient technologies, including set-back thermostats, eligible for 
the State's residential upgrade program. Taking a similar approach at 
the Federal level could significantly increase the long term benefits 
of the Weatherization program. As resources permit, the eligibility of 
more capital-intensive measures should be fully considered.

State Energy Program (Sec. 1022)
    NEMA supports the concept of updating the State energy efficiency 
goals. As with the Federal government, state energy efficiency plans 
should not be limited to encouraging certain energy efficient products 
or components, but rather should focus on promoting the implementation 
of systems and controls that will enable more efficient energy 
management. States should also make special outreach to the commercial 
and industrial sector to reach the untapped energy conservation 
potential of those sectors. Importantly, however, state energy 
efficiency initiatives must not conflict with areas in which the 
Federal government has already exercised its authority pursuant to the 
National Appliance Energy Conservation Act (NAECA) of 1987 and the 
Energy Policy Act (EPAct) of 1992.

Energy Star Program (Sec. 1041)
    NEMA supports the statutory authorization for the Energy Star 
program. Under the new statutory authorization, preserving the 
integrity of the Energy Star label is an express requirement for the 
Secretary of Energy and the Administrator of the Environmental 
Protection Agency (EPA). We believe this is very important. Consumers 
today rely on the Energy Star label to designate superior products with 
superior performance. Vigilant oversight is needed to assure that 
products are properly labeled, so that purchasers can be sure up front 
of the quality of the products that they are purchasing.
    The Energy Star program should require the DOE and EPA to develop 
public plans for the Energy Star program, including the criteria for 
expansion and program implementation and opportunities for public 
comments on new and revised product categories and response to 
comments. Moreover, DOE and EPA should consider the cost effectiveness 
of the Energy Star program as compared to other programs, and should 
assure that production lead times are considered and adequate notice 
given of program changes. These considerations should be balanced 
against the need for the Energy Star program to remain agile and 
flexible while allowing for more accountability, commensurate with its 
increasing stature in the marketplace.
    The Energy Star Buildings Program has made significant advances in 
improving the efficiency of commercial buildings. However, the vast 
majority of Federal facilities have not yet achieved the Energy Star 
rating, a classification given only to the top 25% of buildings in 
terms of watts used per square foot. Therefore, NEMA recommends that 
existing buildings be upgraded to meet the Energy Star Building Program 
requirements.

Test Procedures for Determining Energy Efficiency (Sec. 1044)
    NEMA fully supports the approach taken in the draft to specify 
testing requirements for products for which energy efficiency standards 
would be set in the legislation. Adoption of existing test procedures 
developed through the Energy Star program, where energy conservation 
standards are proposed to be set based on Energy Star performance 
requirements, is appropriate. Similarly, in the case of transformers, 
it is appropriate to establish the test procedures based on the TP-2 
Standard Test Method, developed on a consensus basis by the industry. 
TP-2 is the test procedure associated with the TP-1 energy efficiency 
standard that would be established in the legislation as the energy 
efficiency standard for distribution transformers.

Energy Efficiency Standards for Specific Products (Sec. 1045)
    Subtitle C contains a number of specific energy efficiency 
provisions on which consensus was reached between the time that the 
House initially passed H.R. 4 in August 2001 and the Senate's passage 
of its version of the legislation in April of last year. We are pleased 
to see these agreements carried forward into the draft legislation. We 
believe there are significant energy savings offered by the product 
standards called for in the draft legislation, and that the best way to 
recognize these savings is through the proposals contained in Subtitle 

C.
    As a general matter, with regard to any additional product 
standards, NEMA believes that efficiency standards should be based on 
industry consensus standards achieved through recognized standards 
setting processes endorsed in the private sector. To the extent that 
standards are developed within the Department of Energy or other 
Federal agencies, it is imperative that there be careful adherence to 
established regulatory processes and procedures, such as those 
contained in DOE's July 1996 process improvement interpretive rule. The 
process improvement rule incorporates critical principles for every 
stage of the energy efficiency standards setting process. However, as 
good and practical as this rule is, it is not a binding requirement on 
the Department of Energy. NEMA manufacturers require additional 
assurance that there will be faithful adherence to all aspects of the 
process improvement rule in all future standards setting rulemakings 
for consumer, commercial and industrial products. Greater certainty 
would be provided if the process improvement rule were formally 
incorporated into the Department of Energy's regulations governing the 
establishment of energy efficiency standards.

Standby Power
    On the issue of energy efficiency standards for products in a 
standby mode, your legislation adopts the compromise on this issue 
ratified last year by the conferees. This approach has been supported 
by an ad hoc group of manufacturers and concerned trade associations, 
commonly known as the High Technology Energy Working Group, for the 
establishment of standards for battery chargers and external power 
supplies. It is particularly important to concentrate regulatory 
efforts on those products that are major sources of energy consumption 
in the standby mode and which are assigned a high priority for 
regulation, and to rely on voluntary efforts to address other products.

Distribution Transformers
    Of particular importance to NEMA are the provisions of the 
legislation that adopt industry consensus standards as the energy 
efficiency standards and testing requirements for low voltage dry type 
distribution transformers. These standards already form the basis for 
the performance specification for these transformers in the Energy Star 
program. As indicated below, NEMA believes that the energy efficiency 
standards should be expanded to cover all distribution transformers.
    In 1996, the Transformers Products Section of NEMA developed 
voluntary energy efficiency standards for distribution transformers. 
This standard was revised to further increase efficiency in 2002. As 
virtually all electricity used flows through distribution transformers, 
the appropriate choice of energy efficiency is very significant. The 
basic efficiency standard, known as NEMA TP-1 and the associated test 
and labeling standards (TP-2 and TP-3, respectively) have gained 
widespread acceptance as the industry norm for energy efficient 
transformers.
    As another excellent example of industry led consensus standard 
making, if TP-1 were used nationwide, NEMA estimates an energy savings 
would be in the range of 2-3 quads over a 30-year period. This is an 
average energy savings of between 5 and 10 billion kilowatt-hours per 
year. By using NEMA Standard TP-1, the energy used by low-voltage 
transformers can be cut by over one-third, and by twenty-five percent 
for medium voltage transformers.
    In light of the 2002 revision to TP-1, NEMA requests that the 
current language in the legislation referring to NEMA TP-1-1996 be 
updated to refer to NEMA TP-1-2002.

Energy Labeling (Sec. 1046)
    The draft legislation calls for a rulemaking on energy efficiency 
labeling requirements for products for which energy conservation 
standards would be set in the legislation, including distribution 
transformers. NEMA recommends that the labeling section of the 
legislation be revised to specify that the labeling requirements for 
distribution transformers would be those set under the NEMA TP-3 
labeling protocol for all distribution transformers satisfying TP-1. 
The legislation already adopts the testing and efficiency standards 
requirements of the NEMA protocols for distribution transformers, and 
therefore it would be appropriate to apply the TP-3 labeling 
requirements as well. Doing so would also save the resources that would 
otherwise be expended to carry out what would essentially be a 
duplicative rulemaking process to develop a labeling requirement when 
one is already in place.

Standards for Other Products
    NEMA also supports the provisions of the legislation to adopt the 
performance requirements of the Energy Star program as the energy 
conservation standards for lighted exit signs, traffic signal modules 
and torchiere fixtures. Adoption of these standards will expand the 
benefits of the Energy Star program by increasing the use of highly 
efficient products in the marketplace without the need for costly and 
time-consuming agency rulemaking processes for these products.

Effectiveness of Federal Standards
    Consistent with the Energy Policy and Conservation Act, these 
Federal standards should preempt state standards for the same products. 
The essence of legislation such as NAECA and EPAct is that Federal 
standards were either legislated or required to be developed by DOE in 
exchange for broad preemption of state standards except under extremely 
limited circumstances. Recently, however, a proliferation of state 
energy efficiency standards and legislation has appeared for numerous 
products, including the NEMA products that are the subject of this 
draft legislation. We urge you and your staff to work with stakeholders 
to address this priority issue as it concerns the realm of proposed 
standards and rulemakings in this legislation.

Additional Recommendations
    NEMA is actively working with other stakeholders to develop 
additional consensus recommendations to increase the already 
significant energy savings that will result under the draft 
legislation. At this time, NEMA has the following recommendations for 
improving the energy efficiency provisions of the draft legislation.
    First, we recommend that the legislation be expanded to set energy 
efficiency standards for all distribution transformers, including 
medium-voltage and liquid-filled transformers, to meet the NEMA TP-1 
standard already required under the legislation for low-voltage dry-
type distribution transformers. Expanding the provisions agreed to by 
the conferees last year and included in your draft legislation to 
include all distribution transformers would more than triple the 
transformer annual product electrical capacity covered by higher 
efficiency requirements. The proposed legislation would complete the 
process of establishing energy efficiency requirements for distribution 
transformers called for in EPAct, but which has yet to result in 
minimum energy conservation standards.
    As all electricity used goes through transformers, transformer 
losses are a major portion of losses in the distribution system. 
Specifying TP-1 efficiency reduces losses by about one third over low 
first cost transformers. Thus, requiring TP-1 will raise electrical 
efficiency in the commercial and industrial sector significantly. The 
latest revision to the standard, TP-1-2002, includes modest efficiency 
increases for some transformer sizes.
    The TP-1 standards already form the basis for the performance 
specifications for low-voltage dry-type distribution transformers in 
the EPA/DOE Energy Star ' program. Low-voltage dry-type 
distribution transformers are typically used in commercial buildings 
and often purchased based on low initial cost with little consideration 
of efficiency. Less than 2% of the low-voltage dry-type units shipped 
met TP-1-1996. The draft legislation already includes provisions to 
assure that these transformers will meet higher efficiency standards; 
as noted above, the reference in the current draft legislation to TP-1-
1996 should be updated to refer to TP-1-2002.
    Medium-voltage dry-type distribution transformers are used in 
commercial and industrial buildings. While some buyers do consider 
energy savings, most medium-voltage dry-type buyers order lowest first 
cost units. A little less than half the medium-voltage dry-type 
transformers met TP-1-1996.
    Liquid-filled distribution transformers are typically owned by 
electric utilities. About two-thirds of the liquid-filled distribution 
transformers shipped met TP-1-1996. Therefore, setting the threshold at 
the consensus TP-1 standard will substantially increase the overall 
efficiency of the fleet of new distribution transformers installed.
    In conjunction with the energy efficiency standards for 
distribution transformers, there is a need to clarify the criteria for 
exempting products from the mandatory energy conservation standards. 
This is important in order to ensure that the named exempted products 
are used primarily in special-purpose niche applications and to prevent 
instances of misuse or confusion as occurred with a few of the 
standards enacted under EPAct. A requirement that exempted products be 
``unlikely to be used in general purpose applications'' would give the 
Department of Energy necessary guidance and authority to prevent such 
situations.
    Consistent with the recommendation above to expand the scope of the 
transformer standards, the TP-2 testing protocol should be used for all 
distribution transformers, and the TP-3 labeling protocol should be 
used for all transformers for which TP-1 energy efficiency standards 
would be established in the legislation.
    Second, we encourage you to consider adding to the legislation 
energy conservation standards for medium base compact fluorescent 
lamps. Energy conservation standards for general service fluorescent 
lamps were added to the Energy Policy and Conservation Act (EPCA) 
through EPAct, which designated these lamps as ``covered products.'' 
EPAct did not establish energy conservation standards for medium base 
compact fluorescent lamps (CFLs) nor include them explicitly in the 
list of ``covered products''. EPAct did, however, contain a definition 
of ``medium base compact fluorescent lamp'' and a requirement that the 
Federal Trade Commission establish labeling requirements for these 
lamps. Although EPCA does not include energy conservation standards 
specifically applicable to medium base CFLs, the voluntary DOE/EPA 
Energy Star program does include energy efficiency specifications, test 
requirements, labeling requirements and specifications for parameters 
other than energy efficiency for medium base CFLs.
    Medium base CFLs are a direct screw-in replacement for incandescent 
lamps in most applications. Medium base CFLs consume only approximately 
one-fourth of the electricity used by an incandescent lamp to achieve 
the equivalent light output. Thus, the energy savings for replacement 
of even a modest fraction of existing lamps would be substantial. 
Moreover, medium base CFLs offer highly favorable economics on a life 
cycle cost basis.

 BARRIERS TO THE WIDESPREAD APPLICATION OF ENERGY EFFICIENT PRACTICES 
                            AND TECHNOLOGIES

    While much good has been done to promote energy efficiency, there 
remains work to be finished. NEMA believes the primary barriers to 
investing in energy efficient technology include: (1) the cost of 
investment in energy efficient technologies and whom should receive the 
financial benefit of the energy efficient investment; (2) the lack of 
awareness of a systems and controls based approach for energy efficient 
cost effectiveness; (3) and issues surrounding codes and standards.
    Currently, the federal tax code does not fully encourage an 
investor to make energy efficient investments, upgrades or retrofits to 
facilities. While recognizing that tax matters are not specifically the 
subject of today's hearing, NEMA would like to note the need for tax 
incentives to encourage investment in devices that promote energy 
efficiency. NEMA believes that there are situations where the 
marketplace does not adequately reward innovations in energy-saving 
technology. In such cases, the right types of tax incentives will 
provide the necessary impetus for investments in property that will 
address the energy needs of individual firms and consumers, as well as 
our nation as a whole. Properly designed tax incentives will also 
encourage manufacturers to develop innovative technology to respond to 
the increased demand for energy-efficient devices.
    NEMA believes that a particular tax provision included last year in 
both the House and Senate versions of the energy bill warrants support 
and special attention this year. This provision would allow taxpayers 
to expense and deduct (rather than capitalize and depreciate) a portion 
of the cost of energy efficient property placed in service in 
commercial buildings. Targeting the tax benefits delivered by the 
provision to the commercial sector, where there are substantial 
opportunities to save energy that are not being realized today, is a 
cost-effective means to achieve significant energy savings. Last year, 
NEMA joined with the Natural Resources Defense Council (NRDC) in 
analyzing the legislative language and making recommendations that will 
insure that the tax benefits provided by the provision are commensurate 
with the level of additional investment needed to achieve energy-
savings standards. NEMA has and will continue to support the agreement 
it has reached with NRDC and will work closely with the Congress to 
support enactment of these important provisions.

                               CONCLUSION

    In conclusion, let me reiterate the three points I began with 
today. A comprehensive electrical energy policy should rely on 
affordable, proven technology to address energy supply and demand. 
Second, it is critical to understand that energy efficiency and 
conservation don't mean sacrifice and reduced access, but rather doing 
more with existing capacity by achieving reduction in energy usage 
through the use of more efficient products and systems. Third, market-
based solutions should be the primary vehicle to enhance energy 
efficiency and conservation.
    Chairman Barton, we thank you for your efforts, and for holding 
this hearing today. I am happy to answer your questions.

                    STATEMENT OF ALDEN MEYER

    Mr. Meyer. Thank you, my name is Alden Meyer, I am Director 
of Government Relations for the Union of Concerned Scientists.
    We are a non-profit group of more than 60,000 citizens and 
scientists working for practical, environmental solutions. I 
have a little powerpoint presentation which, if we can get 
turned on, a little entertainment at the close of the panel for 
you here.
    This first slide shows cost trends for renewable energy 
technologies. And I think we need to acknowledge that this is a 
real American success story in this area.
    And it is the result of research and development, tax 
incentives and actions by States like California starting as 
early in 1980, to run with these technologies.
    This is data from NREL, National Renewable Energy Lab, 
showing actual costs to date and then projections out of 2020.
    To realize additional reductions, of course, we need to 
continue R&D, we need to have additional tax incentives and we 
need measures like net metering and interconnection standards.
    But the most important driver we believe is going to be 
expanding the markets for these technologies which allows 
manufacturers to attract the low cost financing they need to 
build new production facilities and continue lower costs.
    This is why we believe the most effective policy in the 
renewable area is the renewable energy standard, also known as 
the renewable portfolio standard.
    This would require electric suppliers to increase their 
share of electric generation coming from non-hydro renewable 
sources over time.
    It could be met by self-generation or by purchasing credits 
from other companies. It is like the clean air trading system 
in that regard.
    It assures producers an expanding market an access to lower 
cost financing. It works together with other policies, and 13 
States have already adopted such standards, several others 
appear poised to do so this year.
    What I am going to show you now is a slide that compares 
where we have been, which is the black trend line here in terms 
of actual renewable energy generation.
    The red line is business as usual projections, which 
includes the actions of the 13 States I mentioned, as well as 
public benefit funds and other incentives.
    The top blue line shows what the provisions in the Senate 
energy bill passed last year would do by the year 2020.
    The public overwhelming supports these technologies and let 
me talk about the Energy Information Administration and their 
analysis on the cost of these technologies. There has been a 
myth out there that the portfolio standard would dramatically 
increase consumer energy bills.
    EIA conducted an analysis at the request of Senator Frank 
Murkowski, and actually found just the opposite. That largely 
as a result of reducing the cost, the demand for natural gas, 
and therefore price pressures on natural gas, an RPS of 10 
percent by 2020 would not only not increase electricity cost to 
consumers, it would result in overall lowering of non-
transportation consumer energy bills because of the savings 
largely on the natural gas side.
    And if you look at what EIA is talking about in natural gas 
price projections in the analysis they used, you can see they 
were projecting $3, $3 to $4, out as far as the eye could see.
    And the little asterisk on this chart shows you where spot 
prices were last month. And as Chairman Barton mentioned, they 
have gone higher since then.
    To the extent that these gas price projections are overly 
optimistic, obviously the economics of the RPS improve even 
further and the natural gas savings from reduced consumption 
improve further.
    We also did an analysis that confirms the EIA findings and 
also quantifies some of the direct benefits, particularly for 
rural economic development over $1 billion in new property tax 
revenues, hundreds of millions of dollars in lease payments to 
farmers and rural land owners.
    And these programs are already proving very popular in 
States like Texas and throughout the Great Plains where it is a 
new source of revenue for the depressed farm economy.
    Of course we are all concerned about greenhouse gas 
emissions. This line shows business as usual trend on 
greenhouse gas emissions from the power sector which accounts 
for roughly 40 percent of U.S. carbon dioxide emissions.
    The 1990 trend line here is what would be required under 
the four pollutant legislation introduced last year in the 
Senate.
    This is the result of our very aggressive analysis of a 
package of renewable energy and energy efficiency policy, the 
clean energy blueprint. This line is what Senator Jeffords' 20 
percent renewable energy standard would do, basically 
flattening out from now through 2020, greenhouse gas emissions 
for this sector.
    This is what Senator Bingaman's RPS combined with the 
Senate electricity efficiency provisions would do. So you can 
see that these policies can start to make a difference on 
greenhouse gas emissions from this sector, and it is something 
we think the committee really ought to take seriously.
    The bottom line is that RPS is good for consumers. It is 
good for the environment. It is good for fuel diversity and for 
energy security and we believe the committee ought to include a 
strong RPS in any bill it reports to the floor of the House. 
Thank you very much.
    [The prepared statement of Alden Meyer follows:]

 Prepared Statement of Alden Meyer, Director of Government Relations, 
                     Union of Concerned Scientists

                            I. INTRODUCTION

    The Union of Concerned Scientists (UCS) is a nonprofit organization 
of more than 60,000 citizens and scientists working for practical 
environmental solutions. For more than two decades, UCS has combined 
rigorous analysis with committed advocacy to reduce the environmental 
impacts and risks of energy production and use. Our clean energy 
program focuses on encouraging the development of clean and renewable 
energy resources, such as solar, wind, geothermal and biomass energy, 
and on improving energy efficiency.
    We favor the adoption of policies to increase the use of renewable 
energy resources in our nation's electricity generation mix. Such 
policies are needed to meet our future electricity needs, diversify our 
electricity supply, reduce the vulnerability of our energy system, 
stabilize electricity prices, and protect the environment. 
Specifically, we endorse a renewable electricity standard, sometimes 
also known as a renewable portfolio standard--a market-based mechanism 
that requires utilities to gradually increase the portion of 
electricity produced from renewable resources.
    The electricity industry penetrates every sector of the economy and 
our lives. It keeps our food fresh. It lights up the darkness. It 
powers the manufacturing process. It runs life-giving medical systems 
and mind-enriching information systems. It helps warm us in the winter 
and cools us in the summer.
    As important as electricity is to the economy, the tragic events of 
September 11th have brought renewed attention to how vital and 
connected our energy system is to national security. The vulnerability 
of the energy infrastructure to attack has been increasingly recognized 
as a significant issue, with terrorist threats reported to nuclear 
power plants and natural gas pipelines, and heightened security 
implemented at dams, power plants, refineries, liquefied natural gas 
tankers and terminals, and the electrical grid.
    Electricity use also has a significant impact on the environment. 
Electricity accounts for less than three percent of US economic 
activity. Yet, it accounts for more than 26 percent of smog-producing 
nitrogen oxide emissions, one-third of toxic mercury emissions, some 40 
percent of climate-changing carbon dioxide emissions, and 64 percent of 
acid rain-causing sulfur-dioxide emissions.
    Unfortunately, there are no quick fixes to make the United States 
energy independent, ensure price stability, or clean up the air we 
breathe. However, investments in domestic renewable energy sources, 
together with continued efficiency improvements, can gradually reduce 
our dependence on imports and reduce the vulnerability of the US energy 
system to disruption of supplies or to attack. Investments that 
increase fuel diversity strengthen the ability of our economy to 
withstand supply interruptions or price shocks from any one fuel 
source. Investments in indigenous renewable energy sources keep money 
circulating and creating jobs in regional economies, and create export 
opportunities. And of course, investments in clean air benefit everyone 
that breathes the air.
    By investing in renewable energy, our nation promotes a host of 
important public goods: national security, fuel diversity, price 
stability, universal and reliable electric service, economic 
development, and a healthier environment. Most importantly, investing 
in renewable energy can provide all these benefits and reduce 
electricity costs.
    In this statement, I review the potential for renewable energy and 
how it can help promote these public goods. I then present the 
renewable energy standard for electricity as the best policy mechanism 
for reducing market barriers and stimulating the development of 
renewable energy resources. Finally, I review three recent studies that 
show we can significantly improve our efficiency and increase the 
contribution of renewable energy to our electricity mix, while lowering 
consumer energy bills.

         II. RENEWABLE ENERGY POTENTIAL, BENEFITS, AND BARRIERS

    The United States is blessed by an abundance of renewable energy 
resources from the sun, wind, and earth. The technical potential of 
good wind areas, covering only 6 percent of the lower 48 state land 
area, could theoretically supply more than one and a third times the 
total current national demand for electricity. An area just over one 
hundred miles by one hundreds miles in Nevada could produce enough 
electricity from the sun to meet annual national demand. We have large 
untapped geothermal and biomass (energy crops and plant waste) 
resources. Of course, there are limits to how much of this potential 
can be used economically, because of competing land uses, competing 
costs from other energy sources, and limits to the transmission system. 
The important question is how much it would cost to supply a specific 
percentage of our electricity from non-hydroelectric renewable energy 
sources. As this testimony will later show, recent analyses demonstrate 
we could affordably generate at least 20 percent of our electricity 
from non-hydro renewable energy by 2020.
    The benefits of renewable energy are as plentiful as the resource 
itself--environmental improvement, economic development, and increased 
fuel diversity and national security.
    Harnessing renewable energy conserves natural resources for future 
generations, and reduces the environmental and public health impacts of 
mining, refining, transporting, burning, and disposing of wastes from 
fossil fuels, as well as reducing air emissions. Renewable resources 
also provide insurance against increased costs from stricter 
environmental regulations in the future.
    Renewable energy provides new economic development opportunities, 
especially in rural areas that are rich in wind and biomass resources. 
According to the US Department of Energy, generating 5 percent of the 
country's electricity with wind power by 2020 would add $60 billion in 
capital investment in rural America, and create 80,000 new jobs. 
Renewable energy technologies also offer the potential for a very large 
export market, as many countries around the world are increasing their 
use of renewable resources.
    Renewable energy technologies diversify our energy resource 
portfolio, reducing exposure to energy supply interruptions and price 
volatility, which can affect the entire economy. Indeed, Stephen Brown, 
director of energy economics at the Dallas Federal Reserve Bank, notes 
that ``nine of the 10 last recessions have been preceded by sharply 
higher energy prices.'' Two years ago, soaring natural gas prices was 
one key factor in the California energy crisis that caused rolling 
blackouts and cost energy consumers billions of dollars. There are now 
significant indications that the natural gas price volatility 
experienced during 2001 was not an isolated event. Just last week, as 
the composite price of March natural gas on the New York Mercantile 
Exchange jumped 65 percent in one day, the Wall Street Journal reported 
industry observers as saying that ``the U.S. is entering a prolonged 
period of higher natural-gas prices, and the days of $3 natural gas, 
which lasted from the mid-1980s until about 2000, may be gone.''
    There is also a growing recognition that renewable energy and 
efficiency can enhance energy security. An official banner at the 
Administration's Renewable Energy Summit in the fall of 2001 read: 
``Expand Renewable Energy For National Security.'' James Woolsey, 
former head of the Central Intelligence Agency, Robert McFarlane, 
President Reagan's former national security advisor, and Admiral Thomas 
Moorer, former chair of the Joint Chiefs of Staff, together wrote 
Congressional leaders in September 2001 urging enactment of minimum 
standards for renewable fuels and electricity, along with an increase 
in energy efficiency funding, in order to increase national security.
    In spite of these compelling environmental, economic, and security 
benefits, renewable energy technologies continue to face many market 
barriers, which unnecessarily keep them from reaching their full 
potential.
    Renewable energy has made great strides in reducing costs, thanks 
to research and development and growth in domestic and global capacity. 
The cost for wind and solar electricity has come down by 80-90 percent 
over the past two decades. However, like all emerging technologies, 
renewable resources face commercialization barriers. They must compete 
at a disadvantage against the entrenched industries. They lack 
infrastructure, and their costs are high because of a lack of economies 
of scale.
    Renewable energy technologies face distortions in tax and spending 
policy. Studies have established that federal and state tax and 
spending policies tend to favor fossil-fuel technologies over renewable 
energy. A recent study by the Renewable Energy Policy Project showed 
that between 1943 and 1999, the nuclear industry received over $145 
billion in federal subsidies vs. $4.4 billion for solar energy and $1.3 
billion for wind energy. Another study by the non-partisan 
Congressional Joint Committee on Taxation projected that the oil and 
gas industries would receive an estimated $11 billion in tax incentives 
for exploration and production activities between 1999 and 2003. In 
addition to these subsidies, conventional generating technologies enjoy 
a lower tax burden. Fuel expenditures can be deducted from taxable 
income, but few renewable technologies benefit from this deduction, 
since most do not use market-supplied fuels. Income and property taxes 
are higher for renewable energy, which require large capital 
investments but have low fuel and operating expenses.
    Many of the benefits of renewable resources, such as reduced 
pollution and greater energy diversity, are not reflected in market 
prices, thus eliminating much of the incentive for consumers to switch 
to these technologies. Other important market barriers to renewable 
resources include: lack of information by customers, institutional 
barriers, the small size and high transaction costs of many renewable 
technologies, high financing costs, split incentives among those who 
make energy decisions and those who bear the costs, and high 
transmission costs.
    Some have called for future support of renewable energy through 
``green marketing,'' selling portfolios with a higher renewable energy 
content (and lower emissions) to customers who are willing to pay more 
for them. We strongly support green marketing as a means to increase 
the use of renewable energy and reduce the environmental impacts of 
energy use. Surveys show that many customers are willing to pay more 
for renewable energy, and pilot programs have shown promising, but not 
overwhelming results.
    Green marketing is not a substitute for sound public policy, 
however. There are many barriers to customers switching to green power, 
not the least of which is inertia. More than fifteen years after 
deregulation of long-distance telephone service, half of telephone 
customers still had not switched suppliers, even though they could get 
much lower prices by doing so. A recent study by the National Renewable 
Energy Laboratory projects that in an optimistic scenario, green 
marketing could increase the percentage of renewable energy in our 
electricity mix from about 2 percent today to only about 3 percent in 
ten years.
    With green electricity, the benefits of any individual customer's 
choice accrue to everyone, not the individual customer. Green customers 
gets the same undifferentiated electrons and breathe the same air as 
their neighbors choosing to buy power from cheap, dirty coal plants, 
creating a strong incentive for people to be ``free riders'' rather 
than pay higher costs for renewable resources. People recognize this 
public benefits aspect of green power. While they consistently say they 
are willing to pay more for electricity that is cleaner and includes 
more renewable energy, they overwhelmingly prefer that everyone pay for 
these benefits to relying on volunteers. A deliberative poll by Texas 
utilities found that 79 percent of participants favored everyone paying 
a small amount to support renewable energy, versus 17 percent favoring 
relying only on green marketing.

                   III. THE RENEWABLE ENERGY STANDARD

    A number of complementary policies should be enacted to reduce 
market barriers to renewable energy development:

 Extending production tax credits of 1.7 cents per kWh and 
        expanding them to cover all clean, renewable resources 
        (excluding hydropower)
 Enacting a federal public benefit fund to match state programs 
        for energy efficiency, renewable energy, research and 
        development, and protecting low-income customers
 Adopting national net metering standards, allowing consumers 
        who generate their own electricity with renewable energy 
        systems to feed surplus electricity back to the grid and spin 
        their meters backward, thus receiving retail prices for their 
        surplus power production
 Increasing spending on renewable energy research and 
        development
    The deployment of all these policy solutions will be required to 
truly level the playing field for renewable energy. However, we believe 
that a national Renewable Energy Standard for electricity--also known 
as a Renewable Portfolio Standard (RPS) is the cornerstone of any 
comprehensive policy approach to stimulate renewable energy 
development. A national RPS can diversify our energy supply with clean, 
domestic resources. It will help improve our national security, 
stabilize electricity prices, reduce natural gas prices, reduce 
emissions of carbon dioxide--which are heating up the earth and 
threaten to destabilize the climate--and other harmful air pollutants, 
and create jobs--especially in rural areas--and new income for farmers 
and ranchers. For these reasons, we believe a national RPS should be 
included in any electricity bill.
    The RPS is a market-based mechanism that requires utilities to 
gradually increase the portion of electricity produced from renewable 
resources such as wind, biomass, geothermal, and solar energy. It is 
akin to building codes, or efficiency standards for buildings, 
appliances, or vehicles, and is designed to integrate renewable 
resources into the marketplace in the most cost-effective fashion.
    By using tradable ``renewable energy credits'' to achieve 
compliance at the lowest cost, the RPS would function much like the 
Clean Air Act credit-trading system, which permits lower-cost, market-
based compliance with air pollution regulations. Electricity suppliers 
can generate renewable electricity themselves, purchase renewable 
electricity and credits from generators, or buy credits in a secondary 
trading market. This market-based approach creates competition among 
renewable generators, providing the greatest amount of clean power for 
the lowest price, and creates an ongoing incentive to drive down costs.
    Thirteen states--Arizona, California, Connecticut, Iowa, Maine, 
Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, Pennsylvania, 
Texas, and Wisconsin--have enacted minimum renewable energy 
requirements. But energy production creates national economic and 
environmental problems that need national solutions. The U.S. Senate 
recognized this need last year when they passed the first-ever national 
renewable energy standard with strong bi-partisan support. As part of 
comprehensive energy legislation (H. 4), the Senate passed a 10 percent 
by 2020 renewable energy standard that, if signed into law, would have 
saved consumers money on their energy bills and resulted in the U.S. 
increasing its total homegrown renewable power to over 74,000 megawatts 
(MW). This level of renewable development would produce enough 
electricity to meet the needs of 53 million typical homes.
    The RPS is the surest mechanism for securing the public benefits of 
renewable energy sources and for reducing their cost to enable them to 
become more competitive. It is a market mechanism, setting a uniform 
standard and allowing companies to determine the best way to meet it. 
The market picks the winning and losing technologies and projects, not 
administrators. The RPS will reduce renewable energy costs by:

 Providing a revenue stream that will enable manufacturers and 
        developers to obtain project financing at a reasonable cost and 
        make investments in expanding capacity to meet an expanding 
        renewable energy market.
 Allowing economies of scale in manufacturing, installation, 
        operation and maintenance of renewable energy facilities.
 Promoting vigorous competition among renewable energy 
        developers and technologies to meet the standard at the lowest 
        cost.
 Inducing development of renewables in the regions of the 
        country where they are the most cost-effective, while avoiding 
        expensive long-distance transmission, by allowing national 
        renewable energy credit trading.
 Reducing transaction costs, by enabling suppliers to buy 
        credits and avoid having to negotiate many small contracts with 
        individual renewable energy projects.
    Some people have asked why hydropower is not eligible to earn 
renewable energy credits in most RPS proposals. The primary reason for 
not including hydro is that it is a mature resource and technology. In 
most cases, it is already highly competitive. It will not benefit 
appreciably from the cost-reduction mechanisms outlined above, and an 
RPS that included hydro would produce negligible, if any, increases in 
hydro generation.
    Some people have also expressed concerns about the variable output 
of renewable sources like solar and wind, and believe that an RPS would 
affect the reliability of our energy system. However, the electric 
system is designed to handle unexpected swings in energy supply and 
demand, such as significant changes in consumer demand or even the 
failure of a large power plant or transmission line. Solar energy is 
also generally most plentiful when it is most needed--when air-
conditioners are causing high electricity demand. There are several 
areas in Europe, including parts of Spain, Germany, and Denmark, where 
wind power already supplies over 20 percent of the electricity with no 
adverse effects on the reliability of the system. In addition, several 
important renewable energy sources, such as geothermal, biomass, and 
landfill gas systems can operate around the clock. Studies by the EIA 
and the Union of Concerned Scientists show these non-intermittent, 
dispatchable renewable plants would generate about half of the nation's 
non-hydro renewable energy under a 10 percent RPS in 2020. Renewable 
energy can increase the reliability of the overall system, by 
diversifying our resource base and using supplies that are not 
vulnerable to periodic shortages or other supply interruptions.

             IV. BENEFITS OF A RENEWABLE PORTFOLIO STANDARD

    Three recent studies, one by the U.S. Energy Information 
Administration (EIA) and two by the Union of Concerned Scientists, show 
that a 10 percent RPS by 2020 is easily achievable and can stimulate 
economic development and increase energy security, while reducing 
consumer energy bills as well as local and global environmental 
hazards. Increasing the RPS to 20 percent by 2020 would result in 
greater diversity, environmental, and economic development benefits 
compared to the 10 percent standard, and would still provide savings to 
energy consumers. When combined with energy efficiency measures and 
additional renewable energy policies, the RPS can significantly lower 
consumer energy bills.
    EIA Analysis: The EIA study was conducted at the request of Senator 
Frank Murkowski, as the Senate considered inclusion of the RPS as part 
of comprehensive national energy legislation (S.1766). As part of their 
analysis, the EIA examined the costs of using the RPS to achieve levels 
of 10 percent (both with and without the sunset provision in S.1766) 
and 20 percent renewable electricity supplies by the year 2020.
    The EIA scenarios found benefits to consumers from increasing 
renewable energy use despite including a number of assumptions that are 
extremely unfavorable to renewable energy. Many of these assumptions 
were examined and rejected by the Interlaboratory Working Group--made 
up of experts from the National Renewable Energy Lab, Oak Ridge 
National Lab, Pacific Northwest Lab, Battelle Memorial Institute, and 
Lawrence Berkeley National Lab--in their Scenarios for a Clean Energy 
Future (IWG, 2000). In some of the most important such assumptions, EIA

 Used higher cost and worse performance assumptions for most 
        renewable technologies than recent experience or projections by 
        the Electric Power Research Institute and DOE;
 Arbitrarily increased the capital cost of wind, biomass, and 
        geothermal technologies by up to 200 percent in a given region 
        after a fairly small amount of the regional potential is met; 
        more than 90 percent of the highest value wind resources in the 
        US, for example, are assigned a capital cost multiplier of 200 
        percent; and
 Limited the penetration of variable output resources like wind 
        and solar power to 15 percent of a region's electricity 
        generation; in parts of Germany, Denmark and Spain, wind power 
        is already providing more than 20 percent of total electricity 
        generation.
    These assumptions, and others, led to projections of very high 
renewable energy prices in high renewable energy penetration scenarios. 
With the availability and penetration of the lowest cost wind and 
biomass resources assumed to be sharply limited, higher RPS levels in 
EIA's version of the model require deploying more expensive renewable 
resources.
    Despite these overly conservative assumptions for renewable energy 
cost and availability, EIA still found that the 10 percent RPS would 
have virtually no impact on retail electricity prices. Figure 1 shows 
that, in 2020, electricity prices would be only one-tenth of one cent 
per kilowatt-hour higher than business as usual under a 10 percent RPS.
    Even these small increases in electricity prices are largely 
offset, however, by lower natural gas prices. Diversifying the 
electricity mix with renewable energy helps stabilize electricity 
prices by easing pressure on natural gas prices and supplies. Under a 
10 percent RPS, EIA found that average consumer natural gas prices are 
2.2 percent lower than business as usual in 2010, and 1.9 percent lower 
in 2020. These lower prices would save gas consumers $1.7 billion per 
year by 2020 (2000 dollars, 8 percent discount rate).
    In the key results section of its report, EIA recognizes this 
benefit of increased renewable energy use by noting that ``the retail 
electricity price impacts of the RPS are projected to be small because 
the price impact of buying renewable credits and building the required 
renewable energy is projected to be relatively small when compared with 
total electricity costs and to be mostly offset by lower gas prices 
that result from reduced gas use.''
    However, EIA did not report on the extent to which these lower 
natural gas prices offset higher electricity costs. By adding total 
residential, commercial and industrial energy expenditures, it can be 
seen that total non-transportation energy costs would actually be $2.7 
billion lower in 2010 and only $1.5 billion or 0.3 percent higher in 
2020 under the 10 percent RPS than under business as usual (Figure 
2).1 The net present value savings of the RPS scenario would 
be $6.7 billion compared to the business as usual case (2000 dollars, 8 
percent discount rate).
---------------------------------------------------------------------------
    \1\ Results obtained through personal communication with Laura 
Martin at EIA, on March 7, 2002. Tables available upon request.
---------------------------------------------------------------------------
    A 10 percent RPS would also help reduce emissions from power 
plants. Under an RPS, carbon emissions from power plants would be 23 
million metric tons or 3 percent lower than business as usual in 2010 
and 53 million metric tons or 7 percent lower in 2020, according to 
EIA.
    ``No Sunset'' Case: The EIA report also examined a 10 percent RPS 
by 2020 without a key provision included in the original RPS proposed 
in S.1766--a 2020 sunset date. EIA found that this sunset provision 
would cause electric generators to chose an alternative compliance 
mechanism rather than develop additional renewable energy sources in 
the later years of the requirement. If the sunset provision was removed 
from S. 1766--as was effectively the case in the RPS passed by the 
Senate--EIA found that there would be a significant impact on the costs 
and benefits of the RPS.2
---------------------------------------------------------------------------
    \2\ The sunset does not actually have to be removed, but it must be 
at least ten years after the date at which the renewable energy ramp-up 
ends, in order to allow generators that come on-line late in the RPS 
ramp-up enough time to recover their costs. Otherwise, no renewable 
energy generation would be added in the last few years of the RPS, and 
suppliers would instead buy proxy credits from or pay penalties to DOE. 
The early sunset thus produces less renewable generation and higher 
costs.
---------------------------------------------------------------------------
    EIA results show that under a 10 percent RPS with no sunset, 
average retail electricity prices would be unchanged through 2020 
compared to business as usual. Average consumer natural gas prices 
would be 2.3 percent lower than business as usual in 2020. With no 
change to consumer electricity prices, lower natural gas prices result 
in savings for consumers on their electricity and natural gas bills 
throughout the 2002-2020 period (Figure 3). Total non-transportation 
energy costs would be $3.1 billion lower in 2010 and $3 billion lower 
in 2020 under the 10 percent RPS than under business as usual (Figure 
2). Removing the sunset provision from the 10 percent national standard 
would also nearly double total energy consumer savings to $13.2 billion 
through 2020.
    EIA 20 percent analysis: Results from the EIA analysis also show 
that increasing the renewable energy standard to 20 percent by 2020 
would result in greater diversity and environmental benefits compared 
to the 10 percent standard, and would still provide savings to energy 
consumers.
    Under a 20 percent RPS, EIA results show virtually no impact on 
retail electricity prices compared to business as usual through 2015. 
In 2020, electricity prices would be just two-tenths of one cent per 
kilowatt-hour higher than business as usual.
    By diversifying the energy mix even further with a 20 percent RPS, 
EIA results show an even greater impact on natural gas prices and 
supplies. Average consumer natural gas prices are 3 percent lower than 
business as usual in 2010 and 3.6 percent lower in 2020. These lower 
prices would save gas consumers $3.3 billion per year by 2020.
    Similarly to the 10 percent RPS case, EIA results show that lower 
natural gas prices more than offset the very small increases in 
electricity prices caused by adding more renewable energy sources to 
the generation mix. Total consumer energy savings would be $5.7 billion 
over the next 18 years.
    According to EIA, a 20 percent by 2020 RPS would also result in 
greater carbon emissions savings from power plants. Carbon emissions 
would be 43 million metric tons or 6 percent lower than business as 
usual in 2010 and 76 million metric tons or 10 percent lower in 2020.
    UCS Analysis: The Union of Concerned Scientists, in Renewing Where 
We Live: A National Renewable Energy Standard Will Benefit America's 
Economy, investigated the costs and benefits of a 10 percent RPS by 
2020 RPS combined with an extension of the Federal renewable energy 
production tax credit as passed by the Senate in March 2002.
    Our analysis used the US Energy Information Administration's NEMS 
computer model, with scenarios run for UCS by the Tellus Institute. We 
based our business-as-usual scenario on Annual Energy Outlook 2002 
(EIA, 2001), the EIA's long-term forecast of US energy supply, demand, 
and prices. The year 2000 is the last year of history in the model, 
which makes projections through 2020. We modified several NEMS 
assumptions for renewable energy, generally in line with the IWG Clean 
Energy Future analysis, in order to model these technologies more 
accurately.
    We found that the national portfolio standard and renewable energy 
tax credits passed by the Senate would reduce long run energy costs to 
consumers. Total annual consumer energy bills (not including 
transportation) would be $100 million lower than business as usual in 
2010, and $3.8 billion or 1 percent lower in 2020 (Figure 4). The 
present value of total consumer savings would be $7.8 billion between 
2002 and 2020. If taxpayer costs from the tax credits and increased 
federal research and development funding for renewable energy are 
included, total consumer savings would be $2.8 billion.3 
Increased competition from renewable energy leads to lower natural gas 
prices, which more than offset the slightly higher costs of generating 
renewable electricity in the United States.
---------------------------------------------------------------------------
    \3\ Last year's House and Senate energy bills included renewable 
energy tax credits worth between $2.6 billion (Congress' estimate) and 
$5.2 billion (UCS' estimate) over the next 10 years. The bills also 
included 10 years' worth of subsidies for fossil fuel and nuclear power 
totaling about $9.1 billion in the Senate bill and $28 billion in the 
House bill. (Note: these dollar figures are not discounted.)
---------------------------------------------------------------------------
    UCS analysis found that under a 10 percent RPS, the United States 
would increase its total homegrown renewable power to over 74,000 
megawatts (MW) by 2020. The majority of this development would be 
powered by America's strong winds, with significant contributions from 
biomass and geothermal. This level of renewable development would 
produce enough electricity to meet the needs of 53 million typical 
homes.
    Renewable energy development resulting from the Senate-passed RPS 
would bring significant economic benefits to the United States. Through 
2020, the national standard would produce

 $17 billion in new capital investment
 $1.2 billion in new property tax revenues for local 
        communities
 $410 million in lease payments to farmers and rural landowners 
        from wind power
    UCS also found that the increased use of renewable energy in the 
United States would reduce air pollution from power plants. Nationally, 
the renewable energy standard will reduce about 27 million metric tons 
of carbon emissions a year by 2020. The renewable standard will also 
reduce harmful water and land impacts from extracting, transporting, 
and using fossil fuels.
    In the future, natural gas is projected to fuel much of the new 
electricity generation built in the United States without additional 
policies for renewable energy. This increase in demand for natural gas 
may lead to natural gas prices that are higher and more volatile than 
those used in our base case analysis. Based on these assumptions, UCS 
also examined the effects of a 10 percent RPS on an alternative 
scenario where wholesale natural gas prices are 35 percent higher by 
2020.
    UCS found that the more expensive natural gas is, the greater the 
savings will be from reducing natural gas use through a renewable 
energy standard. In the scenario that we analyzed, total consumer 
energy bill savings through 2020 from the renewable standard would more 
than double to $17.6 billion. Renewable energy generation and related 
economic development benefits would also increase significantly if gas 
prices were higher.
    In Clean Energy Blueprint: A Smarter National Energy Policy for 
Today and the Future, the Union of Concerned Scientists investigated 
the costs and benefits of two energy efficiency and renewable energy 
scenarios, compared to business as usual. We did not examine RPS-only 
scenarios, as in Renewing Where We Live or as EIA did, but looked at a 
20 percent RPS in combination with other renewable energy and energy 
efficiency policies.
    We examined a scenario consisting primarily of the policies in the 
Renewable Energy and Energy Efficiency Investment Act of 2001 (S. 
1333), sponsored by Senator Jeffords. In addition to a 20 percent RPS, 
S. 1333 would have established a federal public benefit fund and net 
metering. We also assumed that research and development spending on 
renewable energy and efficiency would increase 60 percent over three 
years to levels recommended by the President's Committee of Advisors on 
Science and Technology.
    We also investigated the costs and benefits of the RPS with an 
expanded suite of renewable energy and energy efficiency policies. In 
addition to the above policies, these included:

 Production tax credits of 1.7 cents per kWh for renewable 
        energy would be extended and expanded to cover all clean, non-
        hydro renewable resources, helping to level the playing field 
        with fossil fuel and nuclear generation subsidies.
 Combined heat and power: Incentives would be provided and 
        regulatory barriers removed for power plants that produce both 
        electricity and useful heat at high efficiencies.
 Improved efficiency standards: National minimum efficiency 
        standards would be established for a dozen products, generally 
        to the level of good practices today. In addition, existing 
        national standards would be revised to levels that are 
        technically feasible and economically justified.
 Enhanced building codes: States would adopt model building 
        codes established in 1999/2000, as well as new more advanced 
        codes established by 2010.
 Tax incentives would promote efficiency improvements for 
        buildings and equipment beyond minimum standards.
 Industrial energy efficiency measures: Industry would improve 
        its efficiency by 1 to 2 percent per year through voluntary 
        agreements, incentives, or national standards.
    Like Renewing Where We Live, this analysis used the US Energy 
Information Administration's NEMS computer model, with scenarios run 
for UCS by the Tellus Institute. For this report, we based our 
business-as-usual scenario on Annual Energy Outlook 2001 (EIA, 2000). 
The year 1999 is the last year of history in the model, which makes 
projections through 2020. The efficiency policies were developed by and 
modeled by the American Council for an Energy Efficient Economy. The 
calculated energy savings were used to adjust the AEO forecasts. The 
energy efficiency costs were annualized and added to the results. Once 
again, we modified several NEMS assumptions for renewable energy, 
generally in line with the IWG Clean Energy Future analysis, in order 
to model these technologies more accurately and applied these 
modifications to both the business-as-usual scenario and the Clean 
Energy Blueprint.
    Combined with increased research and development, S. 1333 would 
save consumers a total of $70 billion between 2002 and 2020, with 
savings reaching $35 billion per year by 2020. Under a higher-gas-price 
scenario, cumulative savings would reach $130 billion between 2002 and 
2020. In 2020, monthly bills for a typical household would be $34 per 
month under S. 1333, compared to $38 per month under business as usual 
and $25 per month under the Clean Energy Blueprint.
    Carbon dioxide emissions from power plants would be nearly one-
third lower than under business as usual by 2020, while sulfur dioxide 
emission levels would be 8 percent lower and nitrogen oxide emissions 
15 percent lower.
    When combined with the energy efficiency and additional renewable 
energy policies included in the Clean Energy Blueprint, the economic 
and environmental benefits of the RPS are even greater. Under the 
Blueprint, total energy use would be 19 percent lower than business as 
usual by 2020 and only 5 percent higher than 2000 levels, due to 
increased energy efficiency in homes, offices, and factories. Natural 
gas use would grow by 8 percent from today's level, but be 31 percent 
less than business as usual by 2020. Coal-fired electricity generation 
is 61 percent below business as usual in 2020 and 53 percent lower than 
today's levels.
    Oil use would be reduced by 5 percent, saving over 400 million 
barrels per year by 2020. More oil would be saved over the next 18 
years than is projected to be economically recoverable from the Arctic 
National Wildlife Refuge over 60 years. The Clean Energy Blueprint did 
not include oil savings from increased energy efficiency and renewable 
energy use in the transportation sector. Another recent UCS study, 
Drilling in Detroit: Tapping Automaker Ingenuity to Build Safe and 
Efficient Automobiles, has shown that fuel economy improvements in cars 
and light trucks would provide significant oil savings (UCS, 2001). If 
these savings were combined with the savings from the Clean Energy 
Blueprint, the United States would save more than 15 times the oil 
available in the Arctic Refuge at 2001 oil prices (Figure 5) and total 
oil use would be 9 percent lower in 2010 and 23 percent lower in 2020 
than under business as usual. The combined net savings to consumers 
would increase to over $150 billion per year by 2020 and $645 billion 
between 2002 and 2020.
    Non-hydro renewable energy sources (wind, biomass, geothermal, and 
solar) would produce 20 percent of the nation's electricity by 2020. 
Energy efficiency measures would offset projected growth in electricity 
use. Combined heat and power plants would meet 39 percent of commercial 
and industrial electricity needs. Thus, the Clean Energy Blueprint 
would eliminate the need for 975 of the 1,300 new power plants the 
administration's National Energy Policy says we need by 2020, and 
retire 180 existing coal plants and 14 nuclear plants, reducing the 
number of vulnerable energy facilities.
    By 2020, because of lower electricity demand and because natural 
gas is used both to generate electricity and to produce useful heat, 
overall natural gas generation is 33 percent lower than business as 
usual in 2020. The Blueprint's efficiency and renewable energy policies 
reduce natural gas prices by 27 percent by 2020, saving businesses and 
homes that use natural gas nearly $30 billion per year.
    Under the Clean Energy Blueprint, net energy savings would grow to 
$105 billion per year by 2020, totaling $440 billion between 2002 and 
2020 (total savings between 2002 and 2020 are in 1999 dollars using a 5 
percent real discount rate.) A typical family would save $350 per year 
in lower energy bills by 2020 (Figure 6).
    The Clean Energy Blueprint would reduce power plant carbon 
emissions two-thirds by 2020 compared to business-as-usual projections 
(Figure 7). Sulfur dioxide emissions, which are the primary cause of 
acid rain, and nitrogen oxide emissions, a major cause of smog, would 
both be reduced more than 55 percent.
    The Clean Energy Blueprint would reduce the need to drill for 
natural gas and to build some significant portion of the over 300,000 
miles of new pipelines called for in the administration's National 
Energy Policy. It would also reduce the need to mine, transport, and 
burn 750 million tons of coal per year by 2020 compared to business-as-
usual projections. Moreover, energy efficiency measures and renewable 
energy facilities can be deployed faster than new fossil and nuclear 
energy supplies could be developed.

                             VI. CONCLUSION

    Survey after survey has shown that Americans want cleaner and 
renewable energy sources, and that they are willing to pay more for 
them. A survey conducted last year by Mellman Associates found that 
when presented with arguments for and against a 20 percent RPS 
requirement, 70 percent of voters support an RPS, while only 21 percent 
oppose it.
    The combination of EIA and UCS studies demonstrate that with 
appropriate policies, renewable energy technologies can provide 
Americans with the clean and reliable electricity they desire, while 
also saving them money, contributing to our nation's energy security 
and achieving significant reductions in harmful emissions.
    The net metering and renewable energy production incentive 
provisions included in the current draft bill before the committee are 
laudable and deserving of support. But by themselves, these provisions 
will not get the job done. A strong, market-friendly renewable energy 
standard is required to realize the full potential of America's 
renewable energy resources.
    For all of these reasons, we respectfully urge that as the 
Committee moves forward with its development of national energy 
legislation, you support inclusion of a renewable portfolio standard. 
Thank you.

[GRAPHIC] [TIFF OMITTED] T6052.011

[GRAPHIC] [TIFF OMITTED] T6052.012

[GRAPHIC] [TIFF OMITTED] T6052.013

    Mr. Fossella [presiding]. Thank you, each of you, for your 
testimony and your time and patience. We will jump right into 
the questions. Mr. Fertel, with respect to the Davis-Besse 
nuclear power plant that experienced a large corroded hole on 
the top of its reactor vessel head last spring, the plant has 
been shut down for almost a year.
    Industry, otherwise has a good safety record. Why do you 
think this particular plant was allowed to corrode to such a 
dangerous degree, and how, if at all, is this typical of how 
other plants are operating?
    Mr. Fertel. Let me start with the second part of your 
question first, Congressman. The NRC has required all the 
plants that are similar in design, pressurized water reactors, 
to do inspections.
    And what we found over the last year is that none of the 
plants had a similar problem. So, I think, starting with the 
second part of your question of do we have a vulnerability 
elsewhere, the answer right now is no.
    How did it occur at Davis-Besse? We have understood 
corrosion, like you saw at Davis-Besse, for a lot of year now 
and all the plants have programs that they are implementing to 
basically monitor and manage that.
    In Davis-Besse's case they were not doing it as well as 
they should have been doing it and that is why the plant had a 
problem. That is why the plant has been down for a year.
    And that is why there have been dramatic changes there. As 
a result of Davis-Besse, a number of things have happened. The 
NRC has done a major lessons learned and about 3 weeks ago the 
commission approved, I think, 51 out of 52 recommendations to 
change things that the NRC does based upon what happened at 
Davis-Besse.
    On the industry side, also a number of things have 
happened. As I mentioned, we have had a number of programs 
going on looking at corrosion and aging of materials, which is 
not a phenomena that is unexpected.
    What we found was there had been going on probably very 
good technically, but in a bunch of different areas without a 
lot of integration.
    And we have now taken steps to bring them basically under 
NEI, in some respects, in an integrated way with much more 
senior people looking at both the priorities and the funding 
for those programs.
    Just also to react to the Davis-Besse question from what 
Anna said, Davis-Besse did have a bad event. That should not 
happen, there is no excuse for it.
    On the other hand, both the analysis that they have done 
and the analysis that NRC has recently done, says that there 
was no threat to health and safety from the situation there at 
the time or for probably up to 2 years.
    Now again, that does not excuse the event. And in 2 years, 
if something happened, it wasn't going to be a threat to health 
and safety offsite.
    It was going to be a real problem at the plant, but not a 
threat offsite. So I am not excusing what went on there, but I 
think we need to keep a perspective on what the consequences 
are that could have happened.
    There was not a threat offsite.
    Mr. Fossella. Follow on the other side of the equation, in 
effect, the NRC has not licensed a new plant in over 20 years. 
What do you think, I mean what is your opinion of when we might 
see the next one?
    Mr. Fertel. As far as license renewal, first, even there, 
you know, our plants had a 40 year license that was issued 
originally.
    There was no technical basis for the 40 year license. As 
best we could determine from looking back at the Atomic Energy 
Act and its evolution, there were two primary reasons it is 40 
years.
    One, it was a normal depreciation period that you use. And 
two, it was what we used to issue FCC licenses for 40 years. So 
basically you got a 40 year license.
    Nothing at our plants is designed to stop working or fail 
in 40 years. You analyze your plant from a safety standpoint 
performance for certain systems based upon 40 years of 
operation.
    When you renew the license, what NRC does is they take a 
look at what you are doing, because there is really no 
difference in plant operation in year 39 or year 41, in many 
respects.
    But what they ask you to do is analyze those systems that 
are not in a maintenance program for basically long term 
management of performance and see whether you need to put them 
in that.
    And they ask you to re-analyze those portions of the plant 
that were analyzed for 40 years, now analyze it for 60 years.
    So our conclusion is that the NRC's process is pretty 
rigorous. There is no reason the plant can't operate for 50, 60 
or potentially 70 or 80 years, because you are basically 
changing it out and maintaining it as you go.
    Mr. Fossella. My question was when do you think the next 
new plant will be licensed?
    Mr. Fertel. Oh, I am sorry. Okay, the next new plant, there 
are a couple of things happening there. There is a significant 
effort by the industry, and really I will mention the Scully 
report.
    We are not asking, nobody I am aware of is asking for 50 
percent above market prices. That may be something the DOE 
people have looked at but it is not something the industry is 
looking at.
    Right now what is going on in the industry is there is an 
effort to certify new designs before the Nuclear Regulatory 
Commission, Chairman Meserve mentioned that.
    There are also right now three companies looking at banking 
sites. You are allowed to bank a site for future use. And three 
companies are planning on filing early site permits this year.
    It doesn't mean they are necessarily build there, but it 
means they are banking it. We are working with the NRC to 
define the licensing process better and those are all public 
meetings and everybody can attend them.
    And our expectation is that based upon the electricity 
markets right now and what appears to be a glut of capacity 
that people are waiting to buy at distressed prices, there 
won't be a need for new baseload capacity decisionmaking until 
the 2005-2006 timeframe.
    What we are trying to do is have everything ready by then 
and we are expecting that we could see potential plant orders 
in the time period. And then it would be probably, for the 
first plant, about a 7-year timeframe.
    And then after that we think we are down in the 5 or 6. So, 
in the 2000, latter part of this decade, Congressman.
    Mr. Fossella. Other than what you have provided in your 
testimony, there are those, including some on the panel here, 
who feel that the industry wouldn't exist but for, and I am 
quoting one, for enormous subsidies paid for by rate payers and 
taxpayers. Do you agree with that?
    Mr. Fertel. No, I don't agree with it, but it is a long 
answer to explain it. And Price-Anderson may be a good example.
    This committee has supported Price-Anderson and we 
appreciate that, and so has the Congress over and over again. 
Anna is right on one thing she says that when Price-Anderson 
was passed in 1957, it was a subsidy.
    The government was basically capping liability at $560 
million. The government was picking up $500 million and the 
commercial market would only provide $60 million.
    Over the ensuing 45 years, Congress has modified Price-
Anderson to be, what I believe, is an extremely good public 
policy. It is probably the best public policy in the world for 
a third party liability protection.
    It creates a pool that all the plants, Jeff Benjamin, it 
works for Exelon. If there is an accident at my plant, Jeff has 
to help pay for it.
    It creates a pool across all of our companies that puts 
$9.5 billion available. No other industry has $9.5 billion.
    In fact, they don't have anything close to it. Okay, that 
you have to share, you can't walk away. What you hear is we 
should have unlimited liability. Well, there is no such thing. 
Companies declare bankruptcy when there is unlimited liability.
    We see it every day, unfortunately, over the last 2 years. 
So it has turned out to be, because again of Congress, you 
changed it from a subsidy to an extremely good public policy.
    If you were talking about 1957, you would be correct in 
saying it is a subsidy. It isn't now. It is a very good public 
policy. So I would disagree respectfully with Anna.
    Mr. Fossella. Thank you. Shifting to your left, Ms. 
Aurilio, according to your testimony, ``spent nuclear fuel from 
reactors cause perhaps the most toxic material generated by 
humans.''
    Jumping ahead, ``unshielded it delivers a lethal dose of 
radiation within seconds.'' How many people have died in the 
last 20 years due to exposure to unshielded spent nuclear fuel?
    Ms. Aurilio. Well, hopefully none because I am hoping no 
one has stood next to unshielded nuclear fuel.
    Mr. Fossella. So that sort of answers the second question. 
You are unaware of anyone who has ever died from exposure to 
unshielded spent nuclear fuel, right?
    I am going to shift to your left, because I have about 2 
minutes left. Mr. Benjamin, according to your testimony, 
according to the testimony of Dr. Lyman, who sits on the panel, 
``the nuclear industry is bitterly resisting any new security 
requirements that will cost it money.''
    Is this true, in your opinion, and how much money has 
Exelon spent on new security requirements since September 11?
    Mr. Benjamin. I will answer the second part of your 
question first. We have spent, across our fleet, around $12 
million in capital expenditures by putting new hardware in our 
plants.
    And we have increased our operating and maintenance budget 
for security from roughly $45 million per year, which is about 
4.5 percent of operating budget, up to close to $64 million per 
year. Just a little bit under 6.5 percent.
    I think it is fair to say that we have worked very 
aggressively and in concert with the Nuclear Regulatory 
Commission over the past 17 months to put in real security 
improvements at our sites.
    You drive up to our plant sites today, you will be met out 
in the owner controlled area. Your identification will be 
verified.
    If you are driving a vehicle of sufficient size, it will be 
searched. Again, at a distance sufficiently far from the plant 
site itself, so that any potential terrorist act wouldn't pose 
a threat to the plant itself.
    We have taken a number of additional measures for 
operational readiness. We have gone back and made sure that we 
have checked again on the people who have unescorted access to 
our sites.
    At Exelon alone, we have added over 260 new security 
officers and we have trained them. We have provided them 
improved weapons and we have bought additional weapons for the 
previously existing guard force.
    So I think we have acted both responsibly and in concert 
with the wishes of the Nuclear Regulatory Commission and 
believe we have effected real security improvements.
    The issue in front of us now, again, as I stated in my oral 
remarks, is one of public policy in terms of where do we draw 
the lines?
    Where do we establish the limitations on what we want and 
need a civilian guard force to carry out in terms of its 
security mission.
    And where do we then bring in the roles of local law 
enforcement, State law enforcement, Federal law enforcement and 
the military.
    And those are the issues before us that we are simply 
seeking the NRC acting in full consultation with the Department 
of Homeland Security and Congress to get sorted out before 
issuing a new design basis threat.
    Our job one is safety. Safety to the public. We want to do 
what is proper. We think we have done what is proper. The 
security that we have put in place, I think gives us the time 
to do it right.
    Mr. Fossella. Thank you, Mr. Benjamin. We have other 
questions, but at this point I turn to my colleague, Mr. 
Boucher.
    Mr. Boucher. Thank you very much, Mr. Chairman, I am going 
to be very brief. Mr. Nadel, I want to ask for your assistance 
in perhaps providing a primer on the steps that we need to take 
in order to make sure that our society receives from combined 
heat and power the added benefits both on the environmental 
side and the energy efficiency side that would come from an 
expansion of capacity. What do we need to do? What steps should 
we take?
    Mr. Nadel. Several things. Probably the most important is 
to address some of the barriers in terms of individual utility 
and sometimes individual State regulations on hook ups of these 
types of systems on back up power, how much they get charged 
for back up power.
    What the rates are that they can sell. Some facilities have 
good access to this, they are qualified facilities, many do 
not.
    We think it is real important to get these signals right, 
and we recommend that the energy bill, that hopefully this 
committee reports out, gives FERC explicit authority to develop 
those so that we have fair and reasonable hook up requirements, 
back up power rates, etcetera.
    That is by far the most important thing that I think needs 
to be done. In addition, some tax credits could be useful. The 
President has proposed that in his budget.
    The House Ways and Means Committee did report out a bill in 
2001, so that will be an aspect of it. We think those should 
particularly target the medium and smaller size plants, that is 
where the assistance is most needed.
    Not in the very large plants where the market is starting 
to take off a little bit more. There is some R&D in terms of 
the more advanced technologies, and the bill, I think it is in 
Title VI, does include quite a bit on that.
    So that is good. But particular dealing with the back up 
power, the interconnection, I think that would be very useful.
    Mr. Boucher. All right, that is helpful to know. Would you 
like to take just a minute to underscore what some of the 
benefits of using combined heat and power facilities are, in 
comparison with the national electricity generation-based 
generally, specifically with respect to the more 
environmentally benign nature of CHP and the higher energy 
efficiency that CHP achieves.
    Mr. Nadel. Right, as you point out, and you are absolutely 
correct, combined heat and power or CHP, by using the same fuel 
effectively twice, both to provide heat and provide power, 
tends to be much more efficient.
    We are talking about efficiencies, you know, 75, 80, 85 
percent compared to your typical existing power plant which is 
just over 30 percent.
    Even some of your newer power plants are maybe in the 40's 
or something like that. So you are talking a major efficiency 
advantage, if you will.
    That, in turn, means much lower emissions per kilowatt hour 
of output. Also, it depends on the type of system, but many of 
these systems use very advanced combustion techniques, using 
natural gas and other fuels, they can burn extremely cleanly 
which helps reduce emissions.
    So that is another major advantage.
    Mr. Boucher. Well, thank you. As you may know, I am 
considering recommending to the committee that some of the 
steps you have outlined be taken.
    And it is helpful to have your statement on the record of 
very strong support for that happening. Ms. Aurilio, let me ask 
you a question, if I may.
    The administration is recommending an R&D program of about 
$2 billion to be expended at $200 million increments over a 10-
year period, for, primarily for the development of advanced 
coal gasification technologies.
    The theory being, I suppose, that coal gasification is an 
appropriate way to derive hydrogen which in turn could power 
fuel cells.
    And from the environmental side, the gasification process 
conveniently enables CO2 to be drawn off in a 
separate stream and it then potentially could be sequestered 
and dealt with in a better way than simply releasing it into 
the atmosphere. What do you think of that?
    Ms. Aurilio. That is a great question. I don't think I have 
seen enough of the goals or specifications of the program to 
have an overall opinion on it.
    A couple of concerns I think, and things that I would look 
for in evaluating that kind of program is first of all what is 
the goal of the program?
    So others have testified, for example, about the hydrogen 
car and the fact that there is no actual promise that taxpayers 
will get a product at the end of the billions of dollars that 
are spent.
    I would like to see what taxpayers will get for their money 
at the end of that kind of program. In the past we have 
questioned the clean coal technology program because it is 
developed technologies that weren't even as good as stuff that 
was developed without government subsidy.
    So I would want to see what the criteria were. Finally, I 
think the President's budget, as we looked at it, took money 
out of a lot of very deserving programs like renewable energy 
programs to put into some of these new initiatives.
    And I don't think that we should be taking money out of 
existing renewable energy programs to be paying for stuff like 
this.
    If someone wants to make a case to do this brand new 
technology that again, I think has been very vague in terms of 
its goals and guarantees, we ought to be preserving the 
existing programs as well.
    Mr. Boucher. Okay, thank you. Mr. Meyer, would you like to 
comment on the same question?
    Mr. Meyer. Yeah, I agree with Anna that we need much 
clearer goals set out here. We also need to look at the 
permanence issue, I think, with carbon sequestration.
    Because I think this is a technology that has some promise, 
but it is a technology where you have to be very certain that 
the carbon you put down in the ground stays there for centuries 
and longer.
    Because if you had some pulse of carbon being emitted from 
underground storage, it could be quite troubling to the climate 
system.
    Again, I agree totally with Anna that the shell game of 
cutting some of the core of renewable energy programs, such as 
biomass, wind and geothermal. To switch money into either this 
coal initiative, the FutureGen initiative or the hydrogen 
initiative is misguided.
    We need a balanced portfolio. And as I said in my oral 
statement, we need to increase R&D on renewable technologies if 
we want to keep those positive cost trends going in the right 
way. So I think that was a mistake.
    We are supportive of some additional R&D on these 
technologies. Clearly, if you look at countries like China and 
India, which are going to use their tremendous indigenous coal 
resources to modernize their economies, we need to find ways to 
square the circle in terms of carbon emissions from coal over 
the long term.
    And I think gasification technology is clearly the way to 
go there. As you said, it makes it much easier to separate the 
carbon before it is combusted.
    So, some additional R&D is useful. I agree with Anna, you 
need to see clear goals and what you are going to get for your 
buck.
    We need to see what other countries are going to come in on 
this kind of technology with us. I know they are trying to get 
international partnerships launched here.
    Let's see what the Europeans, the Japanese and others that 
are looking at this are willing to ante up in the bar and do.
    Mr. Boucher. Thank you very much. In deference to the fact 
that we have all had a very long day and you have devoted, as 
we have, virtually your entire day to informing us, let me 
thank each of you for your participation.
    Your written statements and your testimony will be most 
helpful to us. And Mr. Chairman, having said that, I would 
recommend that we call it a day. Thank you very much, I yield 
back.
    Mr. Fossella. Thank you, Mr. Boucher, I will take that 
suggestion under advisement. We have just a few more quick 
questions and then everybody can go home, if you don't mind.
    Mr. Meyer, your testimony states that you support net 
metering and the draft energy proposal contains a provision on 
net metering. Do you support the net metering provision in the 
discussion draft?
    Mr. Meyer. Yes, we think this is a positive step forward. 
As I said, it is not sufficient in and of itself to move 
renewable technology where we want to go.
    Net metering is aimed at onsite, small scale technologies 
which are important and you want to continue the cost trends.
    But that is sort of a niche market in terms of overall 
renewable contribution to the country long term. So we also 
need policies like tax incentives.
    We ought to be extending and expanding the production tax 
credit which unfortunately Congress has only reauthorized in 
year or 2 year increments, which doesn't provide the long term 
certainty to the industry that it needs to achieve low cost 
financing.
    We also need the renewable energy standard, which will 
drive the bulk power technologies, such as geothermal, biomass 
and wind into the major contribution that they can make.
    We see no reason why we can't get 20 percent of our 
electricity from non-hydro renewables by the year 2020. We 
think that ought to be the goal.
    We understand the Senate made some compromises there and 
only went for 10 percent, but we think we ought to go as far as 
we can, particularly given the gas price volatility and some of 
the energy security concerns we are seeing currently.
    Mr. Fossella. And the Union of Concerned Scientists 
supported the net metering provisions in the Senate's energy 
bill last Congress, correct?
    Mr. Meyer. Yes, we did.
    Mr. Fossella. Which is identical to the one in the draft?
    Mr. Meyer. Yes.
    Mr. Fossella. Dr. O'Hagan, can you comment, and if you feel 
you covered it in your testimony, that is fine. NEMA's role in 
helping the Federal Government implement its energy management 
goals?
    Mr. O'Hagan. Mr. Chairman, when I testified here last year 
I suggested that a good place to start would be in this hearing 
room by installing energy efficient lighting. I am afraid to 
see it hasn't happened yet.
    We, I think there are two important things. One is that the 
government should lead by example in upgrading its own 
facilities.
    And the other is widely promoting the use of the voluntary 
consensus standards that have been developed collaboratively in 
the private sector.
    Mr. Fossella. And also discuss an involvement with the 
American Council for Energy Efficient Economy to develop the 
energy efficiency standards in the H.R. 4 conferees adopted, 
which I understand again are the same provisions in the draft 
bill.
    Mr. O'Hagan. That is right Mr. Chairman. We are all on the 
same page on the energy efficiency standards. I don't think 
there is anybody that opposes conservation.
    There is enormous waste. One point I would make that, and 
we have made this point to the Department of Energy.
    In the case of energy efficiency the technology exists. We 
are not waiting for new technologies to come. Unfortunately it 
hasn't been deployed to the extent that it should be.
    And primarily because the first cost is higher, but the 
life cycle cost is much lower. So we would like to see the 
Department of Energy and the government lead a major, national 
education effort to really try to get the country to adopt the 
energy efficient technologies.
    Pointing out that it is cost saving in the long run and 
that is of great benefit to the Nation and our energy policy.
    Mr. Fossella. Thank you, sir. Mr. Nadel, in your testimony 
you State that while you strongly support the energy efficiency 
Title of the draft bill, you would like to add certain energy 
efficiency standards, ``When and if negotiations with industry 
are successfully completed,'' that is your quote. What is the 
status of the negotiations and where are they headed at this 
time?
    Mr. Nadel. We are talking with several industry 
associations about possible new standards. In general, all the 
standards in the bill were consensus, so people both on the 
House side and the Senate side have made clear that they are 
really looking for consensus on these issues.
    So we are trying to work with groups like NEMA. We are 
talking with them about compact fluorescent lamp standards.
    We are also talking with them about extending the 
transformer standard to another type of transformer I will call 
liquid-immersed.
    So we are having discussions with the association, with 
their members to see if we can work out the technical details. 
And if we can fairly soon, hope to have something to present to 
the members for consideration.
    Also talking with one other trade association, I don't 
think I should say in public until it is farther along, but 
hopefully there may be something there as well.
    Mr. Fossella. In addition, you State that the energy 
efficiency provisions in the draft bill are, ``a significant 
improvement relative to the efficiency provisions passed by the 
House in 2001.''
    Can you elaborate on this and tell us in what specific 
respects this draft is stronger than the House passed H.R. 4 on 
energy efficiency?
    Mr. Nadel. Okay, a number of provisions were added in this 
bill that were not in the 2001 bill that I think significantly 
strengthened it.
    The efficiency standards is a prime example. The four 
standards that are specifically in the bill now were not in the 
bill in 2001.
    It has to do with exit signs, traffic lights, torchiere 
lighting fixtures and transformers. In addition, the bill now 
directs the Department of Energy to develop some standards on 
additional products that were not in the House bill.
    Commercial refrigerators, for example, comes to mind, as an 
example. The requirements for Federal Government, the Federal 
energy management provision. So it has been significantly 
strengthened.
    There has been, more than a year has elapsed and there was 
time for people to really sharpen their pencil and come up with 
some additional improvements.
    There is a section on industrial voluntary programs to 
encourage industrial customers to voluntarily improve their 
efficiency. Meaning reduce their energy use per value of 
product by 2.5 percent per year.
    That was not in. So those are some examples of some very 
concrete provisions that have been added. And we very commend 
the Chairman for including them.
    Mr. Fossella. The last question is for Dr. Lyman. In your 
testimony you State that the Nuclear Control Institute is not 
an anti-nuclear organization.
    Can you provide me with one, two or three examples of how 
nuclear power is beneficial, and if so, what would they by?
    Mr. Lyman. Well, we are not an anti-nuclear organization, 
but neither are we pro-nuclear. We are anti-pro-nuclear. So 
let's say our position is neutral.
    I can see obviously there are, it is wrong to not consider 
any options when you are thinking about future energy needs.
    And, but I do believe there are risks associated with n 
nuclear energy generation that do have to be fully taken into 
account. And if they are, I haven't seen any analysis that 
would indicate that it would remain an economic form of 
electricity generation.
    So, I mean, you have to satisfy both safety, security and 
an economic consideration simultaneously. And the day when that 
is possible is the day when I will look at the other purported 
advantages.
    But that is the first bar in my view.
    Mr. Fossella. So to be clear, what exactly is the benefit, 
if any, in your opinion? If you don't believe there are any, 
that's fine. But I am just curious, for the record.
    Mr. Lyman. Simply, from the point of view that I don't 
think options should be limited.
    They have to be evaluated on their merits. And until the 
safety and security issues are fully resolved, I can't look 
forward to even discussing that question.
    Mr. Fossella. Do you think there are any benefits to 
nuclear power?
    Mr. Lyman. There is a limited benefit associated with 
greenhouse gas generation, there is no denying that. Although 
you do have to take into account the full life cycle emissions 
associated with that.
    And, again, I haven't the analysis that would fully justify 
even that statement. What you really do need is a full life 
cycle analysis that does, in which you are able to compare 
apples and oranges, for instance, the purported benefits of 
nuclear power against the risks and the benefits of other 
energy technologies.
    And that is a difficult calculation. But I would simply 
reserve until I have seen a convincing calculation to answer 
that question.
    Mr. Fossella. Ms. Aurilio, do you think there are any 
benefits to nuclear power? And if so, what do you think they 
are?
    Ms. Aurilio. Well, I don't. I think until we solve the 
waste and the safety problem that we are still very concerned 
and I am actually almost floored by the industry's response to 
the Davis-Besse incident, where one, the response was there was 
no offsite threat. I disagree with that.
    It could have caused the most serious loss of coolant 
accident that we have seen. And in the case to Three Mile 
Island, which was a loss of coolant accident, there was a melt 
down.
    No. 2, I was floored by the response that said that none of 
the other plants had similar kinds of problems because in 
October 9, 2002, the North Anna Plant, not named after me, in 
Virginia, actually disclosed that it had serious cracking 
problems.
    I was also floored when I heard that the nuclear industry 
hasn't uncovered any problems with aging related problems in 
license extension. Because in fact similar reactor vessel 
cracking was found in the Oconee plant after the NRC approved 
its license.
    Mr. Fossella. That is interesting that you bring that up. 
What exactly were the offsite problems associated with Three 
Mile Island?
    Ms. Aurilio. Well, there was a release of radiation. Now no 
one can quantify exactly what happened there. The evacuation 
order wasn't given, I believe, until days after the accident.
    So I don't know that anybody actually had the monitoring in 
place to see what the problems were in the folks who might have 
been exposed to that radiation.
    But there certainly was a release of radiation.
    Mr. Fossella. So you are saying there was a health impact 
from Three Mile Island?
    Ms. Aurilio. I mean I can only assume that there was a 
health impact, because there was no monitoring in place and 
because there was denial on the part of the decisionmakers 
until hours and potentially days after the accident.
    I don't think we will ever know.
    Mr. Fossella. But in your, I am just trying, I want to make 
sure I understand this. In your, are you saying there is 
documented evidence or any evidence whatsoever that says there 
was a health impact?
    Ms. Aurilio. There was a release of radiation. And there is 
a theory that says that there is no level of exposure to 
radiation below which there is no risk.
    So if you buy into that theory, which is shared by many 
health physicists, and you know that there is a release of 
radiation that could come into contact with a human being, then 
you have to assume that there was a health risk.
    Mr. Fossella. So if anybody lives around there, you are 
basing your response on a theory and following that through?
    Ms. Aurilio. Yes.
    Mr. Fossella. As opposed to some sort of hard evidence that 
there was in fact.
    Ms. Aurilio. Well, I think there wasn't a good faith effort 
in trying to monitor and find out the evidence.
    Mr. Fossella. I see. Okay. Well, unless Mr. Boucher has any 
more questions, this hearing--I want to thank all the panelists 
for coming, for insightful testimony and thank you for your 
prompt response to questioning and this hearing is in recess. 
Thank you.
    [Whereupon, at 3:53 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

            Responses for the Record of Hon. Kyle McSlarrow

                    QUESTIONS OF CONGRESSMAN WAXMAN

    Question 1: I requested and you agreed to provide the 
Administration's projection on how much oil the nation will consume in 
2040, including an explanation of how this projection was calculated 
and what assumptions about fuel economy and oil production were used.
    Answer: The Department's Office of Energy Efficiency and Renewable 
Energy (EERE) used the VISION model to estimate the light vehicle oil 
use to 2040. The EERE baseline projection to 2040 assumed that the fuel 
economy of light vehicles remained constant at the 2000 levels and all 
vehicles used gasoline. Estimated increases in the total stock of light 
vehicles and estimated increases in the annual number of miles traveled 
per vehicle lead to an estimated baseline light vehicle oil use of 
14.81 mbpd in 2040. No assumptions about oil production were made. EERE 
has not made projections for other U.S. uses of oil, such as in heavy 
trucks, aircraft, industry, buildings, or electricity generation.
    Question 2. Although you declined to say so clearly, I understood 
your testimony to be that under the President's proposal, hydrogen cars 
would not significantly reduce the nation's oil consumption before 
2020, but that the President's proposals on research and development 
and tax incentives for new technology would reduce oil consumption 
prior to 2020. You agreed to provide an estimate of how much projected 
oil consumption will decrease as a result of each of the 
Administration's new policies. Please include a list of each proposal 
and the reduction in projected oil consumption attributed to policy. 
Please also include the timeframe during which the expected decrease in 
projected oil consumption will occur.
    Answer. The following are a list of proposals and a discussion of 
fuel savings:
    Increase light truck Corporate Average Fuel Economy (CAFE) 
standards.
    This proposal would increase the current 20.7 miles per gallon 
(mpg) CAFE standard for light trucks to 21.0 mpg for Model Year (MY) 
2005, 21.6 mpg for MY 2006, and 22.2 mpg for MY 2007.
    This increase in CAFE standards is projected to decrease annual 
petroleum use by 140,000 barrels per day by 2010, and by 250,000 
barrels per day by 2020. Cumulative petroleum energy savings through 
2020 are estimated to be 900 million barrels.
    Credit for qualified hybrid and fuel cell vehicles.
    This proposal would provide temporary tax credits for certain 
hybrid and fuel cell vehicles. The tax credits would be available 
through December 31, 2007. For hybrids, the credit would be based on 
the amount of power provided by the electric drive train and the 
improvement in fuel economy compared to a 2000 model year vehicle. The 
electric drive train tax credit ranges from a low of $250 for a vehicle 
that gets 5 percent of its maximum power from the electric drive to 
$1,000 for a vehicle that gets 30 percent or more of its power from the 
electric drive train. The fuel economy improvement credit increases 
from $500 (for a hybrid that achieves 125 to 150 percent of the fuel 
economy of a model year 2000 vehicle) to $3,000 (for a hybrid that 
achieves at least 250 percent of the fuel economy of a model year 2000 
vehicle).
    For hybrid vehicles, estimates of the reduction in petroleum use 
resulting from the tax credit program will be affected by several key 
factors:
    1) Interaction with State policies to promote hybrids. In addition 
to the proposed Federal tax credit for hybrid vehicles, several States 
(Colorado, Maryland, and Oregon to name a few) have also enacted 
various tax breaks for hybrid vehicles. States have also implemented 
other non-financial policies to encourage the sales of hybrid vehicles. 
Policies of this type typically provide reduced or no cost parking and/
or single occupant hybrid vehicle access to high occupancy vehicle 
(HOV) lanes (Arizona, Maryland, and Virginia allow hybrid vehicles 
access to HOV lanes). State incentives can magnify the impact of 
Federal tax credits, but their availability is difficult to project 
given present State-level budget difficulties.
    2) Interaction with the Zero Emission Vehicle (ZEV) program. Hybrid 
vehicles will likely play a significant role in meeting mandated sales 
requirements under California's ZEV program, which is now being revised 
to remove explicit reliance on fuel economy as a factor in determining 
ZEV credits. Providing Federal tax credits for hybrid vehicles will 
make the ZEV program, which several Northeastern States also plan to 
adopt, more attractive to policymakers by reducing net vehicle costs to 
consumers. Assuming that the ZEV program is successful in California 
and the Northeast, the Annual Energy Outlook 2003 reference case shows 
that hybrid sales would exceed 9 percent of new vehicles sold by 2020.
    3) Interaction with CAFE Standards. If CAFE standards are binding 
on one or more manufacturers, the projected reduction in petroleum use 
could be partially offset if manufacturers change their product or 
sales mix to use up the CAFE ``breathing room'' provided by additional 
sales of hybrid vehicles due to the tax credit. The level of the CAFE 
standards will determine the likelihood that they will bind, with 
higher standards causing the standards to be binding for more 
manufacturers.
    4) Learning Benefits and Cost Reduction. By increasing market 
penetration of hybrids, Federal tax credits can help to accelerate cost 
reduction for hybrid technologies. With sufficient cost reduction, 
Federal tax credits could have a significant impact on hybrid vehicle 
penetration long after the proposed tax credits have expired.
    5) Consumer Acceptance Issues. Given that wide consumer acceptance 
of hybrid vehicles is unproven at this time, the impacts of proposals 
designed to stimulate this market are clearly uncertain. Product 
offering is another issue that cannot be ignored. Although several auto 
manufacturers have announced plans to offer hybrid vehicles in the 
future, others have deferred or canceled the introduction of new 
hybrids.
    In sum, the impact of Federal tax credits for hybrid vehicles on 
petroleum consumption depends on many factors, including other policy 
decisions at the State and Federal levels that are not yet fully 
resolved. Estimates are highly uncertain, and they can also be 
sensitive to the order in which the variety of state and Federal 
programs affecting vehicle characteristics and choices are considered. 
Plausible estimates of cumulative reductions in petroleum use through 
2007 range from zero to as much as 7 million barrels. For a 2020 
horizon, the cumulative reduction in petroleum use from tax credits 
alone could be as much as 29 million barrels. The cumulative combined 
reduction in petroleum use from tax credits and the state ZEV programs 
whose implementation they may help to facilitate could be as much as 
140 million barrels by 2020 in a scenario where CAFE standards are not 
binding.
    For fuel cell vehicles, the proposal provides a minimum credit of 
$4,000 plus an additional credit based on the improvement in fuel 
economy compared to a model year 2000 vehicle ($1,000 for a fuel cell 
vehicle achieving 150 to 175 percent of the fuel economy of a model 
year 2000 vehicle to $4,000 for a fuel cell vehicle achieving at least 
300 percent of the fuel economy of a model year 2000 vehicle). The cost 
hurdles that must be overcome to achieve viable market penetration of 
fuel cell vehicles is not expected within the time frame of the 
proposed tax credit, resulting in few new sales of fuel cell vehicles 
through 2007.

            REPLY TO CONGRESSMAN WAXMAN RE VEHICLE EXPENSING

    Question 3. We also briefly discussed the Administration's tax 
proposals. You stated that the Administration had analyzed how its 
proposal to allow small businesses to deduct the entire value of a 
vehicle during the first year it is put into service might create 
greater incentives for inefficient vehicles than for highly efficient 
hybrid vehicles. You agreed to provide me with the analysis.
    Answer: The Department of Treasury indicates that existing tax law 
does enable greater cost recovery for heavier vehicles, compared to 
lighter passenger cars, because heavier vehicles are not subject to the 
``luxury car'' limits on depreciation that are applied to autos. 
However, Treasury staff have concluded that the Administration's 
proposal to allow small businesses to deduct the entire value of a 
vehicle during its first year would not materially affect this existing 
relationship and the enactment of the Administration's energy tax 
proposals, which include tax credits for hybrid and fuel cell vehicles, 
would provide an incentive equivalent to a first year deduction of 115 
percent of the cost of these energy efficient vehicles. The following 
is summary of the basis for these conclusions.
    Heavier vehicles, by virtue of not being subject to the ``luxury 
car'' limits on depreciation, are provided with larger cost recovery 
allowances under current law when compared to equally priced, lighter 
passenger automobiles that are subject to those limits. The advantage 
of not being subject to the ``luxury car'' limits is also larger if the 
taxpayer is a small business that is able to expense property under 
section 179. This general result is true under current law whether the 
vehicle is a conventional vehicle, a clean-fuel vehicle, or a hybrid 
electric vehicle. The distinction is potentially less important for 
electric vehicles, where the depreciation limits are tripled and 
therefore generally less constraining.
    Nevertheless, the Administration's proposal to raise the expensing 
limit for small businesses will not materially alter the current law 
relationships between passenger automobiles and heavier vehicles exempt 
from the depreciation limitations. This is because current law provides 
expensing and depreciation deductions that are nearly equivalent to 
full expensing for most trucks and vans that are not subject to the 
depreciation limits. For example, a $35,000 pickup truck with a GVWR in 
excess of 6,000 pounds can potentially benefit from $29,400 in first-
year deductions (comprised of a $25,000 expensing deduction, a $3,000 
bonus depreciation deduction, and a $1,400 MACRS depreciation 
deduction). When the remaining MACRS deductions are added to this 
first-year deduction, the present value of deductions (using a 4 
percent discount rate) are nearly 99 percent of cost. Even if full 
expensing is allowed, as is possible under the Administration's 
proposal, the present value of the deductions cannot be increased to 
above 100 percent. Expensing will, however, provide a simplification 
benefit to these taxpayers.
    Finally, under the Administration's energy tax proposals, hybrid 
and fuel cell vehicles are granted a significant tax benefit in the 
form of tax credits. For example, a $25,000 hybrid car with a hybrid 
vehicle credit of only $1,400 (the maximum credit is $4,000) will 
receive tax benefits that are equivalent to deductions having a present 
value of 115 percent of cost, despite the fact that the car remains 
subject to the depreciation limits.
    Question 4: You testified that the goal of the administration's 
FreedomCAR initiative is to enable automakers to decide by 2015 whether 
to offer hydrogen fuel cell vehicles for sale. Assuming that automakers 
do decide in 2015 to offer such vehicles, what proportion of the 
vehicles fleet will consist of hydrogen fuel cell vehicles by 2020, 
2030 and 2040?
    Answer: If fuel cell and hydrogen infrastructure technology 
development is successful, a 2015 commercialization decision by 
industry could lead to hydrogen fuel cell vehicles being offered 3 to 5 
years later. In that case, we estimate that 3% of the total U.S. fleet 
would be light duty hydrogen fuel cell vehicles by 2020, 38% by 2030 
and about 79% by 2040.
    Question 5: Assuming that hydrogen fuel cell vehicles are offered 
to consumers in the mass market starting in 2020, what are the 
projected oil savings and pollutant reductions that will be realized 
over business as usual projections by 2020, 2030 and 2040?
    Answer: The Department believes that successful fuel cell and 
hydrogen infrastructure technology development efforts can lead to a 
commercialization decision by industry in 2015. We estimate that sales 
of light duty fuel cell vehicles (FCVs) may start as early as 2018. 
With this assumption the oil savings (million barrels per day) that 
could be realized over business as usual projections are as much as:

 By 2020--400,000 barrels per day
 By 2030--5 million barrels per day
 By 2040--11 million barrels per day
    This reduction in oil demand is relative to what light duty 
conventional vehicles might otherwise consume and emit. Significant 
energy savings could also result from the widespread use of hydrogen in 
stationary applications.
    DOE has not attempted to model the pollutant reductions (such as 
NOx, SOx, and particulate matter) associated with 
the introduction of fuel cell vehicles.
    Question 6: Will a complete, nationwide hydrogen refueling 
infrastructure, roughly equal in extent to today's petroleum refueling 
infrastructure, be in place by 2020? If not, when do you estimate that 
a nationwide hydrogen refueling infrastructures, roughly equal in 
extent to today's petroleum refueling infrastructure, will be in place? 
What proportion of existing petroleum fueling stations do you estimate 
will offer hydrogen fuel by 2020, 2030 and 2040?
    Answer: The Department believes that successful fuel cell and 
hydrogen infrastructure technology development efforts can lead to a 
commercialization decision by industry in 2015. If this decision is 
positive, it will take 3-5 years to install initial hydrogen refueling 
capability. The full transition to a hydrogen-based energy system, 
including refueling infrastructure equal in extent to today's petroleum 
refueling infrastructure will take several decades and depends on many 
technical and economic factors.
    A consumer study showed that mass market penetration of fuel cell 
vehicles would require hydrogen availability in at least 25% of 
stations in urban areas and in at least 50% in rural areas
    Question 7: Assistant Secretary Garman recently testified that the 
FreedomCAR and FreedomFuel initiatives contain research projects for 
fuel cells that will have applications other than for vehicles, and 
that the first applications will be applied to consumer electronics, 
then stationary sources, including power plants and homes, and then 
vehicles. What is your approximate timeline for deployment into the 
mass consumer market of fuel cell technology for consumer electronics, 
then stationary sources and then vehicles?
    Answer: Deployment of fuel cells in portable and stationary power 
markets can be dependent on technology development success for 
automotive applications, especially related to cost, hydrogen delivery/
availability, and the ability to build a component supplier base. 
Certain portable power applications could become available within the 
current decade. Stationary applications will likely occur in the 2010-
2020 timeframe. If an industry decision to commercialize hydrogen fuel 
cell vehicles is made by about 2015, mass-market penetration could 
begin in 2018.
    The Department's Fuel Cell Report to Congress submitted in February 
2003 provides more discussion on timelines for commercialization of 
stationary and automotive applications.
    Question 8: A recent MIT study finds that if hydrogen fuel is 
derived from fossil fuels, the benefits of fuel cell cars in terms of 
total energy use and greenhouse gas emissions will not exceed the 
benefits of relying on petroleum-electric hybrid cars. On the other 
hand, deriving hydrogen fuel from renewable sources of energy will 
produce greater benefits than hybrids in term of total energy use and 
greenhouse gas emissions.
    a. What is DOE doing to promote the deployment of hybrid vehicles, 
a technology that already exists, prior to the deployment of a national 
hydrogen refueling infrastructure?
    Answer: DOE's has significant research and development efforts to 
improve the performance of hybrid vehicles and reduce the cost of the 
core technologies. Today's hybrid technology is not yet cost effective, 
lacks the needed performance, and has been applied to a fairly narrow 
niche market of smaller and lighter vehicles. Improving the technology 
(e.g., batteries or capacitors for energy storage, power electronics 
for energy conversion and management, and efficient electric traction 
motors) so that it could be cost effectively applied across the entire 
vehicle market is an important objective of the FreedomCAR Partnership. 
The hybrid technologies we are developing support not only improving 
our energy security in the mid-term with hybrid internal combustion 
vehicles, but are also essential to realizing the full potential of 
fuel cell powered vehicles.
    The President's National Energy Policy also endorsed a tax credit, 
for fuel efficient vehicles between 2002 and 2007, to purchase of 
hybrid vehicles and advance their market penetration, which the 
Administration has proposed in its Fiscal Year 2002, 2003 and 2004 
budget requests to Congress. The Clean Cities Program is the key 
deployment activity for light vehicles in DOE. This program now 
promotes the use of hybrid vehicles in their partnerships.
    b. What energy reductions and greenhouse gas reductions will result 
between now and 2020 as a result of DOE's measures to promote 
deployment of hybrid vehicles?
    Answer: It is difficult, if not impossible, to predict the impact 
of hybrid technology between now and 2020 because we do not know the 
rate or degree to which these technologies will be introduced. These 
are business decisions that will be influenced by many factors: the 
success of our research; the cost of fuel in the market; the importance 
the public places on energy security; the extent that government 
incentives are available; and others. The key point, however, is that 
when introduced in substantial numbers the impact will be significant. 
Fuel economy would improve by 50 percent to 200 percent per vehicle 
(depending on the vehicle) and greenhouse gases would be released in 
proportion to the reduction in fuel use.
    Despite difficulties in predicting the future, the Department 
models potential benefits of its programs assuming certain 
technological successes. While the Department has not estimated 
benefits specifically for deployment of hybrid vehicles, it has modeled 
benefits of its FreedomCAR and Vehicle Technologies Program, which 
supports hybrid and other technologies. Estimated annual energy savings 
from the program in 2020 are 1.58 quadrillion BTUs, and estimated 
annual carbon emissions reductions total 29.8 million metric tons. 
Details on the Department's models and assumptions for estimating these 
benefits will soon be available on line at: http://www.eere.energy.gov/
office__eere/budget__gpra.html
    c. Assistant Secretary Garman testified that DOE intends to derive 
hydrogen fuel from fossil fuels. What proportion of the hydrogen fuel 
for transportation uses will come from fossil fuels in 2020, 2030, and 
2040?
    Answer: The Department's scenarios indicate that the proportion of 
the hydrogen fuel for light duty vehicle transportation uses that comes 
from natural gas (rather than from a source with no net carbon 
emissions) will be 90% in 2020, 55% in 2030, and 15% in 2040. However, 
fuel cell vehicles powered by hydrogen that is derived from natural gas 
deliver significant efficiency improvements and carbon reductions when 
compared with petroleum-powered vehicles. Our studies show that even 
without carbon sequestration, natural gas-based hydrogen fuel cell 
vehicles use 50% less energy and emit 60% less carbon dioxide than 
today's vehicles.
    d. What proportion of the FreedomFuel budget will go toward the 
development of hydrogen fuel from (i) fossil fuels, (ii) nuclear power, 
and (iii) renewable energy?
    Answer: The Department's FY2004 Budget Request for the President's 
Hydrogen Fuel Initiative is $181.7 million. In this request, there is a 
total of $38.5 million for hydrogen production research. It includes 
$17.3 million from renewables (44.9%), $17.2 million for fossil 
(44.7%), and $4 million for nuclear (10.4%).
    e. What are the benefits of utilizing hydrogen derived from fossil 
fuels? Please specifically address the effect of this approach on 
greenhouse gas emissions?
    Answer: Domestic coal as a feedstock to make hydrogen is a vast 
energy resource which can reduce our dependence on imported oil. The 
U.S. has over 10,000 Quads (quadrillion BTUs) of coal which could 
supply our demand of 27 quads per year of oil consumed for 
transportation applications. On February 27, 2003, Secretary Abraham 
announced FutureGen, an initiative to demonstrate the world's first 
coal-based, zero emissions electricity and hydrogen power plant. This 
project will be undertaken with international partners to dramatically 
reduce air pollution and capture and store emissions of greenhouse 
gases.
    Combined with other hydrogen production technologies using both 
fossil feedstocks and renewable energy sources, we estimate that as 
much as 170 MMTCe in 2030 and 500 MMTCe in 2040 of greenhouse gas 
reductions could be realized over business as usual projections.

                QUESTIONS FROM CONGRESSMAN JOHN DINGELL

    Question 1(a): Section 3001 of Chairman Barton's draft, entitled 
``Alternative Fishways and Conditions,'' would amend the Federal Power 
Act to permit applicants for hydroelectric licenses to propose 
``alternative conditions'' to those required by the resource agencies 
for the protection of river systems. It appears that the provision 
would require the Secretary of the Interior to accept the applicant's 
proposal unless he or she could demonstrate, subject to judicial 
review, that the proposal does not provide for adequate protection of 
the reservation. Does the Administration support this provision and 
exact language, and why or why not? To what extent are any 
Administration concerns about the hydropower licensing process 
addressed by the proposed rule issued by the Federal Energy Regulatory 
Commission (FERC) on February 20, 2003, entitled ``Hydroelectric 
Licensing under the Federal Power Act''?
    Answer: It is the Administration's policy to fulfill its statutory 
responsibilities to preserve and protect public and Indian trust 
resources. We also wish to encourage a license applicant's ingenuity in 
crafting approaches to fulfilling these responsibilities.
    The President's National Energy Policy called for making the 
licensing process more clear and efficient, while preserving 
environmental goals. The Federal Energy Regulatory Commission (FERC) 
has made substantial progress in achieving these objectives. In its 
integrated licensing process, to be completed this summer, FERC and the 
resource agencies have developed a streamlined process that increases 
collaboration among all parties. In addition, the Department of the 
Interior is in the process of designing a fair, objective, expeditious, 
and transparent appeals process that recognizes the importance of 
hydroelectric generation and ensures that high standards for resource 
conservation, efficiency, and reasonableness are maintained.
    The development of a substantive appeals process in the agencies, 
coupled with process improvements underway at FERC may obviate the need 
for Congressional action. If Congress decides to act, the Department of 
the Interior would like to work with the Committee on wording to ensure 
that all objectives are met without unduly extending the licensing 
process and burdening agency budgets.
    Question 1(b): What effect, both procedurally and substantively, 
would Section 3001 of the Barton Draft have on current law, the 
responsibilities of the resource agencies and those of the Secretary of 
the Interior? Are you aware of any other statute designed to protect 
health or the environment or wildlife under which (a) the head of an 
agency must carry the burden of proof in order to prove a license 
application does not meet the statutory standard for approval and (b) a 
license applicant is the sole party that can propose an alternative to 
a Federal agency's determinations regarding an application?
    Answer: Procedurally and substantively the Administration is 
committed to addressing the issues raised in Section 3001. The 
Administration believes that the combination of the revised FERC 
procedures and the appeals process under development at the Department 
of the Interior will meet these needs in the most efficient and cost-
effective manner.
    The Administration believes that the public interest is best served 
when all parties are committed to mitigation measures based on sound 
science. As in all areas of resource management, the Administration 
holds its agencies to that high standard by requiring that their 
conditions and prescriptions be supported by substantial evidence and 
capable of supporting judicial review. The Administration believes that 
an applicant's alternatives to agency proposals must meet the same 
sound science standards.
    In developing an appeals process, the Administration believes that 
the applicant's intimate knowledge of its own systems puts it in an 
excellent position to propose alternatives. The Administration also 
believes that other interested and affected parties should be heard in 
any appeal. This is especially important when hydroelectric projects 
affect Indian trust resources. The Administration also believes that 
other groups with specialized knowledge should also be heard.
    Question 3. Section 7022 of the draft, titled ``Regional 
Transmission Organizations,'' includes a subsection (d)(3) concerning 
``Federal Utility Participation in RTO's'' denoted ``Existing 
Authorities and Obligations.'' This section provides that ``Where a 
contract, agreement, or other arrangement . . . conflicts with any 
statutory authority, duty, or obligation, under any authority of law, 
of a Federal utility, such authority shall be suspended for the 
duration of the contract, agreement, or other arrangement.'' Does the 
Administration support this provision, and why or why not? What other 
Federal laws would be affected, and how? In particular, how would 
obligations of the Bonneville Power Administration and the Tennessee 
Valley Authority be affected? What would be the legal impact of this 
provision on existing contract rights between Federal authorities and 
private parties, and could this provision give rise to claims against 
the Federal Government for breach of contract.
    Answer 3. Section 7022 of the draft House bill as introduced dealt 
with Federal utility participation in a regional transmission 
organization (RTO). It provided the Secretary the authority, which may 
then be delegated to a PMA, to enter into contracts or other 
arrangements to participate in an RTO approved by the Federal Energy 
Regulatory Commission.
    The Administration supports participation by Federal utilities in 
RTOs. However, and as I said in my written testimony at the 
Subcommittee hearing on March 5, 2003, we had concerns about section 
7022 of the draft House bill because, among other things, it did not 
explicitly provide for Federal cost recovery when a power marketing 
administration joins an RTO, or for preserving prior contracts and 
third-party financing obligations of the PMAs. However, in the full 
Committee markup of the bill, the Committee substituted a new RTO 
provision that resolved our concerns. We believe that this new 
provision, which we support, ensures the sanctity of existing 
contracts, agreements and financing obligations of the power marketing 
administrations and TVA, and that compliance with this provision will 
not give rise to claims against the Federal Government for breach of 
contract.

                  QUESTIONS FROM CONGRESSMAN PICKERING

    Question 1: Does the Administration support the FERC's proposed SMD 
order?
    Answer: The Administration supports the goals of the Standard 
Market Design proposed rule: customers to receive the benefits of 
lower-cost-and more reliable electric supply, prevent market 
manipulation and market power abuse, prevent undue discrimination and 
preference, make competitive markets work better, assure adequate 
electricity supplies, eliminate transmission constraints, and encourage 
investment in new generation and new transmission. We believe those are 
the right policy goals. The proposal is complicated, and public 
comments total many thousands of pages. It is important that the record 
be properly weighed to determine whether the proposed rule effectively 
advances the policy goals, and what changes to the proposed rule are 
needed.
    Question 2: Included in the Omnibus Appropriations bill was 
language that required DOE to conduct a study to evaluate the potential 
of the SMD order. Can you explain to me how DOE will conduct this 
study? Who at DOE will conduct this study?
    Answer: A DOE's analysis is being managed by small team of the 
Department's electricity policy staff. The analysis will consist of 
both quantitative and qualitative analysis. The quantitative analysis 
will be done using two economic models, DOE's POEMS model (managed by 
OnLocation Inc.) and General Electric's MAPS transmission model. 
Charles River Associates will also assist us, chiefly on certain 
questions related to our input assumptions and interpretation of the 
output of the MAPS model. The qualitative analysis will be done by DOE 
staff, aided by specialists on selected subjects.
    General Electric and Charles River Associates are under contract 
with CERTS, the consortium of labs and universities that DOE used for 
our National Grid Study.
    This is a strong team of consultants. GE and Charles River 
Associates, for example were involved in the study of Standard Market 
Design conducted for the Southeastern Association of Regulatory Utility 
Commissioners (SEARUC).
    The scope of the study is consistent with the appropriations report 
language accompanying the FY 03 omnibus bill. The calls for the 
Secretary to submit to Congress:
        ``an independent analysis of the impact of the SMD rule that 
        FERC proposes to finalize. This independent analysis must 
        compare wholesale and retail electricity prices and the impact 
        on the safety and reliability of generation and transmission 
        facilities in the major regions of the country both under 
        existing conditions and under the proposed SMD rule. This 
        analysis must also address the proposed SMD rule's: (a) costs 
        and benefits, including its impacts on energy infrastructure 
        development and investor confidence; (b) impact on state 
        utility regulation, (c) financial impact on retail customers; 
        (d) impact on the reasonableness of electricity prices; and (e) 
        impact on the safe, reliable, and secure operation of the 
        Nation's generation and transmission facilities.''
    The conference report calls for DOE to ``work in consultation with 
the FERC so that the Secretary's analysis will most accurately address 
the contents and conclusions of the most current version of the 
proposed rule.''
    The study is to be completed by April 30, 2003.
    Question 3: What is the Administration's goal in regards to 
electricity policy?
    Answer: Developments in recent years have brought the electricity 
industry to a crossroads. Twice in the past 25 years Congress has 
enacted laws to promote competition in wholesale power markets. While 
the move to competitive markets has fostered significant benefits, 
major challenges exist. Competitive markets have great potential to 
benefit consumers. Between 1985 and 2000, wholesale power prices fell 
23 percent. While the electricity crisis in California and the West in 
2000 and early 2001 reversed some of these gains, prices have continued 
to fall since then. There are still challenges confronting wholesale 
power markets. It is important to start by identifying the problems 
that exist under the status quo. In recent years we have witnessed 
dramatic price spikes in wholesale power markets, attempts to 
manipulate power markets, a large expansion of generation by 
independent power producers, followed by serious challenges facing many 
of these producers, and stagnant investment in the transmission grid. 
Reforms--some of which already are possible under existing law and are 
being pursued by FERC right now--that would promote effective 
competition and address these challenges include the following:

 Prevent market manipulation and market power abuse.
 Promote reliability of electricity service.
 Ensure open access to the interstate transmission grid.
 Eliminate undue discrimination in wholesale power markets.
 Ensure that customers have the ability to respond to price in 
        real-time.
 Encourage investment in new generation and transmission 
        facilities.
 Support transmission policy options, including participant 
        funding, and appropriately allocate costs.
 Lower barriers to entry to electricity markets.
    The Administration believes there is a need to complete the 
transition to effective competition in wholesale power markets that 
deliver reliable, abundant, and affordable electricity.
    Question 4: Does the Administration support the formation of RTOs?
    Answer: The Administration believes regional transmission 
organizations have great potential to promote effective wholesale 
competition in regional power markets.
    Question 5: Does the Administration believe that the FERC should 
allow and account for regional differences in the creation of RTOs?
    Answer: Yes. The United States has and most likely will continue to 
have a series of regional power markets. There are important 
differences among these regional power markets. For that reason, it is 
important to consider regional differences in the development of 
regional transmission organizations.
    Question 6: What role do you see for the states in the development 
of RTOs?
    Answer: Among other authorities, States have jurisdiction over the 
retail sales of electricity and the siting of generation and 
transmission facilities. As a result, States must play a strong role in 
the development of regional transmission organizations, and FERC should 
work closely with the States in the development of market rules that 
reflect differences in regional power markets.

                  QUESTIONS FROM CONGRESSMAN WHITFIELD

Former Worker Medical Screening Program
    Question 1. DOE requested approximately 14.9 million for the former 
worker medical screening programs within the Office of Environment, 
Safety and Health for FY 04, a $1 million increase over FY 03 request. 
Of the amount for FY 04, how much is allocated for the medical 
screening programs for workers at the gaseous diffusion plants for 
screening workers, including the early lung cancer detection program?
    Response. The funding for former worker medical screening programs 
supports three different programs, including the Former Beryllium 
Workers Medical Surveillance Program, the Rocky Flats Former Radiation 
Workers Medical Screening Program and the Former Workers Program. 
Medical screening for former gaseous diffusion plant workers is 
budgeted in the FY 04 Former Workers Program budget request at a level 
of $1 million, including early lung cancer detection screening.
Uranium Enrichment
    Question 2: What action would or has the Department taken to ensure 
continued supply of enriched uranium in the event that USEC and LES are 
not able to deploy advanced gas centrifuge technology?
    Answer: The Department has taken a number of major actions to help 
assure a continued supply of U.S. enrichment to USEC's nuclear utility 
customers:

 On June 17, 2002, the Department of Energy and USEC signed an 
        agreement that, in part, commits the corporation to operate the 
        Paducah Gaseous Diffusion plant at a level at or above 3.5 
        million SWU per year. USEC may not reduce this level until six 
        months before USEC has the permanent addition of 3.5 million 
        SWU per year of new capacity installed based on advanced 
        enrichment technology.
 The June 17 agreement also requires USEC to take ``actions 
        appropriate to maintaining the Paducah plant to operate at an 
        annualized rate of 5.5 million SWU per year.''
 Pursuant to the June 17 Agreement, if USEC ceases enrichment 
        operations at Paducah, as that phrase is defined in the 
        Agreement, DOE may take actions it deems necessary to 
        transition the operation of the Paducah Gaseous Diffusion Plant 
        from USEC operation.
 The Department maintains the Portsmouth Gaseous Diffusion 
        plant in cold standby with the ability to operate at 3 million 
        SWU within 18 to 24 months of a supply disruption.
 The Department is actively pursuing with Russia other 
        initiatives to accomplish the mutual goals of the 1993 U.S./
        Russian HEU Agreement of converting Russian HEU extracted from 
        nuclear weapons to LEU. In this regard, initial efforts of a 
        U.S./Russian Joint Experts Group established by Presidents Bush 
        and Putin in May 2002 have focused on an agreement and 
        implementing contract for the U.S. to purchase LEU derived from 
        Russian HEU to be maintained as part of the Department's 
        uranium stockpile. In the event of supply disruption, DOE could 
        sell the LEU purchased from Russia for use in commercial 
        reactors.
    The Department will continue to monitor the domestic nuclear fuel 
markets to assure U.S. energy security requirements are met.
Energy Employees Occupational Illness Compensation Program
    Question 3(a): To date, the Energy Department has received 14,000 
requests for assistance under DOE's program for claims related to state 
worker compensation. Your staff indicates that approximately 7 claims 
have been processed through the DOE's Physicians' Panel in the 6 months 
since the rule was been issued. And we understand that there are only 
about 20 claims sent to the Physicians' Panel. The rest are backlogged 
with a support service contractor, SEA. By comparison, the Department 
of Labor has been tasked with evaluating claims for cancer, beryllium 
disease and silicosis under the Energy Workers Compensation program. 
The Department of Labor has received over 39,000 claims, recommended 
decisions on almost 20,000 claims, and issued $475 million in payments 
to 6,600 claimants since July 2001. Comparisons are said to be odious, 
but in this case, the comparisons are less than flattering to the DOE. 
How many years will it take for DOE to work through this backlog of 
claims? Three years? Four years? Five years?
    Response: As of April 7, 2003, the Department has initiated the 
processing of more than 7900 claims and has completed the development 
of 44 case files for the physician panels. We continue to work to 
process claims quickly and effectively. As more information is 
developed about exposures at specific sites through site profiles and 
we continue to work with sites to optimize processes, the Department 
expects that it will be processing claims at a rate of 100 per week by 
August 31, 2003. At this rate, our goal is that the current caseload 
(existing claims plus new claims received) will be processed through 
physician panels in approximately five years, depending on new cases 
coming in. However, DOE will continue to do everything it can to 
expedite the consideration for requests for assistance under Subtitle 
D.
    The separate sections of the EEOICPA program delegated to the 
Departments of Energy and Labor are not directly comparable. The DOE 
portion of the program faces unique challenges. In addition to basic 
information on eligibility, the applicant's case must include enough 
information for the physician's panel to determine if the illness or 
death of a DOE contractor employee arose out of and in the course of 
employment and exposure to a toxic substance at a DOE facility. This 
will be based on whether it is at least as likely as not that the 
exposure was a significant factor in aggravating, contributing to or 
causing the worker's illness or death. The law requires that DOE obtain 
additional evidence within the control of the DOE and relevant to the 
panel's deliberations. Therefore, the DOE is working closely with the 
applicants and the DOE sites to obtain the relevant information. The 
final outcome is to assist applicants in filing a claim under the 
appropriate State workers' compensation system.
Energy Employees Occupational Illness Compensation Program
    Question 3(b). Given that DOE had two years to get these claims 
ready for review by the Physicians' Panels before DOE's rulemaking was 
complete in August 2002, what explains the lack of performance?
    Response: The Department was first able to begin processing claims 
under Subtitle D in September 2002 when the rule governing operation of 
the program became effective. As a result of comments from the public 
and Members of Congress, significant and substantive changes were made 
to the rule throughout the rulemaking process and after the public 
comment period had closed. These changes had a direct impact on 
eligibility requirements and the types of documentation needed in 
support of a worker's claim. As a result, the Department was extremely 
limited in its ability to process claims prior to the issuance of the 
final rule. Since September 2002, DOE has initiated processing of over 
7900 claims and prepared 44 cases for review by physician panels, 
including informing 731 that they do not qualify for the program. The 
preparation of cases is a multi-faceted process that involves gathering 
employment records, establishing relevant occupational histories 
(which, for some workers, involves multiple sites), and medical records 
in possession of DOE and in possession of the claimant. We expect that 
the pace with which we are able to prepare cases will rapidly increase 
as we gain experience, streamline efforts such as shared agency 
databases, develop generic information on facilities and their hazards 
(site profiles) that can be used for all cases at that site, and 
benefit from economies of scale. We believe these process improvements 
will allow us to be at a production rate of 100 cases per week through 
the Physicians Panels by August 2003. We are developing options for 
further accelerating the rate with which we process claims.
Energy Employees Occupational Illness Compensation Program
    Question 3(c). What obstacles does DOE face going forward to assure 
rapid and accurate processing of claims?
    Response: The Department does not anticipate major obstacles in 
implementing the requirements of Subtitle D. To date, the greatest 
challenge has been the time and effort required to locate employment 
and occupational history records that are up to 50 years old. The 
challenge is greater for those who have worked at multiple sites, or 
for contractors and subcontractors that no longer have a relationship 
with the DOE. As we move more and more cases through the process, the 
upcoming challenge will be the ability of the independent physician 
panels to handle the case loads.
Energy Employees Occupational Illness Compensation Program
    Question 3(d). How much is DOE paying SEA per year to provide 
claims processing services?
    Response: DOE does not have a contract with SEA for this program. 
DOE has a cooperative agreement with the U.S. Navy's Space and Naval 
Warfare Information Center (SITC) for assistance with the EEOICPA 
program. As part of that agreement, the Navy has made available its 
SITC management and operating contractor to assist the Office of Worker 
Advocacy. DOE is using expertise from SITC in a number of ways--to 
process cases, to develop Office of Worker Advocacy business processes, 
and to implement an integrated claims and records management system. 
DOE paid $3.8 million for this assistance in FY 02 and is budgeted to 
pay $12 million in FY 03.
Energy Employees Occupational Illness Compensation Program
    Question 3(e). What are SEA's specific qualifications to carry out 
this worker compensation administration and case management activity? 
Is it time to look to others with more expertise?
    Response: DOE has the expertise needed to meet its responsibilities 
under Subtitle D. At the SITC, SEA has successfully integrated numerous 
military data systems into an integrated personnel management framework 
allowing for a single point of contact for naval veterans or current 
naval personnel for their human resources, occupational medical, and 
posting/assignment information.
Energy Employees Occupational Illness Compensation Program
    Question 3(f). Was the SEA contract awarded on a competitive basis?
    Response: DOE does not have a contract with SEA for this program. 
DOE has a cooperative agreement with the U.S. Navy's Space and Naval 
Warfare Information Center (SITC) for assistance with the EEOICPA 
program.
Energy Employees Occupational Illness Compensation Program
    Question 4(a). Last year the DOE General Counsel indicated that the 
DOE does not have entities who will serve as a payor for as many as 50% 
of the claims which have been approved by the DOE Physicians' Panels. 
This problem has not been solved in Kentucky for USEC workers and 
perhaps others at the Paducah Plant. Approximately 2000 Subtitle D 
claims are pending at Paducah. Nationwide, this involves thousands of 
claims. This problem was revealed to Congress nearly a year ago, and 
was identified by DOE's advisory committee nearly 18 months ago. Late 
last year, legislation I cosponsored HR 5493 which would authorize the 
Department of Labor to solve the willing payor problem. Would you 
support the idea of having the DOL assigned the responsibility of 
paying valid claims instead of sending workers back to the states where 
they won't have someone to pay their claim?
    Response: To meet our requirements under the Act, DOE is 
identifying the contractual arrangements that exist with current and 
former DOE contractors that will allow as many workers with positive 
findings to receive benefits as possible.
Energy Employees Occupational Illness Compensation Program
    Question 4(b). Please provide a list of all contractors, 
subcontractors and facilities/locations for which the DOE has not yet 
identified a willing payor under Subtitle D. Please identify by time 
period and location.
    Response: EEOICPA did not confer on DOE any authority to identify 
or seek ``willing payors.'' It simply directed DOE to exercise its 
contract administration authority with respect to its existing 
contractor in a manner that would encourage those contractors not to 
contest workers workers' compensation claims filed by their employees 
who had received a favorable final determination from a DOE Physician 
Panel. DOE is so directing its current contractors.
Energy Employees Occupational Illness Compensation Program
    Question 4(c). Congress deemed that workers in Special Exposure 
Cohorts (SEC) would not be able to obtain accurate radiation dose 
estimates. Paducah workers employed for more than 250 days prior to 
1992 who were badged with a dosimeter are in the SEC. What policy will 
DOE apply under Subtitle D for workers whose claims have been approved 
by the DOL under the Special Exposure Cohort and are requesting 
assistance with State worker compensation? Will DOE require workers to 
obtain dose reconstructions for cases where doses cannot be 
reconstructed? Or will DOE accept those with positive SEC findings?
    Response: The law requires that physician panels provide DOE with 
impartial and independent determinations as to whether the illness or 
death of a DOE contractor employee arose out of and in the course of 
employment by a DOE contractor and exposure to a toxic substance at a 
DOE facility. DOE's requirement is to provide the physicians with as 
complete a record of exposures as is possible for them to make this 
determination. If the physicians cannot make a determination with 
information provided, DOE will work with the physicians to obtain the 
information they feel they need, including, if necessary, dose 
reconstructions similar to those being performed by NIOSH.
Energy Employees Occupational Illness Compensation Program
    Question 5(a). The DOE requested $16 million for the Office of 
Worker Advocacy to implement the nuclear workers' compensation program, 
yet we understand that $26 million is what your staff estimates will be 
needed in FY 04. Has DOE requested sufficient funds in the FY 04 budget 
request to eliminate the DOE's backlog of claims in the next 12-18 
months?
    Response: The Department has requested sufficient financial and 
personnel resources in its FY 2004 budget to meet its goals of 
processing 100 claims per week through the physician panels and 
processing all claims currently on hand and to be received within five 
years. We expect to meet this milestone in August, 2003. We are 
developing options for further accelerating the rate with which we 
process claims.
Energy Employees Occupational Illness Compensation Program
    Question 5(b). How many staff are required (both contract and 
federal) to eliminate the backlog in the next 12-18 months?
    Response: The Department has requested sufficient financial and 
personnel resources in its FY 2004 budget to meet its goals of 
processing 100 claims per week through the physician panels and 
processing all claims currently on hand and to be received within five 
years. We expect to meet this milestone in August, 2003. We are 
developing options for further accelerating the rate with which we 
process claims.
Energy Employees Occupational Illness Compensation Program
    Question 5(c). What is the carryover funding from FY 02 into FY 03 
for the Office of Worker Advocacy? What is the projected carry over 
funding for FY 03 into FY 04?
    Response: Carryover funding from FY02 amounted to approximately 
$3.9 million. At the current time, the Department expects no carryover 
into FY04.
Energy Employees Occupational Illness Compensation Program
    Question 6. What is the source of funds for paying D claims where 
DOE does have a willing payor? What is the expected outlay in 2003, 
2004 and 2005? Will DOE use line program funds or is there a separate 
line item for paying these claims in the budget?
    Response: The Department expects that claims under Subtitle D will 
be paid in the same manner as current State workers' compensation 
claims. If a worker who has an illness caused by DOE work exposure to 
toxic substances, the worker may file a claim for a physician panel 
review. If the worker receives a positive finding from the Panel, and 
the worker files a State workers compensation claim, DOE will support 
the claim. When DOE is able, it will order DOE contractor employers to 
accept rather than deny the claim for state benefits. Claims paid by 
the contractor employer will be reimbursed from DOE Program funds. DOE 
pays its contractors an amount sufficient to cover all workers' 
compensation claims. The Department will continue to evaluate this need 
as it gains more experience in processing Subtitle D claims and can 
better estimate the cost of claims.
    Workers' compensation costs are covered in current contracts. If 
DOE contractors require additional funding, it will be identified to 
DOE. It is difficult to predict, at this time, how many claimants have 
lost wages and have unpaid medical bills, and in which facility and 
state those claims will be made.
Occupational Safety and Health Rulemaking
    The FY 03 Defense Authorization Act (Section 3173) contained a 
requirement for DOE to cover its worker health and safety orders for 
industrial and construction safety into regulations and begin enforcing 
these through the DOE's Office of Enforcement within a year. The Armed 
Services Committee members that worked on this provision intended that 
the DOE's new safety program would mirror the existing Price Anderson 
nuclear safety enforcement program, with clearly defined safety 
requirements specified in the rules based on the requirements of the 
DOE's existing Order 440.1A and OSHA. Since DOE is responsible for 
safety, the legislation and report language did not intend for the DOE 
contractors to be defining minimum requirements for safety in plans 
they would be proposing.
    Question 7a. What type of approach is the DOE taking in 
implementing this requirement?
    Answer 7a. Pursuant to section 3173 of the Bob Stump National 
Defense Authorization Act for Fiscal Year 2003 (Section 234C of the 
Atomic Energy Act, 42 U.S.C. 2282c), DOE is preparing proposed 
regulations for worker safety and health at DOE facilities that will 
incorporate all of the requirements mandated by section 3173. As 
required by this section, these regulations will be promulgated by 
notice and comment rulemaking under the Administrative Procedures Act. 
DOE intends to issue a final rule that meets the statutory mandate to 
``provide a level of protection for workers at such facilities that is 
substantially equivalent to the level of protection currently provided 
to such workers at such facilities'' and to provide for enforcement of 
the rule by assessment of civil penalties or contract fee reductions.
Occupational Safety and Health Rulemaking
    Question 7b. What is the schedule for a draft rule being issued? 
What will be the basis for minimum safety requirements, DOE's rules or 
plans proposed by contractors?
    Answer 7b. DOE is working diligently on a notice of proposed 
rulemaking that would be issued on a schedule that would provide 
promulgation of a final rule by December 2, 2003, as provided by 
section 3173 of the Bob Stump National Defense Authorization Act for 
Fiscal Year 2003 (Section 234C of the Atomic Energy Act, 42 U.S.C. 
2282c). DOE is still considering the details of the proposed rule and 
will review comments on the proposed rule after publication in the 
Federal Register.

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                  COMPREHENSIVE NATIONAL ENERGY POLICY

                              ----------                              


                       WEDNESDAY, MARCH 12, 2003

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Shimkus, Shadegg, 
Radanovich, Walden, Issa, Otter, Wynn, Allen, Markey, Brown, 
and Dingell (ex officio).
    Staff present: Jason Bentley, majority counsel; Andy Black, 
policy coordinator; Peter Kielty, legislative clerk; and Sue 
Sheridan, minority counsel.
    Mr. Barton. The subcommittee will come to order. Without 
objection, the subcommittee is going to proceed pursuant to 
Committee Rule 4(e) which governs opening statements by members 
and the opportunity to defer them for extra questioning time. 
What that means in layman's term, members that are here that 
with to give a 3-minute opening statement will be allowed to do 
so. Under the rules, if they wish to defer, they get an extra 3 
minutes on the question period. Is there any objection to that?
    Mr. Allen. No objection.
    Mr. Barton. Hearing no objection, I will recognize myself 
for a 5-minute opening statement. Today the subcommittee is 
going to continue its hearings on a comprehensive energy 
policy. We will hold another day of hearing tomorrow which will 
focus on electricity and gasoline. Today we are going to focus 
on hydropower and hydroelectric relicensing.
    I want to thank the four witnesses that are going to be 
before us today for being here to comment on the hydro issues 
and on Title III of the discussion draft that I have circulated 
to members of the subcommittee.
    The hydro provisions in the draft that has been circulated 
from H.R. 1013, which is legislation sponsored in the House by 
Congressman Radanovich and Congressmen Towns and Walden. Last 
Congress, the House Energy Bill had a hydro title that made a 
few small reforms to the current relicensing process. During 
the energy conferences, I became familiar with the Senate hydro 
section. I believe it to be superior to what we had started 
with in the House. Revisions in the draft today build on the 
Senate language from the last Congress.
    Hydroelectric power is our Nation's leading renewable 
energy resource. The process for relicensing FERC's licensed 
dams has become very distorted into one that threatens the 
future of hydroelectricity as a viable means of producing 
power. Hydropower project owners are facing higher costs, loss 
of operational flexibility, and loss of generation due to new 
operating constraints imposed during the relicensing. These do 
not effectively balance our energy needs with important 
environmental goals.
    The typical hydro project can take from 8 to 10 years to 
weave its way through the licensing process, and cost millions 
of dollars. After legislation which was passed by this 
committee in 1986, the Federal Energy Regulatory Commission, or 
FERC, has been required to give, and I quote, ``Equal 
consideration to a variety of factors when issuing hydro 
project licenses and relicenses.'' This authority requires the 
FERC to consider the power, economic, and development benefits 
of a particular project, as well as energy conservation and the 
protection and enhancement of fish and wildlife. The courts 
have interpreted the Federal Power Act, however, as amended, to 
prevent effective balancing from taking place. The courts have 
given Federal natural resource agencies and others the 
authority to set mandatory conditions on FERC licenses, 
conditions that are automatically made a part of the final 
license. FERC has no opportunity to question the basis of these 
mandatory conditions set by the agencies. The net result is 
that no one is balancing, no one has the authority to look at 
the big picture that hydro fits into our National Energy 
Policy.
    The draft before the subcommittee restores this balance, in 
my opinion, giving certainty and accountability to the 
licensing process, while leaving Federal Resource Agency 
conditioning authority intact. It provides an opportunity once 
mandatory conditions are drafted, for an agency hearing on the 
record of any disputed issues. The draft would allow a licensee 
to propose a cost-saving or energy-saving alternative 
condition, an alternative that the Federal Resource Agency 
would have to accept if that agency determined that it met the 
existing statutory requirements for environmental protection.
    The draft would also require Federal Resource Agency to 
document that it gave equal consideration to the economic, 
environmental and other public impacts of the mandatory 
conditions before imposing them on licensees, something the 
agencies are not now doing. It would also provide for a 
nonbinding dispute resolution process should FERC find a final 
mandatory condition to be inconsistent with the requirements in 
the existing Federal Power Act.
    Over half of all FERC-regulated hydroelectricity capacity 
is due to be relicensed in the next 15 years. If the current 
trends continue, the Nation could lose substantial hydropower 
generation and, with it, enormous clean air reliability, 
drinking water, flood control, irrigation, and recreation 
benefits. Additionally, electricity consumers could face higher 
energy costs as hydro facilities are replaced or closed. Given 
the enormous role that hydro plays, and must, in my opinion, 
continue to play in our national energy electricity grid, the 
time for balancing is now.
    This new hydro language has bipartisan support in the House 
and the Senate. I know it is not the work of the agreement of 
the Ranking Member of our subcommittee and full committee 
Chairman. I and Chairman Tauzin will welcome any and all ideas 
as we move through the process, and we hope that we achieve 
both a consensus and a bipartisan consensus on needed reforms 
to the relicensing process. It makes a difference for 
consumers.
    With that, I would be happy to recognize Mr. Allen for an 
opening statement, if he is prepared to give it.
    Mr. Allen. I am. Thank you, Mr. Chairman. Thank you for 
holding this hearing today on hydropower and the hydroelectric 
relicensing title of the chairman's draft legislation. I 
understand that this title represents a significant departure 
from what this subcommittee agreed to before I joined the 
committee, and I am disappointed that the draft abandons the 
bipartisan negotiated title that required so much effort and 
compromise last year.
    Our experience in Maine suggests that the draft 
hydroelectric relicensing title would not be consistent with 
our commitment to protect the public interest. Maine has more 
than 31,000 miles of rivers and 111 hydroelectric dams. We also 
have a fishing industry employing thousands in a State with 
some of the most spectacular wild rivers in the world.
    This draft legislation attempts to rubberstamp licenses on 
the West's massive hydro dams, but in the process it sweeps up 
Eastern hydropower which has a different history. Some Eastern 
dams have powered industry since the 18th Century. They are 
generally quite small, 78 percent of Maine's hydro dams have 
generating capacities under 10 megawatts, and the power they 
produce is sometimes of less economic value than the fisheries 
and natural resources that they disrupt.
    I support relicensing dams because hydroelectricity is a 
clean renewable source of power, but the law should acknowledge 
that damming our rivers can inflict real and significant costs 
to our environment and our fisheries. No matter where we live 
in this country, we share a broad public interest in balancing 
the need for hydropower with the help of our riparian 
ecosystems. The relicensing process should not, as this draft 
does, weaken the ability of citizen groups and Federal agencies 
to participate effectively in the administrative process.
    The current system has had its successes. Due to the 
concern of Maine citizens, in 1997 FERC decided for the first 
time not to renew a dam license for the Edwards Dam which had 
blocked fish passage and reduced water quality on the Kennebec 
River since 1837. The commission concluded that the benefits of 
removing this dam outweighed its usefulness.
    I was present at the breaching of this dam in 1999. Within 
months, valuable striped bass were spawning in the newly 
reopened river section, and in 2000 the State DEP declared that 
the Kennebec had significantly improved water quality. Under 
the legislation proposed today, the Edwards Dam would still be 
degrading 17 miles of the Kennebec River.
    Dam removal has only occurred in exceptional cases under 
the current relicensing system. Dozens of Maine's hydro 
facilities have been relicensed over the past decade, and the 
process has not significantly decreased hydropower production 
in our State, but it has dramatically improved our fisheries 
and riparian ecosystems.
    Dam owners do not own our rivers. Rivers have been and must 
remain the waters of the United States. The public interest 
must remain the priority when we license private companies to 
rent our rivers to produce power.
    Unfortunately, the bill before us today equates private 
interest with public interest in the waters of the United 
States. First, it limits the public's access to the relicensing 
process, ensuring that the private dam owner has more 
opportunity to influence the administrative outcome than 
citizen users of our rivers. Second, the bill increases FERC's 
authority while decreasing the influence of the Fish and 
Wildlife Service. Third, it changes the standards that dam 
owners must meet in order to protect the natural required 
migratory routes of fish species that are often depleted and 
sometimes endangered. The dam owner no longer has to provide 
fish passage under this bill, as long as the fish resource can 
be protected by other means. This standard would allow the dam 
owner to artificially stock the river if providing adequate 
passage is too expensive.
    I hope that during this hearing we will weigh the 
inevitable tension between private interests and the common 
good, and I hope that this subcommittee will craft legislation 
that will maximize the long-term public value of our rivers. 
Thank you.
    Mr. Barton. Thank the gentleman from Maine. I would now 
recognize the gentleman from California, Mr. Radanovich. Do you 
wish to give an opening statement?
    Mr. Radanovich. I do wish to comment.
    Mr. Barton. The gentleman is recognized for 3 minutes.
    Mr. Radanovich. Thank you, Mr. Barton. I don't want to go 
into the details of the bill because you did such an excellent 
job of outlining the basic tenets of the bill, and I appreciate 
the comments from the gentleman from Maine. However, when it 
was mentioned seeking a balance between the economics and the 
environment of some of the dams in the West, particularly in 
California where we are facing an ever-increasing energy 
shortage, it is this legislation we believe that will achieve 
that balance because--I am not sure what the gentleman from 
Maine's experience has been with the Federal resource agencies 
on relicensing, but the ones that we have experienced have been 
completely out-of-balance, and we need this legislation in 
order to bring balance back to it by more FERC involvement in 
the permit process.
    We have got some licenses and permits that have been going 
on for 10 or 15 years in the relicensing project, and it is 
creating quite a disincentive on an industry that is much in 
need in my State.
    So it is my hope and my desire to achieve the balance that 
Federal resource agencies are mandated to provide in the 
relicensing process that is not there, and these changes are 
much necessary in order to bring that balance back.
    So I appreciate these comments but, for my part of the 
United States, this is legislation that will bring balance back 
to our policy for energy, and look forward to the hearing and 
the comments from folks out there.
    Mr. Barton. Thank the gentleman, as one of the co-sponsors 
of the underlying bill.
    I would recognize the distinguished full committee Ranking 
Member, the former chairman and good friend from Michigan, Mr. 
Dingell, for 5 minutes.
    Mr. Dingell. Mr. Chairman, I thank you for your courtesy to 
me and for holding this hearing and for coordinating with the 
Minority on witness participation. That is all very important, 
and I am appreciative.
    I wish this subcommittee had been afforded more time to 
consider this issue. Since we were unable to arrange for the 
full panoply of witnesses that this important subject warrants 
within the time afforded, but I understand you are under 
substantial time constraints imposed by our leadership, and 
regrettably we will then have to do the best we can under the 
circumstances.
    Mr. Chairman, I also note with regret your decision to 
include Section 3001 in your draft energy bill sends a clear 
signal that you are not inclined to advance the compromise 
hydropower language which was developed in committee during the 
107th Congress. That is regrettable, since it is a compromise 
that arose from a process involving give-and-take by all 
relevant parties, something which I do not believe should be 
lightly thrown away.
    In fact, I would like to request that the subcommittee 
accept for the record a letter to you dated July 9, 2001----
    Mr. Barton. Without objection, so ordered.
    Mr. Dingell. [continuing] signed by the Hydroelectric 
Licensing Reform Task Force, the National Hydropower 
Association, the Edison Electric Institute, and the American 
Public Power Association, indicating support for last year's 
compromise, recognizing that while it does not represent their 
ideal bill it nonetheless is a positive step. I would also like 
to introduce into the record a letter to you dated July 10, 
2001, signed by the American Rivers, the Hydropower Reform 
Coalition, and Trout Unlimited, indicating support for the same 
provisions.
    Mr. Barton. Without objection, so ordered.
    Mr. Dingell. Mr. Chairman, it is regrettable that the draft 
bill upends this compromise, and seems in fact to abandon hope 
for a consensus on hydropower policy. Section 2001 tips the 
procedural and substantive balance to the hydropower industry, 
undercutting the resource agencies' ability to impose necessary 
conditions on hydropower projects and giving license 
applicant's ``super party'' status in license proceeding. I am 
not aware of a reason that that should be done.
    This language would give the industry alone procedural 
rights unavailable to other parties. This is something that 
will cause an explosion, I think, on the floor, something that 
I am not aware has been done in other statutes bearing on 
public health and safety. Specifically, it allows industry 
proposals that conflict with resource agency decisions an 
unprecedented advantage. It allows an applicant's proposal for 
resource protection to trump the agencies' proposals unless the 
Secretary of the Interior can show in court that the industry 
proposal is inadequate. If that is to be the way we run our 
decisions in this area, it is perhaps open to question whether 
we ought to even bother having the resource management agencies 
or the protections that they have afforded our citizens with 
regard to questions of safety, protection of natural resources, 
protection of fish and wildlife and other things, which are 
values of great importance to our people.
    Mr. Chairman, I hope you will listen closely to the 
testimony today, and it is my hope that you will be persuaded 
to return to the compromise which we worked out together during 
the last Congress with participation of all relevant parties. 
That is a good way to begin and will save a lot of unnecessary 
fighting and ill will. The hydroelectric provisions before us 
today will undercut the prospects for bipartisan support of 
this important energy bill. Thank you, Mr. Chairman.
    [The prepared statement of Hon. John D. Dingell and the 
letters follow:]

    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan

    Mr. Chairman, thank you for holding this hearing and for 
coordinating with the minority on witness participation. I wish this 
Subcommittee were afforded more time to consider this issue, since we 
were unable to arrange for the full panoply of witnesses this important 
subject warrants within the time afforded for planning the hearing. But 
I understand you are under severe time constraints imposed by your 
leadership, and regrettably we will have to do the best we can under 
the circumstances.
    Mr. Chairman, I also note with regret that your decision to include 
section 3001 in your draft energy bill sends a pretty clear signal that 
you are not inclined to advance the compromise hydropower language 
developed in Committee during the 107th Congress. That is a shame, 
since that compromise arose from a process involving give and take by 
all the relevant parties, something not to be lightly thrown away.
    In fact, I would like to request that the Subcommittee accept for 
the record a letter to you dated July 9, 2001, signed by the 
Hydroelectric Licensing Reform Task Force, the National Hydropower 
Association, the Edison Electric Institute, and the American Public 
Power Association indicating support for last year's compromise, 
recognizing that while it does not represent their ideal bill it 
nonetheless is a positive step. I also would like to introduce into the 
record a letter to you dated July 10, 2001, signed by American Rivers, 
the Hydropower Reform Coalition, and Trout Unlimited indicating support 
for the same provisions.
    It is regrettable that the draft bill upends this compromise, and 
seems in fact to abandon the hope for a consensus on hydropower policy. 
Section 3001 tips the procedural and substantive balance to the 
hydropower industry, undercutting the resource agencies' ability to 
impose necessary conditions on hydropower projects and giving license 
applicant's ``super party'' status in license proceeding. The language 
would give to industry alone procedural rights not available to other 
parties--something I am not aware has been done in other statutes 
bearing on public health and safety. Specifically, it allows industry 
proposals that conflict with resource agency decisions an unprecedented 
advantage. It allows an applicant's proposal for resource protection to 
trump the agencies' proposals unless the Secretary of the Interior can 
show in court that the industry proposal is inadequate.
    Mr. Chairman, I hope you will listen closely to the testimony today 
and be persuaded to return to the compromise we worked out together 
during the last Congress with the participation of all the relevant 
parties. The hydroelectric provisions before us today will undercut the 
prospects for bipartisan support of this important energy bill.
                                 ______
                                 
                  American Rivers, Trout Unlimited,
                                Hydropower Reform Coalition
                                                      July 10, 2001
The Honorable Joe Barton, Chair
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515

The Honorable Rick Boucher
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515

    Dear Chairman Barton and Representative Boucher: Our organizations 
sincerely appreciate the effort you and your staff have made to work 
with Representative Dingell, the hydropower industry and conservation 
groups to craft an alternative to the environmentally damaging 
rollbacks of hydropower regulation proposed by the Federal Energy 
Regulatory Commission and some members of Congress. The results of this 
discussion thus far have avoided much of the demagoguery and finger-
pointing that has characterized this debate in the past.
    We have reviewed Title II of the ``Consensus Staff Draft'' of the 
Energy Advancement and Conservation Act of 2001. While it offers 
nothing in the way of additional environmental protection in the 
hydropower licensing process, it does offer the potential for improving 
federal agency conditions and prescriptions without the damaging 
rollbacks of environmental standards that had been included in earlier 
proposals.
    In this light, we are prepared to offer limited support for this 
language, with the following understandings:

1) There will be no amendments adopted to alter this language during 
        Subcommittee consideration, full Committee consideration, or on 
        the House floor.
2) There will be language included in the report on the bill that 
        clarifies that the process for considering alternatives to 
        Federal Power Act section 4(e) and 18 conditions will be 
        incorporated into the agencies' existing procedures for 
        devising preliminary and modified conditions and prescriptions, 
        in order to avoid any additional delays in the licensing 
        process.
    Again, thank you for your efforts to bring closure on this 
contentious issue.
            Sincerely,
                                      S. Elizabeth Birnbaum
                    Director of Government Affairs, American Rivers
                                             Steven Malloch
                                           Counsel, Trout Unlimited
                                             Andrew Fahlund
                                 Chair, Hydropower Reform Coalition
cc: The Honorable Billy Tauzin
   The Honorable John D. Dingell
                                 ______
                                 
              The Hydroelectric Licensing Reform Task Force
                                                       July 9, 2001
The Honorable Joe Barton
Chairman
Energy and Commerce Subcommittee on Energy and Air Quality
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515-6115
    Dear Chairman Barton, on behalf of our four organizations, we are 
writing to you, Chairman Tauzin, Ranking Member Dingell and Ranking 
Member Boucher to express our support for the hydroelectric licensing 
provisions (Sections 201 and 202) of ``The Energy Advancement and 
Conservation Act of 2001.''
    For much of the last decade, the hydroelectric industry has worked 
to focus the attention of Congress on the need to improve the Federal 
Energy Regulatory Commission (FERC) hydroelectric relicensing process. 
Indeed, the record compiled in oversight and legislative hearings on 
this issue over the previous two Congresses demonstrates that 
legislative reform of the FERC hydroelectric relicensing process is 
needed if our nation is to preserve consumer access to clean, reliable 
and cost-efficient hydropower.
    While we believe that more comprehensive legislative reform is 
necessary to fully address the problems inherent in the current FERC 
hydroelectric relicensing process, Sections 201 and 202 of ``The Energy 
Advancement and Conservation Act of 2001'' represent a positive first 
step. Accordingly, we support these sections and agree to oppose any 
and all amendments that might be offered to Sections 201 and 202 of 
``The Energy Advancement and Conservation Act of 2001'' in 
subcommittee, in full committee, or during consideration by the full 
House of Representatives.
    We remain committed to pursuing more comprehensive legislative 
reform of the FERC hydroelectric relicensing process and are pleased 
with the commitment recently made by both majority and minority staff 
of the Committee on Energy and Commerce to revisit the issue later in 
the 107th Congress.
    Thank you for your efforts to date. We look forward to continuing 
to work with you and your staff in the weeks and months ahead on this 
most important issue.
            Sincerely,
                            Joel Malina, Executive Director
                      Hydroelectric Licensing Reform Task Force \1\
---------------------------------------------------------------------------
    \1\ Task Force members are drawn from the memberships of the 
American Public Power Association, the Edison Electric Institute and 
the National Hydropower Association and include: American Forest and 
Paper Association, Carolina Power & Light, Chelan County Public Utility 
District, Cowlitz County Public Utility District, Douglas County Public 
Utility District, Duke Engineering and Services, Duke Power, Grant 
County Public Utility District, Idaho Power, Kaukauna Electric & Water, 
Louisville Gas & Electric, New York Power Authority, PacifiCorp, 
Portland General Electric, Sacramento Municipal Utility District, 
Santee Cooper, SCANA Corporation, Snohomish County Public Utility 
District, Southern California Edison, Southern Company, and the Vermont 
Public Power Supply Authority.
---------------------------------------------------------------------------
        Rebecca K. Blood, Senior Legislative Representative
                                  American Public Power Association
           John Neumann, Vice President, Government Affairs
                                          Edison Electric Institute
                    Linda Church Ciocci, Executive Director
                                    National Hydropower Association

    Mr. Barton. We thank the gentleman from Michigan, and look 
forward to working with him on this issue.
    The Chair would recognize the gentleman from Oregon, Mr. 
Walden, who again is co-sponsor of the underlying bill that we 
put in the discussion draft. Mr. Walden.
    Mr. Walden. Thank you very much, Mr. Chairman. I would like 
to commend you for having this most important hearing on an 
issue that of course is of vital importance to the Pacific 
Northwest, the State of Oregon, and my congressional district.
    Mr. Chairman, this hearing will examine hydropower 
relicensing provisions included in your draft proposal which 
would add some balance to the incredibly time-consuming and 
costly process that investor-owned utilities, municipalities, 
and public or people's utility districts must wade through when 
they seek to relicense a facility with hydropower generation.
    My district alone will account for 82 percent of the power 
that is generated from non-Federal hydropower facilities in the 
State of Oregon and subject to relicensing under the Federal 
Power Act. Over 99 percent of the hydropower generated comes 
from facilities up for renewal over the next 3 years. Together 
these projects have the cumulative potential to produce up to 
1,602.36 megawatts. To put it in perspective, Mr. Chairman, it 
takes approximately 1,000 megawatts to power a million homes, 
or it is enough power to serve the load needs of everyone with 
a home in the Pacific Northwest cities of Portland, Seattle, 
and Spokane. Hydropower is extraordinarily important to our 
region.
    In the Pacific Northwest region as a whole, the hydro 
relicensing situation concerning non-Federal isn't much better. 
Seventy-six percent of the power generated from non-Federal 
projects in Oregon, Idaho and Washington is up for relicensing 
over the next 15 years.
    Since 1986, the Federal Energy Regulatory Commission has 
been required, as you know, under the Federal Power Act, to 
give equal consideration to a variety of factors when issuing 
these hydropower licenses and relicenses. This authority 
requires FERC to consider the power, economic and development 
benefits of a particular project, as well as energy 
conservation and the protection and enhancement of fish and 
wildlife.
    Unfortunately, the courts have interpreted the Federal 
Power Act in a manner that prevents any effective balancing 
from taking place. Moreover, the courts have given Federal 
natural resource agencies the authority to set mandatory 
conditions on FERC licenses. We are here today to try and fix 
that problem, Mr. Chairman.
    In the Northwest, we have seen 43 percent rate increases 
last year, proposed 15 percent rate increases this year. If 
hydro licensing and relicensing isn't cleaned up and done 
properly, we are going to suffocate in the Northwest from high 
power rates. And it is ironic since this is the renewable 
energy source in America. I don't know how you get more 
renewable than hydropower. Solar and wind, we are doing that, 
too, and geothermal in my district. But the Northwest is so 
unique and so dependent on hydropower, this is an issue of 
great significance to all of us out there.
    I commend you for this hearing, and my colleague, Mr. 
Radanovich, for introducing the legislation that is contained 
in the underlying bill. Thank you, Mr. Chairman.
    Mr. Barton. Thank you Congressman Walden, we look forward 
to working with you. The Chair would now recognize Mr. Issa for 
a 3-minute opening statement, or do you wish to defer?
    Mr. Issa. Defer.
    Mr. Barton. Okay. The Chair would recognize Mr. Shadegg, or 
does he wish to defer?
    Mr. Shadegg. I just would make a statement, Mr. Chairman.
    Mr. Barton. The gentleman from Arizona is recognized for 3 
minutes.
    Mr. Shadegg. Thank you, Mr. Chairman, and only because I am 
afraid that if I offer to speak less than 3 minutes, I will 
wind up breaking that offer. I am not going to make that 
promise at this point.
    I do want to commend you for holding this hearing. I think 
it is extremely timely and important. As the chairman knows, I 
have been involved in and interested in hydroelectric issues 
for quite some time.
    I want to reiterate the point just made by my colleague, 
Mr. Walden. The reality is hydropower is the ultimate renewable 
resource in the sense that we have already figured out how to 
harness it and it is, in fact, renewable.
    Beyond that, Mr. Chairman, I have tried to make the point 
in prior hearings, one of which I think the chairman will 
recall where I brought in the hydrologic chart which proves 
that this truly is a renewable resource. But beyond that, it 
can be an environmentally sensitive renewable resource.
    I listened only in part to the Ranking Member's remarks and 
the remarks of the Ranking Member of the full committee, and I 
know there are genuine concerns about the environmental impact 
of hydroelectric power, except that I think it is very 
important to note that we can deal with those concerns, and 
particularly it is possible with today's technology to do 
several things. One, to add turbines to facilities where there 
are not turbines now, without environmental impact. Two, to 
improve the efficiency of turbines in facilities where we 
already have turbines and the environmental impact has already 
occurred it is possible to put in place more efficient turbines 
where we can generate electricity without any additional 
environmental impact, and we need to be looking into that. 
Three, it is possible to add hydroelectric generating capacity 
to in-stream flows in ways that we couldn't have done in the 
past. In years gone by, the only way to produce hydroelectric 
power was to build a dam holding back a supply of water with 
the consequent environmental impacts that that caused.
    I remain a supporter of hydropower dams and think they are 
necessary, and have opposed the efforts in this Nation to drain 
some of those dams where they are vitally important, but I 
think it is important to note that our technology today allows 
us to insert hydroelectric generating capacity in the in-stream 
flows where you don't even have to build a dam.
    So, I commend you, Mr. Chairman, for holding this hearing. 
I think it is vitally important that we move forward on this 
topic, and that we do so with open minds, and that we try to 
find an accommodation. We cannot continue to remain as 
dependent as we are on foreign sources of energy.
    Mr. Barton. Thank the gentleman from Arizona. The Chair 
would now recognize one of the workhorses of our committee and 
subcommittee, the gentleman from Ohio, Mr. Brown. Does he wish 
to give an opening statement?
    Mr. Brown. Yes, I do, Mr. Chairman. Thank you.
    Mr. Barton. The gentleman is recognized for 3 minutes.
    Mr. Brown. Last year's energy policy debate had few moments 
of true bipartisan cooperation. One moment, however, was the 
hydroelectric relicensing provisions of last year's bill, which 
was agreed upon in advance of our markup, as a result of long 
and hard work by the chairman's staff and by the Minority 
staff, and for that we are all appreciative.
    It is particularly disappointing, therefore, that the 
Energy Bill discussion draft makes significant changes to that 
carefully crafted compromise language. The hydro relicensing 
provision of this discussion draft would allow only power 
companies to submit alternative license conditions for review 
by Federal Environmental Protection Agencies. This is a vast 
and troubling departure from last year's agreement which also 
would have let environmental groups and States and other 
advocates to propose such alternatives.
    The discussion draft also seems to significantly lower the 
bar for review of alternative conditions. Under the bipartisan 
agreement, alternative conditions had to provide no less 
protection than the conditions proposed by the government. 
Under this draft, no less drops to adequate, and the long-
standing goal of protection is muddled with the potentially 
conflicting objective of utilization.
    If an environmental agency rejects what well may be a less 
protective alternative condition but the power company 
disagrees, FERC can force the cabinet agency to explain itself 
to FERC's own dispute resolution service. No such FERC power-
grab is included in last year's bipartisanly crafted bill.
    Mr. Chairman, the law recognizes that using America's 
rivers as sources of electric power requires delicate balancing 
of competing concerns and interests. The bipartisan provision 
was seen by many on this subcommittee as facilitating the 
licensing process while maintaining that balance.
    The discussion draft provision seems to upset that 
balancing, giving the interest of power production much greater 
weight than the equally valid interest of environmental 
protection. I hope our witnesses will further illuminate this 
important issue. Thank you, Mr. Chairman, I yield back the 
balance of my time.
    Mr. Barton. We thank the gentleman from Ohio. The Chair 
would recognize one of our new subcommittee members, the 
Congressman from Idaho, Mr. Otter. Does he wish an opening 
statement, or to defer?
    Mr. Otter. Thank you, Mr. Chairman. I have nothing at this 
time.
    Mr. Barton. The gentleman defers his 3 minutes for opening 
statement.
    Seeing no other members present, all members not present, 
without objection, have the right to put a written opening 
statement in the record.
    [Additional statement submitted for the record follows:]

 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce

    Thank you, Mr. Chairman. This Subcommittee will soon conclude the 
hearing we began last week on a National Energy Policy and move on to 
marking up legislation.
    None of the elements we are proposing in our draft energy policy 
are new. Hydroelectric power licensing, a topic we will consider today, 
is one of those issues with a long history in this Committee. In fact, 
this Committee was responsible for important reforms in the Federal 
Power Act in 1986 and 1992 that recognized the environmental impact of 
hydropower projects and sought to address their potential harm.
    I appreciate the need for such protections. Those of you who know 
me know that I, like the Ranking Member Mr. Dingell, am an avid 
fisherman. I know the importance of protecting fish habitat. I know 
what water quality means to commercial and sport fishermen. I've fished 
all over the country, and I know the effect hydropower projects can 
have on the environment.
    I also know that a balance can be struck between energy production 
and environmental protection in a way that both win. We demonstrate 
this in Louisiana every day.
    The fact of the matter is that many of these dams have been around 
for 50 years or more. We've come to rely on them as clean, affordable 
sources for about 12% of our Nation's electricity. If the government is 
imposing conditions that force them out of business, we will have to 
make up that power somewhere. If there are ways we can meet our 
environmental objectives and keep these dams operating, we should 
pursue them.
    What is at issue today is the ability of a resource agency to 
impose mandatory conditions on hydropower projects irrespective of the 
impact on energy production or costs. This Committee gave the 
agencies--Fish and Wildlife Service, Forest Service, and others--that 
power. However I think they now exercise it in a way that we probably 
didn't expect. There is little accountability in their decision-making, 
and the chance to review their decisions only comes very late in the 
process.
    We've had bipartisan legislation introduced in the House and marked 
up in this Subcommittee in recent Congresses that would fundamentally 
change that authority. But that is not what we included in the energy 
bill last Congress, and that is not what we are talking about in the 
discussion draft today.
    What the discussion draft proposes, and what I think we can agree 
is good public policy, even if we don't yet agree on the specific 
language, is to require the resource agencies to give greater 
consideration to the impacts of their decisions. If they can achieve 
their mission for resource protection and use in a way that costs less 
or allows better power production, then they should adopt that 
approach.
    If we can agree on this principle, as we generally did in the last 
Congress, then I think we can come to agreement on the language. I 
think we can achieve this without eroding the ability of the agencies 
to protect the resource.
    We had productive discussions on this issue in the energy 
conference. It is my hope that we can build upon those discussions, 
learn from them, and come to agreement on a strong House position for 
this Congress, stronger than last Congress.
    Thank you, Mr. Chairman, I look forward to hearing the testimony of 
our witnesses today on that subject, and yield back the remainder of my 
time.

    Mr. Barton. We would like to call forth our panel now. We 
have Mr. J. Mark Robinson, who is the Director of the Office of 
Energy Projects of the Federal Energy Regulatory Commission. We 
have Ms. Julie Keil, who is Director of Hydro Licensing and 
Water Rights of Portland General Electric. We have Mr. Rob 
Masonis, who is the Director of the Northwest Regional Office 
for American Rivers. And we have Mr. Leon Szeptycki, who is the 
Eastern Conservation Director and General Counsel of Trout 
Unlimited.
    The Chair would welcome our witnesses, and make one point 
of personal privilege. I have former staffer in the audience, 
Ms. Doreen Williams. We are glad to have you here observing the 
hearing. And we are going to recognize you, Mr. Robinson, and 
we will just go right down the row and give each of you such 
time as you may consume, but we would hope that you all would 
try to limit your opening statements to 5 or 6 minutes. So, 
welcome to the subcommittee and, Mr. Robinson, you are 
recognized.

   STATEMENTS OF J. MARK ROBINSON, DIRECTOR, OFFICE OF ENERGY 
  PROJECTS, FEDERAL ENERGY REGULATORY COMMISSION; JULIE KEIL, 
DIRECTOR OF HYDRO LICENSING AND WATER RIGHTS, PORTLAND GENERAL 
  ELECTRIC; ROB MASONIS, DIRECTOR, NORTHWEST REGIONAL OFFICE, 
   AMERICAN RIVERS; AND LEON SZEPTYCKI, EASTERN CONSERVATION 
         DIRECTOR AND GENERAL COUNSEL, TROUT UNLIMITED

    Mr. Robinson. Mr. Chairman and members, my name is Mark 
Robinson. I am the Director of Energy Projects at the 
commission. We support the commission in the areas of 
interstate natural gas pipelines certification, liquid natural 
gas terminaling, and also, more importantly today, hydropower 
licensing and administration.
    I will just make two points today in this oral portion. I 
would like to bring you up to speed on what the commission has 
been doing in developing a new licensing process, and then 
comment on Title III. I will say from the outset that both of 
these efforts that are going on, one at the commission and one 
here, will act to improve the licensing process.
    Starting with the efforts on developing a new licensing 
program at the commission, around 1997 a number of groups 
started discussing how we could improve licensing at the 
commission, and that continued for a number of years in several 
different venues, including all stakeholders that you can 
imagine.
    This past summer it clearly had reached critical mass. It 
was time for the commission to take some action to improve the 
licensing process. So, in September our commission issued a 
notice that started us on a 1-year journey of trying to develop 
a new licensing process.
    We, from the outset, wanted to make this the most open 
commission proceeding that we could imagine. We included in 
this 1-year effort regional forums across the country, drafting 
sessions that included all stakeholders, inviting the agencies 
in to help draft the actual rule, and then just a continuous 
review and feedback to all parties to make sure that nothing 
would be a surprise.
    I am happy to tell you today that we have now issued a 
Notice of Proposed Rule on what has become known as the 
``integrated licensing process.'' And I can also assure you 
there were no surprises. Everyone knew what was going to be in 
that NOPR and it in fact it is there.
    From here on out, we will continue that open process to 
finalize the codification of the integrated licensing process. 
We will include the agencies in redrafting that rule to make it 
final. We will include all stakeholders with another series of 
regional forums. We are well on the way to administratively 
improving the licensing process, and I look forward to that 
conclusion. That is only, however, half the game.
    The ILP, integrated licensing process, will do nothing 
directly to improve the quality of the content of mandatory 
conditions and fishway prescriptions. That is where Title III 
comes in. These two efforts are complementary, they are not 
redundant in any way, and I don't believe that they are in any 
way in conflict.
    Title III has two aspects that I want to point out 
specifically--accountability, which is added to the mandatory 
conditioning and fishway prescription process, and also a 
standard of review which has been lacking to this point. By 
accountability, what I mean there is--I have worked at the 
commission--let me just diverge here for a second. I have 
worked at the commission for 25 years, and one thing I have 
learned is that if somebody is looking at what you produce, it 
certainly sharpens your pencils. I think the agencies will have 
the same effect--the same thing will affect them. The personnel 
who are developing these mandatory conditions and fishway 
prescriptions will have their pencils sharpened by knowing that 
what they produce is subject to review. So that accountability 
I think is an important component of Title III for those two 
requirements.
    The second is the standard of review. To this point, the 
agencies don't have a standard of review in any way similar to 
what the commission has in issuing a license for a hydropower 
project. That standard of review roughly can be stated as equal 
consideration to developmental and nondevelopmental values. 
Things like irrigation, navigation, flood control, power 
production, have to be looked at in the same vein as 
environmental protection, fish and wildlife protection, water 
quality protection, recreational development. That standard of 
review has worked well for the commission in developing 
balanced licenses. I think providing the same sort of standard 
for the review of mandatory conditions and fishway 
prescriptions will add that same sort of--it will make them 
more amenable to insertion into a license that has as its 
overall purpose to ensure that the public interests are served 
across the board. Right now what we have are conditions that 
are mandatory and prescriptions which are mandatory, which are 
single-purpose, they fit the bill for what they are trying to 
do. Integrating that into a license that has every other 
consideration as its basis is sometimes very difficult and 
sometimes impossible, as the commission has noted in several of 
its orders.
    So, in summary, I would just say the commission is making 
great progress, I believe, in improving the licensing process. 
And, Mr. Chairman, I think that your efforts on Title III serve 
that same goal. Thank you very much.
    [The prepared statement of J. Mark Robinson follows:]

  Prepared Statement of J. Mark Robinson, Director, Office of Energy 
             Projects, Federal Energy Regulatory Commission

    Mr. Chairman and Members of the Committee: My name is Mark Robinson 
and I am the Director of the Office of Energy Projects at the Federal 
Energy Regulatory Commission (Commission). I appreciate the opportunity 
to appear before you to discuss Title III of Chairman Barton's 
legislative discussion draft relating to the Commission's hydropower 
licensing program. As a member of the Commission's staff, the views I 
express in this testimony are my own, and not those of the Commission 
or of any individual Commissioner.
    The Commission currently regulates over 1,600 hydroelectric 
projects at over 2,000 dams pursuant to Part I of the Federal Power Act 
(FPA). Together, these projects represent 57 gigawatts of hydroelectric 
capacity, more than half of all hydropower in the U.S., and over five 
percent of all electric generating capacity in the United States. 
Hydropower is an essential part of the Nation's energy mix and offers 
the benefits of an emission-free, renewable energy source.
    The Commission's hydropower activities generally fall into three 
categories. First, the Commission licenses and relicenses hydroelectric 
projects. Relicensing involves projects that originally were licensed 
30 to 50 years ago. The Commission's second role is to manage 
hydropower projects during their license term. This post-licensing 
workload has grown in significance as new licenses are issued and as 
environmental standards become more demanding. Finally, the Commission 
oversees the safety of licensed hydropower dams. This program is widely 
recognized for its leadership in dam safety.
    My testimony today will provide brief overviews of the current 
hydroelectric licensing activity and the licensing process. I will then 
focus on Title III, Section 3001, of the proposed legislative draft.

              I. CURRENT HYDROELECTRIC LICENSING ACTIVITY

    The Commission will process 218 relicense applications this decade. 
These projects include many large capacity and complex projects, and 
have a combined capacity of about 22 gigawatts, or 20 percent of the 
Nation's installed hydroelectric capacity.
New opportunities to balance competing resources
    Relicensing of projects, upon expiration of the current license, is 
of particular significance because it involves projects that originally 
were licensed up to 50 years ago. In the intervening years, enactment 
of numerous environmental, land use, and other laws, as well as 
judicial interpretation of those laws, has greatly affected the 
Commission's ability to control the timing and conditions of the 
licensing process. Under the standards of the FPA, projects can be 
authorized if, in the Commission's judgment, they are ``best adapted to 
a comprehensive plan'' for improving or developing a waterway for 
beneficial public purposes, including power generation, irrigation, 
flood control, navigation, fish and wildlife, municipal water supply, 
and recreation. The Electric Consumers Protection Act of 1986 (ECPA) 
amended the FPA to require the Commission to give ``equal 
consideration'' to developmental and non-developmental values.
Integrating need for power and stakeholder concerns
    The Commission integrates, and weighs the concerns of, the 
licensee, resource agencies, non-governmental organizations (NGOs), 
tribes and other members of the public in its licensing process to 
ensure that relicensed projects are consistent with the public 
interest. Toward this end, the Commission also considers the need for 
sustainable power provided by these projects.
    While the Commission's responsibility under the FPA is to strike an 
appropriate balance among the many competing developmental and 
environmental interests, as required by the public interest standards 
of Sections 4(e) and 10(a) of the FPA, various statutory requirements 
give other agencies a significant role in licensing cases. Several 
entities have mandatory authorities that limit the Commission's control 
of the cost and time investments for licensing. For example, Section 
4(e) of the FPA authorizes federal land-administering agencies to 
provide mandatory conditions for projects located on federal 
reservations under their jurisdiction. Further, Section 18 of the FPA 
gives authority to the Secretaries of the Departments of the Interior 
and Commerce to ``prescribe'' fishways. And, Section 401(a)(1) of the 
Clean Water Act precludes the Commission from licensing a hydroelectric 
project unless the project has first obtained state water quality 
certification, or a waiver thereof.
    The Commission also must ensure compliance with other statutes, 
including the Coastal Zone Management Act, Endangered Species Act 
(ESA), Federal Land Policy and Management Act, Wild and Scenic Rivers 
Act, National Historic Preservation Act, and Pacific Northwest Electric 
Power Planning and Conservation Act, each with its own procedural and 
substantive requirements. Compliance with all these requirements 
involves a multitude of different processes ancillary to licensing, 
which has lengthened the time required to obtain a license.
Complexities and regional variation in relicenses
    Primary issues being addressed at those 218 projects with 
applications for relicensing filed this decade vary by region, but 
include power, water use, fish passage, endangered species, recreation, 
shoreline management, reservoir level fluctuation, and instream flows. 
Water quality and cultural resources are concerns in all regions. The 
projects are distributed about equally between the eastern and western 
United States, but are concentrated in the Northwest and Southeast 
regions.
    Many of the projects will involve more than one state, and in a few 
instances, Canada, in the licensing process. Each governing entity is 
likely to expand the scope of concerns and regulatory goals that must 
be considered in licensing. Following is a discussion of the primary 
complexities in this decade of relicensing, by region.
    In the Southeast, projects have many large reservoirs with 
considerable shoreline area. For example, in 2005, Alabama Power 
Company will be filing applications to relicense nine projects in the 
Coosa River Basin with a combined capacity of 1,160 MW. These projects 
have 103,000 acres of reservoir area with 2,000 miles of shoreline. 
Another example is Duke Power Company's Catawba-Wateree Project with a 
capacity of 841 MW, whose filing for relicensing is due in 2006. The 
project has 11 reservoirs and over 1,700 miles of shoreline. Therefore, 
shoreline management can be expected to be a major issue in 
relicensing, and numerous waterfront property owners and other water 
users can be expected to participate in the licensing process.
    Hydropower issues in the northwestern United States and California 
often concern federally listed threatened or endangered salmonids 
(salmon, trout, and char). Most relicensing proceedings in these 
regions require formal consultation with resource agencies under the 
ESA.
    At the beginning of 1996, the National Marine Fisheries Service 
(NMFS) had listed four strains (geographically distinct groups of a 
species) of salmonids. Today, there are 33 strains of salmonids listed 
by NMFS and the U.S. Fish and Wildlife Service (USFWS). There is a 
significant overlap in the range of the listed salmonid strains and the 
concentration of hydropower sites in the Northwest and California 
(e.g., about 130 licensed projects in these regions are located within 
the geographical boundaries of listed chinook salmon and steelhead 
trout). Thus, these listings, often requiring formal consultation under 
the ESA, have added considerable complexity to the processing of 
relicensing applications.
    In addition to the complexities associated with listed salmonid 
species, California has significant issues related to conflicts in 
water use (e.g., municipal water supply, irrigation, flood control, 
power, recreation, and fisheries). For example, in 2005, we expect a 
relicense application for the Oroville Hydroelectric Project. The 
reservoir for this project, Lake Oroville, is also the principal water 
storage facility of the State Water Project, which conserves and 
delivers water to over two-thirds of California's population and almost 
1,000,000 acres of farmland.
    In the northeastern U.S., a variety of issues prevail, ranging from 
re-establishment of runs of Atlantic salmon and clupeids (i.e., shad 
and alewife) to water quality issues. Recreation use of project waters 
and riparian areas is a primary issue in this region. In addition, two 
large projects on the Canadian border are undergoing relicensing during 
this decade, the 912 MW St. Lawrence-FDR (filed in 2001) and the 2,755 
MW Niagara (to be filed in 2005) Hydroelectric Projects, which 
complicates the relicensing process in resolving cross border issues 
like American Eel protection.
Measures to efficiently process projects
    Staff at the Commission has undertaken numerous measures to 
efficiently process these complex projects. Toward that end, the 
Commission has held hydropower licensing status workshops to move 
stalled cases, held licensing workshops with state agencies on 
integrating state processes, introduced electronic filing, implemented 
an improved ex parte communications rule, and provided numerous 
guidance documents for stakeholders on our web page, in addition to 
proposing a new hydropower licensing process, developed with sister 
agencies, in a recent rulemaking discussed below.

                 II. THE COMMISSION'S LICENSING PROCESS

The traditional licensing process
    The Commission currently uses two different processes in licensing: 
the ``traditional'' process and the ``alternative'' process. Under the 
traditional process, three to three and one-half years prior to filing 
an application, license applicants must consult with federal and state 
resource agencies, affected land managing agencies, Indian tribes, and 
state water quality certifying agencies to provide these entities with 
information describing the proposed project. The applicant must also 
conduct studies necessary for the Commission staff to make an informed 
decision on the application. Under the Commission's detailed 
regulations concerning prefiling consultation and processing of filed 
applications, the formal proceeding does not begin until the license 
application is filed with the Commission. As a result, the Commission 
staff does not generally participate in pre-filing consultation under 
the traditional process.
    After an application is filed, two years prior to license 
expiration, the federal agencies with responsibilities under the FPA 
and other statutes, the states, Indian tribes, and other participants 
have opportunities to request additional studies and provide comments 
and recommendations. Federal agencies with mandatory conditioning 
authority also provide their conditions. The Commission staff may ask 
for additional information that it needs for its environmental 
analysis. All of this information is incorporated into the Commission 
staff's environmental review under the National Environmental Policy 
Act (NEPA) upon which the Commission bases its licensing decision. 
Because of the sequential nature of the traditional process and the 
frequent need to gather further information after the application is 
filed, the traditional process can be lengthy. The median processing 
time after application filing is 47 months.
The alternative licensing process
    In an effort to improve the efficiency and the timeliness of the 
licensing process without sacrificing environmental protection, the 
Commission embarked on a journey of administrative and regulatory 
licensing reform. Beginning in 1997, the Commission altered its 
regulations to provide for an alternative to the traditional licensing 
process. The alternative licensing process adds efficiency by combining 
the pre-filing consultation process with the environmental review 
process under NEPA. Using this process, participants, and in some cases 
Commission staff, work collaboratively prior to the filing of the 
application to develop, in most cases, a preliminary draft NEPA 
document. Participants in the alternative licensing process generally 
anticipate that their efforts will culminate in a settlement agreement. 
The alternative process has been successful in reducing the post-filing 
processing time to a median of 16 months.
Integrated licensing process
    Even in light of successes associated with the use of the 
alternative licensing process, stakeholders have continued to develop 
additional procedural modifications to the more formal traditional 
process that would further improve the efficiency and timing of 
licensing while maintaining environmental protections. In 2001, senior 
managers from the Commission staff and the Departments of the Interior, 
Commerce, and Agriculture formed the Interagency Hydropower Committee. 
This committee developed a proposal for an integrated licensing 
process. Another integrated licensing process proposal was developed by 
the National Review Group (NRG), a multi-stakeholder forum consisting 
of representatives from the hydropower industry and NGOs.
    An integrated licensing process would integrate an applicant's 
prefiling consultation with resource agencies, Indian tribes, and the 
public into the Commission staff's NEPA scoping process. This approach, 
however, would differ from the alternative licensing process in several 
respects, such as ensuring Commission staff involvement at all stages, 
and better integrating the licensing process with the actions and 
processes of other federal and state agencies and Indian tribes.
    The Commission is now engaged in an open rulemaking proceeding 
whereby the Commission is seeking public input on a new licensing 
process. Our open proceeding allows for public and tribal input, both 
before and after the issuance of a Notice of Proposed Rulemaking. This 
proceeding also allows for joint drafting of rule language by 
Commission staff and the federal agencies with mandatory conditioning 
authority under the FPA.
    This rulemaking proceeding was initiated in September 2002, when 
the Commission and the federal agencies with mandatory conditioning 
authority under the FPA issued a notice requesting comments on the need 
for a new licensing process. The notice also established a series of 
open regional public and tribal forums to discuss issues and proposals, 
including proposals for an integrated licensing process.
    Following the regional forums and submission of written comments in 
early December 2002, the Commission hosted public drafting sessions in 
which discussion of the results of the regional forums and comments was 
followed by a broadly-based collaborative effort to develop consensus 
recommendations on an integrated licensing process and, where possible, 
develop preliminary draft regulatory text. Subsequent to the December 
public drafting sessions, the Commission staff and staff from the 
federal agencies with mandatory conditioning authority worked together 
to develop regulatory language for a proposed rule.
    Based on written and oral comments and the public drafting 
sessions, the Commission issued a Notice of Proposed Rulemaking on 
February 20, 2003. In that notice, the Commission circulated for public 
comment a proposal for an integrated licensing process. The new 
integrated process would be added to the traditional and alternative 
processes as an option. The integrated process would be the default. 
The Commission's proposed integrated approach improves both the 
efficiency and timeliness of the licensing process by merging pre-
filing consultation with the Commission's NEPA scoping; enhancing 
consultation with Indian tribes; improving coordination of processes 
with federal and state agencies, especially those with mandatory 
conditioning authority; increasing public participation during pre-
filing consultation; and developing a study plan and schedule, 
including mandatory, binding study dispute resolution. Further, unlike 
the more sequential traditional licensing process, an integrated 
process would allow for these multiple federal and state processes to 
take place simultaneously in a more parallel fashion. With these 
features, the Commission's proposed process should make it much more 
likely that the Commission, federal agencies with mandatory 
conditioning authority, and state agencies or Indian tribes with water 
quality certification authority obtain all the information they need to 
carry out their respective statutory responsibilities by the time the 
application is filed.
    We believe that the efficiency and timeliness of the proposed 
integrated licensing process will reduce costs associated with the 
license application process by minimizing the redundancy and waste 
caused by the often duplicative information needs of the Commission and 
the various federal and state agencies associated with the 
hydroelectric licensing process.
    To obtain further public input on the proposed rule, we are 
currently engaged in a series of six regional workshops. These regional 
workshops, co-hosted by Departments of the Interior, Commerce, and 
Agriculture, will be geared toward members of the hydropower community, 
federal and state resource agencies, environmental organizations, 
Indian tribes, and the general public. As part of the workshops, 
Commission staff will facilitate a session where workshop participants 
will be asked to identify and discuss key issues associated with the 
proposed process. Following conclusion of the regional workshops, the 
Commission will again host a four-day public drafting session at the 
end of April to begin developing final rulemaking language. At the 
conclusion of the public drafting session, Commission staff, with the 
assistance of the federal agencies with mandatory conditioning 
authority, will draft the final rule language. I anticipate that the 
Commission will issue a final rule codifying a new integrated licensing 
process in July of this year.

     III. COMMENTS ON TITLE III OF THE LEGISLATIVE DISCUSSION DRAFT

    Section 3001 would amend Section 4(e) [mandatory conditions] and 
Section 18 [fishway prescriptions] of the FPA. Section 3001(a) would 
amend FPA Section 4(e) to provide that, where an applicant for a 
hydroelectric license proposes an alternative to a mandatory condition 
proposed by the Secretary with supervision over a reservation on which 
a hydropower project is located, the Secretary shall accept the 
alternative condition, if the Secretary determines that the alternative 
would provide adequate protection of the reservation and will either 
cost less or result in improved project generation as compared to the 
original condition. In making the decision, the Secretary must give 
equal consideration to power and other developmental purposes as well 
as preservation of environmental quality. Further, if the Secretary 
does not accept an alternative condition and the Commission finds the 
Secretary's original condition to be inconsistent with law, the 
Commission could refer the dispute to the Commission's Dispute 
Resolution Service for an advisory opinion.
    The provisions of Section 3001(b), which amends FPA Section 18, 
basically mirror those for mandatory conditions but provide that the 
basis for the Secretary of the Interior or Commerce's decision on 
accepting an alternative fishway prescription is if it would be no less 
protective of the fish resources than the fishway initially prescribed.
    As discussed previously, the FPA requires that the Commission can 
authorize projects that are best adapted to a comprehensive plan for 
improving or developing a waterway for beneficial public purposes, 
including power generation, irrigation, flood control, navigation, fish 
and wildlife, municipal water supply, and recreation, giving equal 
consideration to developmental and non-developmental values. Aligning 
the criteria that the agencies must use to more closely parallel the 
Commission licensing criteria under the FPA should act to minimize 
conflict between mandatory conditions and the Commission's conditions 
recommended to reflect the public interest.
    For example, in the order relicensing the Holyoke Hydroelectric 
Project (MA), the Commission required measures to enhance fish passage 
set forth in the water quality certification and fishway prescriptions, 
even though, in the Commission's judgement, a number of the conditions 
entail measures that are very costly in light of their benefits, and 
therefore do not reflect a balancing of developmental and environmental 
considerations. Presumably, the proposed legislation would help to 
minimize this type of conflict.
    I support the idea of greater interaction between the resource 
agencies and the licensees in the development of environmental 
measures, which Section 3001 would encourage. I believe that both the 
language for mandatory conditions and fishway prescriptions would add a 
degree of accountability that currently does not exist. As Congress 
considers any legislation, however, it should be careful to ensure that 
any procedures that could add time or expense to the process are 
justified by improved outcomes.
    Thank you. I will be pleased to answer any questions you may have.

    Mr. Barton. Thank you.
    Ms. Keil?

                     STATEMENT OF JULIE KEIL

    Ms. Keil. Chairman Barton, Congressman Allen, members of 
the subcommittee, thank you so much for inviting me to speak to 
you today. I would also like to note and especially thank 
Congressman Walden from my home State, and Congressman 
Radanovich, for their leadership on this issue. My name is 
Julie Keil. I am the Director of Hydro Licensing and Water 
Rights for Portland General Electric. We are an investor-owned 
utility located in Portland, Oregon. I am responsible for the 
licensing actions surrounding our five FERC hydro licenses, and 
all of the water rights and other things that go with that. 
Those are the cornerstone of our ability to provide economical 
and efficient service to our customers.
    I am the company's front-line negotiator with tribes, 
conservation groups and agencies with regard to the terms and 
conditions of those licenses.
    The issue I am here to talk to you about today is one of 
our favorites in the Northwest, thought of in its broadest 
terms the balance between energy production and environmental 
protection, a discussion that has been going on in many forums 
for a very long time in the Northwest.
    That tension is nowhere more apparent than in the 
relicensing of federally licensed hydro projects. I have 
appeared before Congress three times now, this will be the 
fourth time, to talk about this issue. I am back again today 
because the issue has become more urgent with the passing of 
time rather than less.
    Over the next 15 years, as Congressman Walden pointed out, 
over one-half of all the non-Federal hydroelectric capacity, 
over 30,000 megawatts of power, must undergo the relicensing 
process. PGE alone is in the process of relicensing more than 
600 megawatts all before the year 2006. The fact is, hydropower 
has played and must continue to play a vital role in our 
Nation's energy policy and energy supply. And absent 
legislation reforming the FERC hydro relicensing process, that 
role is in jeopardy.
    Hydropower is our largest, most flexible and most reliable 
renewable resource. It is low-cost, efficient, and truly 
domestic. More than any other form of power production, it also 
provides a myriad of other benefits that you have heard already 
this morning, or this afternoon, including recreation, flood 
control, water supply, and irrigation. It is also emissions-
free, which cannot be overlooked in a time of ongoing concern 
over greenhouse gases and other pollutants.
    All across the West, utilities continue to struggle to 
provide the reliable power that is the engine of economic 
growth, and I will tell you today that the margin for error is 
perilously thin. In these circumstances, hydro's unique 
capabilities become even more important. Unlike most thermal 
projects, hydropower projects can be turned on and off almost 
instantaneously. This is a critical component of a system that 
must match generation-to-load every minute of the day, every 
day of the week.
    Despite these benefits, America is in danger of losing 
substantial hydropower capacity and operational flexibility at 
a time when it is most needed. Characterized by excessive cost 
and delays, the Federal hydro licensing process threatens to 
reduce generation capability and operational flexibility at 
projects throughout the Nation.
    So, how did we get to this point? Simply put, the process 
fails to properly balance the environmental impacts of hydro 
projects with the crucial energy and on-energy values of the 
resource. It suffers from a dispersed decisionmaking authority 
and an inability to weigh competing values.
    The net result of the existing statutory scheme is that no 
one has the authority to balance in the public interest. No one 
has the authority to look at the broader picture and make sure 
that important energy benefits are considered in the exercise 
of resource agency mandates. To call the process a three-ring 
circus does not do justice to the complexity we face.
    To take the analogy one step further, in my role I juggle 
several interests. I am charged with providing reasonably 
priced and reliable electricity to PGE's customers. I must 
ensure that PGE's investors receive a reasonable return on 
their investment. And I must negotiate terms and conditions 
which reflect PGE's deeply held environmental stewardship 
ethic. Our goal in relicensing is to make the environmental 
footprint of our projects as small as possible while 
maintaining a viable project.
    To meet all of my responsibilities requires creativity and 
innovation. My agency counterparts, on the other hand, often 
juggle only one ball, that of the protection of natural 
resources. As a result, they have no incentive to think 
creatively about how to meet the interests of others. This 
fundamental disparity is at the core of the hydro licensing 
conundrum.
    You will undoubtedly hear the argument that problems with 
the FERC relicensing process can be solved solely through 
administrative means. I disagree. My experience is a good 
example of industry's commitment to seek reform in every 
available forum. I was a member of the Federal Advisory 
Committee that worked with the InterAgency Task Force toward 
improvements in the hydro licensing process. I was a member of 
the EPRI National Review Group that also explored 
administrative improvements. And I am participating in the 
current FERC rulemaking. In each one of these forums, our goal 
has been a more efficient and more effective process.
    Nonetheless, I cannot help but conclude that administrative 
reforms cannot fully address the fundamental flaws in the 
process. The problems are embedded in a statutory scheme that 
is outdated, encourages delay, and serves no one's interest. It 
certainly doesn't serve the interest of energy production and, 
I would argue, ill serves the environment as well, as 
environmental protection delayed is environmental protection 
denied.
    The process encourages all involved to spend money on 
lawyers rather than on the environment. To craft a process that 
truly advances all interests, energy and environment, 
legislative solutions are necessary.
    For the hydro industry, the No. 1 legislative priority is 
to reinject balance into the relicensing process to make sure, 
if you will, that everyone is required to juggle multiple and 
perhaps conflicting interests and needs. I believe that the 
language in Title III of Chairman Barton's discussion draft 
which echoes that of the Radanovich/Walden/Towns bill 
successfully addresses this priority in a reasonable and 
environmentally responsible manner. The Barton discussion draft 
offers a fair and reasonable approach to reform, one that would 
restore balance, certainty and accountability to the licensing 
process, while leaving the Federal resource agency conditioning 
authority fully intact.
    As I mentioned earlier, this is not a new issue, it has 
been considered now in multiple sessions of Congress. Through 
those years of debate, the solutions have evolved. From the 
industry perspective, this evolution came about through careful 
consideration, deliberation, and compromise. The result is a 
bill and a discussion draft that we believe achieves the 
admittedly difficult and delicate balance between clean energy 
needs and environmental protection.
    With hydropower licensing improvements, resource 
enhancement and protection will continue, but they must 
continue in a process that also recognizes and protects the 
value of the product that is the subject of relicensing in the 
first place. We can and must achieve balance in this arena. We 
strongly believe that healthy rivers and hydropower can co-
exist, and we continue to work toward that end. Thank you.
    [The prepared statement of Julie Keil follows:]

Prepared Statement of Julie Keil, Director of Hydro Licensing and Water 
               Rights, Portland General Electric Company

    Chairman Barton, Ranking Member Boucher, Chairman Tauzin, Ranking 
Member Dingell, Members of the Subcommittee, thank you very much for 
giving me the opportunity to appear before you today to discuss the 
hydropower licensing language contained in the Subcommittee's 
discussion draft.
    I appear before you today in two capacities. First and foremost, I 
am Director of Hydro Licensing and Water Rights for Portland General 
Electric Company. PGE is an investor owned utility based in Oregon, 
serving more than 700,000 customers in the Portland metropolitan area 
and the Willamette Valley. PGE owns 5 FERC-licensed hydroelectric 
projects. Like most energy companies that possess hydropower assets, 
the capabilities of these projects form the cornerstone of our ability 
to provide efficient and economical service to our customers. They are 
vital to the successful operation of my company, as indeed hydropower 
is essential to the entire Western power grid.
    I am also here representing a broad cross-section of the hydropower 
industry. As a former President of the National Hydropower Association, 
I have participated over the years in hundreds of discussions with 
industry colleagues and non-industry stakeholders as to the challenges 
and opportunities facing hydropower in the 21st century. At the local 
level, I have participated in numerous task forces aimed at improving 
state participation in the hydro relicensing process. I have also 
played a lead role in federal efforts to bring about administrative 
improvements to the relicensing process, as a member of the Federal 
Advisory Committee that worked with the Interagency Task Force, as a 
member of the Electric Power Research Institute (EPRI) National Review 
Group that also explored administrative relicensing process reform, and 
as a stakeholder in FERC's present hydropower rulemaking.
    As you know, the issue of hydro relicensing improvement is not new 
to this Subcommittee. In fact, it's an old issue. In numerous oversight 
and legislative hearings held before this Subcommittee during the 
previous three Congresses, a detailed record has been compiled as to 
the complexity, costs, delays, and conflicting mandates inherent in the 
FERC relicensing process. Committee members have learned that the 
process is broken and that, more importantly, almost every hydropower 
stakeholder wants to see it repaired. The energy issues that continue 
to impact California and the Pacific Northwest have only underscored 
the need for, and importance of, Congress acting as soon as possible to 
reform the relicensing process so we can preserve consumer access to 
clean, reliable, domestic, and cost-efficient hydropower.
    The urgency surrounding this issue has not changed with the passage 
of time. In fact, with each passing year the stakes increase 
considerably. Today, as we look at the next 15 years, over one-half of 
all non-federal hydroelectric capacity--over 30,000 MW of power (enough 
to serve approximately 30 million homes)--must undergo the FERC 
relicensing process. This includes 296 projects in 37 states, much of 
it the West. PGE alone is in the process of relicensing nearly 600 
megawatts, all before 2006. We are not unusual in this respect.
    What has changed, however, is the bipartisanship that now 
characterizes efforts to improve the relicensing process. All of us 
within the hydropower industry are encouraged by this shift towards a 
bipartisan consensus on this issue. The fact that last year both the 
Democratic-controlled Senate and Republican-controlled House passed 
energy bills with hydro licensing improvement titles is a testament to 
the important consumer benefits to be gained from relicensing reform. 
We are hopeful that this year we can finally see hydro licensing reform 
legislation enacted into law. I want to especially thank Congressman 
Walden of my home state for his commitment to this issue. The fact is, 
hydropower has played--and must continue to play--a key role in our 
nation's energy policy; and absent legislative reform of the FERC 
relicensing process, that role is in jeopardy.
    Hydropower is currently the most abundant and lowest-cost renewable 
energy technology in the United States. The benefits of hydropower, and 
its continued importance to our nation's environmental and energy 
policy objectives are well documented. Hydropower is a purely domestic 
resource and it provides Americans with abundant recreational 
opportunities, as well as many flood control, water supply and 
irrigation benefits. What's more, it is also an emissions-free 
resource, which cannot be overlooked in a time of ongoing concern over 
greenhouse gases and other pollutants.
    In 1999, hydro displaced the emissions of 77 million metric tons of 
carbon; that is the equivalent of removing 62.2 million passenger cars, 
nearly 50% of the current fleet, from our nation's roadways. In 
addition, hydropower generation helps us avoid significant amounts of 
Nitrogen Oxide, Sulfur Dioxide, and Mercury, which are all major 
contributors to decreased air, river and lake quality. The importance 
of hydropower to our nation's clean air goals cannot be overstated. We 
must prevent issues, such as a broken licensing process, from weakening 
hydropower's ability to contribute to air quality for us and for future 
generations.
    Another major benefit of hydropower, its reliability, has taken on 
increased importance over the past few years. The management of the 
nation's electric grid depends upon fast, flexible generation sources 
like hydropower to meet peak power demands to maintain level system 
voltages and to restore service after a blackout. Hydropower's ability 
to go from zero power to maximum output quickly and predictably makes 
it exceptionally good at meeting changing loads and providing ancillary 
electrical services.
    Despite these multiple benefits, our supply of hydropower is waning 
and America is in danger of losing substantial hydropower capacity and 
operational flexibility at a time when we feel it is most needed. As we 
face uncertainty in energy markets, increased levels of pollution, 
reliability concerns, and a real need for more domestic and renewable 
resources, we must consider ways to counter these trends. In short, now 
is the time for policymakers at the federal level to fix the hydro 
relicensing process, for it is this process that poses the greatest 
threat to the future viability of this important, renewable resource.
    As documented in Congressional hearings and by FERC in its May, 
2001 Section 603 Report, the relicensing process suffers from dispersed 
decision-making authority and an inability to balance competing values. 
The bottom line is that costs, delays, and conflicting mandates greatly 
undermine this process.
    How did we get to this point? Why such a dysfunctional process? 
While there is no shortage of explanations, most of it can be boiled 
down to one unfortunate reality: the relicensing process fails to 
properly balance the environmental impacts of hydro projects with the 
crucial energy and non-energy values of the resource.
    Since 1986, FERC has been required, under the Federal Power Act, to 
give ``equal consideration'' to a variety of factors when issuing hydro 
project licenses and relicenses. This balancing authority requires FERC 
not only to consider the power, economic, and development benefits of a 
particular hydro project, but also to consider energy conservation and 
the protection, mitigation of damage to, and enhancement of fish and 
wildlife. In other words, under Federal law, FERC has the 
responsibility and authority to strike a balance between power and 
environmental values.
    If this were the provision of the Federal Power Act that governed 
in this situation, relicensing might have a chance to succeed. The 
courts, however, have interpreted the Federal Power Act so as to 
prevent any balancing from taking place. The courts, in effect, have 
given Federal resource agencies unilateral authority to set 
``mandatory'' conditions on FERC relicenses. FERC has no opportunity to 
question the basis of mandatory conditions set by the agencies, or to 
fit those conditions into the final license.
    This would not be as much of a problem if federal resource 
agencies, when imposing a mandatory condition, considered the many 
factors that FERC is required to examine pursuant to the Federal Power 
Act. However, this is simply not done. While all of the agency 
personnel with whom I have worked over the years have been intelligent, 
well-intentioned people, their statutory mandates simply do not require 
them to look beyond the narrow resource areas they are charged to 
protect. The net result is that no one is balancing. No one has the 
authority to look at the big picture of how hydro fits into our 
national energy policy. I go back to my earlier observation: in today's 
uncertain energy climate, where every megawatt counts, this is a 
situation that must be remedied, and remedied soon.
    Some have suggested that the problems with the FERC relicensing 
process can be solved solely through administrative, rather than 
legislative means. I disagree. And I draw that conclusion after having 
invested considerable time and energy in recent years in search of 
substantive administrative remedies.
    While I am 100% committed to exploring and securing administrative 
reform, I have come to the following conclusion: properly developed and 
implemented administrative remedies can certainly help on a number of 
fronts and should be encouraged. But taken alone, administrative 
reforms can not fully address the fundamental and substantive problem 
with the process: the fact that federal resource agencies mandate 
restrictive conditions on the operations of hydropower projects without 
either comprehensive analysis of their impacts or an independent review 
of the conditions.
    These thoughts were echoed by FERC in its aforementioned Section 
603 Report:
        ``. . . changes in regulations, policies, and procedures, while 
        expected to alleviate the situation, are no substitute for 
        legislative action. They are, at best, partial mitigation for 
        the unorthodox legislative scheme.'' 1
---------------------------------------------------------------------------
    \1\ ``Report on Hydroelectric Licensing Policies, Procedures, and 
Regulations: Comprehensive Review and Recommendations Pursuant to 
Section 603 of the Energy Act of 2000''; Federal Energy Regulatory 
Commission Staff, May, 2001.
---------------------------------------------------------------------------
    Let me say once again: legislative fixes are necessary if we are to 
truly reform the hydroelectric relicensing process.
    So, what legislative fixes are needed? For the hydro industry, the 
number one priority is to re-inject balance into the relicensing 
process--a balance between important environmental protection and the 
valuable energy and non-power benefits of hydro projects. I believe 
that the language in Title III of Chairman Barton's discussion draft, 
which echoes that of the Radanovich, Walden, Towns bill (H.R. 1013), 
successfully addresses this priority in a reasonable and 
environmentally responsible manner. And as you heard from Commissioners 
Brownell and Massey last week, they agree as well.
    As mentioned earlier, the FERC licensing process suffers from 
dispersed decision making authority. The process is splintered among 
multiple federal and state agency decision makers, ranging from the 
U.S. Departments of Interior and Agriculture under Federal Power Act 
section 4(e), the U.S. Departments of Interior and Commerce under 
Federal Power Act section 18, and state water quality agencies under 
Clean Water Act section 401, among others. This fractured license 
decision-making authority essentially prevents FERC from being an 
ultimate arbiter of how well individual license conditions fit into an 
overall license and from being able to ensure that the end result of 
the licensing process is reasonable. It also makes FERC's ability to 
manage the licensing process a real challenge.
    Many would argue that the most effective solution to this 
fundamental problem would be to bring the ultimate decision-making 
authority back to FERC, where it originally resided under the Federal 
Power Act. While such a solution has merit, the Barton discussion draft 
offers an alternative approach, one that would restore balance, 
certainty and accountability to the licensing process while leaving 
federal resource agency conditioning authority fully intact. The idea 
behind the Barton discussion draft is to ensure that at least the 
federal agencies involved in setting license conditions under sections 
4(e) and 18 of the Federal Power Act take a broader perspective in 
setting those conditions, as FERC itself must do in setting license 
conditions under Part I of the Federal Power Act.
    Title III of the Barton discussion draft would allow a licensee to 
propose a cost and/or energy-saving alternative condition--an 
alternative that the federal resource agency would have to accept if 
the agency--and the agency alone--determined that it met its existing 
statutory requirements for environmental protection. While this concept 
is similar to the provisions of the House-passed H.R. 4 from the 107th 
Congress, there are some significant differences.
Last Year's Bill Too Restrictive to Allow for Acceptance of Reasonable 
        Alternatives
    For mandatory conditions having to do with management of federal 
lands (Section 4(e) conditions), last year's bill would have created a 
new environmental standard for alternative conditions, to be set on a 
case-by-case basis by agency personnel exercising delegated authority. 
This, in turn, would bind the hands of the Secretary to consider 
reasonable alternatives.
    By contrast, the Barton discussion draft simply mirrors the 
existing environmental protection standard found in Section 4(e) of the 
Federal Power Act, and upon which federal land management agencies base 
their environmental conditions. This language would ensure the 
protection of environmental resources while giving an applicant some 
added flexibility to save water or power, or keep costs down.
    For mandatory prescriptions for fish passage (Section 18 
prescriptions), last year's bill would have restricted the Secretary's 
consideration to a narrow range of prescribed alternatives. By 
contrast, the Barton discussion draft takes a more goal-oriented 
approach that permits the Secretary to determine and set a protective 
goal and decide whether the licensee's alternative meets that goal.
    In both cases (4e and 18 conditions), the Barton language ensures 
that the decision-making authority remains with the Secretaries of the 
federal resource agencies.
Barton Discussion Draft Provides Reasonable Treatment of Applicant and 
        Third Party Alternatives
    The Barton discussion draft allows any party to propose alternative 
conditions or prescriptions; but a license applicant's ``least-cost'' 
or ``more power'' alternative would have to be accepted if the 
Secretary determines that it satisfies the environmental protection 
standard. Given that the licensee and the electric consumer ultimately 
bear the cost of license conditions, it is appropriate and reasonable 
that a Secretary be required to accept a licensee's alternative if the 
Secretary determines that it satisfies the environmental protection 
standard.
    By contrast, last year's bill would have invited conflict, 
confusion and further delay. It would have required resource agencies 
to accept any and all alternative conditions or prescriptions 
(regardless of who proposes them) if they were found to meet the 
specified criteria, and without providing a mechanism for resolving 
competing alternative proposals.
Barton Discussion Draft H.R. 1013 Contains Sunshine Provisions; Holds 
        Government Agencies Accountable
    The Barton discussion draft contains a number of ``good 
government'' provisions aimed at providing accountability in agency 
decisions and returning balance to the licensing process through the 
recognition of the many public benefits served by hydropower projects, 
such as water supply, flood control, irrigation, pollution-free energy, 
and recreation. Specifically, the Barton discussion draft would:

 provide an opportunity--once mandatory conditions are 
        drafted--for an agency hearing on the record on any disputed 
        issues of material fact;
 require agencies to document that they gave ``equal 
        consideration'' to the economic, environmental and other public 
        impacts, to the extent the information is available, of their 
        mandatory conditions before imposing them on licensees and/or 
        rejecting alternative mandatory conditions--something that 
        agencies are not doing now;
 require agencies to submit into the public record all studies 
        and data that are available and relevant to their decisions; 
        and
 provide for a non-binding dispute resolution process should 
        FERC find a final mandatory condition to be inconsistent with 
        its requirements under the Federal Power Act.
    By contrast, last year's bill had no such sunshine provisions.
    Over the last decade, Portland General Electric and--indeed--the 
entire hydropower industry, has devoted significant time and energy to 
finding the appropriate, legislative fix to the ills of the current 
FERC hydro licensing process. In that time, I have witnessed a steady 
evolution; an evolution both of the industry's increasing dedication to 
the issue as well an evolution of the legislative vehicle that would 
best solve the problem at hand.
    In the 106th Congress, the Towns bill laid out a comprehensive 
blueprint for reform. In the 107th Congress, this subcommittee led the 
way in putting forth a new approach, that of an alternative mandatory 
condition; an approach that the Senate last year built upon and that 
has been further refined this year with introduction of the Radanovich, 
Walden, Towns bill (H.R. 1013), whose language mirrors that of Title 
III of the Barton discussion draft.
    From the industry perspective, this evolution came about through 
careful consideration, deliberation and compromise. The result is a 
bill (H.R. 1013) and a discussion draft that we believe achieves the 
admittedly difficult and delicate balance between clean energy needs 
and environmental protection.
    In conclusion, I would like to offer the following thoughts on the 
relationship between energy priorities and natural resources. The river 
and fisheries resources administered by hydro project operators are 
very important ones, and essential and long-lasting commitments are 
being made in relicensing processes. Portland General and the 
hydropower industry as a whole take seriously their role as stewards of 
the rivers we are privileged to use. Licensees go to great lengths to 
involve stakeholders and members of the public in licensing and 
relicensing processes. These consultations take years and, without 
question, natural resource issues constitute the bulk of those 
discussions. Ultimately, the majority of direct and indirect 
expenditures made by licensees are spent on environmental protection, 
mitigation and enhancement measures.
    Some rhetorically argue that the hydropower industry wants to 
``roll back'' environmental regulations in this process. That is 
absurd. With hydropower process improvements, resource enhancement and 
protection will continue. But they must continue in a process that also 
recognizes and protects the value of the product that is the subject of 
the relicensing in the first place. We can and must achieve balance in 
this arena. We strongly believe that healthy rivers and hydropower can 
coexist and we continue to work toward that end.
    Time is short. As we look to self-sustaining energy strategies, now 
is the time for policymakers to better incorporate hydropower into the 
nation's energy mix. We urge you to pass Title III of the Barton 
discussion draft. The language will bring efficiency, certainty, 
accountability and transparency to the licensing process. Its 
provisions will benefit hydro producers, the environment and energy 
consumers, and, as such, is public policy that all Americans should 
support.
    Thank you.

    Mr. Barton. Thank you, Ms. Keil.
    We now would recognize Mr. Masonis for his statement.

                    STATEMENT OF ROB MASONIS

    Mr. Masonis. Good afternoon, Mr. Chairman, Congressman 
Allen, and members of the subcommittee. I appreciate the 
opportunity to appear before you this afternoon. My name is Rob 
Masonis. I am the Regional Director of the Northwest of 
American Rivers, a national river conservation group. We also 
chair the Hydropower Reform Coalition, a coalition of 117 
national and local organizations dedicated to improving the 
licensing of hydropower projects.
    Hydropower produces about 10 percent of total generation in 
the Nation, but it is important regionally in the Pacific 
Northwest, where I live, supplying about 70 percent of our 
electricity.
    As the President's 2001 Energy Plan acknowledged, it is not 
an environmentally benign power source. Hydropower dams can 
block fish, drown rivers and riverside wildlife habitat, and 
radically change water temperatures. Some projects completely 
dewater rivers for miles at a stretch. Some increase river flow 
from nearly nothing to thousands of cubic feet per second, and 
reduce it again to a trickle, decimating the finely turned 
ecology of rive ecosystems. For example, the Hells Canyon 
complex, a series of three large dams in the Snake River along 
the Idaho-Oregon border, blocks access of Snake River salmon 
and steelhead to their spawning grounds, including 85 percent 
of the Chinook spawning grounds in the Snake River basin.
    Idaho Power's original license required it to provide fish 
passage as a condition of the dams' construction, but attempts 
to pass fish failed and were ultimately abandoned shortly after 
the dams were built. The loss of these fish and their decaying 
carcasses at the end of their spawning cycle has had a ripple 
effect throughout the ecosystem, robbing headwater streams and 
forests of a valuable source of nutrients. The project also 
drowned critical wildlife habitat and alters flow and water 
quality for hundreds of miles downstream.
    Scores of hydro projects were licensed before modern 
environmental standards and an adequate understanding of river 
ecology existed. Relicensing represents our first opportunity 
to place conditions on these dams that will protect and restore 
our rivers for our children and grandchildren. Relicensing 
hydropower projects has produced some spectacular successes. My 
own electric utility, Seattle City Light, finished relicensing 
its large Skagit River project in 1996, and it resulted in a 
settlement agreement with diverse parties. The company was so 
proud of the results for Skagit River salmon and steelhead that 
just last month it published an Op Ed in the Seattle Times 
touting its success, and I quote. ``Research indicates these 
salmon also owe their comeback to changes in the way City Light 
operates its hydroelectric dams.'' As the Op Ed further noted, 
``When the cost of salmon restoration finally gets to the City 
Light's customer's bill, it seems reasonable, about 20 cents 
per customer each month.'' American Rivers helped negotiate 
that settlement. In the past 10 years, many similar settlements 
have produced both river restoration and profitable power 
generation for utilities.
    The current licensing process is far from perfect. When the 
process takes too long, modern environmental conditions for the 
project are delayed and the environment suffers as a result. In 
the Pacific Northwest where I live, an example is the Cushman 
Hydroelectric Project in the State of Washington, where the 
license expired in 1974, yet today it still operates under 
antiquated license terms, with no immediate relief in site.
    As Mr. Robinson pointed out, for the last 5 years we have 
been working with industry, Federal and State agencies, and the 
commission to improve the hydropower relicensing process. Those 
efforts resulted in a proposed rule issued just last month. The 
commission estimates that this rule would reduce the time for 
licensing by 30 months and reduce applicant costs significantly 
as well.
    Unfortunately, Title III of the chairman's discussion draft 
would increase delays in the relicensing process, abandon the 
basic Federal Power Act principle of public participation on 
equal footing, unduly burden the natural resource agencies, and 
harm the environment. The current draft is based on language 
that was negotiated last Congress and agreed to by 
representatives of the conservation community and the 
hydropower industry, but the current proposal bears only a 
passing resemblance to that negotiated language. The new 
language would add at least 4 months to licensing, create four 
new administrative processes, and requiring Federal resource 
agencies to consider 11 new factors in developing their 
environmental conditions. Many natural resource agencies 
already have inadequate resources to do the work currently 
required, let alone the much more onerous analysis that would 
be required by Title III as currently drafted.
    The current draft would establish a new environmental 
standard that would invite litigation and judicial second-
guessing of resource agency decisions. The worst aspect of 
Title III is the preferential treatment offered to license 
applicants. Currently, the Federal Power Act creates an open 
equitable process in which the applicant starts the 
proceedings, but other interested stakeholders have equal 
rights to participate and have their comments weighed equally 
by the agencies and the Federal Energy Regulatory Commission.
    Title III would upset this balance by giving only the 
applicants the right to compel the resource agencies to adopt 
different conditions or to review their evidentiary record and 
cutting a host of other interested parties out of the process, 
not just conservationists but also State agencies, Tribal 
interests, irrigators, neighborhood landowners, and 
recreationists. And although the bill says other parties may 
also offer alternative conditions, the clause is meaningless 
without equal footing to present those alternatives.
    Being a good environmental steward is a legitimate cost of 
doing business. We urge the committee not to make environmental 
protection the scapegoat for licensing marginal projects, nor 
to allow utilities that have never adequately mitigated for 
their environmental impacts, to continue to benefit from a 
sweetheart deal at the public's expense.
    The rulemaking currently underway that would establish an 
integrated licensing process holds the promise of fairly 
streamlining the process while not tipping the scales in favor 
of the hydropower industry, as Title III of the chairman's 
discussion draft would most certainly do.
    Those of us in the environmental community, and especially 
the Pacific Northwest, understand and appreciate the value of 
hydroelectric power, but the benefits it provides have come at 
a very high cost to our Nation's rivers and the fish and 
wildlife and human communities that depend on them.
    In the Pacific Northwest, it has profoundly harmed salmon 
and salmon-dependent communities and, I would add, unlike power 
which can be generated in a number of ways, salmon and other 
fish and wildlife need healthy, functioning rivers to survive. 
There is no substitute. I appreciate your time and attention.
    [The prepared statement of Rob Masonis follows:]

Prepared Statement of Rob Masonis, Director, Northwest Regional Office, 
                            American Rivers

                            I. INTRODUCTION

    Good afternoon, Mr. Chairman, Congressman Boucher and members of 
the Subcommittee. I appreciate the opportunity to appear before you 
here today. My name is Rob Masonis, and I am the director of the 
Northwest Regional Office of American Rivers, a national conservation 
organization dedicated to protecting and restoring the nation's rivers. 
American Rivers has more than 33,000 members across the country, and 
works in partnership with more than 4,000 river and conservation 
organizations. American Rivers also chairs the Hydropower Reform 
Coalition, a coalition of 117 national and local organizations 
dedicated to improving the licensing of hydropower projects by the 
Federal Energy Regulatory Commission.
    There are three basic messages in my testimony:

1. Hydropower relicensing significantly improves environmental quality 
        at little cost to power generation.
2. Administrative reforms are working to make the licensing process 
        more efficient.
3. Title III of the Chairman's draft would further complicate and 
        increase the cost of the licensing process, interfere with full 
        participation by states, tribes and the interested public, and 
        diminish environmental quality.
    Hydropower represents an important part of the nation's energy mix, 
producing about 10% of total generation nationally, depending on the 
water year. It is more important regionally in the Pacific Northwest 
where I live, supplying about 70% of our electricity capacity. 
Nationally, about 9% of our electricity comes from hydropower and about 
half is generated by non-federal producers and regulated by the 
Commission. The licensees pay nothing for an essentially free and 
renewable fuel--river water--and well below market value for the use of 
federal lands. (Hydrowire, May 20, 2002)
    Although hydropower can generate flexible, emission-free 
electricity, it is not an environmentally benign power source. 
Hydropower projects include dams that can block fish, sediment and 
water flow; drown rivers and riverside wildlife habitat; and radically 
change water temperatures. They include bypass canals that may 
completely dewater rivers for miles at a stretch. They may be operated 
to meet daily peak demand for electricity, increasing river flow from 
nearly nothing to thousands of cubic feet per second, then reducing it 
again to a trickle at night. And they depend on turbines that destroy 
aquatic life entrained in their spinning blades.
    For example, the Hells Canyon complex on the Snake River along the 
Idaho-Oregon border blocked access of Snake River salmon and steelhead 
to their spawning grounds, including blocking approximately 85% of the 
spawning habitat for fall Chinook salmon. Idaho Power's original 
license required them to construct fish passage as a condition of the 
dams' construction, but sadly this construction was never carried out. 
The loss of these fish and their decaying carcasses at the end of their 
spawning cycle has had a ripple effect throughout the ecosystem, 
robbing headwater streams and forests of a valuable source of 
nutrients. The project also alters flows and water quality for hundreds 
of miles downstream and occupies and affects significant tracts of 
public lands managed by Forest Service and Bureau of Land Management. 
This hydropower complex further drowned critical wildlife habitat and 
greatly diminished animal populations.
    The President's 2001 Energy Plan plan acknowledged and catalogued 
the impacts of hydropower dams on natural resources. ``Hydropower, 
although a clean energy source, does present environmental challenges. 
Unless properly designed and operated, hydropower dams can injure or 
kill fish, such as salmon, by blocking their passage to upstream 
spawning pools. Innovations in fish ladders, screens, and hatcheries 
are helping to mitigate these adverse impacts. Ongoing dam relicensing 
efforts are resulting in community involvement and the industry's 
application of the latest technologies to ensure the maintenance of 
downstream flows and the upstream passage of fish. These efforts also 
have been successful in identifying and removing older, nonfunctioning 
dams and other impediments to fish movements.'' (President's Plan, 3-8)
    The harmful effects of hydropower projects can be reduced or 
mitigated, but this requires careful review and oversight by federal 
and state agencies that are responsible for protecting the affected 
natural resources. The Federal Power Act's licensing process is 
designed to ensure that the impacts of hydro projects are fully 
evaluated, that lands, fish and wildlife are protected, and that each 
project is suited to the river where it is installed. The license for 
each project expires every 30 to 50 years--once a generation--so that 
we can evaluate again the impacts of the project and the terms under 
which it should operate for the next generation. In the Hells Canyon 
example, the project license is currently under review and is scheduled 
to expire in 2005.
    Unfortunately, the scores of hydroelectric licenses scheduled to 
expire over the next decade were licensed so long ago that modern 
environmental standards had not yet come into play and our 
understanding of complex ecological systems was in its infancy. For 
decades, these projects have been operating with minimal environmental 
controls. Current relicensing represents our first opportunity to 
review these dams, canals and turbines, and to place conditions on them 
for the next 30 to 50 years that will improve our rivers and protect 
fish and wildlife for our children and grandchildren.
    Relicensing hydropower projects has already produced some 
spectacular successes. My own electric utility, Seattle City Light, 
finished relicensing their Skagit River project in 1996. The resulting 
changes to the flows from these three dams have produced significant 
and tangible improvements to the Skagit River salmon runs--in fact, 
Seattle City Light was so proud of the results that just last month it 
published an Op Ed piece in the Seattle Times touting its success. 
``(R)esearch indicates these salmon also owe their comeback to changes 
in the way City Light operates its hydroelectric dams.'' (A copy of 
that Op Ed is appended to my testimony.) Importantly, these changes, 
among the most expensive required of any hydropower licensee in the 
past several years, have proven to be affordable. As the article noted, 
``These measures cost money. The Skagit system provides about 25 
percent of Seattle's electricity. Managing flows for fish sometimes 
means water must be released in ways that may result in less 
electricity generation. That means the utility must find more power 
elsewhere that is likely to be more expensive. However, when the cost 
of salmon restoration finally gets to the City Light customer's bill, 
it seems reasonable: about 20 cents per customer each month.'' This and 
other examples of improved river health are the real story of 
hydropower relicensing.
    Over the past ten years, settlements have been commonplace and 
resulted in both ecological restoration and profitable power 
generation. New England Power Company signed two major settlement 
agreements with resource agencies, conservation groups, and other 
stakeholders on the Deerfield and Connecticut Rivers, leading to 
tremendous growth in rural economies. The Menominee River in Wisconsin 
and Michigan is another river where collaborative relicensing yielded 
significant benefits and was accomplished prior to license expiration. 
In New York State, Niagara Mohawk Power Company, resource agencies, and 
other stakeholders have worked river basin by river basin to settle 
Niagara Mohawk's numerous dam relicensings. In the past ten years, 
several significant settlement agreements have been signed, affecting a 
total of 35 dams on six major river basins across the state. And in 
Maine, settlements have not only resulted in fish passage and restored 
flows, but parties agreed to support expansion of the hydropower 
facilities to enable increases in power generation. Each of these was 
accomplished under existing law.

              II. RELICENSING--AN IMPORTANT BALANCING ACT

    The relicensing process is necessarily complex. Because rivers are 
public resources with many competing interests and significant 
environmental issues, the licensing process for hydropower dams 
involves multiple stakeholders. Unlike most electricity generating 
technologies, hydropower does not have ``end of pipe'' standards to 
ensure that the dam's operations do not unduly damage the environment. 
This is because every dam and every river is different, and generic 
standards cannot be applied to each project. Individual conditions 
suited to each project must be established.
    The Federal Power Act (FPA), although commonly considered an energy 
statute, also occupies an important role in environmental protection. 
The statute was amended in 1986 to require the Commission to give 
``equal consideration'' to power (electricity generation) and non-power 
(fish and wildlife protection, recreation, etc.) benefits of the river. 
The FPA contemplates that the economics of the hydropower facility will 
be taken into account by the Commission in this process.
    However, this balancing requirement is not the sole environmental 
constraint placed on of hydro projects. Congress determined--and 
rightly so--that some basic environmental protections must be afforded 
at every dam, and should not be balanced away to promote cheap 
hydropower. Under these statutory requirements, expert federal and 
state resource managers establish conditions, based on substantial 
evidence to protect public trust resources. These basic protections 
form a floor above which FERC then establishes license conditions in 
the public interest.
    Sometimes referred to as mandatory conditions, the statutory 
requirements assure that:

(1) Fish can be passed upstream and downstream of a dam (FPA Section 
        18);
(2) If a nonfederal dam is located on federally owned land, the 
        purposes of the federal land are protected (FPA Section 4(e)); 
        and
(3) The dam complies with state-developed water quality standards (CWA 
        Section 401).
Both fish passage and federal lands protection have been part of the 
relicensing process since enactment of the Federal Power Act in 1920.
    Section 18's mandate, setting fishways apart as a special 
consideration, is in keeping with the law and practice that came to us 
from Europe at the time of settlement. Millers--dam owners--have 
provided fishways at their own expense for many hundreds of years, 
reflecting the understanding that fish are important to commerce and 
have substantial non-commercial value.
    Section 4(e)'s grant of authority to land management agencies to 
ensure that projects on their lands meet current management goals and 
objectives is simple and is based on common sense. Projects located on 
federal or tribal lands are already getting the benefit of cheap rent. 
In order to adequately manage the lands entrusted to them and ensure 
that hydro projects do not interfere with other uses of the land, 
federal land management agencies must be able to constrain how these 
projects are operated.
    The protection of water quality is a responsibility that has been 
delegated to the states since the Clean Water Act was adopted 30 years 
ago. Section 401 ensures that private hydro projects will not interfere 
with state standards, by requiring that each federally licensed project 
obtain a state certification that the project is consistent with state 
standards, including the designated uses for each water body. The 
Supreme Court confirmed in PUD No. 1 of Jefferson County v. Washington 
Dep't of Ecology, 511 U.S. 700 (1994), that these standards may be 
numeric or narrative and include chemical, physical, and biological 
parameters.
    These laws establish the simple rule that a project must meet basic 
environmental standards before we allow it to operate on our rivers--
just as we would not allow a coal-fired plant or a nuclear plant to 
operate without basic protections for the environment, so too we must 
not license hydro plants without this basic level of protection.

         III. IMPROVEMENTS TO THE RELICENSING PROCESS CAN WORK

    On the other hand, American Rivers would be the first to 
acknowledge that the current licensing process is far from perfect. 
Agency environmental reviews are not well coordinated and agencies 
frequently experience significant delay in getting the necessary 
information to establish environmental conditions. In many cases, the 
process takes too long. Unfortunately, it is the environment that truly 
suffers from delays in relicensing. When a license expires the dam 
owner receives ``annual licenses'' that maintain status quo conditions 
at the project until a final license is issued. The longer the process 
takes, the longer it takes to set modern environmental conditions for 
the project.
    In May 2001, FERC issued a report to Congress reviewing ``policies, 
procedures, and regulations for the licensing of hydroelectric projects 
to determine how to reduce the cost and time of obtaining a license.'' 
1 The report shows that Section 4(e) and 18 requirements by 
federal resource agencies are not a major cause for relicensing delays. 
(Report at pg. 38) In cases where agencies have been late with 
conditions it is often because licensees have not provided adequate 
information and the Commission has not required it.
---------------------------------------------------------------------------
    \1\ Report on Hydroelectric Licenseing: Policies, Procedures, and 
Regulations. Comprehensive Review and Recommendations Pursuant to 
Section 603 of the Energy Act of 2000.'' FERC Staff, May 2001.
---------------------------------------------------------------------------
    For the last five years, American Rivers and members of the 
Hydropower Reform Coalition have been working with industry, federal 
and state agencies, and the Commission to make administrative 
improvements to the hydropower licensing process. We have made steady 
progress in a number of areas including federal agency actions and 
procedures to ensure consistency, timeliness, and coordination. The 
past year those efforts have culminated in the development of a 
proposed rule, issued by the Commission just last month. The proposed 
rule draws heavily from proposals developed by two very different 
groups--the National Review Group, a coalition of hydropower interests 
and environmental groups, and the Interagency Hydropower Committee, a 
federal interagency working group--and reflects a remarkable degree of 
consensus.
    The Commission estimates that the proposed rule would reduce the 
average time it takes to complete the licensing process by 30 months, 
cutting down 47 months of preparation and processing time to 17 months. 
Further, it estimates that the proposed process would reduce the cost 
of licensing for a project under 5 megawatts by $150,000 and for a 
project greater than 5 megawatts by $690,000. (Testimony by 
Commissioner Brownell before the House Energy and Commerce Committee).
    According to the Notice of Proposed Rulemaking the proposal, 
referred to as the ``integrated'' process, would become the 
Commission's primary licensing process. The highlights of the proposed 
rule are:

 increased assistance by Commission staff to potential 
        applicants and stakeholders during the development of license 
        applications;
 greater coordination among the Commission and federal and 
        state agencies with mandatory conditioning authority;
 coordinated environmental scoping between the Commission and 
        the applicant's pre-filing consultation;
 increased public participation in the pre-filing consultation 
        process;
 clear and rational schedules and deadlines for all 
        participants, including Commission staff;
 development of a Commission-approved study plan, with informal 
        resolution to study disagreements, followed by mandatory, 
        binding study dispute resolution, if necessary;
 elimination of the need for post-application study requests; 
        and
 creation of a new Commission Tribal Liaison, to be the point 
        of contact for American Indians' concerns regardless of the 
        proceeding or issue.
In addition, the traditional licensing process would be modified by 
increasing public participation, and by establishing mandatory, binding 
dispute resolution for necessary studies.
    The Commission will obtain public input through written comments 
and regional workshops around the country in March and April 2003 to 
discuss stakeholder reaction to the proposed rule. A four-day 
collaborative drafting session is scheduled in April in Washington to 
draft language for the final rule. While we continue to advocate 
improvements to the proposed rule, American Rivers and the members of 
the Hydropower Reform Coalition believe that the Commission is on the 
right track toward making lasting improvements to the hydropower 
relicensing process without jeopardizing public participation or 
environmental quality.
    iv. current proposals would hurt the process and the environment
    The legislative proposal contained in H.R. 1013 and Title III of 
the Chairman's discussion draft would increase delays in the 
relicensing process, abandon the basic Federal Power Act principle of 
public participation, unduly burden the natural resource agencies, and 
harm the environment. It should be rejected in favor of support for the 
Commission's ongoing rulemaking process.\2\
---------------------------------------------------------------------------
    \2\ Barnes, FERC's ``Class of '93'': A Status Report, Hydro Review 
(October 1995).
---------------------------------------------------------------------------
    The current draft is based on language that was negotiated last 
Congress and agreed to in writing both by representatives of the 
conservation community and by representatives of the hydropower 
industry. Unfortunately, the current proposal bears only a passing 
resemblance to that agreed-upon language. Rather than providing a 
simple fix to the industry's complaint that the resources agencies 
sometimes fail to give adequate consideration to lower-cost 
alternatives for resource protection, this language would blow a hole 
in the entire resource agency process by: 1) giving hydropower 
interests preferred treatment in the management of a public resource 
over states, tribes and the interested public; 2) reducing standards 
for environmental protection; and 3) creating a new referral to middle-
tier Commission staff to review the agencies' conditions.\3\
---------------------------------------------------------------------------
    \3\ Report on Hydroelectric Licensing: Policies, Procedures, and 
Regulations. Comprehensive Review and Recommendations Pursuant to 
Section 603 of the Energy Act of 2000.'' FERC Staff, May 2001.
---------------------------------------------------------------------------
    The legislative proposal before the Committee contains detailed 
revisions to an aspect of federal hydro licensing that is foreign to 
most. Rather than walk through the bill step by step, my testimony will 
describe several of its most obvious problems. For a complete critique 
of the bill, see the attachment to this testimony.

A. Title III will make a complex process more so.
    Efficiency in the hydropower relicensing process is a constant 
challenge because of the complexity of the issues and the number of 
stakeholders involved. The Commission's rulemaking proposal makes a 
good first effort at addressing this challenge. Unfortunately, Title 
III would make a complex process more so. It adds four new 
administrative processes at a time when FERC and the same agencies are 
struggling to streamline licensing. It further requires federal 
resource agencies to consider eleven new factors in developing their 
environmental conditions, and establishes a new standard that invites 
litigation and both staff and judicial second-guessing of resource 
agency decisions.
    Many of the new procedures and considerations placed on resource 
agencies are redundant with the Commission's role in relicensing. Title 
III would require the agencies to consider several factors beyond the 
scope of their resource protection responsibilities and well beyond 
their expertise. Evaluation of these factors currently falls to the 
Commission under the FPA and NEPA with the cooperation and input of 
federal agencies on issues where they add expertise--in this case 
fisheries and land management. Having the agencies undertake this 
additional evaluation would be redundant, but it would also 
fundamentally realign the agencies' role in the licensing process, 
which is currently to establish necessary and appropriate environmental 
protections--a floor of environmental protection--and to leave the 
balancing of power development versus other factors beyond those basic 
protections to the Commission.
    Title III's requirement that the natural resource agencies consider 
eleven additional factors also places a virtually impossible burden on 
the resource agencies. At present, many of the relevant state and 
federal agencies do not have sufficient staff dedicated to relicensing. 
As a result, a range of individuals (few of whom are trained in the 
relicensing process) may participate in different parts of a 
relicensing proceeding as time allows, or the appropriate staff is 
overburdened and cannot spend the time to conduct an adequate review of 
the environmental needs at the site or participate constructively in 
the relicensing. Because of the complex nature of the proceedings, and 
because of the new, more productive trend toward collaborative 
relicensing efforts, a consistent presence of qualified staff with an 
appropriate workload would make agency efforts more efficient and 
productive.
    The staffing problem in the state of Alabama, where licenses for 12 
dams on three major rivers will expire by 2007, is instructive. 
Relicensing these projects will involve regular meetings, extensive 
studies, and detailed negotiation. Currently, the U.S. Fish and 
Wildlife Service, which must make recommendations under section 10(j) 
as well as prescribing fishways under section 18 of the FPA, has only 
one staff person to cover this area. His situation is not unique. 
Without additional resources, there is a risk of inefficient or 
incomplete participation on the part of the Fish and Wildlife Service 
and potential disruption or delay in the process. This can be avoided 
with additional resources.
    One potential solution is Section 1701(a) of the Energy Policy Act 
of 1992, which provides authority for FERC to reimburse resource 
agencies for their costs associated with licensing FERC projects. The 
provision calls for FERC to pass these costs on to licensees through 
annual fees. Since 1992, FERC has been collecting fees from licensees 
for some of the federal resource agency relicensing expenses, but this 
money has not found its way back to these agencies. Instead, it has 
gone to the Treasury where these reimbursements to federal and state 
resource agencies have not been made available through annual 
appropriations from Congress. This system is not working. To provide 
adequate resources to these agencies and facilitate more efficient 
relicensings, section 1701(a) should be implemented so that monies 
collected on behalf of state and federal natural resource agencies are 
reimbursed directly to those agencies.
    Title III offers even further complexity to the process via the 
curious step of establishing an appeal to Commission staff if the 
license applicant continues to disagree with the agencies following 
their detailed internal alternatives analysis. While this process is 
non-binding, it asks the Commission's Dispute Resolution Service, 
currently a facilitation group, to make a finding regarding this 
appeal. Such an action would be a significant departure for the Dispute 
Resolution Service, given their traditional role as simply a 
facilitator. Staff in this part of the agency are neither equipped nor 
positioned with adequate seniority to make such determinations. This 
office is accustomed to creating process, not issuing opinions. In 
addition, this appeal would add 90 days to the licensing process--over 
all, Title III can be expect to add more than four months to the time 
necessary for adoption of resource agency conditions.

B. Title III would give hydro applicants unprecedented power.
    Currently, the Federal Power Act's hydropower licensing provisions 
create an open, equitable process in which the applicant starts the 
proceedings, but other interested stakeholders have full rights to 
participate and have their comments weighed equally by the Commission 
and other relevant agencies. Title III would drastically alter this 
process, by giving only the applicants the right to compel the resource 
agencies to adopt different conditions under sections 4(e) and 18.In 
offering this new authority only to license applicants, this 
legislation
    would cut a host of other interested parties out of the process--
not just conservationists, but also state agencies, tribal interests, 
irrigators, neighboring landowners and recreationists. The agency would 
be required to adopt the applicant's proposal if it met the statutory 
criteria, regardless of whether another alternative was more efficient 
or more beneficial to the environment. And although the bill says other 
parties may also offer alternative conditions, there is not requirement 
that they be considered by the Secretary. It is obvious that nothing 
would prohibit others from proposing alternatives but the clause is 
meaningless unless there is equal footing on which those alternatives 
may be heard. The preferential treatment of hydropower interests is 
patently inconsistent with every other element of the Federal Power Act 
and runs counter to the right of the public to maintain control over 
the nation's rivers.4
---------------------------------------------------------------------------
    \4\ ``The public must retain control of the great waterways. It is 
essential that any permit to obstruct them for reasons and on 
conditions that seem good at the moment should be subject to revision 
when changed conditions demand.'' President Teddy Roosevelt, 1908
---------------------------------------------------------------------------
C. Title III would diminish environmental quality
    The compromise language agreed to last Congress would have ensured 
that the alternative license conditions established under this new 
procedure would provide equivalent protection to those originally 
proposed by the agencies. The language of Title III eliminates that 
basic guarantee, establishing a new standard that invites 
administrative and judicial second-guessing of the protections for 
fisheries and federal lands. In addition, it forces the resource 
agencies to give private costs the same level of consideration as the 
protection of public resources.
    The new standard for section 4(e) conditions requires simply that 
the new condition ``provides for adequate protection and utilization'' 
of the federal lands. While this is the standard used in the underlying 
section of the Federal Power Act, its inclusion here has the perverse 
consequence of inviting the courts to second-guess the land management 
agencies' assessment of what is necessary for the protection and 
utilization of their lands. The language adopted by this Committee last 
year, requiring that the alternative ``provides no less protection'' 
than the condition proposed by the resource agency, properly defers to 
the agencies' expertise with regard to their own lands. Judicial review 
of that standard would start with the condition initially developed by 
the agency. Under Title III a court would be invited to make a de novo 
interpretation of what conditions are ``adequate.''
    The standard for section 18 alternative conditions is even more 
harmful. Rather than requiring the installation of a fishway, this 
proposal would establish a standard that the alternative be ``no less 
protective of the fish resources'' than the fishway originally proposed 
by the fishery agency. This language appears to be directly intended to 
allow the substitution of hatcheries, habitat restoration, or even 
mitigation funds, which will not serve the purpose of a fishway--to 
move fish past the dam. Loss of spawning habitat cannot be mitigated by 
hatcheries or downstream habitat improvements. There are many interests 
in moving fish past dams that go beyond the ``protection of fish 
resources,'' such as fishing access and treaty obligations.

                             VI. CONCLUSION

    Being a good environmental steward is a legitimate cost of doing 
business. Should the federal government guarantee profitability of 
hydropower? If a project is already unprofitable because of market 
forces or because it is run poorly, should it be exempted from any 
environmental conditions? The answer to these questions is clearly no. 
According to the courts, ``There can be no guarantee of profitability 
of water power projects under the Federal Power Act; profitability is 
at risk from a number of variable factors, and values other than 
profitability require appropriate consideration.'' 5 We urge 
the Committee not to make environmental protections the scapegoat for 
licensing marginal projects nor to allow utilities that have never 
mitigated for their environmental impacts to continue to benefit from a 
sweetheart deal at the public's expense.
---------------------------------------------------------------------------
    \5\ Wisconsin Public Service Corp. v. FERC, 32 F.3d 1165, 1168 (7th 
Cir. 1994)
---------------------------------------------------------------------------
    No regulatory process is perfect and this one is no exception. Many 
in the environmental community believe that there should be stricter 
environmental conditions at hydropower projects, while many in the 
industry believe that there should be fewer. Perhaps that is a signal 
that things are working. Whichever position one believes, Title III 
would only make the relicensing process more complex and litigious and 
would threaten public trust resources that already bear the brunt of 
relicensing delays.
    We urge the Committee to defer to the Commission's ongoing 
rulemaking to truly improve the hydro licensing process. If the 
Committee wishes to adopt a section on alternatives to resource agency 
conditions, we urge it to agree to the negotiated compromise from last 
Congress. Anything undercutting environmental protections or placing 
the voice of license applicants over that of other parties invites 
wholesale opposition from the broad range of interests affected by 
hydropower licensing.
    Those of us in the environmental community and especially in the 
Pacific Northwest, understand and appreciate the value of hydroelectric 
power. It is a valuable source of emissions free energy and provides 
numerous other benefits including being the cheapest source available. 
Unfortunately, its legacy of impacts to our region's and nation's 
rivers has been neglected too long. Now is the time to bring these dams 
up to modern environmental standards, not to continue the status quo.

    Mr. Barton. We thank you, sir. We now will hear from our 
last witness, Mr. Szeptycki. Your statement is in the record, 
and you can elaborate on it.

                   STATEMENT OF LEON SZEPTYCKI

    Mr. Szeptycki. Mr. Chairman, my name is Leon Szeptycki, and 
thank you very much for giving me the opportunity to testify 
today on behalf of Trout Unlimited volunteer members across the 
country.
    For those of you who don't know, TU is a nonprofit 
organization with more than 125,000 members organized into 
approximately 450 chapters. Our mission is to conserve, 
protect, and restore North America's trout and salmon fisheries 
and their watersheds. Over the last 10 years TU volunteers and 
staff have participated in numerous hydroelectric relicensings 
from California to Maine, and I assure all of you here that I 
am not the usual face of Trout Unlimited participating in those 
processes. The typical TU participation in the hydroelectric 
relicensing is done by our volunteer members. Typically, an 
angler or group of anglers in a community with a river affected 
by a hydropower dam, who care enough about that river to devote 
significant amounts of their free time to attempting to approve 
the way the dam affects the river's biological functioning.
    That gets me to two of the most important concerns of our 
members with respect to the FERC relicensing process. The 
licensing process has to be structured to give members of the 
public, including those volunteer TU members, early and 
meaningful input into the process. I would submit that this is 
not just something our members want for their own selfish 
fishing concerns, but something that makes the whole process 
more efficient and contributes to a better overall result in 
the relicensing process.
    Now, in terms of fish passage, our members' second priority 
is high quality fish passage because, without fish passage, the 
rivers and the fisheries simply won't function. Many of our 
local chapters are located on waters that are just a shadow of 
their native fisheries. I do most of my work in the East and a 
great deal of it in Maine, and I can't really improve on the 
way Congressman Allen described the situation in Maine, but in 
that State entire runs of Atlantic salmon and sturgeon are near 
extinction, runs of shad and alewives are a fraction of their 
historical numbers, and the single greatest cause of these 
depressed fisheries, some of them potentially highly valuable 
commercial and recreational fisheries, is inadequate fish 
passage at dams, many of them hydroelectric dams.
    Poor fish passage on hydro dams has been an unfortunate 
fact on many rivers in this country, and good fish passage 
should be one of the bare minimum goals of every relicensing. 
Now, TU has been most effective in accomplishing its goals in 
relicensing by participating in collaborative settlement 
negotiations. And this is why we believe that the discussion 
draft H.R. 1013 could not have come at a worse time.
    Over the last several years, the trend in relicensing has 
shifted strongly away from traditional adversarial relicensings 
toward collaborative settlements. These collaboratives give 
organizations like TU and other community members meaningful 
input into the process and the result of the relicensing, and 
also gives licensees better control over the final terms of the 
license. As that trend continues, we are getting better at 
reaching settlements more quickly and more efficiently. To 
further promote efficient collaborative settlements, FERC is 
working on the rule that a number of people here have already 
discussed today, and that rule would increase the incentives to 
settle these cases, increase the incentives to negotiate, and 
make that process move much more quickly.
    Trout Unlimited opposes the discussion draft before the 
subcommittee today because this proposal runs absolutely 
contrary to the primary concerns of TU members around the 
country. The draft will reduce public participation in the 
relicensing process, and it will reduce substantially 
protections for fish passage.
    We also have a deep concern that the discussion draft would 
derail existing efforts and the existing evolution to move the 
relicensing process toward collaborative processes and would 
cut that evolution short.
    Now, everyone has discussed, and it is in our written 
testimony in great detail, all the additional procedures 
required by the discussion draft, and I won't go over them 
again here. But I would like to make the point that these 
steps, by their very nature, will serve to cut the public out 
of the relicensing process in a number of ways. The language of 
the bill itself does not provide for public participation in 
any of the new required procedural steps, and those procedural 
steps are precisely the kinds of government processes that our 
volunteer members find it most difficult to participate in, 
things like a trial-type hearing or a FERC-sponsored dispute 
resolution.
    More importantly, however, I think, is the fact that the 
procedures fundamentally alter the balance of power in 
relicensing, and will substantially reduce the incentive of 
applicants to enter into meaningful settlement discussions, the 
type of discussions that we found most productive at achieving 
the results that work for everybody.
    In those collaborative processes, our Trout Unlimited 
members and other member of the public can have real and early 
input into things like the early studies that drive the whole 
relicensing process. And among the factors that motivate 
license applicants to sit down in the first place and enter 
into those negotiations and enter into those collaborative 
processes are the requirements of Section 4(e) and Section 18 
as they are currently drafted. Changing those requirements even 
procedurally will change the delicate balance that is driving 
the evolution of the relicensing process toward more 
collaborative settlements.
    The draft Title III does more than just change the 
procedures, however, it would significantly weaken the 
protections that Federal prescriptions now provide for rivers 
and fisheries. Currently, Federal agencies are charged with 
developing license conditions that provide certain basic levels 
of protection that every dam has to meet. Hydropower facilities 
should not undercut the purposes of Federal land that they 
impact, and they should provide for basic effective fish 
passage. Agencies are not required to balance these basic 
protections against the profitability of the applicant or 
against other factors.
    H.R. 1013 would fundamentally change the nature of Federal 
conditioning authority by requiring the agency to balance 
required measures against--I think the number that has been 
thrown out--11 other factors. Although this balancing is 
couched in terms of a procedural requirement, it changes the 
substance of the statute. And I should add that in requiring 
hydroelectric dams to meet certain basic measures of 
environmental protection is no different than the statutes that 
apply to coal-burning power plants, to facilities that dump 
pollution into waters. All of these facilities, including most 
other facilities that generate electricity have certain basic 
minimum environmental requirements that they are required to 
meet.
    In conclusion, what I would like to do is assure you that 
our organization's concerns are not just about fish, they are 
also about people and also about money. The rivers of this 
Nation provide more than 557 million days fishing for 34 
million anglers who spend $41 billion a year in pursuing their 
hobby. This is why a group of State fish and wildlife agencies, 
sport fishing groups, and other fishing industry groups have 
all signed on in opposition to H.R. 1013, continue to heed 
their views and reject the proposed hydro title as currently 
drafted. Thank you.
    [The prepared statement of Leon Szeptycki follows:]

 Prepared Statement of Leon Szeptycki, General Counsel, Trout Unlimited

    My name is Leon Szeptycki, and I am the Eastern Conservation 
Director and General Counsel of Trout Unlimited. I am testifying today 
on behalf of TU's volunteer members around the country. Trout Unlimited 
(``TU'') is a nonprofit organization with more than 125,000 members 
around the country organized into approximately 450 local chapters. Our 
mission is to conserve, protect, and restore North America's trout and 
salmon fisheries and their watersheds. Over the last ten years TU 
volunteers and staff have participated in numerous hydroelectric 
relicensings from California to Maine. Numerous TU chapters have as 
their home waters a river affected by one or more hydroelectric 
facilities, and the impacts of those facilities are almost always the 
primary focus of those chapters' volunteer activities.
    TU agrees that reforms to the hydroelectric relicensing process are 
needed, but we do not agree that legislative changes to the Federal 
Power Act are necessary or appropriate to bring about those reforms. 
The last ten years have seen a major evolution of hydroelectric 
relicensing under the Federal Power Act. The trend has shifted strongly 
away from traditional, adversarial relicensings, towards collaborative 
settlements that serve the interests of all the participants. As that 
trend continues, we are getting better at reaching settlements more 
quickly and more efficiently. To further promoted efficient 
collaborative settlements, FERC is currently working on rules that 
would make the relicensing process more streamlined and that would 
further promote collaborative settlement as the preferred mode of 
relicensing. The hydropower industry and the conservation community are 
both actively engaged in this rulemaking, and we are very optimistic 
that the final rule will be one that improves the process and that all 
sides support.
    Trout Unlimited opposes H.R. 1013, which has been incorporated into 
the discussion draft energy bill as Title III (I will refer to the 
proposal throughout as H.R. 1013). H.R. 1013 would create more red tape 
and delay and would severely reduce protections for rivers and 
fisheries impacted by hydroelectric generation. We also have a deep 
concern that H.R. 1013 would derail existing efforts to reform the 
relicensing process and cut short the current trend towards 
collaborative settlements of relicensing cases.

1) TU has used the existing process to work cooperatively with some 
        license applicants to improve dam operation for valuable 
        fisheries.
    TU has been involved in some of the earliest and largest 
settlements of relicensing cases. To name just two early examples, our 
Idaho and Montana councils were at the center of a deal with what is 
now Avista to relicense a series of dams on the Clark Fork River. In 
the East, our Maine council played an active role in reaching a deal to 
relicense dams then owned by Central Maine Power on the Rapid River, 
one of the state's best brook trout fisheries. In these settlements, 
along with others we have worked on in the last five years, the 
applicant was able to work collaboratively with anglers, boaters, local 
communities, state agencies, and federal resource agencies to obtain 
their license promptly and cost effectively. The deals reached in those 
cases preserved the profitability of the projects while at the same 
time enhancing river health and the opportunities for river recreation.
    The road has been bumpy at times, and not all collaborative 
settlements have worked as well as others. However, everyone involved 
in the process has learned a tremendous amount about how to make 
collaborative relicensings work better, and are now implementing what 
they have learned. This body of knowledge is improving ongoing 
relicensings and influencing the current FERC rulemaking.
    A common feature of successful settlements has been the willingness 
of the applicant to sit down early in the process and receive input 
from all interested parties, including volunteers and community 
members. The willingness of the licensee to listen to the views of 
these concerned citizens on preliminary issues, most notably the 
studies that drive the relicensing process, ultimately paves the way 
for a smoother relicensing and a faster settlement. These relicensings 
can only settle if all participants understand, based on the studies 
done during the process, the impact of a settlement on their particular 
interest, be it fishing, recreation, or the ecological health of the 
river.
    TU has a particular concern about the need to facilitate the 
participation of volunteer community members in the process. Most of 
TU's participation in relicensings is driven by concerned volunteers 
who devote extensive hours to what are for them very intimidating 
proceedings.
    Relicensings have generally gone badly--taken too long or gotten 
stalled out entirely--when applicants have refused to listen to the 
views of stakeholders and take them into consideration. People are 
unwilling to settle when they do not trust the information produced by 
the process or when the information simply does not give them a basis 
to make a sound judgment.

2) Collaborative settlements are becoming more efficient, and are 
        becoming the preferred mode of hydropower relicensings.
    The use of collaborative settlement is increasing, and is producing 
positive results for applicants and for river health. In one of the 
first significant collaborative processes, parties were able to reach a 
settlement with Washington Water Power (now Avista) to resolve 
licensing issues for a multiple dam project on the Clark Fork River in 
Idaho. The settlement will allow the projects to function profitably 
and will provide a host of benefits for watersheds affected by the 
project. Most notably, over the life of the license more than $20 
million will be spent to improve habitat in the basin for bull trout, 
cutthroat trout, and other species.
    Just last month, and at the other end of the spectrum in terms of 
magnitude, Pacificorp announced a settlement in a relicensing of a 
project on the American Fork River in Utah. The settlement, which 
included TU, the National Park Service, and the U.S. Fish and Wildlife 
Service, will allow the very small (one megawatt) American Fork project 
to operate until 2006, at which time it will be decommissioned. The 
agreement will restore river habitat on the American Fork for 
Bonneville cutthroat trout, recreational opportunities in the American 
Fork canyon, and opportunities for the public to enjoy the Timpanogos 
Cave National Monument.
    The collaborative licensing process is flourishing. Around the 
country licensees are reaching settlements that allow them to continue 
to function profitably and that bring significant benefits to the 
rivers that drive their turbines. In some cases, these settlements are 
reopening long closed-off spawning for habitat migratory fish such as 
salmon and steelhead trout. Other examples of successful settlements 
over the last several years include settlements with PGE on the Sandy 
River in Oregon, with PacifiCorp on the White Salmon River in 
Washington, with the City of Tacoma on the Cowlitz River in Washington, 
with Florida Power and Light on the Upper Kennebec River in Maine, and 
with New England Power and Gas on the upper Connecticut River in New 
Hampshire.
    Further evidence of the growing success of collaborative 
settlements comes from California. California is currently faced with a 
flood of relicensings. Over the next 15 years hydroelectric licenses 
for approximately 150 dams will expire in that state. The California 
relicensings are overwhelmingly being done as collaborative 
settlements. Applicants are pursuing collaborative relicensings, with 
the goal of settlement, on the Pit 3, 4, 5 Project (Project No. 233), 
the Klamath Project (Project No. 2082), the Stanislaus-Spring Gap 
Projects (Projects No. 2130, 2005, and 2067), and the Big Creek 
Projects in the Upper San Joaquin Basin (extensive project numbers), to 
name just four. Moreover, two California projects that were among the 
most protracted relicensings on FERC's books recently reached 
settlements through collaborative negotiations. Both the Rock Creek 
Cresta project and the Mokelumne project recently used the 
collaborative licensing process to break logjams that had made those 
licenses more than ten years overdue.

3) FERC has proposed new rules to improve the relicensing process, and 
        H.R. 1013 would undermine that rulemaking and the trend towards 
        negotiated relicensings.
    To further the momentum of these successful collaboratives, FERC is 
currently engaged in a rulemaking to improve the relicensing process. 
On February 20, FERC issued a draft rule that would create a new, 
default relicensing process know as the ``Integrated Licensing 
Process,'' or ILP. The ILP incorporates many of the practices that have 
driven the most successful settlements, including early consultation 
between FERC, the applicant, resource agencies, and other parties; 
early, prefiling input from stakeholders and resource agencies on 
studies; better integration of NEPA analysis, the licensing process, 
and federal conditioning; and strict timetables. TU is particularly 
pleased that the new rules would appear to facilitate the early 
participation of citizen's groups in the relicensing process. While 
comments on the rule are not due for a month, and we do not yet know 
how various relicensing participants will react to all parts of the 
proposed rule, the proposal has great promise to accelerate the current 
momentum towards a more streamlined and collaborative process.
    In this context legislation is simply not needed. The hydropower 
relicensing process is being reformed by its primary participants, and 
H.R. 1013 would impede the progress towards reform. Currently the 
balance of interests struck by the Federal Power Act drive license 
applicants, the conservation community, recreational interests, and 
resource agencies to negotiate because of the risks to all parties 
posed by the traditional relicensing process and the benefits of the 
collaborative process. H.R. 1013 would profoundly disturb this balance, 
and a would create a process so favorable to project owners, and so 
unfavorable to the health of fisheries, that applicants would have far 
less incentive to negotiate and to take the steps early in the 
licensing process needed for meaningful settlement negotiations. H.R. 
1013 as now drafted would produce relicensings that take longer, cost 
more, and fail to protect our nation's rivers and their fisheries.

4) Specific Problems with H.R. 1013.
    H.R. 1013 has three critical flaws. First, it creates additional 
procedures that will make relicensings lengthier and more cumbersome. 
Second, those additional procedures severely reduce the amount of 
environmental protections currently afforded rivers under the Federal 
Power Act. Third, the processes created by the bill are heavily 
weighted in favor of applicants and would tend to cut the public out of 
key parts of the conditioning process.
    a. H.R. 1013 would create delay and unneeded red tape. H.R. 1013 
would add three significant steps to the process of federal 
conditioning under both section 4(e) and section 18 of the Federal 
Power Act. First, any applicant who proposes an alternative condition 
is entitled to a trial type hearing before the federal agency. This 
type of hearing would potentially consume huge amounts of time and 
resources. Second, the conditioning agency would be required to submit 
to FERC a written statement explaining the basis for its decision and 
demonstrating that the agency gave equal consideration to a variety of 
factors, including energy supply, cost, navigation, and flood control. 
This provision would create duplicative and wasteful effort, as FERC 
already spends a great deal of time in each relicensing examining these 
factors. Requiring the resource agencies to look at these factors also 
sets them up for failure, as they simply do not have the expertise or 
the resources to devote to these issues. Third, if the resource agency 
fails to adopt the applicant's proposed conditions, FERC can refer the 
matter to its Dispute Resolution Service, which must issue an advisory 
opinion within 90 days. Again, this simply would add more time and 
expense to the process, and is unnecessary in light of the strides that 
are currently being made towards negotiated settlements of these 
issues.
    To make it clear, I do not mean to suggest that the section 4(e) 
and section 18 conditioning process is not in need of improvement. For 
example, TU would have no objection to requiring a better 
administrative record and allowing all parties access to a streamlined 
appeal process. The procedures outlined in H.R. 1013 simply go to far. 
TU is particularly concerned about this aspect of the bill, because so 
much of our participation in hydropower relicensings is handled by 
volunteer members with limited time and, except in very rare cases, no 
money. Effectively run collaborative negotiations provide a real 
opportunity for input from volunteer citizens and the local community. 
Trial type hearings, cumbersome appeals, and FERC-run dispute 
resolutions tend to shut out these critical voices.
    b. H.R. 1013 reduces the environmental protections provided by 
sections 4(e) and 18. H.R. 1013 would substantially reduce the 
environmental protections current law provides for rivers affected by 
hydropower, and would result in a long term barrier to the health of 
those rivers. Sport fisheries, recreational opportunities, and aquatic 
health would all suffer.
    Section 4(e) and section 18 currently function to set the basic, 
minimum level of environmental protection that must be in place at 
hydropower projects. Section 4(e) requires conditions that are 
``necessary for the adequate protection and utilization'' of the 
federal lands impacted by a project. Section 18 requires the 
construction, maintenance, and operation of fishways required by the 
Departments of Interior or Commerce. When it passed these provisions, 
Congress made the correct judgment that federal lands, rivers, and 
fisheries are public resources, and that federally licensed hydropower 
dams should include a minimum level of mandatory protection for those 
public resources.
    The core licensing provisions of the Federal Power Act require the 
balancing of power generation with other values. It is entirely 
appropriate, however, that this balancing be buttressed by certain 
basic levels of environmental protection. Ensuring that no dam degrade 
the core purpose of federal lands and requiring that every dam include 
some measure to allow fish to migrate should remain basic minimum 
safeguards.
    The issue of fish passage is one that is particularly important to 
the more than 125,000 trout and salmon anglers that belong to TU. 
Throughout the country countless fisheries have been impaired or even 
extirpated because of hydroelectric dams with inadequate fish passage. 
In New England, for example, power generating dams utterly destroyed 
the region's runs of Atlantic salmon, shad, and sturgeon. Maine once 
supported a robust commercial fishery for Atlantic salmon; now, even 
sport fishing for the tiny remnant population of this fish is 
forbidden. The single most significant cause of this decline are the 
hundreds of dams that impede fish passage on the state's rivers. 
Section 18 of the Federal Power Act is absolutely critical to restoring 
depleted fisheries and preserving those migratory fisheries that 
remain. The improvement of fish passage has created some of the most 
exciting conservation successes we have seen in recent years. On the 
Sandy River in Oregon, the Cowlitz and White Salmon rivers in 
Washington, the Kennebec River in Maine, and others, improved fish 
passage is making possible the restoration of entire watersheds and 
their fisheries.
    H.R. 1013 would alter the fundamental requirements of section 4(e) 
and section 18. The current statute requires agencies to set conditions 
that protect the core purposes of federal reservations and provide for 
fish passage. H.R. 1013 would require those agencies to demonstrate 
that they have given ``equal consideration'' to a host of other 
factors. This language, included in the amendments to both sections 
4(e) and 18, represents a straightforward roll back of the protections 
of these important provisions. In addition, as discussed previously, 
the procedural burdens imposed by H.R. 1013 would fundamentally alter 
the balance of power in negotiations and the licensing process 
generally.
    The notion that cost, power generation, and these other factors 
play no role in the current conditioning process is simply not true. In 
the numerous licensings that are now being handled through multi-party 
collaborative processes, the cost concerns of license applicants, as 
well as the other concerns enumerated in H.R. 1013, shape the fishway 
requirements and other conditions on the license that become part of 
the settlement signed and supported by all the parties. This is the 
best and most efficient way of dealing with these issues and balancing 
the various demands place on the river. Dramatic legislative 
intervention in the way this process is evolving risks placing a club 
in the hands of license applicants, use of which may suddenly seem more 
attractive than negotiating a settlement.
    The committee should also be skeptical of the claim that fishway 
requirements and section 4(e) prescriptions are dramatically reducing 
available power by closing down otherwise profitable projects. 
Certainly, good fish passage costs money, and can affect the operations 
of a project. Although there have been cases where the need for fish 
passage has contributed to making a project unprofitable, that has only 
happened in cases where the projects have generated small amounts of 
power and been economically marginal to begin with. The most celebrated 
example of recent dam removal is an excellent illustration of this. The 
Edwards dam in Maine was a small, uneconomical project that had blocked 
passage upriver for more than 100 years. It was clear that fish passage 
was needed at the dam, and it was equally clear that, for such an 
economically questionable project it was cheaper to remove the dam than 
put in fish passage and keep generating. All the parties reached a 
negotiated settlement that opened up 18 miles of river to salmon, shad, 
stripers, alewives, and sturgeon, effectively bringing a major stretch 
of river back to life. Economical projects that generate meaningful 
amounts of electricity are simply not being compromised by sections 
4(e) and 18. The proposed changes to section 18 would dramatically 
increase the chance that potentially major and economically valuable 
fisheries would be sacrificed to keep small, marginal projects 
operational.
    c. H.R. 1013 would cut the public out of key parts of the licensing 
process. All of the processes created by H.R. 1013 dramatically favor 
the applicant, and tend to cut the public out of critical phases of the 
relicensing process. H.R. 1013 would allow applicants to propose 
alternative conditions, which in turn would trigger the series of 
additional administrative processes discussed above. While other 
parties are not prohibited from proposing alternative conditions, only 
conditions proposed by the applicant are entitled to any procedural 
protections. Under H.R. 1013 the federal agency would not even be 
required to read conditions proposed by a citizens group or local 
community. This fundamental disparity is exacerbated by the nature of 
the various new procedures created by H.R. 1013. The statute does not 
provide for the participation of other parties in any of the additional 
procedures--the ``trial type'' hearing on the alternative conditions, 
the written statement to FERC, or the participation of the FERC Dispute 
Resolution Service. Even if public participation was a requirement, the 
time, expense, and required expertise for these proceedings 
(particularly given the demands of the existing process) would tend to 
exclude nonprofessional citizens groups, local residents, and 
communities. Even state agency professionals, given limited resources 
available for the states, will almost certainly not be able to 
participate.

5) Conclusion.
    H.R. 1013 could not have been introduced at a more inopportune 
time. Collaborative settlements are flourishing. FERC has just proposed 
a significant new rule that will both streamline the relicensing 
process and allow for more meaningful public participation. H.R. 1013 
would derail these processes and produce more difficult, adversarial, 
and burdensome relicensing processes.
    Using rivers to generated power has had a negative impact on the 
health of this nation's rivers for over one hundred years. Anglers, 
boaters, and others around the country are denied countless 
opportunities to recreate because of hydropower facilities. In light of 
this historical and ongoing impact to public resources, sections 4(e) 
and 18 of the Federal Power Act provide perfectly reasonable and wise 
basic minimum protections for our nation's rivers. Congress should 
reject any effort to water down these important provisions of the 
Federal Power Act.

    Mr. Barton. Thank you. The Chair would now recognize 
himself for first question period of 5 minutes. Mr. Otter and 
Mr. Issa will be recognized for 8 minutes when it is their turn 
because they deferred their opening statements.
    Mr. Robinson, how many Federal agencies could, if they want 
to, under the current law, place a 4(e) mandatory condition on 
a relicensing application before your agency?
    Mr. Robinson. Well, at least the Forest Service for 
forestlands, and the Department of Interior, in many instances 
for Tribal reservations, and at times we also get other bureaus 
of the Department of Interior doing mandatory conditions.
    Mr. Barton. So at least four, and there could be more than 
that.
    Mr. Robinson. Yes.
    Mr. Barton. And under current law, if an agency places a 
mandatory restriction or condition--I shouldn't say 
restriction, it doesn't necessarily have to be a restriction--
mandatory condition, FERC has no ability to request that that 
be modified or reviewed.
    Mr. Robinson. No.
    Mr. Barton. You just have to accept it or reject it, is 
that correct?
    Mr. Robinson. Well, we have to accept it. We don't have a 
mechanism to reject it. We can not issue the license, but for a 
relicense that is not really a viable option.
    Mr. Barton. Now, I note that your agency expressly declined 
to tackle the issue of mandatory conditioning in this Notice of 
Proposed Rulemaking that has been alluded to by some of our 
witnesses, and that the staff, in its Section 603 report, 
states that changes in regulations, policies and procedures 
while expected to alleviate the situation, are no substitute 
for legislative action--and I quote that--``no substitute for 
legislative action.'' It would seem that your agency's position 
seems to be pretty clear legislation is needed if we are to fix 
the licensing and relicensing process, is that correct?
    Mr. Robinson. As I said in my opening statement, I think 
that there are two things that are going on right now that will 
help to improve, one is the effort that we have in developing 
the integrated licensing process, but that goes to 
administrative relief. On the legislative relief, yes, I do 
believe that the Title III is the only way to try to bring some 
semblance of coherence to the licensing process where you have 
mandatory conditions and fishway prescriptions being brought 
into the license without any ability to review them at the 
commission.
    Mr. Barton. This subcommittee is aware of the complaints 
that Section 4(e) conditions encompass geographic and species 
issues that are beyond the actual Federal land area supporting 
the condition. Among other problems such action places the 4(e) 
agency in direct conflict with other Federal agencies or State 
agencies having jurisdiction over project lands, including the 
Federal Energy Regulatory Commission and State Clean Water Act 
certifications. This is particularly troublesome when a small 
or very small parcel of Federal land may be located within 
hydroelectric project boundaries.
    Would FERC favor an amendment to the proposed Barton 
discussion draft that would require 4(e) conditions to be 
proportional and restricted to the area of Federal land located 
within a project boundary?
    Mr. Robinson. Yes.
    Mr. Barton. Long question, short answer. Now I want to 
speak to you, Mr. Masonis. I don't want you to feel unloved 
here, and we appreciate your testimony.
    In your written testimony--and I think I am quoting this 
correctly and, if I am not, correct me--you state, or your 
group states, that fish passage in Federal lands protection are 
minimum environmental requirements that every dam operator on a 
public river must meet regardless of cost.
    Now, I don't have a problem with the first part of your 
statement, fish passage in Federal lands protection are minimum 
environmental requirements, but I do have a little bit of a 
problem, or a lot of a problem, which is ``regardless of 
cost.'' Do you not think that there should be some 
consideration of the cost?
    Mr. Masonis. Mr. Chairman, I do think there should be some 
consideration of the cost, and my experience working in 
relicensings with respect to fish passage in particular has 
been that the agencies are painfully aware of the cost of 
alternative fish passage designs when they go through the 
process of mandating those.
    Our point in the testimony was to suggest that fish passage 
is a fundamental element of a healthy river ecosystem since 
these fish need to migrate. Even resident fish that do not go 
out to sea, they often migrate in their life history. And there 
is really no substitute for that. You can't substitute 
something that is not fish passage for effective fish passage, 
and that was the point we were trying to get across.
    Mr. Barton. And, last, but certainly not least, Mr. 
Szeptycki, where I come from TU is an Aggie term that we refer 
to the University of Texas when we are trying to be derogatory. 
I know your group is a very positive group, and when you said 
you represent TU, my head kind of jerked up, so that's my 
condition reflex.
    Mr. Szeptycki. Well, as a graduate of the University of 
Kansas, I apologize.
    Mr. Barton. What we are trying to do in the proposed draft, 
we are not trying to take groups like yours out of the loop. In 
fact, I think you are a very positive influence in the 
discussions. But under the current law, if a Federal agency 
sets a mandatory condition, there is nothing that can be done 
about it. I mean, it is just there. And what we are looking 
for--and maybe the discussion draft is not the perfect way to 
do it--but what we are looking for is some way to maintain 
input, but put some sort of consideration of what we call cost-
benefit analysis into it so that there is some give-and-take. 
And right now, unless it just happens--I think you are the one 
that said there have been great discussions in a collegial 
nature and the discussion draft disrupts that--there is no 
process that guarantees give-and-take under the current law.
    Does your group oppose the principle of changing the 
current system so that there has to be some give-and-take while 
maintaining your right to participate?
    Mr. Szeptycki. I guess I have a couple of responses to that 
question. One is that the give-and-take is occurring. Most of 
these relicensings are being handled through collaborative 
settlements, and there is a lot of back and forth about the 
precise nature of the fish passage, the cost of different 
alternatives, and the efficacy of different alternatives. And 
even in relicensings that aren't being handled formally through 
the collaborative process, there is a lot of back and forth 
between the license applicants and the agencies setting out the 
prescriptions. But I think that the thing that drives these 
discussions--and, in particular, you started out, Mr. Chairman, 
talking about the participation of Trout Unlimited--being 
careful not to use the abbreviation--in these relicensings, and 
you have got to understand, these people are not professional 
fish conservationists. They know a lot about the river, they 
know a lot about fish, but they are devoting their free time to 
this. And if it is an adversarial, highly bureaucratic 
government process, they really can't participate in it.
    What happens in these collaboratives is the licensees sit 
down with stakeholders, including the Trout Unlimited members, 
and receive their input on how the whole licensing is going to 
go, including the studies that they are going to do that are 
ultimately going to drive the conditions on the license, 
including the fishway prescriptions and the 4(e) conditions, 
and one of the things that is motivating them to sit down and 
talk is their need to have control over the process and the 
balance struck under the Act, as currently drafted, including 
those minimum environmental protections that are in Section 
4(e) and Section 18. And what our concern is that those 
prescriptions--if provisions weren't in there setting out those 
basic conditions that have to be met, that licensees wouldn't 
have the same motivation to sit down at the beginning in order 
to start crafting a result that will work for everybody, and 
sit down at the beginning and receive input from the whole 
community, including our members.
    Mr. Barton. Thank you. The Chair would recognize Mr. Allen 
for 5 minutes.
    Mr. Allen. Thank you, Mr. Chairman, and thank you all for 
your testimony here today. Mr. Robinson, you have done this 
integrated relicensing process, you have been through it. How 
much does FERC estimate that its new rule will accelerate the 
licensing process, and by how much do you estimate it will 
reduce costs for applicants?
    Mr. Robinson. Our objective with the ILP is to have the 
licenses issued within the 2-year timeframe that extends from 
the period that the application must be filed by statute, and 
the expiration of the license. We are looking at about 17 
months to get the ILP licenses issued so that we don't have 
annual licenses being issued on these projects. That will 
happen if everyone cooperates. We are hopeful that people will, 
agencies will--State agencies in particular--but we will have 
to see how that works out. That is the way it is designed.
    Mr. Allen. What would you say is the current average?
    Mr. Robinson. Currently, for the traditional licensing 
process, our median processing time is about 47 months, 3\1/2\ 
years approximately, so it is a significant savings there.
    We are a multi-shop place, you can pick your method. Our 
alternative licensing process has a median timeframe of around 
16 months from the application being filed. That is used on 
approximately 30 percent of our relicense applications today.
    Mr. Allen. And the reduction in cost that you estimate for 
applicants, once you have done this integrated relicensing 
process, there is a significant reduction of cost to the 
applicant, is that right?
    Mr. Robinson. That is correct, and I am afraid to try to do 
that from memory, I will have to provide that number. But the 
ILP is designed to have a significant savings to the 
applicants, and everybody involved in the process for that 
matter.
    [The following was received for the record:]

              Cost and Time Estimate for Licensing Process
   Proposed Rule RM02-16-000 estimates the following time and costs to
                     prepare a license application:
------------------------------------------------------------------------
                                                    Time         Cost
                 Project Size                     (hours)     (dollars)
------------------------------------------------------------------------
Traditional Licensing Process (TLP)
Projects greater than 5-MW....................       46,000    2,300,000
Projects smaller than 5-MW....................       10,000      500,000
Integrated Licensing Process (ILP)
Projects Greater than 5-MW....................       32,200    1,610,000
Projects Smaller than 5-MW....................        7,000      350,000
------------------------------------------------------------------------
Expected reductions in time and cost for use of the ILP process are a
  result of: (1) integrating application preparation with environmental
  scoping; (2) early coordination among the Commission and federal and
  state agencies and tribes; (3) firm schedules and deadlines for all
  participants; (4) early development of a study plan and early
  resolution of any study disagreements; and (5) increased involvement
  of Commission staff throughout the licensing process.

    Mr. Allen. Well, I want to commend you, first of all, 
because that change, just by itself, that administrative change 
clearly should make the process of relicensing, which has 
suffered significant problems, move much more smoothly. And 
clearly that is an important step.
    Ms. Keil, in your testimony where you referred, I think, to 
the last compromise that was hammered out last year--I am not 
sure if you did, I think it was in there somewhere----
    Ms. Keil. I am not sure I did, but you could ask me about 
it anyway.
    Mr. Allen. I can ask you about it anyway. Do you now oppose 
enactment of Title IV of H.R. 4, as passed by the House during 
the 107th Congress?
    Ms. Keil. I think it is important, Congressman Allen, to 
look at the evolution since the last Congress and the 
improvements that have been made to that bill. From the 
industry's perspective, the standard that has been inserted is 
one that mirrors the statutorial language. If we look at the 
one for 4(e), for instance, ``protect and utilize the 
reservation'' is indeed the language of the statute. We believe 
that mini-trial type hearings and other provisions are good 
Sunshine, good government provisions, and what has been 
referred to as the ``super status'' for the applicant is one 
that we think is justifiable and important.
    Applicants come to the table are licensees with the most 
information of any party about the license that is before the 
commission, and are really in the best position to propose 
least cost alternatives.
    I would like to point out that nothing here reduces the 
amount of public participation that would occur earlier in the 
process, and indeed that is vast, and we value the 
participation of folks who come to our licensings. We actually 
provide support to American Rivers and TU in our licensing so 
that they can come to the table as equal participants, and we 
would anticipate continuing to do that.
    Mr. Allen. But they would have less leverage--under the 
proposed legislation, they would have less leverage than they 
have at the present time.
    Ms. Keil. At that final step, I think that is right. 
Earlier in the process, I would disagree.
    Mr. Allen. Mr. Robinson, are you arguing that FERC should 
be able to substitute its judgment for that of the resource 
agencies? The chairman was asking you a question in which you 
conceded there were at least four other agencies which could 
impose mandatory conditions. And the question is does FERC--
what expertise does FERC have to judge the adequacy of license 
conditions for fish passage and protection of Federal lands, 
and isn't giving FERC the responsibility to make those 
decisions as illogical as giving the Department of the Interior 
authority to be the final arbiter of economic issues?
    Mr. Robinson. Title III, of course, doesn't do that at all, 
it keeps the authority with the Secretary. But if the idea was 
to give the commission some review of those conditions, I would 
just say this. It takes two aspects, two areas of expertise to 
license a project. One involves folks--I am an aquatic 
ecologist myself--people who are trained in those fields, who 
spend their entire professional career dealing with hydropower 
projects and how they affect natural resources. I have a staff 
of probably 60 or so people that do that day in/day out. They 
have the expertise and knowledge of how hydropower projects 
affect fish, wildlife, and everything in between. On the other 
side, what you need is the local knowledge, those folks who 
deal day-to-day with those resources, maybe don't have the 
expertise in hydropower impacts or hydropower mitigation or 
protection measures, but do know the resource. That is why we 
have to work cooperatively together to try to find solutions 
for these projects, the types of mitigation measures that come 
into play. So I think we do have that expertise, but so do the 
agencies and so do others.
    Mr. Barton. The Chair would recognize Mr. Radanovich for 5 
minutes.
    Mr. Radanovich. Thank you, Mr. Chairman. Mr. Robinson, I 
again would like to go over the need for legislation at least 
from my view of the perspective of sort of our experience on 
relicensing and the court involvements and the court decisions 
that lead to what I view as somewhat of a narrow view of the 
regulations that govern relicensing without economic input.
    The work that is being done on the collaborative remedies 
within the department still belies, in my view, the need for 
the legislation that corrects that. Can you give me a better 
dynamic about how the courts and court judgments have kind of 
skewed the process so a more balanced interpretation isn't the 
result of it?
    Mr. Robinson. For better or worse, I have been at the 
commission long enough to see this progression of events that 
go to how the commission can treat mandatory conditions and 
prescriptions. When I first started at the commission, they 
were inappropriately, I think, viewed as just recommendations 
to be treated as you will. Over time, the courts have taken it 
sort of to the other extreme where the commission is now in a 
position where they have no potential to interact or discuss 
the relative merits of a mandatory condition or a prescription, 
and at times that puts us in a posture where we have to issue a 
license where the record may not, in the commission's view, 
support those conditions which we must, by the nature of the 
statutes and the interpretation of the court, must include.
    I would like to, if I could, just take one more second to 
talk about the cost issue. It occurred to me after I finished 
with Mr. Allen. There are actually two components to cost to 
relicensing. One is the process itself, and the other is the 
outcome, those measures that are required as the result of that 
process.
    One thing we did look at was to see what the costs are 
associated with what are called protection, mitigation, and 
enhancement measures for projects where you have 4(e) authority 
and prescriptions and projects where 4(e) prescriptions were 
not imposed because there are no reservations involved. Those 
numbers, as I have in here, where there are no 4(e) 
requirements is around $418 per kilowatt on average for 
projects. For those projects that did have those conditions in 
them, it was $590. I think it was 2.7 times more expensive to, 
as a result of licensing where you had 4(e) in prescriptive 
authority. There are projects currently before us right now 
where I think we have some issues with the agencies about 
whether or not very costly measures are in fact needed, but 
will have no opportunity to make a modification of that or 
change it. They will go in if they are prescribed or submitted 
to the commission.
    Mr. Radanovich. Thank you very much. Mr. Masonis, thank you 
for being here, and I want to preface my question a little bit 
because under the law FERC must take into account a wide range 
of factors, including not only the environment of the 
situation, but also energy economics, clean air, flood control, 
drinking water, irrigation and transportation. And in a recent 
article of Inside FERC, I think you were quoted as saying that 
if there is any objection to the mandatory decisions, that they 
can be challenged in court, when asked about FERC's recourse if 
disputes over licensing conditions arise.
    It seems to me at least--and, again, I think we all want to 
kind of do what the law says, and that is seek a balance--and, 
yet, it seems to me that a lot of your constituency or the 
environmental community will find a sympathetic court to, at 
least in my view, give an unbalanced decision, which seems to 
be the history to me, which is why I feel the need for the 
legislation. Is it something that we should just go to the 
courts and do, and find out where we can get a sympathetic 
judge and where we can't, and is that what we are up against 
here, if we are really looking for balance, I think, on our 
approach, which would lead to timely consideration it permits 
as well.
    Mr. Masonis. I appreciate the question. I think that there 
are ways to find that balance in the process as it exists now. 
There are clearly cases that do end up in court where issues 
regarding mandatory conditions have not been resolved. I don't 
want to suggest that is not the case, but what I do want to 
suggest is that the process itself has plenty of opportunity 
right now, and it is improving with the rulemaking that Mr. 
Robinson has been discussing with members of the subcommittee 
today, to identify those conditions that are necessary in order 
to protect fish and wildlife and the environmental values of 
rivers, taking fully into account the other issues that you 
mentioned. Sometimes parties disagree about that, but that 
dialog is taking place.
    I think another part of my answer is that one of the 
critical flaws that we see in this legislation is the fact that 
groups like ours are not there at that critical final stage, as 
drawn out in Mr. Allen's question. Last year I believe we had 
legislation that included an opportunity for groups like 
American Rivers and Trout Unlimited and Tribes and other 
interested parties to also offer alternatives to a mandatory 
condition and have a full airing on equal footing with the 
utility. That is not the case under this current legislation.
    Mr. Radanovich. Thank you. If I may ask other questions 
later, if possible.
    Mr. Barton. We will do a second round. Mr. Walden is 
recognized for 5 minutes.
    Mr. Walden. Thank you, Mr. Chairman. Ms. Keil, I welcome 
you back before the Congress and appreciate your testimony, as 
well as that of the other witnesses. Can you talk a little bit 
about some of the relicensing that you have been engaged in, 
and some of the dam removal efforts that Portland General 
Electric has been involved in as well, and just the costs 
associated there, what that means to the average ratepayer?
    Ms. Keil. Sure. As I mentioned in my testimony, we have 
five projects. One of them is going to be removed. That removal 
is the result of a forecast by the utility of an unacceptable 
license coming down the road, and will cost PGE's customers 
upwards of $20 million by the time we are done with that 
removal.
    Mr. Walden. $20 million?
    Ms. Keil. $20 million, not including the loss of 22 
megawatts of hydropower from that project.
    Mr. Walden. Will you have to go acquire that power in the 
open market then?
    Ms. Keil. Yes. PGE is a company that is short--that is to 
say we already don't have enough native resources to serve our 
load. And so we will be out buying that power in the market 
from whatever resource we can get it from, which is a serious 
disadvantage to PGE as a company and to its customers.
    The other four projects are going forward in relicensing, 
and those costs will range--probably the most expensive one of 
those will be upwards of $30 million of process costs alone by 
the time we are done. And for the smaller projects, my guess is 
I will bring them in around $15 million worth of process costs. 
That has nothing to do at all with protection mitigation and 
enhancement measures that will follow on.
    Mr. Walden. What is the total price tag with the process 
cost and what you anticipate will be the cost put on the 
projects?
    Ms. Keil. A couple of the projects are a little too early 
to guesstimate the eventual cost, but if I was to guess, the 
one that we have farthest along is probably going to be $150 
million worth of enhancements. The other ones will be somewhat 
less because the projects are smaller, but I wouldn't doubt 
that they will crest $50 million.
    Mr. Walden. So you are looking at several hundred million 
dollars then in project enhancements?
    Ms. Keil. Yes. And that is just to maintain the production 
we have, not to add anything to the system.
    Mr. Walden. Will you be able to maintain the same level of 
output, do you thin?
    Ms. Keil. No. We will start to lose production, we are 
going to lose flexibility. One of the projects we will lose 
probably close to 20 percent of production as a result of 
licensing.
    Mr. Walden. Twenty percent of production.
    Ms. Keil. About 20 percent.
    Mr. Walden. And that is not the dam you are going to 
remove.
    Ms. Keil. That is not the one we are going to remove, that 
is right. That is one we are keeping.
    Mr. Walden. Do you think the language in the Barton bill 
fully resolves the problems you face?
    Ms. Keil. You know, Congressman Walden, I don't think you 
could ever fully resolve this issue. There is a natural tension 
here, and there will always be a natural tension here.
    Mr. Walden. And there should be, frankly.
    Ms. Keil. Yes, and there should be. I think it leads to 
creative solutions on all parts when interests can come to the 
table. I think this bill makes a significant step forward in 
allowing more information to come to the table and to encourage 
parties who currently have no interest in negotiating to come 
to the table and try and reach a solution that solves not only 
their problems, but also those of the utility's customers.
    Mr. Walden. Mr. Masonis, I am just curious about your views 
on the bill and your comment these requirements should take 
place regardless of cost. Obviously, in the Northwest, as you 
well know, the big debates of the Columbia and Snake system and 
the passage along the Snake River dams especially. What is the 
position of your organization relative to either breaching the 
Snake River/Columbia River dams, which ones, if any, do you 
think that is the solution to, and do you support removal of?
    Mr. Masonis. Congressman Walden, we support--when the 
Federal salmon plan was being issued in 2000, we were 
supportive of removing the four lower Snake River dams, and 
continue to be supportive for the reason that based upon our 
assessment of the science regarding Snake River salmon 
recovery, it is impossible to recover those stocks with those 
dams in place.
    Mr. Walden. And you don't believe there is a fish passage 
or a trap-and-haul that would work?
    Mr. Masonis. There is fish passage at each of the four 
dams. The problem is that the cumulative mortality is so great 
and we have actually spent, as a region, primarily as 
ratepayers but also as taxpayers--the price tag most recently I 
saw was somewhere around $3.5 billion. A lot of that cost has 
been associated with----
    Mr. Walden. Are there any Columbia River dams you think 
should be removed, or your organization?
    Mr. Masonis. No, Mr. Walden.
    Mr. Walden. Just the Snake River. Okay, thank you.
    Mr. Barton. The Chair thanks the gentleman. Mr. Otter is 
recognized for 8 minutes.
    Mr. Otter. Thank you, Mr. Chairman. I want to associate 
myself with the remarks of those members before me who thanked 
the panel for being here today.
    Mr. Masonis, let me begin with you. In your testimony, you 
mentioned a dam that had not been relicensed even though there 
had been quite a few years in the process. How many years was 
that?
    Mr. Masonis. Since 1974 when the license expired.
    Mr. Otter. And what dam was that?
    Mr. Masonis. That's the Cushman Hydroelectric Project.
    Mr. Otter. And what is the reason it hasn't been?
    Mr. Masonis. There have been disputes regarding the natural 
resource measures, among others, that should be included in the 
new license issued for that project. That project is somewhat 
unique in the sense that it was never properly licensed to 
begin with. When it was originally built, it was built only 
with, I believe, authorization for an occupation of Federal 
land, but the project works were actually not authorized to be 
built. And there is also a Tribe, the Cicomas Tribe, which has 
Tribal lands adjacent to the project site, and there have been 
a number of issues associated with the Tribe's interest as 
well.
    Mr. Otter. Would that be a candidate for being torn out 
then?
    Mr. Masonis. No, it is not.
    Mr. Otter. Should it be?
    Mr. Masonis. No. In the view of my organization and others 
who have been participating with the conservation interests, 
our primary goal is to get flows below that project that are 
adequate to support the listed salmon species below the 
project, as well as to maintain the river channel and have a 
healthy river system.
    Mr. Otter. I see. Mr. Robinson, do you agree with that 
assessment?
    Mr. Robinson. The commission actually issued a license for 
that project for its continued operation. It was remanded by 
the courts. I think that is still the position of the 
commission, that it can be licensed.
    Mr. Otter. So are we still in the courts then? We have been 
in the courts since 1974?
    Mr. Robinson. No sir, not since 1974. Uniquely, that 
project had about, I think it was, 8 acres of National Park 
Service land on it, and it took an Act of Congress to remove 
those acres before we could go forward with licensing, and that 
took a considerably long time to do that.
    The issues now before the commission, that were reviewed by 
the courts, went to flows below the project for migratory fish 
purposes, and other environmental issues. And I believe the 
status of that is that it is back in front of the commission 
again.
    Mr. Otter. I see.
    Ms. Keil. Congressman Otter, if I might----
    Mr. Otter. You certainly can.
    Ms. Keil. I think what Mr. Robinson said about Cushman 
points out how flawed the current system is for reaching 
resolution of these things. If you send an intensely fact-based 
dispute like this off to the Court of Appeals, the likely 
result is it is going to come back to the commission with some 
instruction to do it right. So you have the serious risk of 
creating a do-loop, if you will, that just sort of goes around. 
And I think one of the beauties of the legislation that is in 
front of you is it has the potential to put those disputes--
more clearly focus them and to put them back into the licensing 
process where they belong.
    Mr. Otter. I thank you for that intervention, it is most 
helpful. Mr. Robinson, if Title III was adopted in its present 
form, what guarantee would we have, or is there any kind of 
guarantee that we would have, that there would not be certain 
interest groups that would be excluded from the process?
    Mr. Robinson. Well, actually, I think that is kind of a 
false path on this. The process will still be the same. The 
licensing process will still be the same. All the participants 
will have every opportunity. The only thing that Title III 
would do would be where there was an alternative condition 
proposed by the licensee, it would allow that agency, whichever 
one it was, to review it, the Secretary to review it and come 
back with an alternative.
    Currently, there is nothing other than the FERC process to 
allow people to be involved in development of those conditions, 
and that would not change. So, I don't see how there is any 
potential for excluding the public. It basically functions the 
same way it does now with another review process factored in.
    Mr. Otter. Well, under our present law, especially those 
that we issued from the Federal level, your agency isn't the 
only one that operates under those conditions. I mean, the 
Federal Highway System, we have got $14 billion in highway 
projects right now that are being held up, which would create, 
I might add, 400,000 construction paying jobs. And in this 
economy, Lord knows we could use it. But because of some 
environmental consideration that hasn't been satisfied, or some 
mitigation that hasn't been agreed to, in my State alone where 
we still killed 32 people on one little stretch of highway, we 
have got $58 million worth of projects being held up because 
those agencies that have requested certain mitigation haven't 
been satisfied. But we will continue to kill 32 people a year, 
I suppose, and that is--I don't know if that is a mitigation 
cost that those folks want to talk about. So why should your 
agency be any different, or should we ask that all Federal 
agencies that have certain oversights over other Federal 
agencies, like FERC, like the Federal Highway System, like the 
Forest Service, like BLM, should we ask that perhaps we have 
this same consideration for every one of those agencies and not 
just FERC?
    Mr. Robinson. I am a firm believer that if you have 
authority vested in an agency, that they have to have 
accountability, and they should have a standard of review that 
is imposed by a body like Congress in using that authority. I 
think what Title III does is just exactly that for those two 
issues, it will make those agencies more accountable and more 
consistent in exercising the authority that they have been 
granted by Congress.
    Mr. Otter. I would certainly agree. Mr. Szeptycki, on the 
Columbia/Snake River runs, we have right now I think there is 
24 out of 28 steelhead or salmon species or subspecies that are 
considered either threatened or endangered. We know that only 
four of those species actually went over the lower four Snake 
River dams.
    If the four lower Snake River dams should be a candidate 
for removal and those other 18 species are endangered or 
threatened, shouldn't the dams on down the Columbia River then 
also be candidates? Wouldn't they also be candidates?
    Mr. Szeptycki. Let me preface my comments by saying that we 
have got a whole group of people out in our Portland office who 
are working very hard on the Columbia and Snake River issues, 
and it is not my primary area of expertise. But I will say 
this. The biology of each of those salmon runs is different, 
and the fish passage challenges that they face, depending on 
where they are going to spawn, are different. And the 
downstream fish passage challenges when they are returning from 
their native streams out to the ocean to grow, for each run of 
salmon, depending on where they go, at what time of year they 
come into the rivers, what time of year they leave the rivers, 
are different.
    And what I do know about those Snake River runs is that the 
biologists have taken a good, long, hard look at those runs and 
concluded that the only way to restore those particular runs--
and I should add they were extremely robust runs of salmon and 
steelhead that used to make it all the way up into Idaho--the 
only way to restore those runs is by removing those dams. And 
as Mr. Masonis commented, there has just been a huge amount of 
money spent on measures short of removing the dams that have 
failed. And it is my understanding that with respect to the 
other runs of fish that you are talking about, that that type 
of conclusion has not been reached about the need to remove the 
dams.
    Mr. Otter. I understand. Thank you, Mr. Chairman.
    Mr. Barton. Thank you. We will now start our second round, 
and we will start with the gentleman from Maine, Mr. Allen, for 
5 minutes.
    Mr. Allen. Thank you again, Mr. Chairman. A couple of 
questions, Mr. Robinson. The industry, in the past, has 
testified that America is in danger of losing substantial----
    Mr. Barton. Would the gentleman defer? We just--in the nick 
of time, Mr. Markey has come. Could we let Mr. Markey do his 
first round, then we will recognize you as the first member for 
the second round.
    Mr. Allen. Absolutely. Thank you.
    Mr. Barton. If the gentleman is ready, we will recognize 
Mr. Markey.
    Mr. Markey. I am ready, and I thank the gentleman from 
Maine very much for his forbearance.
    Ms. Keil, hydropower is a pretty important, indeed vital, 
part of your company's business, isn't it?
    Ms. Keil. Yes, it is.
    Mr. Markey. Now, Ms. Keil, Portland General Electric is a 
wholly owned subsidiary of the now-bankrupt Enron Corporation, 
is it not?
    Ms. Keil. Yes, it is.
    Mr. Markey. Now, isn't it true that the FERC staff has 
found that Enron and Portland General Electric, amongst others, 
manipulated electricity and natural gas prices in California 
and the Pacific Northwest?
    Ms. Keil. You sound like you are speaking from more 
knowledge than I have. You know, I have not been involved in 
the trading side of the company. They let me do my job and I 
like the hydroelectric project, so I really couldn't comment on 
what has been happening on the trading side.
    Mr. Markey. Well, the answer is yes, but let me read a few 
passages from an August 13, 2002 FERC press release about 
Portland's involvement in Enron's manipulation. It says ``The 
Federal Energy Regulatory Commission today launched following 
investigations into instances of possible misconduct by Avista 
Corporation and Avista Energy, Inc., El Paso Electric, and 
three Enron corporate affiliates, Enron Power Marketing, Enron 
Capital, and Trade Resources Corporation, and Portland General 
Electric Company. The key finding is''--this is from the 
Federal Energy Regulatory Commission. ``The key findings and 
recommendation of the staff factfinding investigation are there 
exists sufficient evidence to warrant formal investigations of 
possible violations of the Federal Power Act by Portland 
General Electric Company.''
     Is it possible that some of Portland's hydroelectric 
facilities might have been involved in these manipulations?
    Ms. Keil. It is possible, but very unlikely. PGE's 
hydroelectric projects are operated to the benefit of PGE's 
customers in the Portland Metropolitan Area and in the 
Willamette Valley. Most of the trading operation happens around 
resources other than PGE's hydro projects, and the benefits of 
those hydro projects were effectively walled off by the Oregon 
Public Utility Commission at the time Enron acquired us. So, 
from an accounting perspective and a benefit perspective, PGE 
operates its own resources for the benefit of its customers and 
to meet the environmental standards that they expect of us.
    Mr. Markey. But since we can't tag electrons to their 
source, we really can't readily determine whether Portland's 
hydro and other generation facilities were utilized to carry 
out the manipulations that Enron and Portland carried out, 
isn't that correct?
    Ms. Keil. All you can tell, Congressman Markey, is where 
the money flows, and electrons flow where electrons are going 
to flow, and I would tell you again that from an accounting 
perspective, PGE's customers have been guaranteed the benefits 
of those projects by actions of the Oregon Public Utility 
Commission. And to be honest, the magnitude of our hydro 
resources is small enough that I doubt that it was a key 
portion of the trading philosophy that was going on at the 
time.
    Mr. Markey. Let me read to you a passage from the August 
2002 FERC staff report, starting on page 78. ``Enron's 
corporate culture which permeated all of its affiliated 
companies including those affiliates such as Portland, which 
are not currently in bankruptcy, fostered a callous disregard 
for the American energy consumer and demonstrates the need for 
more explicit prohibitions as well as aggressive market 
monitoring and enforcement.'' Now, I agree with that, Ms. Keil.
    Ms. Keil. I certainly wouldn't argue with the statement, 
sir, because I don't have the facts to say so. But I think 
everyone in this room who has worked with Portland General 
Electric's hydro side of the company would tell you that they 
have not seen a change in philosophy or culture as a result of 
our ownership by Enron.
    Mr. Markey. So the question for this committee and for the 
Congress is why should Congress grant regulatory relief to an 
Enron subsidiary that the FERC staff believes may have been 
manipulating prices in the West and energy markets?
    Ms. Keil. No disrespect, sir, but I fail to see the 
connection. What we are looking for is a system that will allow 
project benefits to flow to PGE's customers as they do now, and 
to insert a reasonable consideration of cost in environmental 
measures as we go forward. I really don't see the connection 
between the two.
    Mr. Markey. Well, there is. Thank you, Mr. Chairman.
    Mr. Barton. Thank the gentleman from Massachusetts. Before 
we recognize Mr. Allen, I would just make a comment. I think 
the gentleman's questions were appropriate to the bill in 
general because we have provisions on transparency and 
increased civil and criminal penalty enforcement by the FERC, 
and market manipulation. So those are all very relevant issues 
that need to be addressed. There will be three panels tomorrow 
in which any of those questions could be addressed.
    This panel was supposed to talk about a more mundane topic 
of just hydro relicensing.
    Ms. Keil. And I am not coming back tomorrow. That was bad 
enough.
    Mr. Barton. If Mr. Markey wants you to come back, you may 
get to come back. But, anyway, I think the questions were 
appropriate, but maybe not directly on point to the purpose of 
this hearing.
    Recognize Mr. Allen for a second round of questions for 5 
minutes.
    Mr. Allen. Thank you, Mr. Chairman. Mr. Robinson, there has 
been testimony that America is in danger of losing substantial 
hydropower capacity and operational flexibility at a time when 
it is most needed. Could you estimate how much power has been 
lost through relicensing over the past 10 years?
    Mr. Robinson. I don't think I can answer the 10-year 
portion, but the last time we looked at it--which we looked at 
relicensing I think back in 1993, so it was probably about a 
10-year period--in terms of capacity, installed capacity, 
relicensing actually resulted in a net positive, small but a 
net positive for capacity. In terms of generation, there was a 
small reduction in generation. I think the estimate was 
something in the 3 to 4 percent range. What we did not try to 
estimate because actually the complexity of it, looking across 
the Nation, sort of boggled our minds, and so we just left it, 
was operational flexibility. And what that meant in terms of 
lost returns on the sale of electricity, it was too complicated 
to even approach, so we did not.
    Mr. Allen. Okay. In your experience, does construction of a 
fishway significantly result in a significant loss, say, more 
than 5 percent of electricity production?
    Mr. Robinson. There is a component of attraction flows that 
comes part and parcel with every fishway that is in place, but 
we have not made an estimate. Five percent doesn't seem 
unreasonable.
    Mr. Allen. So, essentially what you are saying is that at 
least so far relicensing has not made a measurable difference 
in generating capacity? Operational flexibility is, you are 
saying----
    Mr. Robinson. Operational flexibility, it clearly, on a 
case-by-case basis, has had extraordinary impacts on individual 
projects in their operational flexibility. Taking plants from 
peaking to run-of-river, which is a completely different kettle 
of fish--excuse the pun--but in terms of generation capacity, 
no real significant difference.
    Mr. Allen. There was some earlier conversation about cost-
benefit analysis. As I understand it, FERC isn't required by 
law to ensure the profitability of hydropower projects under 
your jurisdiction, is that right?
    Mr. Robinson. That is correct.
    Mr. Allen. And are applicants required to submit economic 
information from which you could determine that that particular 
project is profitable or not?
    Mr. Robinson. We don't do a profitability estimate. What we 
do is a cost-to-generate-power, and what the alternative cost 
of power would be, so that the commission has a perspective 
when they issue this license, whether or not they are issuing a 
license that would result in power that is more expensive or 
less expensive than the alternatives that are out there.
    Mr. Allen. Okay. Let me seek Trout Unlimited.
    Mr. Szeptycki. I can go by that.
    Mr. Allen. Are fish conservation measures equivalent to 
fish passage, and if you could talk about the difference and 
also answer the question whether FERC staff has the expertise 
to review fishway conditions, in your opinion?
    Mr. Szeptycki. Well, taking the first part of it, the 
current Title III talks about--and let me just turn to the bill 
to get the exact language right--talks about alternatives that 
protect fish resources and doesn't specifically require that 
the applicant come up with an alternative fishway. And this 
lack of precision in the language is troubling because there 
really is no substitute for both upstream and downstream fish 
passage. If the fish can't get to where it normally spawns and 
if it can't go from where it normally spawns to the ocean or 
wherever else it goes, there is no substitute for that. And we 
have spent huge amounts of money on both coasts trying to 
restore fisheries with inadequate fish passage through 
hatcheries, through things like trapping and trucking fish, and 
they have uniformly performed very poorly. And there is just no 
substitute for a decent fishway, and it is of considerable 
concern to us that this imprecision in the language could lead 
to proposed alternatives that involve just stocking more fish 
or taking other measures short of actual fish passage because 
there is no substitute for it.
    And in terms of FERC's expertise, I think the people that 
are in the best position to make a determination about fishway 
prescriptions are the people that Congress put that decision in 
charge of, and those are the resource agencies that are working 
on restoring those fisheries runs. They are the ones who know 
what the fisheries need. They are the ones who are familiar 
with the technology and how they would apply to that specific 
location, and they are really the people that should be making 
that decision.
    Ms. Keil. Congressman, if I might point out, the language 
in the bill would allow the Secretary, in the situation that 
Leon proposes, to reject the alternative if the Secretary truly 
believes that a fish passage system is required for protection 
of fish resources in that system.
    I guess I would point out that we don't believe that a one-
size-fits-all approach to this is necessarily correct, and that 
there may be situations in which alternatives other than fish 
passage structures may be the best way to protect, enhance, and 
mitigate for impacts on fish species.
    Mr. Allen. Thank you all. Thank you, Mr. Chairman.
    Mr. Radanovich [presiding]. Thank you. Ms. Keil, I want to 
give you the opportunity to expand on the overall generation 
loss issue, but first wanted to reiterate that this is a 
hearing on hydro relicensing, it is not--which deals with many 
corporations both public and private. It has nothing to do with 
giving advantage to business, in my view, anyway, and I think 
it is good to keep the topic on that. But when the question was 
asked about overall generation loss due to the length or 
problems with relicensing, it was mentioned that there was no 
net loss. Would you comment on that? But, also, in addition to 
that, I want to get your opinion--I mean, I have had in my 
district one relicensing that took 18 years to do, and another 
one that is 4 years old and nowhere near being resolved, which 
dramatically increases the cost of relicensing, and I would 
like to get you to comment about your experience on that, the 
added cost to hydro regeneration as a result of the length of 
the permit and the delays.
    Ms. Keil. Sure. Let us tackle the generation loss question 
first. I think the real question is more than counting up 
kilowatt hours, it is counting up the loss of generational 
flexibility and operational flexibility. PGE, for instance, 
counts on its hydroelectric projects to be able to come up in 
the morning when people get up and turn on their hair dryers 
and their toasters and their television sets to watch C-SPAN 
and see what you all are doing. And so hydro is a very 
important factor in our ability to do that for people, and we 
need to be able to do it instantaneously.
    Many licenses are seeing a loss in that capability. As Mark 
mentioned, converting projects from what are called peaking 
resources to run-of-the-river may not result in a loss of 
kilowatt hours over the length of production because you are 
still dealing with the same amount of water, but it reduces 
your ability to have that kilowatt hour available to you when 
you need it, when your customers need it. And that peaking 
resource has to be replaced somewhere, you simply can't run a 
system without it.
    On the cost side, I run the largest capital budget in PGE's 
system, and I am not building anything. So the process costs 
that I see year to year only mount up and only increase the 
eventual cost of protection. So the more efficient and the more 
effective we can make that process, the better off my customers 
are going to be both from a cost perspective and from having us 
have the ability to implement the improvements that they expect 
us to implement.
    Mr. Radanovich. Thank you very much. I don't have any other 
questions. Mr. Otter.
    Mr. Otter. Thank you. Mr. Robinson, especially during those 
times of tough and high energy rates and everything that went 
on a couple of years ago, there was as a result of the 
California experience which they affectionately and wrongly 
refer to as the results of deregulation--they weren't even 
close to deregulation. I don't know how you would call setting 
the retail price and turning the wholesale price as a free 
market opportunity but, anyway, during that time, our bills 
went up substantially. And I got letters from all kinds of 
folks saying to me, ``What will you do about the power, the 
cost of power,'' and obviously they are not as aware--and I 
tried to explain that in my replay to my constituents--that 
there is a lot of costs that go into the cost of a kilowatt of 
electricity. And when you go flip on the switch, why, all of 
those costs come through that wire and end up going through the 
meter, and the result is in a month you are going to get a bill 
for that.
    And one of the things that I am astounded when I get a 
second letter back, or e-mail, or whatever, is that very few 
people, consumers, are aware of the fact that all these 
mitigation costs on relicensing, many of which are set by the 
U.S. Fish and Wildlife, who never have to answer to an 
election, set by many groups, interest groups, some of them 
sitting right here at this table, as a result of 
``mitigation.'' What can we do along with this process of 
educating the consumer so that when you hear these apple pie, 
mother and environmental things that are going on and we are 
not considering the cost of some of these things, we need to 
start reflecting this in what is going to happen to every power 
bill. And maybe 20 cents to some folks isn't a lot of money, 
but to people that work in a processing plant in Idaho adding 
value to potatoes and calling them Freedom Fries at the end of 
the line, that means in many ways whether or not 27,000 Btus to 
make a pound of french fries, that means whether or not we are 
going to be competitive with Canada, we are going to be 
competitive with Chile, or any other country that produces 
french fries. What can we do through FERC? How can we help FERC 
explain to these people that when they see these passionate 
stories in the sports section or lifestyle section of their 
local newspaper, if they read it--and I am not suggesting that 
they should--but if they do, what can we do to convey to them 
that every one of these things add up? Maybe this one was just 
20 cents, and this one was just a nickel, and this was just 
something else, but pretty soon, you know, that adds up to a 
much higher power bill.
    Mr. Robinson. Congressman, I can tell you what we do. Every 
project that we license, we take all the mitigation measures 
that are proposed either by the applicant, the 4(e) conditions, 
the prescriptions, the 10(j) recommendations that come from the 
State Fish and Wildlife Agencies, the 401 conditions from the 
State--there are more conditions on these licenses than you can 
shake a stick at--including the ones that we impose. But every 
single condition that we know about we publish in our 
environmental documents, and we make that available and make it 
a part of what everybody should understand in the 
decisionmaking process about which conditions should be 
included in the license.
    How do you get that information more generally 
knowledgeable to the public? Maybe we should do more when we 
have our public sessions to encourage people to come, to 
listen, to understand what is actually at stake in the 
relicensing of these projects, particularly in a State like 
Idaho which is so clearly dependent upon hydropower generation.
    Mr. Otter. Maybe I could make a suggestion here, and you 
and I can talk more about this out of the confines of this 
meeting room, but it would seem to me to be extremely helpful 
if every customer of Idaho Power, or Portland Light--or 
whatever it is, and I apologize for not remembering the Pacific 
Power and Light--if every one of those customers, during that 
mitigation process, that said to relicense this dam for 72 
megawatts is going to cost you $482 million, or which $10 
million of that is going to go for a bicycle path, of which 
another $43 million is going to go for a fish passage, another 
X-number of dollars--and this is what it is going to mean on an 
annualized basis. You know, when we try to pass a bond issue 
for a school building in my county or in my school district in 
Idaho, we get from the County Commissioner, we get from the 
public school sector, here is what is going to cost you on your 
property taxes, here is exactly what it is going to cost you. 
Now, you go down that line and you tell me which one of these 
that you want to include.
    Mr. Barton. The gentleman needs to give him a question and 
let him have a chance to answer.
    Mr. Otter. My question is that during the mitigation 
process, why cannot we include making sure that when the power 
bill goes up the month previous to the finalizing of the 
mitigation, this is what it is going to cost, and you can 
expect it because each one of these items--that bicycle path is 
going to cost you so much, and right on down the line.
    Mr. Robinson. That information is no doubt appropriate for 
people to have. Our process and what we do currently is to 
finish a larger figure out there of what the cost per year is 
going to be on power production from that plant for that type 
of mitigation. How you translate that to the individual 
customer is something that I quite honestly haven't given any 
thought to.
    Mr. Barton. The gentleman's time is expired. The gentleman 
from Arizona is recognized for 5 minutes. We welcome the 
gentleman from Maryland. He wishes not to ask questions. If he 
wished to, he would have been given the opportunity to.
    Mr. Shadegg. Thank you, Mr. Chairman, and I apologize to 
you and the members of the committee that I have not been able 
to stay in the room. I have had constituent appointments that 
have called me away, but let me ask some questions, if I might.
    Ms. Keil, I want to start with you. I want to ask a couple 
of two-part questions. The first two-part question: Do you 
believe that we can increase America's supply of energy, 
electrical energy, by adding turbines to existing dams where 
they do not now exist, question one. And the second part of 
that question, do you believe that can be done without negative 
environmental impact?
    Ms. Keil. Yes, and yes.
    Mr. Shadegg. Would you like to extrapolate or expand a 
little bit? If not, I will move right along.
    Ms. Keil. No. There is clearly a great amount of untapped 
capacity in the country, and for most of those areas, most of 
the impact of the construction has already occurred. So you 
could add power production with relatively little or no 
additional impact.
    Mr. Shadegg. Great. This one is the same kind of two-part 
question. Do you believe we could also add to power production 
in this country--something I think we all agree needs to be 
done given the fact that we have an increasing appetite for 
electricity and we have grave concerns about relying upon 
foreign sources for energy in general--by replacing either 
inefficient turbines or less efficient turbines in existing 
dams with more efficient turbines? Question No. 1, can we do 
that, can we produce more electricity in that fashion? Is there 
opportunity there? And, second, can we also do that without 
environmental damage?
    Ms. Keil. Again, I would have to say yes and yes. On the 
first half, it is clear that for older projects, and even 
projects built in the 1950's and 1960's, you can gain a 
tremendous amount of efficiency by replacing the turbine 
components. I have seen increases as much as 10 percent more 
kilowatt hours out of existing units by replacing some of the 
components. Those upgrades in particular have no environmental 
impact. All of the construction takes place inside of the power 
house. It tends not to change the amount of water that goes 
through the units or, in most cases, even the pattern of the 
water flow that goes through the units. And, actually, if you 
have got places where entrainment of fish into turbines is an 
issue--that is, you have got fish going through the turbine 
units--sometimes newer, more efficient units are actually more 
fish-friendly than the other ones. So you can get a little bump 
in fish protection at the same time that you are getting a bump 
in efficiency.
    Mr. Shadegg. Last question for you, would you then 
recommend that this committee look at adding incentives to do 
both of those things to any comprehensive energy package we 
pass?
    Ms. Keil. We would certainly be in favor of any incentives 
that the committee would like to suggest.
    Mr. Shadegg. I would like to ask Mr. Masonis and Mr. 
Szeptycki, I consider myself, I guess, an environmentalist. I 
am an outdoorsman. I love rivers, I love lakes, I like to boat. 
I am a fisherman, although I am a lousy fisherman. My son is a 
better fisherman. Given your legitimate concern, with which I 
sympathize, and given the effort to try to--the demand for 
electricity, given that you both I am sure believe that there 
are some dams that ought to come down, some dams currently 
producing electricity that ought to come down for environmental 
reasons, are your organizations willing to look at improving 
generation at other dams either by adding turbines where we are 
already releasing water, we just aren't running it through a 
turbine, or by replacing inefficient turbines with more 
efficient turbines?
    Mr. Masonis. I will take that question first. Congressman, 
I appreciate the question, and the answer to the question is we 
are certainly interested in looking at ways to improve 
efficiency at existing hydroelectric projects and generation in 
a way that does not result in significant environmental harm.
    Mr. Shadegg. Do you agree with the point that in some 
instances replacing an inefficient turbine with a more 
efficient turbine can also result in a more fish-friendly 
turbine?
    Mr. Masonis. I think that is right, that there are both 
environmental and economic generation benefits that can flow 
from such a step.
    Mr. Szeptycki. The only thing I would add to Mr. Masonis' 
answer--I mean, I would agree with him 100 percent. I think 
that if there is going to be a statute providing for 
incentives, it would have to be completely clear that 
additional generation not cause any additional environmental 
impact, and there has been a concept that has been discussed 
several times in this hearing about peaking generation.
    I should add that I don't think the statute before the 
committee, the bill before the committee today, is really going 
to affect peaking generation. It is not typically the fishway 
prescriptions that get rid of peaking flows, it is other 
aspects of the hydroelectric relicensing process. But my only 
concern would be if you put a turbine where there wasn't one, 
and it was a run-of-river project, that the owner of that 
project--the peaking power is so valuable that they would 
become tempted to attempt to run it as a peaking project, and I 
think that is something that would have considerable 
environmental impacts that we would oppose.
    Mr. Shadegg. My time has run out. I would be happy to take 
a second round, if the chairman will give me one.
    Mr. Barton. Let me recognize Mr. Wynn, and we will come 
back to the gentleman from Arizona. The gentleman from Maryland 
is recognized for 5 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. I apologize for not 
being here. Unfortunately, conflicting meetings prevented me 
from arriving earlier.
    I do have one question, or actually a couple of questions 
related to one topic, and that is pump storage. Mr. Robinson, 
can you tell me what role does pump storage technique currently 
play, and is there potential for growth in this area?
    Mr. Robinson. There is a potential for growth, and what 
pump storage does is it provides power at peak periods when the 
loads are highest, by using electricity during off-peak periods 
to pump water uphill, store it, and then run it back down 
through the turbines during those periods when power is needed 
most. So it takes cheap power and uses it to pump water up, and 
it produces more valuable power during periods when it is 
needed.
    We had a flurry of interest in pump storage projects about 
5 years ago but, unfortunately, the capital investment on a 
pump storage project is extreme. It is very, very expensive to 
build one of those kinds of projects. And we didn't see, after 
the initial contacts, initial interest, a whole lot of follow 
through on those projects.
    Mr. Wynn. Is the basic research and development in place 
now, or are we still at a point where we are looking at 
research and development as an issue?
    Mr. Robinson. No, not at all. I mean, you can always use 
more research and improve products, and that is certainly true 
in the hydropower industry, but it is very well understood. We 
have had pump storage projects in operation for--I know there 
was one that was under construction 30 years ago when I first 
got involved with hydropower.
    Mr. Wynn. What about the environmental impact, if this is a 
better, if you will, from an environmental standpoint, approach 
to hydroelectric energy?
    Mr. Robinson. You have the initial investment of lands, 
typically, the upper reservoir you have to do some flooding. 
Lower reservoirs, in many instances, take advantage of existing 
reservoirs or rivers. But after you have that initial 
investment of land, you are basically pumping, in some 
instances under closed systems, the same water up and down. And 
for those that are in open systems--by that, I mean they are on 
rivers or lakes or streams--you have all the mitigation 
measures that are available for those kinds of projects, like 
screens to protect fish from being impinged or coming into the 
system.
    Mr. Wynn. So you wouldn't define it as better or worse 
relative to traditional hydro?
    Mr. Robinson. I think hydro is so dependent upon the site 
that you are developing, but in general I would think pump 
storage has some environmental benefits, or can have some 
environmental benefits.
    Mr. Wynn. But is it your conclusion that it is just not 
commercially viable at this point?
    Mr. Robinson. Things change over the years. As the 
economics change, as other fuel sources become more or less 
expensive, hydropower development becomes more or less 
attractive. Pump storage, because it is so capital-intensive up 
front, has to have the right set of economics in place for 
energy in general to move forward, and we will see how that 
develops over the years.
    Mr. Wynn. I don't have any further questions, Mr. Chairman.
    Mr. Barton. Thank the gentleman from Maryland, and would 
recognize the gentleman from Arizona for a second round of 5 
minutes.
    Mr. Shadegg. Thank you, Mr. Chairman. Let me follow up on 
that point. We have some pump storage in Arizona on a series of 
lakes, and it raises an issue for me. One of the concerns in 
Arizona arises out of, for example, Lake Powell Glen Canyon 
Dam. One of the issues there is we no longer use it for peak 
power, or very limited amount of peak power.
    My question, first for Ms. Keil, is, are you aware of any 
location in America, or in the world for that matter, where 
essentially a coffer dam has been built? You build an upper 
dam. You build a dam close to it downstream. Albeit you are 
devoting some land to environmental loss, you are changing the 
nature of that. You release water out of it, you hold it at the 
lower level, and then you have it available to pump right back 
up for pump storage. You can then control the damage that 
peaking power would do by only releasing the peaking power 
water into a relatively short section of the river. If either 
of you could answer that question.
    Ms. Keil. Congressman, I am not aware--I am not a pump 
storage person, we don't have any on our system, so that I 
couldn't speak to. We do have a project that we use extensively 
for peaking, that utilizes a thing called a re-regulation 
reservoir, so that while the upper two parts of the project 
peak, all of the fluctuation is buffered in the reservoir 
behind the last dam in the system, and that allows us to hold 
the flows in the lower river steady. It is actually quite an 
effective system.
    Mr. Robinson. One comes quickly to mind, and I am sure 
there are others because the system you describe is obviously a 
good concept for pump storage. The Smith Mountain Lake Project 
where I live in Virginia takes advantage of a downstream 
reservoir that is basically dedicated to holding that water and 
putting it back up in the upper reservoir and eventually 
releasing it along downstream.
    Mr. Shadegg. Mr. Masonis, has American Rivers taken a 
position in support of draining Lake Powell and decommissioning 
Glen Canyon Dam?
    Mr. Masonis. Not that I am aware of, Congressman. No is the 
answer.
    Mr. Shadegg. The answer is you have not. It seems to me we 
ought to continue these talks. I mean, I think there are 
legitimate concerns, there are very legitimate concerns about 
Glen Canyon--about Grand Canyon and the effect that Glen Canyon 
Dam has had on Grand Canyon. I think we could look at various 
creative alternatives, and there are several environmental 
groups in Arizona, including the Grand Canyon Trust, which has 
been willing to look at alternatives so that the environmental 
damage done by the dam can be mitigated without eliminating the 
dam and the huge resource that exists.
    Mr. Szeptycki, has your organization looked at the fact 
that--taken a position on the draining of Lake Powell or 
decommissioning of Glen Canyon Dam, question one, and question 
two, is your organization aware that if you did that, one of 
the world's greatest trout hatcheries and fisheries below the 
dam, Lee's Ferry, would be wiped out?
    Mr. Masonis. We have not take a position in favor of 
removing that dam.
    Mr. Shadegg. Is the concept of something like Ms. Keil 
described or I described, that is, a series of a second dam, 
something that either of your organizations have looked at, and 
specifically in the context of saying, oaky, if there are dams 
we want to eliminate currently producing energy, it is an 
uphill fight to reduce the Nation's of energy, perhaps there 
are places where we can get peaking power, which is extremely 
valuable, or places where we can get generating capacity in 
general without doing significant environmental damage by 
buffering it through using a double-dam system.
    Mr. Szeptycki. In terms of using multiple dams to buffer 
peaking flows, I know that has been done in several instances, 
and it is quite effective at restoring trout fisheries in 
Tennessee and North Carolina below TVA dams where they have 
installed buffering weirs that have dampened peaking power and 
it has had a positive effect on those fisheries.
    I am familiar with a few pump storage projects in New 
England, and the one--I would agree with what Mr. Robinson 
said, they are incredibly capital-intensive. These are projects 
that have been around for a while, and they are not sort of 
stand-alone projects, they are projects that exist in 
conjunction with a series of other hydroelectric dams.
    I know of one on the Connecticut River that is associated 
with Holyoke Dam which generates electricity, and this pump 
storage project is upstream of that, and it uses the reservoir 
from the Holyoke Dam to take water upstream, and it doesn't do 
anything about the fish passage concerns on the Holyoke Dam.
    So, I think that there are some issues there that hold some 
promise, but it is extremely expensive and very site-specific 
and complicated.
    Mr. Shadegg. Conceptually, it is something you are willing 
to consider.
    Mr. Szeptycki. Yes.
    Mr. Masonis. Congressman, if I may, I wanted to respond to 
the issue of peaking in particular. There has been some 
discussion here today about the loss of flexibility in 
operating, and the bottom line with power peaking operations 
that result in drastic swings and flows is that they devastate 
the river downstream. There is no way of getting around that. 
And, frankly, a lot of the power peaking operations that occur 
today under the terms of licenses that were issued 30, 50 years 
ago, those license conditions were set at a time when we really 
didn't quite have a handle on that particular issue.
    We have worked on relicensings where there have been re-reg 
dams, and clearly re-reg dams are a benefit. If you are going 
to peak, you need some way to control that flow downstream to 
protect the downstream resources. What is hugely problematic 
going forward is to see the grandfathering essentially of old 
license conditions that allow power peaking in new hydropower 
licenses, without addressing the ecological impact of those 
flows.
    Mr. Shadegg. If I just understand the concept, when you say 
a re-reg dam, a re-reg dam is a dam further downstream that 
could deal with that.
    Mr. Szeptycki. Correct.
    Mr. Shadegg. And I guess I understand the concern about 
grandfathering old rights. What I want to make sure is that we 
have an opportunity for a dialog on, well, okay, but if the 
Nation is now recognizing the environmental damage that is done 
by peaking, we still need some peaking power, is the door open 
to at least discuss a re-reg dam as a way of mitigating the 
downstream impacts so that you could kind of have your cake and 
eat it, too--that is, you mitigate the environmental damage of 
peaking, which we all recognize, but at the same time you don't 
eliminate the possibility for peak power.
    Mr. Masonis. And we would certainly consider that on a 
case-by-case basis, as my colleagues have pointed out, that 
these are very fact-specific, and we are willing to do that.
    Mr. Szeptycki. I have been involved in not FERC licensed 
dams, but a couple of Corps of Engineers projects that involved 
extreme peaking, and there were extensive discussions about how 
to mitigate the effects of that. And the issue of weir or re-
reg dam came up, and those were quite valuable projects. In 
each of those cases, the cost was just prohibitive, and there 
was the very difficult issue of finding the land to do it, and 
both of those--in the two cases I am familiar with where people 
thought about that, it just wasn't feasible.
    Mr. Shadegg. Thank you, Mr. Chairman, for your indulgence.
    Mr. Barton. He has had his cake and eaten it, too, his time 
and exceeded it, too. The Chair is going to recognize himself 
for a few wrap-up questions.
    Mr. Robinson, under the current Federal Power Act, FERC is 
required to take into consideration a broad array of public 
interest factors to produce a balanced and reasonable license. 
It is my view that given the mandatory conditioning authority 
that the agencies have, it is difficult to do that in a 
balanced way. Do you agree or disagree with that?
    Mr. Robinson. On individual projects, I would certainly 
agree. I think about 12 percent of the time the commission has 
recognized that conditions it received as mandatory or as 
prescriptions were not conditions that the commission otherwise 
would have included, given their responsibility under the 
Federal Power Act to issue a balanced license.
    Mr. Barton. And in your agency's view, if this section of 
the draft were to become law, would it be more likely to get a 
balanced review factor, or less likely?
    Mr. Robinson. I think with the increased accountability and 
the review standard that the law would impose, it would 
significantly increase the likelihood of those conditions being 
more consistent with the balancing that goes on at the 
commission.
    Mr. Barton. Now, Mr. Masonis and Mr. Szeptycki, I know you 
all don't support the current draft, you have made that clear 
and I understand that. Do you oppose any legislative change--we 
had the proposal in the last Congress that made it to the 
conference, so I would hope that you would support some 
legislative change, you just happen to have problems with the 
particular draft that is on the table, am I correct?
    Mr. Masonis. From the perspective of American Rivers, that 
is correct, Mr. Chairman.
    Mr. Barton. So you are not opposed to any change, you just 
don't like what we are proposing?
    Mr. Masonis. We believe that the proposal in its current 
state puts interests other than the utility at a distinct 
disadvantage.
    Mr. Szeptycki. We supported the compromise draft in the 
last Congress, and I think we would be prepared to look at that 
again.
    Mr. Barton. Thank you. Well, I want to thank this panel, 
you all have been very gracious with your time, and we have 
been able today to let all the members who wished to 
participate, participate fully, so we have had a good exchange 
of views.
    We will keep the record open. There may be members that 
have written questions they want you to answer. We are going to 
recess this hearing. We are going to reconvene it tomorrow at 
9:30 a.m., where we will hear from three panels that deal with 
electricity, gasoline and petroleum issues, and ethanol and MTB 
issues. So we stand recessed until 9:30 tomorrow morning.
    [Whereupon, at 4:40 p.m., the subcommittee recessed, to 
reconvene at 9:30 a.m., Thursday, March 13, 2003.]


                  COMPREHENSIVE NATIONAL ENERGY POLICY

                              ----------                              


                        THURSDAY, MARCH 13, 2003

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Burr, Whitfield, 
Norwood, Shimkus, Wilson, Shadegg, Buyer, Radanovich, Walden, 
Rogers, Issa, Otter, Boucher, Allen, Waxman, Hall, Pallone, 
Strickland, Capps, Doyle, and Dingell (ex officio).
    Also present: Representatives Blunt and Green.
    Staff present: Jason Bentley, majority counsel; Sean 
Cunningham, majority counsel; Andy Black, policy coordinator; 
Peter Kielty, legislative clerk; and Sue Sheridan, minority 
counsel.
    Mr. Barton. If everybody will find your seat. Today we want 
to continue the hearing that we began last week and continued 
yesterday. We have got three panels today, a total of 19 
witnesses, so we are going to have a lot of information 
presented to us.
    Without objection, the subcommittee is going to proceed 
pursuant to Committee Rule 4(e) which governs opening 
statements by members and the opportunity to defer them for 
extra questioning time. What that means is if a member wishes 
to make an opening statement, they should be allowed to do so 
under the rules, but if they wish to defer, they get an extra 3 
minutes during their question time. So hearing no objection to 
that, the Chair would recognize himself for an opening 
statement.
    We are going to finish our hearings on a comprehensive 
energy policy today. We are focusing on electricity and 
gasoline issues. It is my hope and anticipation that this 
subcommittee will begin our markup next Wednesday. We are going 
to send notice to the members probably tomorrow or Monday on 
that issue.
    The draft bill that has been released has an electricity 
title. This comes at an important time for our economy, in this 
sector of our economy. Today, needed investments in 
transmission are not occurring, plans for new power plants are 
being put on hold, not just because of a temporary glut in some 
regions of generation capacity, but also, in my opinion, 
because of a crisis of confidence in the utility sector. 
Investors are uncertain about the future of electric industry 
reform, wholesale purchasers of power continue to struggle with 
a patchwork quilt of jurisdictions from State to State, region 
to region and utility to utility. I am glad to have so many 
witnesses here today to discuss electricity. I especially want 
to bring the members' attention to the testimony from our 
witness from Wall Street, because all consumers will benefit 
when private capital begins to reenter this important part of 
our economy.
    The draft that has been released has many elements to 
improve transmission capacity and its operation, also to 
improve the operation of wholesale markets themselves. Open 
access transmission provision in the draft bill, referred to as 
FERC-lite, would take steps to harmonize the regulation of 
interstate transmission. Repeal of the Public Utility Holding 
Company Act, which we call PUHCA, would take steps to improve 
the flow of capital into a sector that badly needs investment. 
The reliability section would provide for mandatory reliability 
standards developed and enforced by an electric reliability 
organization under strong FERC oversight. The draft bill would 
also seek to improve procedures for siting new electric 
transmission lines. Just as in the last Congress, it would give 
States a timeline for action on proposals to relieve interstate 
congestion areas. The FERC would get the authority to act only 
if the States do not take action.
    More and more I have heard that there is an equal problem 
in that the Federal agencies themselves sometimes refuse to 
act. Therefore, in the draft bill we have a timeline for 
Federal agency decisionmaking on critical lines or else a 
willing State may exercise the right to approve a right-of-way 
consistent with other Federal laws.
    Turning to gasoline, we are working on language related to 
the operation of the Reformulated Gasoline Program and other 
matters regarding to the regulation of the fuels. In this 
regard, I believe that the Clean Air Act current oxygen 
requirement has clearly been a success at stretching fuel 
supply and promoting cleaner air. Having said that, there have 
been costs to replace the oxygen requirement with a renewable 
fuel standard as to well as to make other changes in the Clean 
Air Act. As many members know, I will only support making 
changes in these areas that regard reformulated gasoline and 
convention gasoline if I am assured that we are going to have 
just as clean air in the future.
    Witnesses on our third panel, and I want to say bless you, 
because you are probably going to get on about three this 
afternoon, are going to be asked to comment on the use of MTBE 
and ethanol in the operation of the reformulated conventional 
gasoline market. I am very interested in hearing their 
testimony and views regarding what changes to our current 
system of fuel regulation will provide a positive impact on the 
availability, price and environmental performance of gasoline.
    I want to welcome all the witnesses that are here today. I 
think we have set a record. We have 19 witnesses. That is a 
record for any hearing that I have chaired, and it may be a 
record for the Congress. With that, I would recognize my 
distinguished ranking member, Mr. Boucher, for a 5-minute 
opening statement.
    Mr. Boucher. Thank you very much, Mr. Chairman. The hearing 
that we have today and the ones preceding it offer a valuable 
opportunity for subcommittee members to hear from a range of 
witnesses on the various topics addressed in energy policy 
legislation and have also provided a useful forum for 
evaluating the provisions of the draft legislation circulated 
by the chairman.
    Today's hearing will focus on two of the more contentious 
issues: electricity and a renewable fuels standard. I will 
focus my remarks this morning on the electricity title which is 
a part of the draft legislation. The House Energy and Commerce 
Committee has devoted 4 years to a so far elusive quest for 
consensus on electricity reform measures. We have found no 
broad agreement on proposals to amend the Public Utility 
Holding Company Act or PURPA, to alter the merger review 
authority of the FERC, to establish incentive pricing for new 
transmission line construction, to vest the FERC with 
transmission line siting authority or to legislate standards 
for regional transmission organization, size, membership or 
function.
    While I appreciate the chairman's inclusion of provisions 
relating to net metering, to time-of-use pricing and to 
transmission reliability as a part of his electricity title, I 
still have a number of concerns relating to the electricity 
provisions. For example, I am troubled by the combination of 
provisions to repeal the Public Utility Holding Company Act and 
simultaneously to repeal the merger review authority of the 
FERC. Repeal of the Holding Company Act would inevitably lead 
to an avalanche of industry consolidations which would require, 
I think, very careful scrutiny at the Federal regulatory level. 
The Department of Justice currently views mergers through a 
lens of antitrust protections but does not have the 
capabilities possessed by the FERC to assess a proposed 
merger's effects on electricity consumers. The FERC is our 
expert agency about matters relating to electricity generation 
and transmission, and I am persuaded that its expertise in 
reviewing proposed mergers may be even more needed in the 
future than at the present time.
    I am also troubled by the provisions that relate to the 
ability of qualified facilities under PURPA to sell excess 
power into the grid after the electricity needs of their 
industrial hosts have been met. The chairman's draft expands 
upon the language approved in the Senate last year and sets a 
number of ways in which utilities could be relieved of their 
mandatory purchase obligations. The provisions included in the 
chairman's draft set a very low bar for exemption from these 
purchase requirements to the potential detriment of our 
Nation's combined heat and power producers. Those provisions, I 
think, deserve a close and critical analysis by the committee.
    The provision that would give the FERC preemptive authority 
over the siting of transmission lines is also of concern to me. 
I have asked many witnesses before this subcommittee for 
evidence that States are arbitrarily denying permission for the 
construction of needed new transmission, and I have heard no 
evidence that would justify removing the ultimate decision over 
this new siting from the States to the Federal level.
    The issues surrounding the electricity debate, including 
those that I have mentioned, are complex and notwithstanding a 
number of years of review, we have not been able to reach a 
consensus on these contentious matters. We have, however, an 
increasingly active and imaginative FERC which has taken steps 
to make the wholesale market more reliable and has provoked, 
shall I say, a spirited debate over the proposal for a standard 
market design for the Nation's transmission grid. The pendency 
of the SMD rulemaking obviously complicated even further the 
process of seeking consensus on legislation relating to the 
electricity market.
    In view of the fact that the electricity debate bogged down 
progress of a comprehensive energy bill in the last Congress, 
the chairman may wish to consider moving the energy provisions 
and the electricity provisions on separate tracks. That was the 
chairman's choice during the last Congress, and I would not 
that H.R. 4, which did not contain electricity provisions, 
obtained broad bipartisan support in this committee with more 
than 50 votes for passage and broad bipartisan support on the 
floor of the House as well. I suggest that the chairman 
consider following that same time-tested and wise path during 
the course of this Congress. Pass this comprehensive energy 
measure resembling H.R. 4 minus electricity, and then give the 
committee the time required to assess what statutory changes to 
Federal electricity rules are both needed and appropriate. And 
if the chairman decides to pursue that course, I pledge to have 
my close attention to the electricity provisions that he puts 
before the committee.
    Thank you, Mr. Chairman, and I look forward to the 
testimony of our witnesses.
    Mr. Barton. Thank my distinguished friend from Virginia. 
The Chair is going to recognize out of order the distinguished 
majority whip, Mr. Blunt, for a panel witness introduction.
    Mr. Blunt. Mr. Chairman, I thank you for recognizing me and 
for holding this hearing today. I also know that you will do a 
great job introducing the panel later, but I want to take my 
time to introduce to the subcommittee my good friend John 
Twitty. John is the general manager of City Utilities in 
Springfield. We have been friends for 20 years. He is here 
today on behalf of the American Public Power Association, and I 
am glad that this association has invited Mr. Twitty to come 
and speak about energy policy. Through his management, City 
Utilities in Springfield, Missouri has continued to provide 
many of the residents of my district with inexpensive and 
reliable power.
    For more than 20 years, John has worked with Missouri 
utility companies. In 1983, he began his career in Rolla, 
Missouri with Rolla Municipal Utilities and came to City 
Utilities in Springfield in 1991. October of last year he was 
named the general manager and under his management and under 
the management of his predecessor, Robert Roundtree, Cities 
Utilities in Springfield has been a terrific example of how an 
energy company can work with a local community to provide 
reliable electricity, water and public transportation at a fair 
price. John's service to Springfield extends beyond his daily 
responsibilities at City Utilities to many community 
activities.
    I am certainly pleased he is here today, and while I may 
not hear his remarks, I look forward to reading them as I read 
the transcript of this hearing, which I assure you, largely 
because John Twitty is here, I will do. Thank you, Mr. 
Chairman.
    Mr. Barton. We thank the whip for that distinguished 
introduction. We look forward to the witness' testimony. And 
you are welcome to stay and hear it if you wish.
    Mr. Blunt. Mr. Chairman, I would actually enjoy staying 
today, but for reasons you understand I can't.
    Mr. Barton. I understand. We now want to recognize the 
distinguished dean of the House, the ranking member of the full 
committee, Mr. Dingell, for an opening statement.
    Mr. Waxman. Mr. Chairman?
    Mr. Barton. The gentleman from California?
    Mr. Waxman. Mr. Dingell has been gracious enough to allow 
me to go ahead of him as have others on the Democratic side, 
and I want to thank them for that.
    Mr. Barton. Does the gentleman wish to make an opening 
statement?
    Mr. Waxman. I do and I am going to have to go to the 
Government Reform Committee. I will come back here.
    Mr. Barton. The Gentleman is recognized for 3 minutes.
    Mr. Waxman. On March 20, 2001, 2 years ago, we convened in 
this room to examine the California energy crisis. Curt Hebert, 
the President's first FERC chairman, told us that California 
merely suffered from a supply and demand imbalance and that 
environmental restrictions limited the full use of power 
resources in the region. Chairman Hebert offered us a solution. 
He said we should create financial incentives to ensure that 
the transmission system is upgraded and that we needed a 
regional transmission organization for the West. He told us 
that buyers and sellers of electricity needed non-
discriminatory access to all transmission facilities in the 
West. And early last year, the current FERC chairman, Pat Wood, 
offered us a solution. He said we needed to encourage the 
construction of new infrastructure, assure non-discriminatory 
transmission access in the electric industry, and, yes, we 
needed regional transmission organizations. We know now this 
wasn't the problem.
    California's markets didn't collapse because there weren't 
incentives for transmission lines or because FERC didn't have 
authority over public power and rural electric coops. Western 
families did not get price gouged because there wasn't a west-
wide regional transmission organization. Instead the crisis was 
caused by market manipulation. Abuse after abuse has come to 
light in the electricity and natural gas industries. El Paso, 
Dynegy, AEP, Enron, CMS Energy and Williams have all been 
involved in scandals. Indeed, energy scandals have emerged from 
coast to coast.
    But this committee won't address the true causes. Instead 
we are pursuing the same recommendations that Hebert made 2 
years ago. It is as if we simply don't care what the facts are. 
In fact, if we stick to the current schedule, we won't even 
have a hearing on these abuses prior to marking up legislation. 
The chairman noted with pride we have 19 witnesses, a record 
number. That means we are churning through these hearings so 
quickly that we will go right to legislation without looking at 
why the industry collapsed, without trying to find out and 
delving into the fundamental problems of the industry. In fact, 
if we stick to the current schedule, we won't even have a 
hearing on these abuses prior to marking up the legislation.
    If we are serious about having energy markets at work, we 
need to restore integrity to the oversight of this industry. 
That is not an easy job. We need to dig in and hold hearings on 
market abuses and find out what the real solutions are, not 
simply recycle the ones that were proposed by people that never 
understood the problem in the first place and allowed what 
happened in California to go on and on and on. And I fear what 
they proposed for California will be delivered to the rest of 
the country as well--a dysfunctional market that hurts the 
consuming public. Thank you, Mr. Chairman.
    Mr. Barton. I thank the gentleman from California; and 
recognize the gentleman from Kentucky, Mr. Whitfield. Does he 
wish an opening statement?
    Mr. Whitfield. Mr. Chairman, I am going to waive my opening 
statement.
    Mr. Barton. All right. The gentleman will have 3 additional 
minutes. Mr. Norwood, does he wish an opening statement?
    Mr. Norwood. Mr. Chairman, I waive and request the 
additional 3 minutes.
    Mr. Barton. Okay. Mr. Shimkus?
    Mr. Shimkus. I will also defer, Mr. Chairman.
    Mr. Barton. Okay. Mr. Buyer?
    Mr. Shimkus. He said the same thing.
    Mr. Barton. He is going to defer? We need to hear that from 
him.
    Mr. Buyer. I defer.
    Mr. Barton. He defers. Mr. Walden?
    Mr. Walden. Mr. Chairman, since I deferred last time and 
stepped out of the room when I could ask questions and went to 
the bottom of the list and never did get to, I am going to take 
my 5 minutes this time.
    Mr. Barton. All right. Three minutes, you are going to take 
your 3 minutes.
    Mr. Walden. I will talk fast. Thank you, Mr. Chairman, for 
holding this hearing. Let me start off by thanking you for 
including the bill I introduced last Congress to ban the 
practice of round tripping trades, the Truth in Electricity 
Trading Act. Yesterday I reintroduced this legislation for this 
Congress, and I am grateful the chairman not only included it 
in the House electricity offer to the Senate during last year's 
energy conference on H.R. 4, but I am grateful that you have 
included it in the draft proposal before us today. I think it 
is an issue that has to be addressed, it is an issue that 
contributed to the cost of power that was completely out of 
control in the western market last year, a year ago.
    Although it won't be a topic for today's hearing, I very 
much want to thank you as well for including the hydro 
relicensing provisions in this draft bill that will add some 
balance to a process which has, quite frankly, become a 
malaise. So, again, I thank you for adding those provisions.
    I also look forward to working with the chairman on 
renewable titles. The district I represent has benefited 
greatly from continued development of renewable energy sources 
like wind and geothermal, to mention just a couple. Sherman 
County in my district, for example, has been able to double its 
property tax base with the development of the Klondike Wind 
Project. The wheat farmers there now I think are making more on 
what they plant out there with blades than what they plant with 
wheat. And the Oregon Institute of Technology, located in 
Klamath Falls, also in my district, continues to be a leader in 
the research and development of geothermal and renewable energy 
technologies.
    I must raise some concerns, though, that I have about 
several provisions included in the electricity title of this 
draft. Mr. Chairman, I have shared a letter that Congressman 
Otter and I have co-signed with you and with Chairman Tauzin. 
My first concern pertains to the possibility that under this 
current draft the Bonneville Power Administration could be made 
FERC jurisdictional. Many of the non-FERC jurisdictional 
utilities in my district in Oregon, and the Northwest as a 
whole, feel that giving FERC jurisdiction over BPA would upset 
existing transmission rights and could possibly force BPA into 
a standard market design. My colleagues and I in the Northwest 
delegation have met with FERC Chairman Pat Wood on several 
occasions and raised our concerns about SMD and the 
ramifications its implementation would have on the Northwest. 
This concern originates from our understanding that SMD was 
based upon a traditional thermal system where hydropower is not 
an integral component of a region's load needs. As you know, 
Mr. Chairman, almost 60 percent of the Northwest power 
generation comes from the hydro-based sources compared to 6 
percent nationwide.
    Another concern that is causing heartbreak back home is 
language included in the draft proposal regarding the 
participation of BPA in an RTO. Bonneville understanding its 
role as the largest provider of transmission in the Northwest 
is actively engaged in regional discussions on the formation of 
an RTO. Those discussions are attempting to introduce a RTO 
proposal that meets the needs of many different stakeholders in 
the region and consider the hydro environment in the Northwest.
    Mr. Chairman, in the absence of enough time, I am going to 
submit the rest of this for the record, but those are the two 
concerns I have with this bill that I hope we are able to 
continue to work to resolve.
    [The prepared statement of Hon. Greg Walden follows:]
 Prepared Statement of Hon. Greg Walden, a Representative in Congress 
                        from the State of Oregon
    Thank you Mr. Chairman for holding this hearing today on the 
electricity, ethanol and renewable energy provisions included in your 
draft energy proposal.
    Let me start off my remarks by thanking the chairman for including 
a bill I introduced last Congress to ban the practice of ``Round-Trip'' 
trades called ``The Truth in Electricity Trading Act.'' Yesterday I 
reintroduced this legislation for the 108th Congress and I'm grateful 
that the chairman not only included it in the House electricity offer 
to the Senate during last year's energy conference on H.R. 4., but I'm 
grateful that he also included it in the draft proposal before us 
today.
    Although it won't be a topic for today's hearing, I'm also very 
pleased that the Chairman included hydro relicensing provisions in his 
draft that will add some balance to a process, which has quite frankly, 
become a malaise. So, again, I thank the chairman for including these 
helpful provisions in his draft.
    I also look forward to working with the Chairman on a renewables 
title. The district I represent has benefited from the continued 
development of renewable energy sources like Wind and Geothermal. 
Sherman County in my district, for instance, has been able to double 
its property tax base with the development of the Klondike (?) project, 
and the Oregon Institute of Technology, located in Klamath Falls and 
also in my district, continues to be a leader in the research and 
development of geothermal technologies.
    As grateful as I am to the subcommittee and full committee chairmen 
for including these provisions in the draft proposal that is before us 
today, I must raise some concerns I have about several provisions 
included in the electricity title of this draft. My first concern 
pertains to the possibility that under this current draft the 
Bonneville Power Administration (BPA) could be made FERC 
jurisdictional. Many of the non-FERC jurisdictional utilities in my 
district, Oregon and the Northwest as a whole feel that giving FERC 
jurisdiction over BPA would upset existing transmission rights and 
could possibly force BPA into a Standard Market Design (SMD) situation. 
My colleagues and I in the Northwest delegation have met with FERC 
Chairman Pat Wood on several occasions and raised our concerns about 
SMD and the ramifications its implementation would have on the 
Northwest. This concern originates from our understanding that SMD was 
based upon a traditional thermal system where hydropower is not an 
integral component of a region's load needs. As you know, Mr. Chairman, 
almost 60% of the Northwest's power generation comes from hydro-based 
sources compared to 6% nationwide.
    Another concern that is producing a lot of heartburn back home 
concerns the language included in the draft proposal regarding the 
participation of BPA in a Regional Transmission Organization (RTO). 
Bonneville, understanding its role as the largest provider of 
transmission in the Northwest, is actively engaged in regional 
discussions on the formation of a RTO. Those discussions are attempting 
to produce an RTO proposal that meets the needs of the many different 
stakeholders in the region and considers the unique hydro environment 
of the Northwest.
    It is my understanding that the language included in Section 
7022(d) would preclude the implementation of the results achieved in 
these negotiations. Moreover, the language brings into question whether 
or not it would ``suspend'' BPA's statutory authority concerning its 
current obligations and duties. There is some uncertainty as to whether 
this language could, for example, allow a RTO to override BPA's 
statutory obligations to recover endangered salmon under the Endangered 
Species Act or preclude BPA from making its annual Treasury payment to 
pay for the cost of the Federal Columbia River Power System. At this 
stage, my inclination is to ask that this language be removed from the 
bill, as there's too much uncertainty to what its implementation would 
mean for the Pacific Northwest, particularly in light of the rate 
increases the region has suffered through over the last two years.
    With that said, Mr. Chairman, I want to work with your and the 
chairman of the full committee to see if we can hash out language which 
would achieve the goals your striving for in this legislation while 
considering the unique hydropower environment of the Northwest.
    Thank you, Mr. Chairman. I yield back the balance of my time.

    Mr. Barton. I thank the gentleman, and we appreciate his 
introduction yesterday of the bill that has many of the 
provisions or some of the provisions that are in our draft 
discussion bill. The Chair would recognize again the dean of 
the House and the ranking member of he full committee, Mr. 
Dingell, for a 5-minute opening statement.
    Mr. Dingell. Mr. Chairman, as always, you are very 
gracious, and I thank you for your courtesy this morning. 
Today, we resume this committee's research for consensus on the 
difficult issue of electricity legislation. Again, Mr. 
Chairman, you have done the committee and the members a service 
by putting forth a draft to focus the discussion, and I 
appreciate your willingness to solicit the views from a variety 
of witnesses. This will be very helpful.
    Over the years, the search for the holy grail of an 
electricity bill has taken a number of forms. Initially, the 
goal was a Federal mandate to require the States to adopt 
retail competition. That did not pass. The focus then became a 
matter of clarifying the line between State and Federal 
jurisdiction. That did not pass. Then came the efforts to 
describe how the Commission should consider regional 
transmission organizations, or RTOs. That idea met the same 
fate. During the last Congress, members from both sides of the 
aisle widely decided that in the absence of consensus, 
including an electrical title would only jeopardize the rest of 
the bill. The wisdom of that approach was again confirmed last 
year when electricity proved to be one of the most difficult 
issues in conference.
    Nevertheless, we find ourselves on the brink of tackling 
the issue in a markup, perhaps as early as next week. The 
outlook for enacting sound electricity legislation is, I 
believe, dim, and the pressure to act quickly is almost certain 
to preclude thoughtful consideration of the issue. FERC has not 
yet released the results of the staff investigation it ordered 
13 months ago into the manipulation of electricity and natural 
gas markets in California and other western States, which had a 
calamitous effect upon those States, the economy and upon the 
citizens thereof. I am hard pressed now to understand how the 
members can decide and why they would want to decide what to do 
without the benefit of this most basic information.
    Turning to the particulars of the draft, Mr. Chairman, I 
remain skeptical of the wisdom of repealing significant 
consumer protections in current law. Last month, the Securities 
Exchange Commission, the SEC revoked Enron's exemption under 
the Public Utility Holding Company Act of 1935, PUHCA. Had the 
SEC attended to this matter earlier, Enron would not have been 
able to erect the complex OPEC corporate structure that it did 
to the detriment of shareholders and consumers alike. While 
there are arguments for modernizing PUHCA, I do not think that 
it is responsible for the Congress to repeal the act outright 
or to make changes in matters of the kind I have just 
discussed.
    Similarly, I am baffled by proposals to repeal FERC's 
authority to oversee utility mergers. At last week's hearing, 
the DOE witness testified that the administration supports 
strengthening, not weakening, FERC's merger authority. Chairman 
Wood of FERC expressed reservations about repealing the 
Commission's merger authority. Chairman Massey flatly opposed 
the idea.
    I have other doubts about the electricity draft. I am 
concerned that the provisions on incentive transmission rates 
could unjustifiably enrich industry at the expense of 
consumers. I am concerned that the siting provisions will strip 
States of their legitimate authority over siting transmission 
lines and transfer to them responsibilities for Federal land 
management that they cannot properly administer. I am concerned 
that market reform provisions, though a step in the right 
direction, barely scratch the surface of what is needed. If we 
are to treat electricity as commodity, we must ensure that we 
have a properly regulated market as we do for other 
commodities, many of which are less vital to consumers and to 
the state of our economy.
    Mr. Chairman, it might be possible for us to agree on an 
electrical title that protects consumers and discourages market 
manipulation. I would certainly be happy to support such. I 
plan to introduce legislation which I sponsored in the last 
Congress along with Mr. Markey, Waxman and Boucher, that 
proposes a number of the reforms you might want to consider. If 
you, however, continue to press for a controversial electricity 
title, we may lose yet another opportunity to enact useful 
energy legislation that could benefit consumers. I hope that 
you will avoid this course and return to the bipartisan 
approach that characterized the energy bill in the committee 
report during the 107th Congress.
    Finally, Mr. Chairman, as you know, any debate of the 
comprehensive national energy policy will have to include a 
discussion of ethanol and MTBE-related issues. Although the 
final set of panelists will address those issues, I commend to 
the majority working with us to select a balanced panel of 
witnesses on this important issue. We have no draft or outline 
of the majority's plans in this area. But before we act on this 
important and complex area, there should be sufficient 
opportunity for all interested parties to review language 
relating to these matters.
    Mr. Chairman, I hope that you will make progress on this 
issue, but I hope also that you will urge members contemplating 
such a major amendment to make careful consideration of a draft 
which I hope you will make available to us as far in advance of 
the markup as possible. Thank you, Mr. Chairman.
    Mr. Barton. I thank the distinguished dean of the House for 
that opening statement. Mr. Issa defers. Mr. Burr?
    Mr. Burr. Mr. Chairman, I would like to take my 3 minutes, 
not for the purposes of an opening statement, because I have 
had the opportunity over a number of years where we have 
discussed an energy plan and electricity. I think most people 
on this committee know where I stand. I want to take this 
opportunity, and I would ask my colleagues to pay special 
attention to a witness we have from North Carolina today. I 
think many times we judge people based upon the stock that they 
come from, and we certainly have an individual with us today 
that being the grandson of the great Sam Ervin comes from the 
stock that we would all like to associate with.
    But the fact is that Commissioner Jimmy Ervin is a native 
of Morrington, North Carolina, and he has established his 
identity on his own. He is a graduate of Davidson College where 
he received an AB magna cum laude. In 1991, he was a graduate 
of law school from Harvard School of Law. After practicing--
become practicing lawyer in North Carolina in 1981, 
Commissioner Ervin entered private practice in Morrington, his 
hometown. While in private practice from 1981 to 1999, 
Commissioner Ervin represented clients in a variety of areas. 
He left his practice of law to take an office as a member of 
the commission in North Carolina on July 2, 1999. His term ends 
in 2007.
    My hope today, Mr. Chairman, is that we will have this 
legislation finished by then. There are days that I have 
questioned it, but I plead with my colleagues that the time for 
debate in this institution is over. Let us move a product, let 
us do it with the help and the aid and the support of people 
like Commissioner Ervin across the country, and let us not 
delay what we have already delayed for so long. I thank the 
Chair for his indulgence, I thank my colleagues, and I welcome 
the Honorable Jimmy Ervin.
    Mr. Barton. It is my hope that you and I, and all members 
of this subcommittee, will stand in the Rose Garden sometime 
this year behind the President as he signs the bill and gives 
each one of us a pen. We have Mr. Allen from Maine. Does he 
wish to make an opening statement?
    Mr. Allen. I will defer, Mr. Chairman.
    Mr. Barton. He gets an additional 3 minutes in his 
questions. Mr. Hall of Texas, does he wish to make an opening 
statement?
    Mr. Hall. Just a brief one, Mr. Chairman----
    Mr. Barton. The gentleman is recognized 3 minutes.
    Mr. Hall. [continuing] to recognize two of our former 
colleagues, of course, Glenn English and with him, I think, is 
Mr. Wynn, who does most of the real work. Glenn just sits up at 
the table there.
    And I wasn't going to ask about Sam Ervin, I was just going 
to presume that he was his son or his grandson and enjoy it. We 
have Henson Moore who was a great member here, and one that is 
of interest to me represents the American Chemistry Council, 
and that is very important to my State, your State and the 
State of Mississippi, because we have gone through a lot of 
legislation together.
    I think it is great that you are having this meeting. We 
have an unusual group here to testify. By my reckoning, we are 
in about year 9 of work on electric restructuring in this 
committee, and, as you know, most of us know that those folks 
who are out here have been before us before and have testified 
before this committee. I suspect if we examine the record, we 
would find that many of you have shifted your position, some of 
you substantially. To me that characterizes the difficulty of 
this issue, and it is one of the main reasons it is so 
difficult to get the Congress to find common ground and send 
electricity to the President. But I am willing to continue to 
search for ways to amend current law to bring it more into 
conformance with the reality of the times today. Your testimony 
here will be very good. And as for the other two, I have Bill 
Douglass from the State of Texas that will be on the second 
panel, I think, who is a major leader in our area and a man 
that people listen to.
    Mr. Chairman, you and those who have advised you have 
selected well. You have great witnesses here, and their 
testimony is going to be helpful, and I appreciate it. I yield 
back my time.
    Mr. Barton. We thank my good friend from Texas. Mr. Otter 
of Idaho? Defers. Seeing no other members present, the Chair 
will state that all members have unanimous consent to put their 
written statements in the record.
    [Additional statements submitted for the record follow:]

Prepared Statement of Hon. Vito Fossella, a Representative in Congress 
                       from the State of New York

    Mr. Chairman, I am honored to be here as the Committee continues 
examining various provisions of your proposed energy legislation. As I 
mentioned at last week's hearing, few topics are as important as 
defining and passing into law a comprehensive national energy policy. 
Today's witnesses represent segments of the energy industry whose input 
is crucial to obtaining such a goal. Testimony from members of the 
electricity sector will provide valuable information on how to promote 
growth, while supplying consumers with reliable electricity from a 
market in which they can trust. Reliable energy is an issue of great 
importance for my constituents. I am pleased to have the North American 
Electric Reliability Council here to explain how provisions in this 
bill will affect New York City's strict reliability standards. I am 
also interested in hearing thoughts on FERC's proposed Standard Market 
Design.
    Furthermore, today's hearing will address a topic on the top of 
everyone's mind: America's fuel supply. The Energy Information 
Administration's This Week in Petroleum states the U.S. average price 
for regular grade gas is over $1.70 per gallon, ``only a tenth of a 
cent below the highest national . . . average price on record.'' The 
publication's future outlook isn't much better, predicting ``strong 
gasoline demand ahead of the normal seasonal increase, extensive 
refinery maintenance, and still tight crude oil supply, may be pointing 
to added price pressure in the months ahead.'' In such an environment, 
changes to the national gas pool could cause even greater price hikes 
that unnecessarily squeeze the wallets of American citizens. These 
pressing circumstances call on us to reduce our reliance on foreign oil 
while encouraging efficiency and alternate energy sources. Advancing 
such initiatives should be our highest priority, rather than discussing 
burdensome mandates Americans will be forced to pay for at the pump. 
Some of the panelists in front of us will discuss a proposed renewable 
fuels standard. I have many questions about the how this proposition 
will affect refiners and consumers in New York.
    Once again, thank you for holding this hearing Mr. Chairman. I 
yield back the balance of my time.

                                 ______
                                 
 Prepared Statement of Hon. Mike Rogers, a Representative in Congress 
                       from the State of Michigan

    Mr. Chairman, thank you for holding this important hearing as we 
begin to move forward on how best to provide for our nation's energy 
needs.
    The goal of better, more efficient markets will not be achieved 
without substantial new investment in the transmission grid. 
Electricity providers in my home state of Michigan, working closely 
with the Michigan Public Service Commission and the Federal Energy 
Regulatory Commission (FERC), have led the way in seeking innovative 
solutions for attracting new investment in transmission facilities.
    I want to particularly call the subcommittee's attention to the 
recent sale by DTE Energy of its transmission subsidiary, the 
International Transmission Company (ITC), to a group of investors led 
by the investment bank Kohlberg Kravis Roberts (KKR), for $610 million. 
This transaction, which will provide immediate benefits to electricity 
consumers in Michigan, is a model for how innovative regulatory 
initiatives can spur new investment in the transmission grid.
    Wall Street's verdict on the ITC sale was immediate. On February 
26, 2003, the day the transaction closed, Standard & Poor's assigned 
its A- rating to the senior secured bank loan of ITC that financed the 
transaction. Investors increasingly see that, given the proper 
regulatory structure, independent transmission companies are a 
profitable, stable investment option.
    Chairman Wood and the other FERC commissioners are to be 
congratulated for putting in place the regulatory structure that made 
the ITC sale possible. I wholeheartedly support the provisions in the 
draft bill that encourage FERC policy in this area.
    Mr. Chairman, thank you again for your continued leadership. I look 
forward to working with you as we proceed.

                                 ______
                                 
  Prepared Statement of Hon. Mike Doyle, a Representative in Congress 
                     from the State of Pennsylvania

    I want to thank you Chairman Barton for convening this hearing 
today and I will keep my comments brief this morning.
    As I've said before, I think it is vital that we move forward with 
this effort to write a bill establishing a comprehensive national 
energy policy. I also think that it is important that as a part of that 
effort, we do strive to include provisions dealing with electricity and 
those markets as they obviously play an integral role in our overall 
energy picture.
    I realize there are those that suggest it is premature to address 
electricity while we are continuing the process of understanding all 
the factors that contributed to the crisis we saw in recent years in 
California and other western states and I respect that opinion. But at 
the same time, I think its important to note that there are many 
consumers throughout the nation that could benefit from our efforts on 
electricity, and to me it seems a little unfair to hold back the 
potential for progress because of the these ongoing investigations.
    In fact, while I realize that California has filed and continues to 
pursue claims of market manipulation against a large number of 
companies, it is also true that not every company that was doing 
business in California is subject to these charges. There are companies 
that had long-term electricity contracts with California that, as I 
understand it, actually did save the state and its residents money. so 
I think its important that we not automatically lump all companies 
involved with California together as the causes for their crisis are 
considered.
    Its also important to note that there are states and regions that 
are benefiting from a deregulated environment with regard to 
electricity. In my home state of Pennsylvania for instance, my 
constituents have seen substantial reductions in rates, increased 
competition, and more choices including green power. Based on my 
experience with Pennsylvania, I think that moving toward establishing 
RTO's and encouraging the FERC to work toward their ideas for 
implementing Standard Market Design (SMD) has shown great promise and 
can benefit customers and consumers everywhere.
    So I am generally encouraged by the direction we are taking with 
regard to electricity to date. At the same time, I do have some 
questions and concerns with the draft bill; for instance with the 
section regarding siting of transmission facilities. Some additional 
clarification or work also seems needed on the process DOE would use to 
designate 'congestion areas', in maintaining or increasing access to 
the grid for all types of generation, and to insure market 
transparency. I hope that we can address these and other areas of 
concern in a manner that achieves some true bipartisan and regional 
consensus.
    Mr. Chairman, thank you for the time and I look forward to 
continuing to work with you and other members of the Subcommittee on 
these important issues.

    Mr. Barton. We will now begin to hear testimony from our 
first panel. Several of them have been introduce, but we will 
go down and introduce each one of them in their own right.
    We are going to start with Mr. David K. Owens, who is the 
executive vice president, Edison Electric Institute. We will 
then hear from Mrs. Jan Schori, who is the general manager and 
CEO of the Sacramento Utility District who is testifying on 
behalf of the Large Public Power Council. She is from 
California. We have Mr. John Twitty, general manager of the 
City Utilities of Springfield, Missouri. He is testifying on 
behalf of the American Public Power Association, and he was 
introduced by our distinguished whip, Mr. Blunt. We have Mr. 
Glenn English, former distinguished member from Oklahoma, who 
is the CEO of the National Rural Electric Cooperative 
Association, and he has been before us numerous times, as Mr. 
Hall pointed out. We have Mr. Ron Walter, who is the executive 
vice president of Calpine Corporation. He is testifying on 
behalf of the Electric Power Supply Association, or EPSA. Mr. 
Walter is from San Jose, California. We have Mr. Henson Moore, 
who is the president and CEO of the American Forest and Paper 
Association. He is testifying on behalf of the Electricity 
Consumers Resource Council and the American Chemistry Council. 
As Mr. Hall pointed out, he is a former member from the great 
State of Louisiana. Last but not least, we have the Honorable 
Sam J. Ervin, the commissioner from the North Carolina Public 
Utility Commission, and he has been formally introduced by Mr. 
Burr of North Carolina.
    Gentlemen and lady, welcome. Your testimony is in the 
record. We are going to ask that you summarize it in 5 or 6 
minutes, and we are going to start with Mr. Owens. Welcome to 
the subcommittee.

    STATEMENTS OF DAVID K. OWENS, EXECUTIVE VICE PRESIDENT, 
   BUSINESS OPERATIONS GROUP, EDISON ELECTRIC INSTITUTE; JAN 
 SCHORI, GENERAL MANAGER AND CEO, SACRAMENTO UTILITY DISTRICT, 
 ON BEHALF OF LARGE PUBLIC POWER COUNCIL; JOHN TWITTY, GENERAL 
MANAGER, CITY UTILITIES OF SPRINGFIELD, MISSOURI, ON BEHALF OF 
AMERICAN PUBLIC POWER ASSOCIATION; GLENN ENGLISH, CEO, NATIONAL 
 RURAL ELECTRIC COOPERATIVE ASSOCIATION; RON WALTER, EXECUTIVE 
  VICE PRESIDENT, CALPINE CORPORATION, ON BEHALF OF ELECTRIC 
 POWER SUPPLY ASSOCIATION; W. HENSON MOORE, PRESIDENT AND CEO, 
 AMERICAN FOREST & PAPER ASSOCIATION, ON BEHALF OF ELECTRICITY 
CONSUMERS RESOURCE COUNCIL AND AMERICAN CHEMISTRY COUNCIL; AND 
   SAM J. ERVIN, COMMISSIONER, NORTH CAROLINA PUBLIC UTILITY 
                           COMMISSION

    Mr. Owens. Thank you, Mr. Chairman. Good morning, Mr. 
Chairman and members of the subcommittee. I am David K. Owens, 
executive vice president of the Edison Electric Institute. We 
certainly appreciate this opportunity to testify this morning.
    As you know, the electricity industry is facing its worst 
financial challenge in decades. As we have been painfully 
reminded by recent events, electricity is not just another 
commodity, it is an essential service. We are committed to 
ensuring the integrity of electricity markets to consumers, 
investors and the public. As you consider an energy bill 
against this backdrop, EEI strongly believes that Congress 
should focus on those electricity issues that only Federal 
legislation can resolve. We believe electricity legislation 
should provide the right incentives to increase needed 
investment in our overall energy infrastructure. We believe it 
must set a clear policy direction for the future but at the 
same time be flexible enough to adjust to changes in our 
industry.
    Let me comment on provisions of the Barton draft 
electricity title. My written testimony provides more detail 
about the issues that I will raise this morning. There were 
references about our transmission system, it certainly was not 
built with the idea of creating a robustly competitive 
wholesale market. Needed transmission investments are not being 
made today. There is a need in fact to enhance our transmission 
system in order to promote more competition. State transmission 
siting processes will probably prove adequate for most new 
transmission line construction, but regional electricity 
markets require a siting process that has the ability to 
consider regional and even national needs. We support the very 
limited FERC backstop siting authority authorized in the draft.
    We also support the goal of the Barton draft to reduce 
delays in Federal permitting of transmission lines. We support 
the interstate compac provision in the draft, but we have some 
suggestions to improve the provisions for streamlining the 
Federal permitting process for siting new transmission lines. 
We also support the transmission pricing provisions to 
encourage FERC to promote capital investment in needed 
transmission infrastructure. FERC currently lacks jurisdiction 
over government-owned and cooperatively owned transmission, 
which constitute about 30 percent of the Nation's interstate 
transmission system. Now this swiss cheese regulation of 
interstate transmission is ultimately unsustainable as the 
industry evolves. We believe the goal of protecting consumers 
requires putting all utilities participating in interstate 
wholesale electricity markets under FERC's full, just and 
reasonable requirements. At a minimum, EEI member companies 
strongly support inclusion of an effective FERC-lite provision, 
such as the one in the Barton draft, in any electricity bill.
    We support eliminating any legal uncertainty about whether 
Federal utilities can participate in RTOs, although we are 
concerned the draft may not meet this important goal. We also 
support the reliability provisions with one minor modification 
addressing the governance of regional entities. We support the 
Barton draft PUHCA repeal provisions. PUHCA is a barrier to 
capital investment, the creation of independent regional 
transmission companies and the entry of additional players in 
electricity markets.
    While we appreciate the draft's recognition that PURPA is 
not compatible with today's electricity markets, we believe 
that a compelling case exists for repealing PURPA prospectively 
on the date of enactment. We urge you to adopt this proposal as 
a PURPA provision. We support eliminating duplicative review of 
utility mergers and bringing the FERC regulatory process more 
in line with the process used for other industries.
    EEI's member companies support a growing role for 
economically affordable, renewable energy resources and meeting 
our Nation's energy needs. Utilities are engaged in a wide 
array of renewable programs in the States. However, we believe 
that States and consumers should determine whether and what 
type of renewable resource makes sense. Now, because net 
metering is a retail electric service issue, we are pleased 
that the Barton draft does not preempt State net metering 
decisions or programs. We do have a number of suggestions on 
those provisions, however.
    Finally, we wholeheartedly agree that the integrity of 
wholesale electric markets must be restored and maintained. Our 
biggest with the market integrity provisions in the Barton 
draft is they do not effectively apply to our participants in 
interstate wholesale electricity markets. California and other 
parties have submitted a massive filing to FERC, according to 
news stories, alleging that California's government-owned 
utilities engage in Enron-type manipulative strategies that 
hurt western consumers. All of these market participants, in my 
opinion, should be subject to FERC authority to make their case 
and to be judged just as EEI member companies are going to be 
judged.
    Mr. Chairman and members of the subcommittee, we strongly 
support the movement toward electricity legislation. I would be 
happy to answer any questions. Thank you.
    [The prepared statement of David K. Owens follows:]

 Prepared Statement of David K. Owens on Behalf of The Edison Electric 
                               Institute

    Mr. Chairman and Members of the Subcommittee: My name is David K. 
Owens, and I am Executive Vice President of the Edison Electric 
Institute (EEI). EEI is the association of U.S. shareholder-owned 
electric utilities and industry affiliates and associates worldwide. We 
are pleased to have the opportunity to testify today on the electricity 
title of the February 28, 2003, energy bill discussion draft circulated 
by Subcommittee Chairman Barton (``Barton draft'').
    I plan to discuss EEI's priorities in an electricity bill and 
comment on specific provisions in the Barton draft electricity title, 
but first I would like to provide a brief overview of the current 
financial crisis affecting our industry, which serves as a critical 
backdrop against which you are considering legislation.

          FINANCIAL CHALLENGES FACING THE ELECTRICITY INDUSTRY

    The electricity industry is facing its worst financial crisis in 
decades, as the aftermath of the Enron implosion, a boom and bust cycle 
in generation in some areas and the economic slowdown have combined to 
erode investor confidence. This has had a devastating impact on 
utilities' access to capital on reasonable terms. As the most capital-
intensive industry in the country, the higher cost of capital makes it 
more difficult to finance infrastructure projects to maintain reliable 
electric service.
    The shareholder-owned electric utility sector lost $78.3 billion in 
market capitalization between December 2000 and December 2002, a 23.9 
percent drop over two years. The EEI Index, a measure of the overall 
stock performance of shareholder-owned electric utilities, was down by 
14.7 percent in just 2002 alone. If the coverage is expanded to include 
merchant generators, the drop in market capitalization is even steeper.
    Throughout 2002, credit rating changes in the utility sector were 
overwhelmingly negative, as downgrades outnumbered upgrades by a 
whopping 182 to 15, according to Standard & Poor's. This 12:1 ratio of 
downgrades-to-upgrades compares to a 3:1 ratio in 1999, 2000 and 2001. 
Currently, 18 percent of all utilities are non-investment grade; as 
recently as 2000, this percentage was only 5 percent.
    In addition, it is estimated that the electricity industry must 
refinance $100 billion in short and long-term loans during 2003. 
Critical questions facing the industry are where and at what cost will 
the industry find this capital.
    Utility stocks used to be the safe haven for ``widows and 
orphans,'' who relied on steady utility dividends to help meet their 
income needs. Now, however, the capital markets view the electricity 
sector as high risk. Consolidation in the banking industry and federal 
barriers to investment in the electricity industry increase the 
difficulty of finding willing investors who are able to provide the 
needed capital infusions to the electricity industry.
    The last year has also seen a ``return to basics'' movement in the 
industry. Utilities and their customers have been painfully reminded by 
the upheaval in electricity markets that electricity is not just 
another commodity, but is instead an essential service for all 
consumers. And, we have all recognized the importance of assuring the 
integrity of electricity markets to investors, customers and the public 
at large.
    During the past several years, FERC has moved more aggressively to 
advance regulatory policies to promote more liquid and transparent 
wholesale electric markets. While there have been many criticisms of 
FERC's original standard market design (SMD) proposal, FERC appears to 
be responding by giving different regions greater flexibility to 
establish more liquid markets which best serve regional needs.
    EEI supports those aspects of FERC's market design proposals that 
lead to liquid, transparent and fair regional markets, recognizing that 
FERC must work much more closely with the states to accommodate 
regional needs, state authority and other relevant concerns. We look 
forward to FERC addressing these issues in the ``white paper'' that 
FERC expects to release in April.

        OVERVIEW OF ELECTRICITY LEGISLATION AND EEI'S PRIORITIES

    According to the Department of Energy, competition in wholesale 
electricity markets reduces consumers' electricity bills by nearly $13 
billion annually. While experience with retail competition clearly has 
been mixed, wholesale competition can benefit consumers. Congress 
should focus its legislative efforts on promoting the benefits of 
wholesale competition.
    Congress can promote a more efficient competitive wholesale 
electricity market by addressing those electricity issues that only 
federal legislation can resolve in a way that provides the right 
incentives to increase capital investment in the nation's energy 
infrastructure and sets a clear direction for the future.
    While Congress should establish the appropriate framework in which 
electricity competition can evolve, past experiences demonstrate that 
it should not try to legislate in response to the problem of the day. 
Electricity markets have evolved rapidly since Congress began debating 
electricity legislation in 1995 and the Federal Energy Regulatory 
Commission (FERC) approved open-access transmission rules in 1996. Our 
markets will continue to change dramatically in the foreseeable future. 
Any legislation that is passed must be flexible enough to adjust to the 
changes in business cycles, regulatory approaches and business 
activities that will inevitably occur.
    However, many in our industry are concerned that federal 
electricity legislation could add to the industry's challenges in these 
financially turbulent times if legislation decreases regulatory 
flexibility or increases the uncertainty and costs of providing 
affordable electric service to our consumers. To put it in engineering 
terms, the margin for error in our industry is significantly reduced 
right now.

Improving the Transmission Infrastructure
    Healthy competitive wholesale markets depend on robust transmission 
systems to move power to where it is needed. Unfortunately, 
transmission growth has not kept pace with electricity demand. Our 
current transmission infrastructure was never built for the purpose of 
moving large quantities of power across long distances. It is not a 
superhighway. It simply cannot perform this function in an efficient 
manner.
    According to the North American Electric Reliability Council 
(NERC), the volume of actual transmission transactions has increased by 
400 percent in the last four years. Increased congestion on 
transmission lines not only increases costs to consumers when not all 
transactions can be completed, but it also threatens the system's 
reliability.
    At the same time that congestion is increasing, investments in 
transmission have actually been declining. Over the past 25 years, 
investments in transmission have fallen at a rate of $103 million per 
year compared to the investment needed just to maintain the current 
level of transmission adequacy. Difficulties in siting new transmission 
lines, on both private and public lands, and in raising capital are 
significant obstacles that have contributed to this decline in 
transmission investment.
    In addition, most new transmission currently is being built to 
serve local load and to connect new generation to the grid, instead of 
the high-voltage wires needed to strengthen regional electricity 
markets. The relative annual growth rates in lower voltage lines and 
higher voltage lines have changed significantly since the early 1970s. 
In the early 1970s, the annual growth rate in lower voltage line-miles 
(69 kV and below) that support localized grid operations and 
interconnections was 1.9 percent, while the annual growth rate for 
high-voltage line-miles (115 kV and higher) was 3.2 percent. By the 
latter half of the 1990s, this relationship had reversed: the higher 
voltage line-miles were growing at only 0.3 percent, while lower 
voltage line-miles were growing at 3.5 percent.
    We were very disappointed that the electricity title being 
negotiated as part of last year's energy bill appeared unlikely to 
include any provisions designed to improve our transmission 
infrastructure. Therefore, we are encouraged that the Barton draft 
electricity title includes a number of provisions to enhance 
transmission infrastructure. We strongly believe that these issues 
should be addressed in any final electricity title approved by 
Congress.
    FERC Backstop Siting Authority--The Barton draft would grant FERC 
backstop transmission siting authority for only those transmission 
lines being proposed in DOE-designated ``interstate congestion areas'' 
if certain findings are made. These findings include that the proposed 
transmission line is consistent with the public interest and that a 
state lacks the authority to site the line or is unwilling to site the 
line within a certain time period.
    We believe that state siting processes will continue to be adequate 
for the construction of most new transmission and that, with the 
conditions imposed in the bill, this new FERC backstop authority will 
be used only as a last resort in very limited instances. However, we 
believe that the authority could be critically important in those 
instances.
    Wholesale electricity markets are becoming increasingly regional as 
power flows across multiple states and as multi-state RTOs gain 
operational control of utility transmission lines. Most state siting 
laws do not recognize the role new entities such as RTOs will play in 
transmission planning nor do they specifically allow for the 
consideration of regional, not just state, benefits of new transmission 
lines. If states consider only intrastate benefits and not regional 
benefits, they may have little choice under state law but to reject the 
proposed line, even if the benefits to the region are significant.
    Regional electricity markets require a siting process that has the 
ability to consider regional and even national needs. FERC has 
jurisdiction over wholesale electricity markets, but it currently does 
not have the authority over transmission siting to help ensure that 
there is sufficient transmission capacity to support those markets. In 
comparison, FERC has the authority to site interstate natural gas 
pipelines. We believe the Commission should have at least limited 
backstop siting authority.
    We are concerned about a limitation in FERC's eminent domain 
authority restricting use of transmission rights-of-way for parks or 
trails without consent of the property owner involved. Transmission 
rights-of-way are often likely candidates for multiple uses for trails, 
parks, bike paths and other recreational uses. Indeed, the Washington 
and Old Dominion bike trail in Northern Virginia runs partly along a 
transmission corridor. The additional recreational uses in a 
transmission right-of-way may well increase the public's acceptance of 
the right-of-way. As long as public recreational uses are merely 
incidental to transmission corridors, we see no reason why FERC's 
eminent domain authority should not apply to such incidental uses as 
well.
    Federal Permitting of Transmission Lines--We appreciate the 
recognition embodied in the Barton draft that the length and 
complicated nature of the federal permitting process makes it difficult 
to address transmission infrastructure issues adequately and in a 
timely fashion. Indeed, we are finding that our member companies are 
going to extraordinary lengths to avoid siting on federal land if at 
all possible because of that process. This places a greater burden on 
private lands and, in some cases, state lands to meet the nation's 
needs for grid infrastructure enhancement. The byproduct is the 
potential for more conflict with private landowners and an 
underutilization of federal lands, even where those lands may be best 
suited to help fulfill the nation's infrastructure needs.
    Rights of Way Across Federal Land: The Barton draft would allow 
states to assume permitting authority for rights-of-way across federal 
lands subject to Title 5 of the Federal Land Policy and Management Act 
(FLPMA) under certain conditions. It appears that the goal of this 
provision is to reduce delays in the federal permitting of transmission 
lines. We concur with the goal.
    The provision, however, does not really address the core concerns 
of our member companies: that is, the fragmented federal permitting 
process for rights-of-way when multiple federal jurisdictions are 
involved, working under their own deadlines and without any 
coordination with the state process. It also does nothing to reduce or 
eliminate multiple and duplicative environmental reviews and the 
frequent refusal of federal agencies to engage until the state process 
is done.
    We are concerned that, depending on how the language is construed, 
the provision could provide a powerful incentive for federal agencies 
to deny right-of-way applications and that it may not shorten the time 
or reduce the cost associated with getting a right-of-way special use 
authorizations. Irrespective of the potential benefit of this 
provision, we would encourage the Subcommittee to consider modifying 
and adding to this language.
    Interstate Compacts: The Barton draft would authorize states to 
enter into interstate compacts to establish regional siting agencies. 
We support this provision. The western governors and other regions are 
working on the formation of multi-state entities to coordinate siting 
decisions on interstate transmission lines. Because of the differences 
between the states, these multi-state entities may only be able to 
serve an advisory function unless authority can be delegated through 
mechanisms such as interstate compacts.
    Corridors Across Federal Lands: The Barton draft would require 
certain Secretaries and the Council on Environmental Quality (CEQ) to 
complete a study and report to Congress on transmission corridors. We 
strongly support the designation and development of corridors for 
transmission across federal lands under Section 503 of the Federal Land 
Policy and Management Act. To date, few of these corridors have been 
designated, despite substantial work by EEI member companies, the 
Bureau of Land Management, and the U.S. Forest Service to identify the 
potential for corridors.
    A focused study could be helpful in encouraging the development of 
appropriate corridors, but we have significant concerns with how the 
provision is drafted. We also have a major concern that preparation of 
such a study and report to Congress could very well divert resources 
from the Administration's effort to move forward with corridor 
designations and thereby slow a process that has already been delayed 
by a decade.
    Interagency Task Force and Memorandum of Understanding: The Barton 
draft would require the establishment of an interagency task force 
chaired by CEQ to develop a Memorandum of Understanding on federal 
coordination of transmission permitting.
    We believe that the establishment of an interagency task force to 
develop such an MOU would be a positive step forward and would provide 
a modest benefit. We also believe it would be useful for Congress to be 
more specific and pro-active in addressing certain problems in the 
federal permitting process for transmission lines. These problems, 
while shared by other linear facilities, have a greater impact on 
transmission facilities because they have been traditionally 
certificated at the state level, hence there is no traditional lead 
federal agency. Each federal agency with potential jurisdiction over a 
project has its own set of rules, timelines for action, and processes 
for permitting. There are other concerns: (1) a tendency to require 
multiple and duplicative environmental reviews; (2) not only a failure 
to coordinate with any state process, but a refusal to become involved 
until the state process is completely finished; and (3) a lack of 
harmonized permit terms from one agency to the next, and an increasing 
tendency to shorten permit periods, making it difficult to build and 
maintain a reliable national grid infrastructure or to attract the 
necessary capital investment.
    We encourage the Subcommittee to consider creating an opportunity 
for an applicant to have the Department of Energy serve as a lead 
agency for transmission and distribution facility permitting, including 
special use authorizations for rights-of-way. Furthermore, giving that 
lead agency clear responsibility to set deadlines, coordinate with 
states and tribes, and prepare a consolidated environmental record of 
review on which the other federal agencies must rely would 
significantly improve the federal permitting process for transmission 
without jeopardizing the ultimate authority of each federal agency to 
make their permit decision.
    Transmission Pricing--The Barton draft would direct FERC to 
establish by rule incentive-based and performance-based rate treatments 
to promote capital investment in the transmission infrastructure. While 
FERC has existing authority to address transmission pricing issues, 
this has not been a high priority of the Commission's. In addition, 
while FERC's recent pricing initiatives include some positive 
incentives, they also demonstrate a clear bias toward utility 
divestiture of transmission assets, thereby penalizing vertically 
integrated utilities that are turning operational control, but not 
ownership, of their transmission lines over to regional transmission 
organizations (RTOs). Congressional encouragement to FERC on 
transmission pricing would be helpful.

Consistent Oversight of the Operation of the Transmission Grid
    As we've already stated, transmission is the backbone that enables 
competitive wholesale electricity markets to work efficiently for the 
benefit of consumers. However, these benefits are threatened not only 
by insufficient investment in transmission infrastructure, but also by 
the lack of FERC jurisdiction over government-owned and cooperatively 
owned transmission facilities, which constitute almost 30 percent of 
the nation's interstate transmission system. In the Pacific Northwest, 
the federal Bonneville Power Administration (BPA) alone owns and 
controls nearly three-quarters of the region's high-voltage 
transmission capacity. The entire state of Nebraska and most of 
Tennessee are served by non-jurisdictional utilities, creating huge 
geographical gaps in FERC's authority.
    According to a December 2002 GAO report, ``Lessons Learned From 
Electricity Restructuring,'' because of this lack of jurisdiction
        FERC has not been able to prescribe the same standards of open 
        access to the transmission system. This situation, by limiting 
        the degree to which market participants can make electricity 
        transactions across these jurisdictions, will limit the ability 
        of restructuring efforts to achieve a truly national 
        competitive electricity system and, ultimately will reduce the 
        potential benefits expected from restructuring.
    We believe that this bifurcated regulation of interstate 
transmission lines is ultimately unsustainable as the industry's 
structure continues to evolve. The nation's transmission grid is 
physically integrated. Electrons do not recognize boundaries between 
public and private transmission ownership.
    In addition, the continued reliable operation of the grid is 
threatened by the lack of mandatory, enforceable reliability rules for 
all transmission system users.
    FERC Open Access (``FERC Lite'')--The Barton draft would grant FERC 
limited jurisdiction over the portion of the interstate transmission 
grid owned and operated by non-jurisdictional utilities, such as 
government-owned utilities and electric cooperatives. This authority 
would enable FERC to require those utilities to provide 
nondiscriminatory open access to their transmission facilities at rates 
comparable to those they charge themselves and on terms and conditions 
comparable to those shareholder-owned utilities are required to offer.
    We believe sound public policy to protect consumers would mean 
putting all utilities participating in interstate wholesale electricity 
markets under FERC's full ``just and reasonable'' requirements. At a 
minimum, EEI's member companies strongly support inclusion of an 
effective ``FERC lite'' provision in any electricity bill.
    The ability of government-owned utilities to finance transmission 
facilities with tax-free ``private use'' financing no longer provides a 
barrier or excuse for their failure to participate in RTOs or to offer 
open access upon terms comparable to that required by FERC. Last year 
the Treasury Department promulgated regulations that permit ``private 
use''-financed transmission facilities to participate in FERC-approved 
RTOs. As a result, the provisions of proposed Section 211A(f) are no 
longer necessary.
    Regional Transmission Organizations--We commend the Chairman for 
not including mandatory RTO participation provisions in this draft. 
EEI's member companies are moving aggressively to comply with FERC 
Order Number 2000 on RTOs.
    The Barton draft also would authorize the federal electric 
utilities to participate in RTOs. We believe it is essential to 
eliminate any legal uncertainty about whether federal utilities can 
delegate authority over their transmission systems to a RTO. However, 
we are concerned that this provision, as drafted, may not meet this 
goal.
    Reliability--Increasingly competitive wholesale electricity markets 
and traditional voluntary reliability standards are no longer 
compatible. We need a new reliability regime capable of developing 
mandatory reliability rules that are enforceable on all users of the 
transmission system. We support the reliability provisions in the 
Barton draft with one minor modification addressing the governance for 
regional entities with delegated enforcement authority.
Removing Federal Barriers to Wholesale Competition and Investment
    Among the electricity issues that only Congress can address are 
repeal of the Public Utility Holding Company Act (PUHCA) and reform of 
the mandatory purchase obligation under the Public Utility Regulatory 
Policies Act (PURPA). The structure and regulation of electricity 
markets have changed dramatically since these federal statutes were 
enacted, and they are in desperate need of reform. PUHCA was enacted in 
1935 during the New Deal; PURPA represents the only part of the Carter 
Administration's 1978 energy plan still in effect.
    PUHCA Repeal--The Barton draft would repeal PUHCA twelve months 
after enactment, while giving FERC and state utility commissions broad 
access to books and records of a utility holding company and its 
subsidiaries. Such access, together with state and federal jurisdiction 
over utility activities, provides regulators the ability to protect 
utilities and their consumers from improper cross-subsidization, 
including the use of utility debt to finance non-utility activities.
    We strongly support PUHCA repeal, which has been part of every 
major electricity bill and has long been recommended by the Securities 
and Exchange Commission and other federal agencies. PUHCA is a long-
standing barrier to capital investment in the utility industry, the 
creation of independent regional transmission companies and the entry 
of additional players in wholesale and retail electricity markets.
    PURPA Reform--We commend the Chairman for including provisions in 
the draft bill that recognize that PURPA is incompatible with 
competitive wholesale electricity markets. PURPA requires electric 
utilities to purchase power from certain legislatively-favored 
generators at government-determined prices.
    These prices were supposed to ensure that consumers would pay no 
more for PURPA power than for other power. Unfortunately, due to a 
confluence of factors not foreseen by the authors of PURPA, FERC or 
state regulators, this has not been the result. Instead, long-term 
PURPA contracts generally have proven to be at rates far above 
competitive market prices of electricity.
    Competition in electricity generation has been unleashed by the 
enactment of the Energy Policy Act of 1992 and the issuance of FERC 
open-access rules in 1996 (Orders No. 888 and 889). Consequently, 
electricity generators and wholesale customers have access to each 
other under the same terms and conditions applicable to the utility 
owning the transmission wires. QFs favored by PURPA have the right to 
request transmission service and to sell power to any wholesale 
customer, just like any other generator. They do not need the special 
privilege of being able to sell to a purchasing utility at the 
utility's ``avoided cost'' rate.
    While we appreciate the draft's recognition that PURPA is not 
compatible with today's electricity markets, we believe that a 
compelling case exists for repealing PURPA prospectively upon the date 
of enactment, along the lines of legislation that has been authored by 
Representative Stearns. We urge your consideration of this legislation 
and inclusion of it into the electricity title as the PURPA provision.
    Rather than repealing PURPA's power purchase mandate as of the date 
of enactment, the Barton draft would continue the power purchase 
mandate indefinitely, unless FERC makes a finding that one of three 
statutory tests is met. The first test is derived directly from FERC's 
proposed Standard Market Design (SMD) rulemaking. Memorializing in 
legislation the specific market attributes proposed by FERC in the SMD 
would codify a rigid view of what constitutes a workably competitive 
electricity market. FERC, itself, subsequently has indicated that there 
should be greater regional flexibility in structuring markets than this 
first test envisions and has already approved an RTO with a real-time 
but no day-ahead market.
    Second, we agree that a utility participating in a FERC-approved 
RTO should not be subject to PURPA's power purchase mandate; however, 
it takes more than one utility to make an approved RTO. It is unfair to 
hold a utility responsible for the decisions of others in its region 
over which it has no control. In addition, in Michigan and elsewhere in 
the country, utilities have divested their transmission. The new 
transmission owner may be participating in an approved RTO, but the 
utility remains subject to PURPA and can never meet this test. In these 
circumstances, the use of this test actually punishes utilities for 
doing something that FERC is encouraging as pro-competitive: the 
divestiture of transmission to an independent third party.
    Third, we agree that if FERC finds that a utility operates in a 
competitive wholesale market, that utility should not be subject to 
PURPA's mandatory purchase obligation. However, there is nothing to 
constrain FERC's discretion with respect to making this finding, or 
even how quickly FERC must act. Without any standards, FERC can hold 
utilities ``hostage'' to PURPA for as long as it sees fit. Given the 
enormous costs in above-market power prices that PURPA has imposed, and 
continues to impose, on electricity consumers, there is no basis for 
this indefinite continuation of PURPA.
    PURPA's requirement that utilities purchase power from certain, 
legislatively-favored generators at government-dictated prices has no 
place in the competitive wholesale electricity market this Subcommittee 
is seeking to foster. We urge its prospective repeal on the date of 
enactment.
    FERC Merger Authority--Utility mergers are among the most heavily 
scrutinized of any industry, even though all of the monopoly functions 
of a utility obviously remain thoroughly regulated after a merger.
    A wide range of government regulators, including the Department of 
Justice (DOJ) or the Federal Trade Commission (FTC), FERC, and, in most 
cases, the interested state utility commissions must examine proposed 
utility mergers. In addition, the Nuclear Regulatory Commission must 
review mergers involving nuclear plants. State attorneys general and 
consumer advocates also often participate in utility merger proceedings 
at the state and federal levels. During their merger analysis, the FTC 
and DOJ determine whether the merger will adversely affect competition. 
In addition, state commissions examine the impact of the proposed 
merger on utility rates. FERC duplicates these reviews.
    In addition, the DOJ and FTC merger review processes are 
streamlined and have deadlines the agencies must meet. While we 
acknowledge that FERC has made progress in improving its merger review 
process, other changes are needed, so that utility mergers do not drag 
on for years. The redundant, duplicative review of utility mergers 
should be eliminated to bring it into line with the merger review 
process applied to most other industries.
Promoting Renewable Energy Resources
    EEI's member companies support a growing role for economically 
affordable renewable energy resources in meeting our energy needs. We 
support extending and expanding the Section 45 production tax credit, 
as well as increased funding for renewable energy research and 
development. However, because of the significant regional differences 
in availability, amount and types of renewable energy resources, we 
believe it is important for the states to determine whether requiring a 
certain percentage of electricity to be generated from renewable energy 
resources makes sense for their consumers.
    States already are encouraging the development of renewable energy 
resources through a variety of programs that best fit their own 
circumstances. More than 90 utilities in 30 states have implemented or 
announced green pricing programs to support investment in renewable 
energy technologies. Forty-three states support programs that offer 
incentives, grants, loans or rebates to consumers using renewable 
energy resources.
    And, 13 states have adopted renewable portfolio standards. Electric 
suppliers in nine states with competitive retail markets are offering 
green power products to consumers.
    Net Metering--Because net metering is a retail electric service 
issue, we are pleased that the net metering program in the Barton draft 
is a PURPA Section 111(d) requirement that the states consider such a 
program, instead of a mandate that would preempt state decisions or 
existing programs.
    We do have a number of concerns with the provision. The net 
metering provisions that would prohibit any standby, capacity or 
interconnection charge create an uneconomic subsidy when such charges 
are economically justified. In addition, the provisions that would 
measure net metering ``in accordance with normal metering practices'' 
are confusing because net metering is not the norm at this time. The 
better approach is to require simultaneous metering of energy sold to 
and sold by an on-site generating facility.
    In addition, the Barton proposal goes beyond encouraging renewable 
energy resources when it endorses net metering for combined heat and 
power facilities up to 500 kilowatts in size at commercial facilities. 
As we have learned from PURPA, cogeneration in and of itself does not 
always mean a facility that is more energy efficient or desirable.
Maintaining Market Integrity
    The integrity of wholesale electric markets must be restored and 
maintained. The public, our investors and our customers must have 
confidence in our markets. That is why EEI supports FERC's efforts to 
foster transparent, liquid regional wholesale electric markets. We 
believe such markets will provide the basis for price transparency and 
an effective platform for market monitoring and oversight.
    Given current market concerns, the Barton draft's market 
transparency provision would make sure that FERC develops appropriate 
price and market information. Round trip trading, which we agree is 
improper, would be prohibited by the draft.
    Our biggest concern with both the market transparency and round-
trip trading provisions is that these provisions do not extend to all 
participants in interstate wholesale electricity markets. The current 
language, referring to ``any person, including any entity described in 
Section 201(f),'' inadvertently excludes various non-jurisdictional 
electricity sellers in interstate commerce that do not qualify as 
``persons'' under the FPA. This problem can be fixed by extending FERC 
authority to ``any person and (emphasis added) any entity described in 
Section 201(f)'' of the Federal Power Act.
    An even bigger problem occurs in the Barton draft provision 
amending FERC's remedial authority under Section 206 of the Federal 
Power Act, because the provision extending FERC's remedial authority to 
government-owned utilities and electric cooperatives has so many 
qualifications as to be virtually ineffective. The provision applies 
only to a ``spot market sale of electric energy'' that is for 24 hours 
or less, but not to longer term sales or to transactions involving 
transmission, congestion or related services.
    It also excludes all transactions by non-jurisdictional entities 
that sell less that 4 million MWh of electricity per year. We urge that 
the qualifications in these provisions be removed so that FERC has 
remedial jurisdictional over all interstate wholesale electric 
transactions.
    No market participant in interstate wholesale electric markets 
should be immune from FERC's investigative and remedial authority. 
Recent news accounts make it clear that alleged improper activities in 
electricity markets are not limited to jurisdictional utilities. The 
state of California and other parties last week submitted a massive 
filing to FERC that, according to news stories, alleges that California 
municipal utilities engaged in a number of Enron-type manipulative 
market strategies. These alleged market schemes include municipal 
utilities engaging in ``Ricochet'' trades, involving selling power out 
of state and then back into the state to avoid price caps, and ``Death 
Star,'' in which companies created false congestion on the transmission 
system and then were paid a premium to remedy the problem. We note that 
the alleged ``Death Star'' activities were facilitated because the 
California Independent System Operator does not operationally control 
government-owned utilities' transmission systems.
    We firmly believe that all participants in competitive interstate 
wholesale markets, including government-owned utilities, should be 
subject to the same rules and requirements and to FERC's full rate 
refund authority. As California's electricity crisis painfully 
demonstrated, retail consumers of shareholder-owned utilities 
desperately need the consumer protections offered by FERC's ``just and 
reasonable'' rate standard and refund authority applied to all 
electricity suppliers.

                               CONCLUSION

    As we have stated, only Congress can address a number of critically 
important electricity issues. We hope our comments on the Barton draft 
are useful to you and the other Subcommittee Members as you prepare to 
mark up a comprehensive energy bill. We look forward to working with 
you to produce the first comprehensive energy bill since the passage of 
the Energy Policy Act of 1992.

    Mr. Barton. Thank you, Mr. Owens. We would now like to hear 
from Ms. Jan Schori.

                     STATEMENT OF JAN SCHORI

    Ms. Schori. Thank you, Mr. Chairman, good morning. And good 
morning to the members of the committee. My name is Jan Schori, 
I am the general manager of the Sacramento Municipal Utility 
District in California, and today I am testifying on behalf of 
the Large Public Power Council, which, as the committee knows, 
is an association of the 24 largest public power systems in the 
United States. We collectively serve over 22 million customers, 
we own about 33,000 miles of transmission lines and have 
control over about 61,000 megawatts of generation. We are 
located in virtually all States and territories and all regions 
of the country.
    I am going to defer to John Twitty, who is testifying on 
behalf of APPA, for broader comments on the overall energy 
title on behalf of Public Power. I wanted to make very brief 
comments on two key sections of interest to the LPPC members in 
the draft electricity title: The expansion of FERC jurisdiction 
contemplated by the FERC-lite provision, as well as the uniform 
refund authority provision.
    First, on FERC-lite, I want to emphasize that the LPPC 
members have always supported and continue to support open 
access transmission. We have support Order 888 and the 
comparability standard as it was defined in 888; meaning, that 
we support--that we will make service available to others 
comparable to what we are providing to ourselves and our own 
customers. However, with respect to the language that is now in 
the draft that the committee is considering, we would like the 
opportunity to work with the committee to amend the language to 
assure that we will be able to continue to meet our obligation 
to serve our customers and meet all of our load obligations. We 
oppose full FERC jurisdiction. There have been certain FERC 
decisions as well as court decisions which potentially 
broadened the original understanding that was reached in the 
language of FERC-lite and which potentially changed the intent 
of the compromise that was reached. So we look forward to 
working with the committee to amend that language to restore 
the original agreement and intent.
    Second, on uniform refund authority, the LPPC members have 
only just received a copy of the draft. We have not yet had an 
opportunity to meet and discuss and take a formal position on 
behalf of the LPPC. However, I will note that we appreciate 
that the language has been significantly narrowed. It is now 
addressing spot market sales only, and it also is making clear 
that sales will be permissible if they are undertaken under the 
market rules that are in effect at the time that sale is made. 
And those are significant improvements over the original 
language.
    That concludes my comments for this morning. I will be 
happy to answer any questions.
    [The prepared statement of Jan Schori follows:]

 Prepared Statement of Jan Schori on Behalf of The Large Public Power 
                                Council

    My name is Jan Schori and I am the General Manager of Sacramento 
Municipal Power District, located in Sacramento, California. I am 
testifying today on behalf of the Large Public Power Council (LPPC), an 
association of 24 of the largest public power systems in the United 
States. LPPC members directly or indirectly provide reliable, 
affordably priced electricity to almost 22 million customers. Our 
members own almost 33,000 miles of transmission and control over 61,500 
MW of generation. LPPC members are located in states and territories 
representing every region of the country, including several states 
represented by members of this Subcommittee--such as Georgia, Florida, 
Texas, California, New York, and Arizona.
    LPPC has testified before the Subcommittee on numerous occasions 
throughout the consideration of energy policy and electric 
restructuring. Over the years, we have worked with members of the 
Subcommittee and full Committee and their staff in a cooperative 
fashion. We appreciate the opportunity to continue our involvement. We 
also appreciate the continued support of the Chairman on private use. 
In addition, on behalf of our members from the Tennessee Valley, I want 
to thank the Chairman and the Subcommittee for your years of support 
for the consensus process in that region--support we sincerely hope 
will continue to be demonstrated by the inclusion of a TVA title in 
this bill when introduced. Finally, thank you for this opportunity to 
express the views of LPPC on your draft energy legislation. I will not 
be commenting on all provisions of interest or concern to LPPC members 
today but will, instead, focus on several issues of primary concern to 
our members--FERC transmission jurisdiction, service obligation, and 
``Uniform Refund Authority.'' I commend to you as well the list of 
specific concerns that another witness on this panel, John Twitty, 
outlines in his testimony.

                         PUBLIC POWER IS UNIQUE

    Public power systems are owned by the communities we serve, not by 
investors. We are not-for-profit entities, which makes us different. 
Public power systems have been a part of the nation's electric system 
since the late 1800s, with many created as a part of the city 
government. Many LPPC member systems continue to provide numerous 
services to their communities in addition to electricity, such as flood 
control and natural gas, water and wastewater services.
    Electricity is a vital component of our lives now and, as has been 
recently demonstrated in my home state of California, a cornerstone of 
the economy. There are dire consequences if electricity is not reliable 
and affordable.
    As the electric supply of the country has been ``deregulated,'' 
many providers of electricity have sold off their generation or 
transmission assets or have severed their direct relationship with 
electric customers. But public power systems still have an obligation 
to serve the customers for which the systems are built. This service 
obligation is generally imposed by state law or local ordinance, 
sometimes by the statute creating the public entity. As a result, all 
available resources go first to serving those customers. Power is sold 
and surplus transmission made available only if it is surplus to those 
needs.
    Our rates reflect the fact that we are not-for-profit entities. Our 
rates include only the costs of producing and delivering power to our 
customers and, in some cases, payments to our governing boards or 
municipal entities as a component of the local budget. Since public 
power systems are locally controlled, decisions about policies such as 
rates are made by people who are in touch with local concerns. The city 
council sets policies for many LPPC members, while other public power 
systems have a separately elected or appointed utility board that 
governs their policies. Local control helps ensure that we respond to 
community needs. In addition, since public power systems are community 
based, our revenues stay close to home. This helps keep the local 
economy strong.

                      THE NEED FOR MARKET REFORMS

    As the Chairman noted last week, this Subcommittee has held over 30 
hearings in the last five years on the issues of energy policy and 
electric restructuring. LPPC has been involved in many of these 
efforts.
    This Subcommittee has undertaken tremendous efforts to become well 
educated on the electricity industry and market. However, this industry 
has undergone tremendous change and no substantive hearings have been 
held by the Subcommittee or full Committee since December 2001. Once 
robust investor-owned utilities are now in serious financial shape with 
180 rating downgrades in the past year. Some significant players in the 
market have filed for bankruptcy. There is an unstable market for all 
participants and for consumers. The capitol market for utility 
infrastructure has basically collapsed. Many LPPC members and our 
customers have serious concerns about legislating major changes to 
electric power markets at this time, concerns which are shared by our 
cities and states. Any legislative action must be cautious and 
carefully considered.
    Standard & Poor's recently issued a credit analysis report on the 
public power sector that noted that the credit rating stability of 
public power ``is a testament to the sector's ability to withstand 
periodic shocks as well as respond to new challenges.'' More than 80% 
of the public power sector has an ``A'' rating or better at this time 
and public power systems are functioning well in competitive wholesale 
markets. A strength of public power systems is our focus on providing 
the lowest-cost power to our customers.

                     EXPANSION OF FERC JURISDICTION

    Our issue of primary concern today before this Subcommittee, one 
that affects our willingness to continue to support legislative action 
and our ability to exhibit the strength and resilience market watchers 
see in our sector, is the issue of expanded FERC jurisdiction. LPPC and 
its member companies support open access transmission. In 1999, LPPC 
worked with the Chairman of this Subcommittee to guarantee open access 
transmission service by non-jurisdictional entities. Public power 
agreed that limited FERC jurisdiction could be extended to public power 
systems and cooperatives in order to ensure that open access 
transmission service would be provided to all market participants. That 
is the provision that is known as ``FERC-lite.'' LPPC continues to 
support this limited expansion of FERC transmission jurisdiction--for 
the purpose of open access transmission. A recent Supreme Court 
Decision and the subsequent issuance of FERC's proposed Standard Market 
Design rule have raised concerns that the current language of the FERC-
lite provision could be read to allow expansion beyond its original 
intent, possibly to impose full FERC jurisdiction over public power 
systems and cooperatives.
    LPPC looks forward to working with the Subcommittee to craft 
language that would preserve the original intent of FERC-lite and 
respect the compromise that was made three years ago. The modification 
we seek to ``FERC-lite'' would make it clear that FERC may require 
public power, coops, TVA and PMAs to provide open access transmission 
services--that is, service to others that is comparable to the service 
they provide themselves. This is completely consistent with FERC's 
reciprocity requirements.
    FERC itself is not seeking to expand its jurisdiction over public 
power systems. FERC Chairman Pat Wood has not asked Congress to expand 
federal authority over public power systems, preferring a ``voluntary 
approach to entice such utilities into the marketplace.'' The 
Administration and Commission have generally supported the concept of 
open access transmission but have not sought additional jurisdiction 
over the transmission assets of public power. We hope that the Chairman 
and this Subcommittee recognize this issue and correctly return FERC-
lite to a limited extension of FERC jurisdiction to ensure open access 
to the transmission system.
    I know that LPPC is not alone in raising the issue of service 
obligation. We hope that you will address this issue because, for us, 
it is about protection our customers.
    On the issue of ``Uniform Refund Authority,'' LPPC is reviewing 
your new draft. LPPC has no official position on the language but we 
appreciate the fact that you have narrowed the focus to the spot market 
and limited the grant of authority to violations of market rules in 
place at the time of the sale in question. Before legislating further, 
it would be my advice that Congress should take a hard look at how FERC 
is exercising its current refund authority prior to granting additional 
authority.

    Mr. Barton. We thank you, and it is always good to end on a 
positive note, so we appreciate that. Now I would like to hear 
from Mr. Twitty. You are recognized for 5 minutes.

                    STATEMENT OF JOHN TWITTY

    Mr. Twitty. Thank you very much, sir. Good morning, Mr. 
Chairman.
    Mr. Barton. Microphone on. You actually have to push a 
button there. Glenn English is a high tech guy, he can help you 
with that.
    Mr. English. I was fumbling.
    Mr. Barton. Yes.
    Mr. Twitty. He was most helpful, and we appreciate that. 
Thank you, Mr. Chairman, members of the committee. Let me thank 
Congressman Blunt even though he is not here for that nice 
introduction earlier. I am here today on behalf of City 
Utilities of Springfield, Missouri and the American Public 
Power Association to talk about issues facing the electric 
industry and your energy bill discussion draft. I have 
submitted a comprehensive written statement for the hearing 
record and would like to summarize that for you this morning.
    APPA appreciates and supports the chairman's effort to 
enact comprehensive energy legislation. We support a number of 
the key provisions in the draft, including clean coal 
technology, energy efficiency improvements, Price-Anderson 
reauthorization, hydro licensing reform, the natural gas 
pipeline in Alaska and low-income energy assistance. At the 
same time, we have some serious concerns regarding the electric 
restructuring provisions in Title VII. Much of our industry is 
still reeling from the effects of the western crisis 2 years 
ago, and much of what went wrong is still the subject of 
ongoing investigation and analysis by Federal and State 
agencies, including the FERC. We believe it makes sense for 
Congress to have the final results of those investigations 
before proceeding with any additional electric restructuring. 
It may also help to achieve some consensus among Members of 
Congress, regulators and stakeholders on how to proceed since, 
as you know and has been mentioned several times, consensus has 
thus far proven elusive.
    In addition, Congress would have an opportunity to see how 
the FERC may further refine or alter their plan for a standard 
market design and have an opportunity to address that issue 
sometime in the future. Finally, in his recent testimony, the 
FERC chairman asked for only two new authorities: authority to 
require market information or market transparency and an 
increase in civil and criminal penalties for violations of the 
Federal Power Act and the Natural Gas Act.
    Mr. Chairman, our economy has had about all the 
experimentation with electric restructuring it can stand right 
now. However, if the committee and Congress are determined to 
legislate in this area, we cannot support most of Title VII as 
currently drafted. We do support the electric reliability 
provisions but believe this to be more a matter of 
infrastructure security than industry restructuring. We also 
support reauthorization of the Renewable Energy Production 
Incentive Program, which is addressed in Title VII but prefer 
the version introduced this session as H.R. 671 by 
Representatives Bono, Markey, Blunt and others.
    While my crystal ball is no clearer than any of yours 
regarding the results of the ongoing investigations and what 
they might reveal, it seems to me that some elements of Title 
VII are not helpful and other elements that could be helpful 
have been omitted. For example, repeal of both the Public 
Utility Holding Company Act and FERC's merger authority leaves 
consumers vulnerable and invites market manipulation. PUHCA 
repeal will not spur increased investments in new facilities, 
it simply spurs investments in acquisitions of existing 
facilities by existing companies.
    Moreover, a recent report by APPA shows how partial repeal 
of PUHCA in the Energy Policy Act of 1992 has led, in part, to 
a number of failed diversifications that have harmed consumers, 
electricity markets and investors. We believe that PUHCA, while 
not aggressively enforced by the SEC, still provides some level 
of consumer protection through passive features, such as the 
contiguous integration requirement. Imagine how many utilities 
Enron could have acquired and the impact on consumers and 
investors if not for that requirement. Thus, if PUHCA is to be 
repealed, it should be replaced with other consumer 
protections, such as strengthening FERC's merger review 
authority.
    In addition, Title VII leaves out important elements, such 
as direction to FERC on use and revocation of market-based 
rates and language to ensure that load serving entities, such 
as City Utilities, can continue to use its own transmission 
lines or firm contractual rights to meet its legally required 
service obligation. With its directed rulemaking for incentive 
transmission rates, lack of adequate safeguards against market 
manipulation and loss of Federal oversight on utility mergers 
and acquisitions, we are concerned that Title VII, as drafted, 
has the potential to raise the cost of providing electricity in 
public power communities like Springfield. While not all 
utilities are enjoying the same positive outlook, public power 
systems are financially stable, able to raise capital and have 
received very favorable ratings from Wall Street. Obviously, we 
would not like to see changes in Federal law that could dim 
that outlook.
    There are issues that need to be addressed, though not 
necessarily through legislation. One of these is the increasing 
congestion on the transmission system. Clearly, new lines are 
needed, but as the chairman has acknowledged in the draft's 
bill, it is the difficulty in siting new lines that is the 
problem. Furthermore, FERC already has the authority it needs 
to address these issues. The bottom line, we believe, is that 
there is no need for incentive rates to attract capital. This 
congested situation is forcing some of us to pursue local 
generation that is not necessarily the most efficient for our 
region. City Utilities, for example, has experienced cuts in 
firm transmission rights on lines that we own, even on off-peak 
days and times. This has caused us to seek approvals to 
construct a new 275 megawatt coal fired plant inside our 
service territory in order to assure that we can meet our 
obligations to serve customers without relying on the external 
transmission system. Without those constraints, others in our 
areas could have participated and benefited from this new 
plant, but we are the folks who must provide services behind 
the switch on the wall and must do whatever is necessary to 
maintain service. That means we need physical resources and a 
physical path or the lights go out.
    Mr. Chairman, APPA and I stand ready to work with you on 
comprehensive energy legislation, and I thank you for the 
opportunity this morning.
    [The prepared statement of John Twitty follows:]

  Prepared Statement of John Twitty, General Manager, City Utilities, 
     Springfield, Missouri, on Behalf of the American Public Power 
                              Association

    Thank you Chairman Barton, Ranking Member Boucher, and Members of 
the Subcommittee for this opportunity to testify. I am pleased to 
appear today on behalf of the American Public Power Association (APPA) 
to discuss Chairman Barton's draft energy bill.
    My name is John Twitty, and I am the General Manager of City 
Utilities of Springfield, Missouri, a municipal electric, gas, water 
and transit utility established in 1945, and serving approximately 
100,000 customers. I am also a member of APPA's Board of Directors and 
Executive Committee. APPA represents the interests of more than 2,000 
publicly owned electric utility systems across the country serving 
approximately 40 million customers. APPA member utilities include state 
public power agencies and municipal electric utilities that provide 
electricity and other services to some of the nation's largest cities. 
However, the vast majority of these publicly owned electric utilities 
serve small and medium-sized communities in 49 states, all but Hawaii. 
In fact, 75 percent of our members are located in cities with 
populations of 10,000 people or less.
    The first and only purpose of public power systems is to provide 
reliable, efficient service to their customers at the lowest possible 
cost. Like hospitals, public schools, police and fire departments, and 
publicly owned water and waste water utilities, public power systems 
are locally created governmental institutions that address a basic 
community need: they operate on a not-for-profit basis to reliably 
provide an essential public service at a reasonable price. Publicly 
owned utilities also have a legal obligation to serve the electricity 
needs of their customers and they have maintained that obligation, even 
in states that have introduced retail competition. Furthermore, because 
they are governed democratically through their state and local 
government structures, public power systems operate in the sunshine, 
subject to open meeting laws, public record laws and conflict of 
interest rules. Most, especially the smaller systems, are governed by 
an elected city council, while an elected or appointed board 
independently governs others. Democratically governed, not-for-profit, 
obligated to serve all customers--understanding the underlying 
structure and mission of public power is essential in promoting 
policies that will maintain industry diversity and protect all 
consumers' interests.

                       NON-ELECTRICITY PROVISIONS

    Although the majority of my testimony will focus on the electricity 
provisions in Title VII of the draft bill, I will briefly highlight 
several other areas of importance to APPA. As has been the case since 
President Bush introduced his national energy policy plan in 2001, APPA 
believes that there are a number of areas where the Administration and 
Congress should act to maintain or enhance the viability of traditional 
fuels used to generate electricity, promote the commercialization of 
new, alternative sources of electricity, increase energy conservation, 
provide adequate energy assistance to low-income households, and 
maintain infrastructure security. APPA supports the following 
provisions in the bill that will achieve these goals:

 Title I--Energy Conservation. This title authorizes greater 
        funding for energy efficiency and conservation efforts and 
        implements specific conservation measures at federal 
        facilities. Specifically, APPA supports Title I, Subtitle B, 
        Section 1021 to increase the authorization for the Low Income 
        Home Energy Assistance Program (LIHEAP) and weatherization 
        assistance. Current weather and economic conditions underscore 
        the need for an increase in this federal program that helps 
        thousands of families pay their home energy costs.
 Title IV, Subtitle A--Price Anderson Act Reauthorization. This 
        provision would reauthorize the Price-Anderson Act, a law that 
        indemnifies Department of Energy (DOE) contractors and Nuclear 
        Regulatory Commission (NRC) licensees for damages resulting 
        from nuclear incidents.
 Title VII, Subtitle C--Reliability. This subtitle would ensure 
        the reliability of the interstate transmission grid by creating 
        a national industry self-regulating organization to develop and 
        enforce mandatory reliability standards, subject to FERC 
        oversight. We agree with the testimony submitted by the North 
        American Electric Reliability Council (NERC) that this section 
        is acceptable with one change--ensuring that stakeholders 
        govern the regional entities designated by the electric 
        reliability organization to promulgate reliability standards 
        (please see NERC's testimony for the legislative language 
        necessary to effect this change). Although this provision is 
        included in the electricity title, we believe that electric 
        reliability represents a fundamental part of our nation's 
        infrastructure security, and should be considered separately 
        from electricity restructuring provisions.
 Title VIII--Coal. This title would authorize funding and 
        specify criteria for the development of a program at the 
        Department of Energy to deploy clean coal technologies. APPA 
        supports clean coal technology research and development, as 
        well as incentives when linked to a tradable tax credit 
        available for public power and rural electric cooperatives.
 Title II, Subtitle A--Alaska Natural Gas Pipeline. This title 
        would facilitate the construction of a natural gas pipeline 
        from Alaska to the lower 48 states. APPA members in June 2001 
        approved a resolution urging the federal government to support 
        construction of the Alaska Natural Gas Pipeline, particularly 
        with the assurance of open access. Increasing supplies of 
        natural gas should help to mitigate price spikes like those we 
        are presently seeing in the market.
 Title V, Subtitle A--Vehicles and Fuels, Energy Policy Act 
        Amendments. This subtitle provides fleet owners--including 
        electric utilities--and others with additional flexibility and 
        opportunity to meet alternative fuel vehicle goals established 
        in the Energy Policy Act of 1992. We would also encourage the 
        Subcommittee to add provisions to this title allowing for the 
        banking or trading of biodiesel credits, as well as ensuring 
        that credit is given for hybrid or neighborhood electric 
        vehicles under EPAct.
 Title III--Hydroelectric Relicensing. This title will improve 
        the Federal Energy Regulatory Commission hydroelectric 
        licensing and relicensing processes. APPA supports the language 
        in the bill that will allow current licensees, for the first 
        time, to offer alternative conditions to those mandated by the 
        federal resource agencies under Sections 18 and 4E of the 
        Federal Power Act as long as those alternatives accomplish the 
        same level of environmental protection.
 Title VII, Subtitle F, Section 7072--Renewable Energy 
        Production Incentive. This section would reauthorize and reform 
        the Renewable Energy Production Incentive (REPI) program at the 
        Department of Energy. We look forward to working with the 
        Subcommittee to make changes to the language in Section 7072 to 
        conform to the stand-alone REPI reauthorization and reform 
        bill, H.R. 671, recently introduced by Representatives Bono (R-
        CA), Markey (D-MA), Blunt (R-MO) and others. REPI was 
        established by the Energy Policy Act of 1992, and authorizes 
        DOE to make direct payments to publicly- and cooperatively-
        owned electric utilities for electricity generated from solar, 
        wind, landfill-gas, and certain geothermal and biomass 
        projects. Since 1995, REPI has funded more than 36 renewable 
        energy projects in 17 states. REPI's authorization is set to 
        expire in September of this year.
      City Utilities plans in the near future to install a wind turbine 
        and solar array as demonstration projects for renewable energy 
        production. Future plans for acquiring or installing additional 
        renewable capacity will in large part be dependent on the 
        continued availability of REPI funds to help offset the 
        additional cost to our customers. As the only incentive 
        available to locally-owned, not-for-profit utilities to make 
        new investments in renewable energy projects, REPI delivers 
        important and significant air quality benefits to the 
        communities served by project owners and operators. The REPI 
        program merits extension, requires reform, and deserves 
        congressional attention.

EVALUATING LESSONS LEARNED FROM DEREGULATION IN THE WEST BEFORE MOVING 
                        FORWARD WITH LEGISLATION

        ``The [electricity] markets are not developing for many complex 
        technical and financial reasons. Yet although Enron 
        demonstrated the potential for abuse of energy deregulation, 
        the issue is not so much fear of crooks as respect for the 
        complexity of restructuring properly--if the objective is even 
        possible with a commodity like electricity.''

From article appearing in the February 19, 2003, Roanoke Times and 
         World News, referencing a report by the State Corporation 
                                            Commission of Virginia.
    At its most recent policy meeting in February, APPA members voted 
to urge that Congress review the results of various ongoing 
investigations into consumer abuses and market manipulation in western 
electricity markets and then develop consensus for further action based 
on those results before imposing any new requirements on electric 
industry participants, or experimenting with further industry 
restructuring. Although market abuses in the West continue to be 
uncovered, these recent events have not been fully aired by Congress, 
nor will the provisions in the draft bill ensure that market 
manipulation will be curtailed. As recently as February 25, 2003, the 
U.S. Attorney's office in San Francisco subpoenaed the California 
Independent System Operator to obtain documents and recordings between 
grid operators and the agency's trading floor from May 1, 2000, and 
July 31, 2001. This action suggests that federal prosecutors are 
broadening their investigation of market manipulation.
    We recognize that restructuring legislation as proposed by Chairman 
Barton and others has been debated, revised and--once--voted on in 
subcommittee over the past several years. However, significant 
deregulation activities at the Federal Energy Regulatory Commission 
(FERC) and at the state level have progressed during this same time-
frame. Revelations in recent months have made it more clear that the 
results of these deregulation efforts have been disastrous in the West 
and questionable elsewhere. Rather than proceed with legislation 
modeled on the failed Enron vision of the electricity industry, we 
believe that Congress should take a fresh look at the electricity 
industry and examine the characteristics that are fundamentally 
different from those of other industries. These characteristics 
include, among others, the fact that electricity is a real-time product 
produced and consumed simultaneously, cannot be stored, is a necessity 
of modern life, and has no reasonable substitute. Delivery of 
electricity requires hard-wire connections, making this function a 
natural monopoly that must be regulated in some manner. Further, it is 
a complex network industry and all parts--generation, transmission and 
distribution--must work together. This situation necessitates planning 
to ensure optimum use of individual facilities and the network, as well 
as concomitant infrastructure investments. All of these unique 
characteristics make it very difficult to displace regulation with a 
purely competitive market in the electricity industry.
    Despite promises that the deregulation of both wholesale and retail 
markets would be beneficial to consumers by reducing electricity 
prices, the western experiment caused power costs to skyrocket and had 
a detrimental impact on consumers and investors. APPA believes that the 
proposals in Title VII would do little if anything to reduce and 
stabilize electricity costs throughout the industry because they fail 
to ensure competitive wholesale markets--and the lower costs, improved 
service and innovation which should be the ultimate goals of federal 
policy. By imposing unnecessary jurisdictional and regulatory burdens 
on public power systems and at the same time neglecting to mitigate 
wholesale market manipulation, the legislation has a significant 
potential to raise costs for many electric consumers, including those 
served by public power systems. Given this outcome, we urge the 
Subcommittee to reevaluate the merits of moving forward with 
legislation until there is a greater understanding of what can be done 
by FERC under existing law to ensure effective competition, including 
how FERC may proceed on proposals to institute a standard market 
design. Only then it will become more clear whether or not Congress 
should continue along the same restructuring path, find new ways to 
restructure, or impose a different regulatory structure.

  CREATING EFFECTIVE WHOLESALE MARKETS SHOULD BE THE GOAL OF FEDERAL 
                                 POLICY

    APPA continues to evaluate the information we receive from ongoing 
investigations into the western electricity crisis as well as the 
results of retail competition in states that have deregulated. We still 
do not have all of the information we need to determine the remedies 
that will be the most effective. Given what we do know, however, we 
believe that, at a minimum, the following issues still need to be 
addressed before competitive electricity markets will become viable: 
ensuring sufficient transmission infrastructure; restoring financial 
viability to the industry; mitigating market power abuse; ensuring FERC 
maintains its ability to review mergers; safeguarding the ability to 
meet service obligations; and creating effective wholesale markets. 
APPA does not believe that the draft legislation adequately addresses 
these issues.

I. Transmission Infrastructure
    Competition will not work, much less benefit consumers, without a 
solid and well-developed transmission infrastructure. In many places, 
our nation's transmission infrastructure is clearly inadequate to 
support competitive markets. The grid has been neglected by many 
utilities because a weak transmission system protects their local 
generation investments. Transmission congestion is increasing, and with 
congestion, opportunities to manipulate markets and exercise market 
power grow exponentially.
    Accelerating development of the transmission infrastructure 
required to support competitive markets seems to be the most 
intractable of all of the obstacles to achieving competitive markets. 
The problem is not that capital is unavailable because returns on 
investment are inadequate. To the contrary, Wall Street values the 
virtually guaranteed regulated return produced by these natural 
monopoly facilities. Rather, even where the transmission owner is 
ready, willing and able to expand the system, it is very difficult to 
site new facilities.
    APPA appreciates that the draft bill has acknowledged this problem 
in Section 7012 by giving the federal government limited authority to 
ensure the siting of interstate transmission lines. We also appreciate 
the emphasis in Section 6231 on the development of new transmission 
technologies by directing the Secretary of Energy to create a program 
to promote the improved reliability and efficiency of electrical 
transmission systems.
    It has previously been suggested in statements by members of this 
Subcommittee and in testimony by other stakeholders that because public 
power systems come under limited direct FERC jurisdiction, we are in 
some way hindering the creation of a ``seamless'' transmission system. 
Some argue that without more FERC jurisdiction, there will continue to 
be large gaps in the system, thereby hindering the flow of electricity. 
These supporters of increased FERC jurisdiction over public power 
systems argue further that if public power were subject to increased 
FERC jurisdiction, the interstate transmission grid would suddenly 
function like the interstate highway system.
    First, the comparison between the interstate highway system and the 
interstate transmission grid is tenuous at best. The only similarity 
between the interstate highway system and the transmission grid is that 
both were originally created for non-commercial uses--the highway 
system for national security and the transmission system for 
reliability. Second, the interstate highway system was planned and 
built by the federal government, and the use of eminent domain 
authority was employed where necessary. Contrastingly, the electric 
transmission grid was created on an ad hoc basis to facilitate 
reliability, and the use of eminent domain had to be approved by state 
siting authorities. Therefore, seams issues and other hindrances to 
creating a competitive wholesale market will exist regardless of 
regulatory jurisdiction.
    APPA members own only approximately 8% of the nation's bulk 
transmission lines. Bringing those lines under increased FERC 
jurisdiction will not solve the major problems of siting and technology 
development and will not result in a more robust competitive wholesale 
market. Furthermore, Sections 211 and 212 of the Federal Power Act 
allow entities seeking access to transmission lines owned by public 
power systems to petition the FERC if access is denied based on undue 
discrimination. Nevertheless, APPA agreed several years ago to the 
language known as FERC-lite which gives FERC an additional tool to 
ensure that public power systems provide comparable treatment to other 
entities that wish to access our transmission lines. However, the 
language in Section 7021 of the bill needs to be updated in order to 
clearly limit FERC-lite to review and approval of transmission service 
tariffs.

II. Financial Stability in the Industry
    The electric utility industry has experienced a tremendous upheaval 
in the last two years. The stock of many merchant generators and power 
marketers has plummeted and the credit ratings of a substantial number 
of traditional vertically integrated investor-owned utilities have 
suffered significant downgrades.
    Unlike regulators, the markets have not been slow to punish 
corporate malfeasance. Enron is in bankruptcy-court proceedings and the 
stock price of Dynegy, another large trader, which in May 2001 had 
stocks being traded at a high of $57, now has stocks being traded at 
approximately $2. Other energy trading companies, such as the Williams 
Companies and El Paso Corporation, have also suffered dramatic 
decreases in the value of their stock. Even Duke Energy, consistently 
rated among the top investor-owned utilities, had its credit rating 
reduced and its rating outlook revised to negative. The weakened 
financial condition of energy companies clearly hurts both investors, 
who have lost billions of dollars, and consumers, who will pay higher 
rates as the result of utility companies' lower credit ratings and 
higher costs of debt.
    At the same time, public power systems for the most part have 
remained financially stable, and the outlook from Wall Street for 
public power is positive in 2003. Last year, 182 private energy 
companies received credit downgrades according to Standard & Poor's, 
and only 15 have been upgraded. Contrastingly, of the 197 consumer-
owned utilities (including rural electric cooperatives) rated by 
Standard and Poor's, 12 received upgrades and 14 received downgrades 
with the remainder undergoing no change in their credit ratings. APPA 
is concerned that further legislation to restructure the industry, 
including repeal of the Public Utility Holding Company Act (PUHCA) and 
loss of local control, will have consequences that could damage public 
power's stable and positive financial outlook.
    While APPA members in most parts of the country are weathering the 
storm of financial uncertainty, their lack of confidence in being able 
to obtain reasonably priced wholesale power in recent years, coupled 
with the lack of confidence in being able to obtain firm, reasonably-
priced transmission service (without significant risk of curtailments 
or hefty congestion charges), has led some to build their own localized 
generation. Indeed, my utility is currently in the process of securing 
approval to construct a 275 MW coal-fired unit within our service 
territory. While borne of necessity, this trend is not optimum in terms 
of APPA's members being able to leverage the economies of scale that 
drive costs down in a functionally competitive wholesale market. Unless 
confidence in the market is restored through the mitigation of market 
manipulation, however, this trend will continue.

III. Mitigating Market Power Abuse
    Unless behavior is carefully constrained (or better yet, as has 
been recommended by the Federal Trade Commission in a number of FERC 
filings, structural safeguards are put in place), the market can easily 
be manipulated by those who exert market power. Determining who has 
market power is difficult since there are many sub-markets within the 
electric wholesale power market with both geographic and time 
constraints that do not exist in most other markets.
    Although Section 7082 of the proposed bill prohibits round-trip 
trades of electric power, legislation should not try to identify each 
and every way market participants can manipulate the market, and 
attempt to separately legislate against it. Rather, Congress should 
give FERC broad authority to identify the type of practices that are 
prohibited (in general terms, just as the antitrust laws define in 
general terms what is prohibited), and impose a duty on FERC to take 
all steps necessary to ensure that wholesale markets are vigorously 
competitive and free from manipulation, the exercise of market power, 
and other wholesale market abuses. A clear directive in this area is 
important in light of the abuses that have occurred in the western 
electricity market, the gas industry and elsewhere. Otherwise, as 
experience has shown, consumers will suffer significant harm.

IV. Maintain and Strengthen FERC's Merger Review Authority
    With the collapse of the merchant sector of our industry, 
consolidation is likely to occur at an increasing pace, with the 
ability to undermine the competitive forces Congress and FERC are 
seeking to foster (and increasingly depending upon to produce just and 
reasonable rates for consumers). FERC review of mergers is an essential 
tool for ensuring that markets are workably competitive and is 
particularly important at this time of transition for the electric 
utility industry. APPA has consistently urged adoption of a higher 
standard that would condition merger approval on an affirmative finding 
that the proposed merger will promote the public interest, as opposed 
to the current standard that only requires the merger to be consistent 
with the public interest.
    In addition, FERC's merger authority needs to be clarified and 
expanded to cover mergers of utility holding companies as well as the 
disposition of generation assets by jurisdictional utilities and 
``convergence'' mergers of electric and gas utilities.
    FERC lacks the clear authority to review the former. While APPA 
believes FERC has the authority and responsibility to review the 
latter, it has declined to do so.
    The draft bill not only fails to improve upon FERC's ability to 
review mergers, it eliminates their authority altogether. Deletion of 
FERC's merger review authority is neither supported by FERC itself nor 
by the Department of Energy. Section 7101 of the proposed legislation 
would repeal Section 203 of the Federal Power Act to eliminate FERC's 
authority to review, approve and condition utility mergers and asset 
disposition. Inclusion of this provision makes it more likely that 
large generation companies will increase in size and in their ability 
to exercise market power.

V. Safeguarding Ability to Meet Service Obligations
    In the transition to competitive wholesale markets, it is essential 
that the ability of all utilities to meet their ``obligation to serve'' 
wholesale and retail customers under federal, state and local laws and 
contracts not be impaired. Congress should include a provision that 
requires FERC, in whatever market structure it adopts, to preserve such 
utilities' existing transmission rights--whether they arise from 
transmission ownership, service agreements under FERC's Open Access 
Transmission Tariffs, or other firm transmission contracts. Including 
such a provision would enable these utilities to continue to meet their 
obligations to serve with existing resources at reasonable cost and 
without any degradation of reliability. This protection must encompass 
both transmission-owning utilities and those that depend on 
transmission facilities owned by others to meet their service 
obligations, and must include municipal joint action agencies and 
generation and transmission cooperatives that serve member distribution 
systems at wholesale, as well as utilities that directly serve retail 
customers. The language should also require FERC to exercise its 
jurisdiction to facilitate the planning and expansion of transmission 
to meet the reasonable needs of load-serving entities to serve current 
and future loads.

VI. Creating Effective Wholesale Markets
    Before wholesale electricity markets can work effectively, the 
proper market structure, market rules, market monitors and market data 
must be in place. Also, as mentioned above, market power must be 
identified and mitigated. APPA believes that these issues can be 
addressed through the following:
        Specifying criteria for market-based rate approval and 
        revocation. APPA believes market based rates for jurisdictional 
        utilities should only be approved on a finding that the 
        applicant will not possess market power and that effective and 
        sustainable competition will exist in that market. The analysis 
        must include an examination not only of the resources available 
        to individual applicants and whether such assets could be used 
        to set the market-clearing price, but also of the effect of 
        transmission constraints and how those assets fit into the 
        broader market structure. Location-specific constraints must be 
        taken into account, as should requirements for grid 
        reliability. Further, and frequently ignored in traditional 
        market analysis, is the time-sensitive nature of electricity.
        Enhancing FERC's merger review authority. As opposed to 
        repealing that authority, FERC's merger review process should 
        be revised as discussed above. Further, FERC should be able to 
        preserve the integrity of the market through preliminary relief 
        in order to prevent irreparable harm pending issuance of a 
        final order.
        FERC on November 20, 2002, approved the merger of Ameren Corp. 
        and Central Illinois Light Company. As part of FERC's merger 
        conditions, Ameren agreed to several transmission system 
        upgrades which will increase the import and export capability 
        of Ameren's service area, and serve to mitigate market 
        concentration concerns. Therefore, if FERC's merger review 
        authority were to be repealed, as envisioned in the draft 
        legislation, the benefits of the transmission upgrades 
        incorporated in the conditions for approval of this merger 
        would never be achieved.
        Market transparency. Market transparency is an essential 
        requirement for fully competitive markets. Today, many 
        electricity markets are opaque, and disparities in market 
        knowledge vary widely from one stakeholder to another. APPA 
        believes that legislation should ensure transparent information 
        on market transactions and should grant clear authority to the 
        Energy Information Administration (EIA) and the FERC to collect 
        and publish appropriate data while protecting proprietary 
        information. Transparency of market information is a 
        fundamental prerequisite of competitive markets and necessary 
        to protect consumers. We believe the directed rulemaking in 
        Section 7081 of the draft bill is a step forward toward 
        assuring market transparency, but that the language needs to 
        clarify to FERC that close calls should be resolved in favor of 
        transparency, not secrecy.

  IF ELECTRICITY LEGISLATION MOVES FORWARD, THE FOLLOWING PROVISIONS 
                           SHOULD BE REVISED

    Eventually, the structural issues listed above must be addressed 
before wholesale markets can become truly competitive. Other issues may 
also be uncovered when we more fully understand the causes and effects 
of the western electricity crisis. In the interim, FERC--particularly 
under the auspices of its new Office of Market Oversight and 
Investigations--has tools at its disposal that it can use to influence 
the behavior of market participants to mitigate market power and 
restore consumer and investor confidence. APPA does not agree with all 
of FERC's actions--in particular, we believe that FERC should slow down 
and more fully acknowledge regional differences in implementing its 
standard market design rulemaking. However, we are confident that FERC 
will continue to utilize the tools at its disposal to ``calm the 
waters'' in the energy markets until we are more informed about how to 
proceed.
    Nevertheless, if the Subcommittee insists on pursuing the draft 
electricity legislation, the provisions delineated below should be 
revised. The legislation should also include provisions addressing 
market transparency, criteria for the approval and revocation of 
market-based rate authority, and enhanced FERC merger review authority 
as outlined above.
    Section 7011--Transmission Infrastructure Improvement Rulemaking. 
This section would require FERC to adopt ``incentive transmission 
pricing'' rules and would unnecessarily codify the ``participant 
funding'' model for pricing transmission expansion. FERC already has 
authority under existing law to create incentives for transmission 
improvements and to impose ``participant funding'' where appropriate. 
Therefore, reiterating in legislation this ability is unnecessary and 
would in fact create a preference for participant funding. Furthermore, 
``participant funding'' is an untested concept and, in most parts of 
the country, is likely to delay and limit transmission construction at 
a time when congestion and curtailments are increasing, to the 
detriment of consumers. Competitive markets will fail without 
construction of substantial new transmission in many areas.
    Transmission pricing is a complex subject currently being debated 
by FERC. FERC has ample authority under the Federal Power Act to 
experiment with incentive pricing alternatives and modify pricing 
models over time as experience is gained. For example, the Commission 
on January 15, 2003, issued a proposed policy on incentive transmission 
rates and already has approved incentive rates based on the facts in 
individual proceedings. Congress should allow the Commission to 
continue to assess the facts on a case-by-case basis and not codify an 
untested funding mechanism that could be detrimental in many regions of 
the country.
    Section 7021--Open Access Transmission By Certain Utilities. Known 
as ``FERC-lite,'' this provision would require public power systems and 
rural electric cooperatives that own transmission to provide non-
discriminatory access to other entities. Open, non-discriminatory 
access to the interstate transmission system has been a longstanding 
principle of public power. Although APPA can continue to support the 
FERC-lite concept, the language in this section must be revised to 
clarify that FERC-lite is limited to the review and approval of 
transmission service tariffs for consistency with the comparability 
standard.
    Section 7022--Regional Transmission Organizations. This language 
would force federal transmission-owning entities to forego their 
existing statutory authorities and obligations if they contractually 
enter into an RTO, in the event that the existing authority and 
obligations conflict with the contract. The scope of the language moves 
well beyond the ability of an RTO to oversee and operate the federally-
owned portions of the transmission system.
    Section 7043--Repeal of the Public Utility Holding Company Act 
(PUHCA) of 1935. Rather than enhancing competitive wholesale markets, 
the repeal of PUHCA would increase the uncertainty and instability in 
the wholesale electricity market. As mentioned above, utilities and 
utility holding companies have placed operating utilities in jeopardy 
by engaging in unregulated activities and using profits from operating 
utilities to prop up those activities. As delineated in the attached 
analysis compiled by APPA staff entitled ``The Public Utility Holding 
Company Act: Its Protections Are Needed Today More Than Ever,'' these 
activities were permitted by partial repeal of PUHCA in the 1992 Energy 
Policy Act. The 1992 Act exempted developers of independent power 
generation facilities, called Exempt Wholesale Generators, whether they 
were owned by operating utilities, utility holding companies, or 
parties not involved in the electric utility business. This exemption 
resulted in a substantial number of electric utilities and utility 
holding companies taking advantage of the new freedom from Securities 
and Exchange Commission scrutiny to create unregulated power production 
subsidiaries--the very subsidiaries placing many operating utilities in 
jeopardy today.
    PUHCA was originally enacted in 1935 to protect investors and 
consumers by establishing effective regulation over multi-state utility 
holding companies. Exemptions to many of the Act's provisions were 
provided to utility holding companies that operated substantially in 
one state, as state regulators were presumed to have adequate authority 
and access to the necessary information to effectively oversee these 
companies. In the Act, Congress identified several classes of problems 
it sought to remedy, including: lack of investor information; incorrect 
valuation of assets and earnings; improper pricing of inter-affiliate 
transactions; no relationship between a company's expansion and 
operational efficiencies; and subsidiaries and affiliates in different 
states, making effective regulation difficult. Not coincidentally, this 
same list of problems characterizes the current energy industry.
    Sections 7044 and 7045--Federal and State Access to Books and 
Records. A Wall Street Journal article from December 26, 2002, stated 
that ``As [energy] deregulation swept the nation in the late 1990s, 
state legislatures often clipped the wings of regulatory commissions to 
save money and give emerging markets more breathing room . . . With 
little or no authority to review the books and records of the 
unregulated businesses, they now only see part of the picture.'' 
Although a step in the right direction, the provisions included in the 
draft to give FERC and the states greater access to books and records 
for the limited purpose of reviewing electric utility rates are not 
adequate to protect customers and investors. While such expanded 
authority is appropriate, it is by no means an adequate substitute for 
the protections afforded by PUHCA. Before PUHCA is repealed, there must 
be strong market power protections in place, regulatory gaps must be 
filled, and opportunities must be provided to ensure that transactions 
across the entire utility holding company and all of its subsidiaries 
can be carefully examined.
    Section 7081--Market Transparency Rules. Although a step in the 
right direction toward assuring market transparency, the language in 
this section needs to clarify to FERC that close calls should be 
resolved in favor of transparency, not secrecy.
    Section 7082--Prohibition on Round Trip Trading. This provision is 
too narrow in its scope to effectively mitigate market manipulation. 
Rather than try to identify each and every way bad actors can 
manipulate the market, the language should give FERC broad authority to 
identify the type of practices that are prohibited (in general terms, 
just as the antitrust laws define in general terms what is prohibited). 
FERC should also be given the authority to punish manipulative behavior 
through fines and by withdrawing authority to sell power at market 
based rates.
    Section 7092--Jurisdiction over Interstate Sales. This provision 
would unnecessarily extend FERC jurisdiction over public power systems 
by imposing FERC's refund authority over the spot market sales made by 
public power systems. This language is an encroachment on local 
authority that is neither prudent nor warranted. Public power systems 
have been regulated differently under federal law for more than 66 
years. This is neither an accident nor an oversight, but rather good 
public policy that recognizes the differences between not-for-profit 
public power systems operating in the public interest and regulated at 
the local level, and multi-state, investor-owned private utilities. 
Public power systems do not represent a significant presence as sellers 
in the wholesale markets, and public power systems are, and will 
continue to be, net purchasers of electricity. The limited volume of 
surplus energy from public power systems precludes their ability to set 
a market-clearing price--public power systems are price takers, not 
price makers.
    There is no policy justification for reversing decades of 
effective, local authority. Uniform refund authority would negate any 
notion of the FERC-lite agreement, and makes jurisdiction over public 
power systems FERC-heavy, including the ability to set wholesale rates 
after the fact. This is, in fact, a back door to extensive new FERC 
regulation over public power.
    Section 7101--Repeal of Certain Provisions of Federal Power Act 
Regarding Disposition of Property, Consolidation and Purchase of 
Securities. This provision would repeal Section 203 of the Federal 
Power Act, eliminating the ability for FERC to review mergers. APPA 
opposes this provision, as discussed extensively above.
    In conclusion, APPA encourages the Subcommittee to move forward 
with energy policy legislation as envisioned in the draft bill with the 
important distinction that the electricity restructuring provisions 
should be deleted and addressed at a time when we more fully understand 
the appropriate remedies to prevent a repeat of the western electricity 
crisis. Thank you again for this opportunity to testify.

    Mr. Barton. Thank you, sir. We now welcome, Mr. English, 
who is representing the National Rural Electric Coop 
Association.

                   STATEMENT OF GLENN ENGLISH

    Mr. English. Thank you very much, Mr. Chairman; I 
appreciate that. I am Glenn English, the chief executive 
officer of the National Rural Electric Cooperative Association. 
I am representing nearly 1,000 electric cooperatives in 47 
States that is owned and, I am proud to say, regulated by some 
35 million consumers. And I am pleased to be here.
    I, first of all, Mr. Chairman, want to apologize to Sergio 
Leoni and Clint Eastwood, because I think the description of 
this legislation can be the good, the bad and the ugly. First 
of all, I would like to focus on the good. The reliability 
provisions in this legislation we feel are good, the enhanced 
penalties we feel are good, the market transparency efforts we 
feel are steps in the right direction, the voluntary RTO 
provisions are good, and we agree that moving and dealing with 
the siting provisions is a step in the right direction.
    Now I would like to focus a little bit, Mr. Chairman, on 
what we find to be bad. The repeal of PUHCA removes any kind of 
consumer protections whatsoever. We would like to see PUHCA 
updated and modernized. And, failing that, we would like to see 
a replacement of consumer protection legislation if PUHCA in 
fact is going to be repealed. There is nothing in this 
legislation that does that.
    The so-called FERC-lite provisions that are contained 
within the legislation while they might have been workable 
under Rule 888 by FERC, when we look at the standard market 
design proposal by FERC, it simply does not work. Also, we have 
already had many public statements by the chairman of FERC 
stating that he finds it unnecessary to even have provisions of 
the FERC-lite nature contained in any legislation. I can 
understand and appreciate why many would like to see Rural 
Electric Cooperative, even though we are the smallest of the 
entire electric utility industry and a lot of very small 
electric cooperatives, included in the provisions of 
regulations. That means FERC has to divert its resources from 
those who have proven to have committed egregious mistakes--
those who have mismanaged, those who have abused the system--
and require those resources to be focused on dealing with those 
who have not been shown to have been guilty of any problems.
    We also have great difficulty with the repeal of the merger 
review. That, to us, is an anti-competitive provision, one that 
attempts to provide the opportunity for those with the deepest 
pockets to be in a position to squeeze out those who may be 
interested in competing within this marketplace. And I would 
also say that we have great difficulty with the provisions 
dealing with the PMAs. These PMAs have contractual obligations 
that this legislation would void or at least provide the 
opportunity to void, and we think that is wrong.
    But there is the ugly, and it is the ugly that we really 
find to be not only anti-consumer, but we also find it to be 
anti-competitive. When you look at the situation with regard to 
incentive rights, the Federal Energy Regulatory Commission 
today has the ability to use incentive rates, and they apply it 
on a case-by-case basis. The only reason we can see for this 
provision being included in the legislation is to require FERC 
to go beyond what they have found to be a just and reasonable 
application of incentives. It also seems to push FERC in the 
direction of using incentive rates only when in fact a task 
force comprised of all industry representatives, as well as 
those from the financial markets that provided a study of the 
Transmission Task Force to the Secretary of Energy, pointed out 
this is only one of several options. For instance, reducing 
risk is another way of dealing with problems that increased 
investment in the transmission system.
    And also we are puzzled by the fact that this legislation 
does not require that any of these additional funds that might 
come about as a result of incentive rates be used to build 
transmission. It can be used for virtually anything. But 
participant funding, another feature within this legislation, 
another one that can only be categorized as ugly is another one 
that we find troubling. Certainly, the Federal Energy 
Regulatory Commission today has the ability to be able to make 
judgments and decisions on a case-by-case basis on the case of 
just and reasonable as to what the compensation should be. But 
this particular feature, while it has been hailed as bringing 
about equity between regions, actually it is anti-competitive 
within the regions. It discourages the building of transmission 
within the regions, makes it more difficult for competition to 
take place within a region, and certainly we think that it 
would discourage improved transmissions within regions of the 
country. And we don't really think that is the aim of the 
authors.
    Mr. Chairman, what we would suggest is that for many of 
these provisions, those that fit into the category of being bad 
and ugly, that we should simply take a time out, see what FERC 
does through the standard market designs, give them the 
opportunity to apply the lessons of California and Enron, to 
give us an opportunity to get it right. But certainly trying to 
pass legislation to codify into law based on regulations that 
have not even been finalized yet we think would be a very 
serious mistake. Thank you very much, Mr. Chairman, for giving 
us this opportunity to testify.
    [The prepared statement of Glenn English follows:]

Prepared Statement of Glenn English, Chief Executive Officer, National 
                 Rural Electric Cooperative Association

                              INTRODUCTION

    Chairman Barton and Members of the Subcommittee, I appreciate this 
opportunity to continue our dialogue on the restructuring of the 
electric utility industry. For the record, I am Glenn English, CEO of 
the National Rural Electric Cooperative Association, the Washington-
based association of the nation's nearly 1,000 consumer-owned, not for 
profit electric cooperatives.
    These cooperatives are locally governed by boards elected by their 
consumer owners, are based in the communities they serve and provide 
electric service in 47 states. The more than 35 million consumers 
served by these community-based systems continue to have a strong 
interest in the Committee's activities with regard to restructuring of 
the industry.
    Electric cooperatives comprise a unique component of the industry. 
Consumer-owned, consumer-directed electric cooperatives provide their 
member-consumers the opportunity to exercise control over their own 
energy destiny. As the electric utility industry restructures, the 
electric cooperative will be an increasingly important option for 
consumers seeking to protect themselves from the uncertainties and 
risks of the market. I would like to thank you, Mr. Chairman, and 
Members of the Committee for your receptiveness to the concerns and 
viewpoints of electric cooperatives.

                        TIME OUT ON ELECTRICITY

    Congress should take a time-out on electricity. It should take time 
to review the failed deregulation schemes of recent years before it 
acts. It should avoid undermining the Federal Energy Regulatory 
Commission's (FERC) ability to respond flexibly to changing conditions 
in the electric utility industry. And, it should avoid bogging down 
energy legislation with a controversial electricity title.
    The electricity industry is in a state of turmoil and rapid change. 
In some parts of the country, the competitive wholesale power 
marketplace is rapidly developing. In other regions, wholesale 
competition is developing at a more deliberate pace. Retail competition 
continues forward in a few states, has stalled in many, and is in full 
retreat in some others. Wall Street, FERC, and the industry are all 
still trying to determine what lessons we should take from the disaster 
in California's market, Enron's bankruptcy, and the rapid decline of 
many power marketers, independent power producers, and investor-owned 
utilities. Investors, the Commission, and the industry are still 
working to piece together the causes of this turmoil.
    Now is not the time for Congress to act. If Congress moves now, and 
enacts electricity legislation before the causes of the turmoil have 
been thoroughly analyzed, Congress risks codifying the very problems 
that it seeks to solve and possibly breaking those aspects of the 
industry that are actually working.
    By acting now, Congress would also risk denying FERC the resources 
and flexibility it needs during this time of change. It will take all 
the resources and flexibility available at the FERC to protect 
consumers from market failures and abuses during the transition to 
competitive markets and to ensure that consumers benefit from the new 
market structures that ultimately develop.
    Congress must not enact any law at this critical time that would 
undermine FERC's ability to respond to changing circumstances. While 
the Commission has the flexibility today to respond quickly to evolving 
conditions and the expertise to anticipate the consequences of its 
actions, the same cannot be said of any rigid congressional mandate. 
Given the rapid pace of change and the existence of enormous regional 
differences in power markets, a policy that might make sense today in 
one part of the country may not make sense tomorrow or in another part 
of the country. Congress must not, therefore, force FERC to adopt rules 
that the Commission could conclude today, or in the future, are 
unnecessary, unjust, or unreasonable given the developing state of the 
market in any part of the country.
    Congress should also recognize that electricity legislation is 
controversial. Congress should focus instead on issues--such as LIHEAP 
reauthorization, Price-Anderson Act reauthorization, and support for 
clean-coal technologies--that are vital for the nation's long-term 
energy security. It would be better to call a time-out on electricity 
and to concentrate on the country's real energy needs.

                THE FEBRUARY 28 DRAFT ELECTRICITY TITLE

    As noted above, NRECA believes Congress should take a time-out on 
electricity. For many reasons, now is not the time for Congress to 
address the electricity industry. To the extent Congress does act, 
however, it should be certain that it does not restrict FERC's existing 
ability to respond flexibly to changes in the industry, regional 
differences in electricity markets, and the needs of consumers.
    NRECA is disturbed, therefore, that the February 28 draft includes 
provisions that will distract FERC from its core mission by expanding 
its jurisdiction over consumer-owned utilities even though FERC 
Chairman Wood has himself said that such additional jurisdiction is 
unnecessary.
    NRECA also opposes provisions in the February 28 draft that permit 
the Secretary of Energy to undermine the critical role of the Power 
Marketing Administrations and TVA in serving the energy, flood control, 
irrigation, and other needs of rural America; require FERC to adopt 
incentive transmission rates that could increase the cost of 
electricity to consumers without improving service; codify an 
inflexible approach to funding needed new transmission infrastructure 
that discourages critical investment and reinforce existing market 
power; deprive FERC of its existing authority to ensure utility mergers 
are in the public interest; and repeal PUHCA without adopting effective 
market power protections in its place. These provisions threaten to 
increase instability on both Wall Street and Main Street, undermining 
important consumer protections, developing wholesale markets and 
investor confidence.
    On the other hand, NRECA is pleased that the February 28 draft is 
narrower in many ways than was H.R. 3406. For example, NRECA was 
pleased to see that the February 28 draft lacked any proscriptive 
language with respect to Regional Transmission Organizations. FERC 
needs to retain the flexibility it has today to define the kinds of 
transmission institutions that can best serve consumers in light of 
evolving market conditions and regional differences.
    Similarly, NRECA was pleased to see that the net metering 
requirements in H.R. 3406 have been moved to title I of PURPA. 
Cooperatives do not object to considering the role that net metering, 
advanced metering, and real-time pricing can play on their systems. 
Some cooperatives have already adopted these concepts where and to the 
extent it serves the best interests of their consumers. Others are in 
the process of doing so. Nevertheless, were the language in 
Sec. Sec. 7061 and 7071 made mandatory, those provisions would impose a 
significant burden on many electric cooperatives and their consumers: 
shifting costs from some classes of consumers to others and 
inappropriately subsidizing consumers with their own generation.
    NRECA supports elements of the February 28 draft that would tend to 
increase stability for consumers and investors in the electric utility 
industry. Electric reliability provisions, enhanced civil penalties and 
an adjustment of the refund effective date for violations of the 
Federal Power Act, prohibitions on wash trades, and new limited federal 
siting authority could all enhance the FERC's ability to protect 
consumers without limiting its existing authority or flexibility.

              SPECIFIC PROVISIONS OF THE FEBRUARY 28 DRAFT

Section 7011 Incentive Rates
    For several reasons, NRECA opposes Sec. 7011 of the February 28 
draft, which requires FERC to adopt a transmission pricing policy that 
includes incentive rates. First, this provision is unnecessary. FERC 
has already begun work on a new transmission pricing policy that 
includes incentives, including higher rates of return for new 
transmission construction, participation in an RTO, and transfer of 
transmission facilities to an independent transmission company that is 
participating in an RTO. Congress does not have to force FERC to do 
something it is already doing.
    Second, NRECA believes it is wrong for Congress in this bill to 
restrict FERC's discretion to adopt those approaches that it believes 
will best encourage the construction of needed transmission facilities 
and otherwise serve the public interest. As discussed above, with the 
market in the beginning of an evolutionary process, a good approach to 
transmission pricing today in one part of the country may not be a good 
approach tomorrow or in a different region. FERC already has authority 
today to adopt a transmission policy with incentives--and is doing so. 
It also has the authority to rescind or alter that policy if, at a 
later date, it considers incentives to be unnecessary or contrary to 
the public interest. The draft bill would deprive the FERC of that 
critical authority. FERC would have to include incentives in its 
transmission pricing policy no matter how unnecessary, unjust, or 
unreasonable, it later considers them to be.
    Finally, NRECA believes that arbitrary increases in rates of return 
are already an unnecessary and unwise approach to encouraging 
investment in needed transmission facilities. As explained by the 
Department of Energy's National Transmission Grid Study, ``authorizing 
higher rates of return is not the only approach to stimulating needed 
investments in transmission facilities over the long term. Reducing 
regulatory uncertainty should also be a focus of efforts to stimulate 
needed investments'' (NTGS at 31) As the NTGS notes, the rate of return 
required by investors varies with the level of risk. The lower the 
risk, the lower the return required to attract capital.
    Similarly, the Department of Energy's Energy Advisory Board looked 
at how best to encourage the construction of needed new infrastructure, 
given that ``there is a clear reluctance from the financial community 
to finance transmission projects.'' (Report at 22.) The Board 
determined that ``[i]nvestment in the grid will only occur when 
regulatory policy provides (a) reasonably certain cost recovery, (b) 
regulatory certainty, in terms of who can operate the system and under 
what rules and (c) provides a return that makes investment in 
transmission a reasonable option, considering other available 
investment options.'' (Id).
    That conclusion is significant. As NRECA has been saying for 
several years, FERC can best encourage the construction of new 
transmission facilities by providing investors with certainty that they 
will recover their costs. While the rate of return may be important, 
the level of return required to attract capital investment is a product 
of the level of risk faced by investors: the lower the regulatory risk, 
the lower the rate of return required to attract investment.
    NRECA believes it is far better to increase regulatory certainty 
than to simply throw more money at the transmission shortage. By 
increasing regulatory certainty, Congress and the Administration can 
attract greater investment in transmission infrastructure without 
raising rates of return. That approach keeps costs down for consumers 
and strengthens electric markets by permitting more generation from 
across a region to compete economically. Higher rates of return should 
be a last resort, not a first resort.
    The competing approach, granting transmission owners higher 
``incentive rates'' would raise costs for consumers and narrow electric 
markets by building toll gates between generators and consumers. 
Interestingly, recent Moody's reports indicate that the regulated 
(i.e., transmission) component of the industry may now provide a more 
attractive investment vehicle than the unregulated (i.e., generation 
and trading) component of the industry. Similarly, Fitch recently rated 
the newly formed American Transmission Company's senior unsecured debt 
``A'' because:
        Cash flow is expected to be stable and healthy. ATC is a 
        monopoly provider whose transmission franchise is supported by 
        state regulation and [FERC] approved tariff. Its costs are 
        recovered through an annual revenue requirement allocated as 
        fixed demand charges to regional electric utilities using the 
        transmission network.1
---------------------------------------------------------------------------
    \1\ Yahoo! Finance Press Release, ``Fitch Rates American 
Transmission Company LLC `A/F-1,' '' March 16, 2002.
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    In other words, ATC has an excellent debt rating (and associated 
low cost of capital) because it faces low risk.
Section 7011 Participant Funding
    For similar reasons, NRECA also opposes Sec. 7011's requirement 
that FERC permit RTO's to require that all ``new transmission 
facilities that increase the transfer capability of the transmission 
system'' to be participant funded.
    First, FERC is already considering adopting participant funding for 
certain transmission facilities as part of its standard market design 
(SMD) rulemaking. Congress need not order FERC to do something it 
already intends to do.
    Second, as I have already stated several times, NRECA believes it 
is wrong for Congress in this bill to restrict FERC's discretion to 
adopt those approaches that it believes will best encourage the 
construction of needed transmission facilities and otherwise serve the 
public interest. The draft bill would deprive the FERC of that critical 
authority. FERC would have to permit participant funding even if it 
later considers participant funding to be unnecessary, unjust, or 
unreasonable.
    Third, NRECA believes that the broad participant funding mandate in 
the bill will discourage the construction of much needed transmission 
facilities, raise costs to consumers, and entrench existing market 
power.
    NRECA does not oppose participant funding in all circumstances. 
Like many others, NRECA supports participant funding for those 
transmission facilities that would not be required but for the 
interconnection of new generating facilities that plan to export power 
outside of the region where they are sited. That approach protects 
native load consumers in one region from paying for transmission 
facilities that provide them no benefit. If the new transmission 
facilities benefit a generator, or consumers in another region, the 
generator or the consumers in the other region should pay the costs of 
the transmission facilities.
    On the other hand, NRECA believes that the cost of any new 
transmission facilities required in a region to serve consumers in that 
region reliably or economically should be rolled into the cost of 
transmission in that region. NRECA and many others, including the 
Louisiana Public Service Commission, believe that this is the equitable 
approach. If consumers in a region benefit from a particular 
transmission upgrade, those consumers should all pay the cost of the 
facilities.
    NRECA also believes that this is the best approach to encourage 
investment in needed transmission facilities. Rolling the costs of new 
transmission facilities determined by a regional plan to provide 
benefits to consumers in the region into the regional revenue 
requirement gives investors precisely the assurance they need that they 
will recover the costs of their investment as well as a reasonable rate 
of return. Participant funding, on the other hand, makes cost recovery 
extremely uncertain. Under a participant funding approach, investors 
receive no direct income from the use of their facilities. Instead, 
they receive ``congestion revenue rights,'' or CRRs. CRRs, however, 
only entitle their holders to revenue in the event of congestion, which 
may be substantially reduced or even eliminated due to the construction 
of the expansion. An allocation of CRRs alone thus discourages 
investment in new facilities, or at the least creates a perverse 
incentive to undersize upgrades to maintain congestion on the system, 
since that is the only way they get paid.
Section 7012 Limited Federal Siting Authority
    NRECA understands that limited federal siting authority may be 
necessary to permit the construction of some regional transmission 
facilities and upgrades that are critical to the continued reliable and 
economic service of consumers. Nevertheless, NRECA believes the rights 
of permitting, siting and eminent domain authority come with the 
responsibility for serving the public interest. That means that any 
provision providing for federal permitting, siting, or grant of eminent 
domain must meet the following criteria:
 Federal permitting, siting, and eminent domain must be used 
        solely to create an interstate high voltage transmission grid 
        that will help utility systems meet their obligations to the 
        states and their consumers;
 The facility for which federal permitting, siting, or eminent 
        domain authority is sought must have been specifically reviewed 
        and determined by an RTO-led or other appropriate multi-state 
        regional planning process to be necessary for the reliable and/
        or economic operation of the regional transmission grid, and 
        thus provide benefits to the consumers within the region; and
 Federal permitting, siting, or eminent domain must be used 
        only as a backstop to state permitting, siting, or eminent 
        domain authorities.
    Section 7012 of the February 28 draft is a good start in that 
direction. The limited federal authority it provides is restricted to 
interstate transmission and may only be used as a backstop where state 
authority fails.
    The section's requirement, however, that facilities receiving 
federal siting and eminent domain authority be within federally 
determined interstate congestion areas is both too broad and too 
narrow. On one hand, not all transmission upgrades within a congested 
area may be properly located or designed to address the congestion. 
Thus, some facilities built within ``interstate congestion areas'' 
might receive federal siting authority under the February 28 draft 
without providing significant benefit to the consumers within a region. 
On the other hand, the process for designating interstate congestion 
areas appears ill suited to identifying the most serious problems in 
regional transmission grids. Conducted in Washington, D.C. only once 
every three years, the process seems rather too distant both physically 
and temporally from the problems to be addressed.
    NRECA believes it would be more effective to trust the regional 
planning processes conducted by FERC-approved Regional Transmission 
Organizations or other multi-state entities to make good, timely, 
decisions about the transmission requirements of their regions.
Section 7021 ``FERC-lite''
    NRECA opposes any expansion of FERC jurisdiction over cooperatives. 
Such expansion is unnecessary as cooperatives have not denied third 
parties access to their transmission systems. Provisions subjecting 
cooperatives with RUS financing to additional FERC jurisdiction are 
simply a solution in search of a problem.
    Even had cooperatives not provided open access to their systems, 
FERC already has adequate authority to protect other market 
participants. Under Sections 211 and 212 of the Federal Power Act, as 
amended and expanded by the Energy Policy Act of 1992, FERC has the 
direct and explicit authority to require transmission-owning 
cooperatives to provide transmission service to third parties at just 
and reasonable rates. Under the principle of reciprocity, FERC has also 
required cooperatives to provide transmission service to public 
utilities pursuant to terms and conditions comparable to those FERC 
imposes on those public utilities.
    Even the Chairman of the FERC has stated that the Commission does 
not require any additional jurisdiction over cooperatives. Speaking to 
reporters in January, Chairman Wood stated that ``FERC would not seek 
congressional authority over municipals and co-ops, preferring 
voluntary approach to entice such utilities into the marketplace.'' 
``Wood Says He Wants Munis, Co-ops To Want To Be Part Of SMD, But Won't 
Force Them,'' Platts, Electric Power Daily, Thursday, January 30, 2003.
    NRECA recognizes that it supported the movement of H.R. 2944 from 
this subcommittee to the full Commerce Committee in the 106th Congress, 
even though H.R. 2944 included a ``FERC-lite'' provision similar to the 
one in Sec. 7021 of the February 28 draft. That was because when the 
idea of ``FERC-lite'' first appeared, the ``Commission rules'' 
referenced and applied to cooperatives by the provision were Order 888 
and its progeny. Since Order 888's reciprocity provisions already 
required to some degree that cooperatives provide service comparable to 
that imposed on public utilities by Order 888, ``FERC-lite'' did little 
more than codify an existing regulation with which cooperatives were 
already complying.
    Today, however, the ``Commission rules'' that would be incorporated 
into the statute are in FERC's standard market design. Thus, even 
cooperatives with outstanding RUS financing could have to:

 Transfer to an Independent Transmission Provider (ITP) 
        operational control over the transmission facilities that they 
        built to serve their own member owners.
 Incur the substantial transaction costs required to establish 
        an ITP that operates their transmission facilities, a day-ahead 
        energy market, a real-time energy market, and any other 
        mandates that are part of a final SMD rule.
 Incur costs required to schedule service for member-owners in 
        the SMD markets.
 Pay congestion charges for use of their own facilities, built 
        to serve their own member-owners.
 Participate in auctions to obtain congestion revenue rights 
        for use of the transmission facilities that they built to serve 
        their own member owners.
 Permit third parties to take transmission service out of, or 
        across their transmission facilities without making any 
        contribution to the fixed costs of the system.
 Be subjected to market monitoring and mitigation procedures 
        and the associated costs.
    These obligations go far beyond the requirements to which 
cooperatives are currently subject, and far beyond what could possibly 
be necessary to ensure third parties fair open access to the limited 
transmission facilities owned by rural electric cooperatives with RUS 
financing. These obligations could deny cooperatives control over and 
reasonable access to the very facilities that their members own, paid 
for, and built to serve their own needs. Such a broad expansion of FERC 
authority over these facilities threatens cooperatives' ability to meet 
their core purpose: to bring reliable, affordable electric service to 
their member-owners.
    NRECA is also concerned that ``FERC-lite'' could now have an even 
more dramatic impact on small distribution cooperatives than it would 
have in prior years. First, FERC decided for the first time in its SMD 
NOPR to take jurisdiction over and regulate bundled retail 
transmission. That means that ``FERC-lite'' would now apply not only to 
those cooperatives providing wholesale transmission service, and to 
those very few cooperatives providing unbundled retail transmission, 
but also potentially to hundreds of distribution cooperatives that use 
a small amount of radial, high voltage transmission line to serve 
bundled retail consumers. These distribution only entities whose 
facilities could not possibly have any use to the competitive wholesale 
market could be subjected by ``FERC-lite'' to all of the expensive and 
complicated burdens imposed by SMD.
    Second, in several cases FERC has asserted that any facility that 
carries a wholesale electron is transmission subject to its 
jurisdiction, even if the facility would otherwise be considered a 
local distribution line. That means that any distribution-only 
cooperative that serves only bundled retail consumers could also be 
subjected by ``FERC-lite'' to all of the expensive and complicated 
burdens imposed by SMD if a single retail consumer installs their own 
generator--no matter how small, no matter how little role the generator 
could play in the wholesale market.
    For these reasons, it is more important than ever that, if Congress 
enacts some version of ``FERC-lite,'' it include an explicit, bright-
line test that exempts all small electric cooperatives from the 
obligations of ``FERC-lite.'' It is not adequate to exempt those 
cooperatives that own no ``transmission facilities that are necessary 
for operating an interconnected transmission system.'' The Commission's 
definition of transmission is growing so quickly, soon no distribution 
cooperative would qualify for an exemption no matter how little 
transmission the cooperative might have or how burdensome it would be 
for the cooperative to comply. Just the cost of proving that it 
qualifies for an exemption could impose undue economic burdens on some 
small distribution cooperatives, some of which have only a few thousand 
meters.
    Given the tendency of regulators to expand their roles over time, 
it is also critical that if Congress does enact some form of ``FERC-
lite'' that Congress also state clearly that it does not intend the 
Commission's authority over cooperatives with RUS financing to ever 
expand beyond the limits enunciated in the ``FERC-lite'' provision. 
Future Commissions should not be permitted to consider the ``FERC-
lite'' provision to be an invitation for further expansion of their 
jurisdiction over rural electric cooperatives. ``FERC-lite'' cannot be 
just the camel's nose under the tent.
Section 7022 Regional Transmission Organizations
    NRECA opposes the subsection of Sec. 7022 of the February 28 draft 
that gives the Secretary of Energy the authority to require the Power 
Marketing Administrations and TVA to join an RTO and overrides all of 
the PMAs' and TVA's existing legal authorities, duties, and 
obligations, to the extent they conflict with the requirements of the 
RTO. This language goes far beyond what would be necessary to authorize 
the PMAs and TVA to join RTOs. The language in this section raises 
serious issues about the federal government's mission to market and 
reliably deliver hydroelectric power to public bodies and electric 
cooperatives. Millions of consumers depend on power generated from 
multi-purpose federal projects. The federal power program is affected 
by numerous statutes that relate to the preference in the sale of 
electricity. NRECA believes the consequences of suspending the federal 
power program's myriad of statutory obligations requires additional 
examination before it is implemented.
Section 7031 Reliability
    NRECA supports the North American Electric Reliability Council's 
legislative proposal to create the North American Electric Reliability 
Organization as a single national self-regulating reliability 
organization with the authority to set mandatory reliability standards 
applicable to all users of the bulk transmission system. That proposal 
is critical to the continued reliability of the interstate transmission 
grid in a competitive environment. For that reason, NRECA supports 
Section 7031 of the bill with a few minor amendments to which the 
broad-based coalition in favor of the NERC legislation has recently 
agreed.
Sections 7041, 7081, 7082, 7084, 7091, 7101 PUHCA, FERC Merger Review, 
        and Market Abuse
    NRECA opposes the repeal of PUHCA in Sec. 7041 of the bill. Now is 
the wrong time to repeal PUHCA. While it has not been adequately 
enforced, PUHCA is more critical today than ever to protect consumers 
from abuses in the utility industry. It was PUHCA that prevented Enron 
from owning, and abusing, more than one electric utility. It was PUHCA 
that should have prevented Enron and many other companies in the 
industry from shifting the risks of their unregulated and off-shore 
activities to retail consumers in the United States.
    If repealed, NRECA believes it should be replaced with modern 
legislation that takes a practical approach to controlling market 
power, focusing on the substance of consumer protection and market 
power abuses, as well as the acquisition of undue market power through 
ownership and affiliation. Such legislation should give federal 
regulators an array of tools that they can use to protect consumers and 
enhance competition in electric markets. If circumstances require it, 
regulators should have the authority to impose structural solutions 
that will prevent investor-owned utilities from accumulating undue 
market power, or remedy already existing market power that threatens 
competitive markets.
    For these reasons, NRECA also opposes Sec. 7101 of the February 28 
draft, which repeals FERC's authority to review dispositions of 
jurisdictional property, including utility mergers. Section 7101 moves 
far in the wrong direction. Without PUHCA it is more important than 
ever that FERC not only exercise its existing authority to review 
utility mergers but also new authority. As the Senate version of H.R. 4 
provided in the 107th Congress, FERC needs new authority to review 
transfers of generating facilities and clearer authority to review 
mergers between electric utility holding companies. The standard of 
review for large utility mergers should also be strengthened to ensure 
that such mergers enhance competition. At a time when competition is 
just beginning to develop in the nascent wholesale electric market, 
Congress and FERC should not allow it to be choked through the rapid 
consolidation of generation assets in the hands of a few large 
companies.
    NRECA also believes that Congress should encourage FERC to 
reconsider the standards FERC uses to grant utilities and others the 
right to sell power at market-based rates. As FERC has conceded, 
inadequately competitive wholesale markets have often led to exorbitant 
rates for consumers. Thin markets, inadequate transmission, market 
power and market manipulation have singly or together caused rates to 
rise far above just and reasonable levels. Under such conditions, only 
traditional rate regulation can ensure that rates are consistent with 
the law and that consumers are protected from abuse.
    For the same reasons, NRECA supports the goal of Sec. 7081 of the 
February 28 draft, which authorizes FERC to collect data from sellers 
of electric energy about the availability and market price of wholesale 
electric energy. To prevent manipulation of market prices, market price 
information must be transparent to buyers and sellers. NRECA believes, 
however, that this section should include language that ensures that 
data collection is implemented in a manner that minimizes the cost and 
burden to those that must provide the information and requires all 
relevant agencies to coordinate with one another to prevent duplicative 
requirements.
    NRECA also supports Sec. 7082 of the February 28 draft prohibiting 
round trip trading; Sec. 7084 of the February 28 draft enhancing 
criminal and civil penalties for violations of FERC rules; and, 
Sec. 7091 of the February 28 draft, moving up the refund effective date 
to the day that a complaint is filed with FERC. Each of these 
provisions enhances FERC's existing ability to protect consumers 
without limiting its discretion and flexibility or distracting it from 
its core mission of ensuring just and reasonable rates, terms, and 
conditions for interstate transmission and wholesale electric sales.
Section 7092 FERC Refund Authority
    NRECA opposes Sec. 7092 of the February 28 draft. That provision 
would, for the first time, subject RUS borrowers' wholesale rates to 
FERC review and regulation. At a time when Congress and FERC are 
seeking to move towards a competitive wholesale market for electric 
energy, Sec. 7092 would move in the opposite direction, increasing the 
regulatory burden on electric cooperatives that seek to sell power in 
the wholesale market. Yet, electric cooperatives have not been part of 
the problem. Not-for-profit electric cooperatives have not gamed 
markets, they have not abused consumers, and they have not exercised 
market power. It would be impossible for them to have done so. 
Cooperatives do not own enough generation and are not large enough 
players in electric markets to exercise market power. All together, 
electric cooperatives generate only about 5% of the electric power in 
the country, which is less than half of the power they need to serve 
their own consumers. All combined, electric cooperatives' sales to 
public utilities represent less than 1% of all sales in the wholesale 
market.
    Instead of solving a problem, Sec. 7092 would distract FERC from 
its core responsibilities and increase uncertainty for electric 
cooperatives, their member-owners, and their creditors. To date, 
cooperatives have been one of the most financially stable sectors of 
the electric utility industry. While other sectors have seen their 
credit ratings decline precipitously, cooperatives have experienced 
more credit upgrades than downgrades. Because cooperatives stuck to 
their knitting and did not engage in speculative generation 
construction or speculative trading, they have continued to have access 
to the credit they need to serve their consumers' electricity needs at 
a reasonable rate. Section 7092 threatens that stability.

    Mr. Barton. We thank you, Mr. English. I do wish that 
myself and all the bills that I introduce could be beautiful 
like all the beautiful people that you associate with.
    Unfortunately, for me, I am not a beautiful person, and 
sometimes I have to do ugly things, but that is what makes the 
world go around.
    Mr. English. We think you have the potential to be 
beautiful, Mr. Chairman, and we would like to help you get 
there.
    I would be delighted to provide you with the provisions 
that make this a beautiful bill.
    Mr. Barton. We are going to give you a chance to----
    Mr. English. Thank you very much, Mr. Chairman.
    Mr. Barton. [continuing] make me beautiful. It is probably 
impossible, but hope springs eternal. We would now like to hear 
from Mr. Walter, and your testimony is in the record, and you 
are recognized for 5 minutes.

                     STATEMENT OF RON WALTER

    Mr. Walter. Good morning. My name is Ron Walter. I am 
executive vice president of Calpine Corporation and one its 
founders. Thank you for the opportunity to testify today before 
this subcommittee on behalf of the Electric Power Supply 
Association, or EPSA. Calpine is a leading independent power 
producer in this country. With the completion of several power 
plant projects that are now under construction, by the end of 
this year we will be the seventh largest generator of 
electricity in the country. We are proud to have power plants 
that are either in operation or under construction in 13 of the 
States represented here on this subcommittee.
    EPSA is the national trade association representing 
competitive power suppliers and have about one-third of the 
installed generation here in the United States. Our Nation 
tends to take for granted that an adequate, affordable and 
reliable supply of electricity will always be available. 
Electricity is the most fundamental commodity which powers our 
personal and commercial lives. All too often the country does 
not pay sufficient attention to electricity until a crisis 
occurs. We must attend to these issues before a new crisis 
happens, and we appreciate this committee's efforts to do so.
    From an historical perspective, the Energy Policy Act of 
1992 was successful in that it fostered a growing private 
sector investment in modern, efficient and environmentally 
beneficial gas-fired power plants. Since 1992, Calpine has 
invested over $15 billion to build new power plants--our money. 
We have 20,000 megawatts in operation and 10,000 megawatts of 
construction--enough for 30 million households here. 
Unfortunately, the installation of new generation alone doesn't 
complete the vision of reaping the benefits of a fully 
competitive market. Until fair and open access to transmission 
is available, until fair access to power procurement is 
available to consumers, we will not see the positive impact of 
more affordable costs and greater reliability that should 
accrue to the consumers. EPSA and Calpine urge Congress to take 
a fresh perspective on what legislation might best address the 
needs of consumers.
    The key issues today, and it was referred to earlier, 
revolve around the availability of capital and the evolution of 
open and fair competition to deliver affordable power. With 
open competition, regulatory certainty, the sanctity of power 
contracts and fair long-term procurement practices, capital 
will once again flow to this industry. A second key issue is 
the ability for the most efficient power plants to operate 
regardless of who owns them. This is not happening today in far 
too many markets. As a result, consumers are paying a higher 
price where markets are restricted.
    I would like to make a few remarks on standard market 
design and FERC's proposal. We need FERC to act in a timely 
manner to implement the key proposals of SMD and RTOs, which 
include an independent transmission grid operations, a single 
transmission tariff, a long-term bilateral contract market and 
a transparent short-term market. These actions will open 
markets up, create regulatory certainty and benefit consumers 
and producers. Legislation that would put SMD or RTOs in limbo 
would increase uncertainty, would be costly to consumers and, 
we believe, to the environment.
    EPSA and Calpine commend Chairman Barton for introducing 
his draft legislation. We generally support its provisions. 
Specifically, all transmission providers should operate under 
the same set of rules, so we support the FERC-lite section 
applying to municipal and cooperative entities, and the 
authorization for Federal utilities like BPA and TVA to enter 
into RTOs. We support the draft's efforts to increase the 
investments in transmission systems. EPSA supports the repeal 
of PUHCA to facilitate further investment in this electric 
industry. We also support your compromise position on 
transmission siting.
    Our one serious concern with the draft is in respect to 
PURPA. PURPA plants, including both cogeneration facilities and 
renewables, provide a valuable resource to industrial customers 
as well as consumers, in general. PURPA should not be repealed 
except and until a truly competitive market is sustained with 
free access to multiple buyers and seller of electricity, and 
that is certainly not the case today.
    In conclusion, Calpine and EPSA believe that the Congress 
wisely introduced competition to the electric sector in 1992. 
If we now complete the steps necessary for a fully competitive 
wholesale market, consumers will benefit from more reliable, 
more affordable and more environmentally beneficial power 
plants. Thank you, and I will take questions, of course, as 
they come.
    [The prepared statement of Ron Walter follows:]

  Prepared Statement of Ron Walter, Executive Vice President, Calpine 
                              Corporation

    Mr. Chairman and Members of the Subcommittee: Thank you for the 
opportunity to testify today. I am Ron Walter, Executive Vice President 
of Calpine Corporation. I am pleased to be here representing both 
Calpine and the Electric Power Supply Association (EPSA).
    Based in San Jose, CA, Calpine is a leading independent power 
company that is dedicated to providing wholesale and industrial 
customers with clean, efficient power generation. Calpine has nearly 
20,000 megawatts of operating assets in 23 states and nearly 10,000 
megawatts under construction in 11 states. By the end of 2003, Calpine 
will be the nation's seventh largest power generator. We have energy 
centers in most of the states represented on the Subcommittee, 
including California (where we built the first new power plant in 
almost a decade and continue to be the principal source of new in-state 
generation), Texas (where we will be 10 percent of the generation in 
ERCOT), as well as Illinois, Louisiana, Maine, Massachusetts, Missouri, 
New Jersey, New York, Ohio, Oregon, Pennsylvania and Virginia.
    EPSA is the national trade association representing competitive 
power suppliers, including independent power producers, merchant 
generators and power marketers. These suppliers, which account for more 
than a third of the nation's installed generating capacity, provide 
reliable and competitively priced electricity from environmentally 
responsible facilities. EPSA seeks to bring the benefits of competition 
to all power customers.
    On behalf of the competitive power industry, I appreciate this 
opportunity to comment on electricity policy as Congress resumes work 
on omnibus energy legislation.
    At the risk of stating the obvious, the nation tends to take for 
granted that an adequate, affordable and reliable supply of electric 
power will be available to provide for our physical and economic well-
being. All too often, though, the country does not pay sufficient 
attention to policy and market issues that impact the price and supply 
of electricity until a crisis occurs. From Calpine's perspective, we 
must attend to these issues and continue to build on our track record 
of using the latest technologies to create a truly modern U.S. electric 
power industry.
    While competitive suppliers have succeeded in bringing new 
generation on-line, we want to work with you to extend what Congress 
under this Committee's leadership advanced with enactment of the Energy 
Policy Act of 1992. That statute ushered in a new approach in which the 
costs of building power generation no longer fell on ratepayers--a 
broken system in which the incentives were to put more and more money 
into a regulated rate base with a generous, guaranteed rate of return. 
In 1992, Congress introduced competition from generators like Calpine 
and other EPSA members. The Act has succeeded in that Calpine alone has 
installed 20,000 megawatts of new generating capacity using modern, 
efficient and environmentally responsible natural gas-fired technology. 
Since 1999, almost 80 percent (or 92,000 MW) of new U.S. power supplies 
came from the competitive power sector. While much has been 
accomplished since the 1992 law was enacted, more remains to be done.
    While the 1992 law promoted competition in the generation of power, 
the benefits of that competitive generation will not be fully realized 
until competitive power suppliers have non-discriminatory access to a 
more seamless transmission system and achieve greater participation in 
fair and open mechanisms for the procurement of power. Unfortunately, 
many regions of the country do not yet have fully competitive 
conditions with respect to transmission and power procurement.
    Against this backdrop, EPSA urges you and your colleagues to look 
with a fresh perspective on what type of legislation best meets the 
needs of electricity consumers. EPSA believes that many of the issues 
raised in the past are less relevant today, while new issues have 
emerged that we respectfully suggest should command the attention of 
Congress.
    We ask you to always keep in mind three basic principles:

 First, any structural or procedural change brought about by 
        legislation must be aimed at providing consumers with the 
        lowest-cost reliable power available;
 Second, maximum consumer benefits will flow from competition 
        built around seamless regional markets in which power is 
        generated at the least expensive and most efficient facilities 
        regardless of who owns them; and
 Third, the basic concept of ``first do no harm'' should 
        apply--the collateral effects from incomplete or poorly thought 
        out policy changes could have a negative impact on all 
        electricity users.

                       THE LANDSCAPE HAS CHANGED

    Much has transpired in the years since the House Commerce Committee 
began consideration of comprehensive electricity restructuring 
legislation several years ago. While some issues have increased in 
relevance, like the need to remove barriers to new capital investment, 
others no longer require legislative attention.
    The landscape has changed in significant respects: for example, the 
statutory authority of the Federal Energy Regulatory Commission (FERC) 
to police wholesale power markets and respond to issues of market power 
abuse has been upheld; steady progress has been made towards 
independent regional transmission organizations (RTOs); and Public 
Utility Regulatory Policies Act (PURPA) facilities are recognized as 
integral sources of cost-effective power with proven efficiency and 
environmental benefits.
    Today, the issues confronting the power sector revolve around the 
availability of adequate capital to build needed generation and 
transmission and the continuing evolution of open and fair competition 
in a manner that will lead to the delivery of the most affordable power 
to consumers. The two are inextricably linked. Industry participants, 
investors and lenders need regulatory certainty regarding power markets 
and assurance that contracts that were signed in good faith will not be 
overturned. This, in turn, should improve access to capital.
    While a few power markets presently have excess capacity, none are 
over-supplied from a long-term perspective. We know all too well from 
recent history that even a relatively small shortage of power can 
result in significant price volatility. Furthermore, when the economy 
picks up and as various regions of the country continue to grow, there 
will be an inevitable need for construction of additional, clean 
generating capacity. However, in today's market these new plants are 
more likely to be financed when competitive generators can enter into 
long-term power purchase agreements. Above all else, national and state 
electricity policies should send positive signals to the investment 
community about competitive wholesale markets and focus on policies 
that contribute to achieving that goal, including a regulatory 
environment conducive to long-term power contracts.

                THE GOAL SHOULD BE TO BENEFIT CONSUMERS

    The introduction of wholesale competition has been good for 
consumers. With wholesale and some retail competition, inflation-
adjusted electricity prices decreased from 1985 to 2001 on average by 
31 percent for residential customers and by 35 percent for industrial/
commercial customers.1 The Department of Energy has 
estimated that, even in today's partially competitive market, wholesale 
competition reduces consumers' bills by $13 billion annually and that 
the savings from increased competition would exceed $20 billion 
annually.2 Moreover, studies have shown that fully 
establishing RTOs could save consumers as much as $60 billion by 
2021.3
---------------------------------------------------------------------------
    \1\ The ``2003 Data Update: Assessing the ``Good Old Days' of Cost-
Plus Regulation'' prepared for EPSA by the Boston Pacific Company.
    \2\ U.S. Department of Energy National Transmission Grid Study, May 
2002.
    \3\ E.g., the ``Economic Assessment of RTO Policy'' prepared for 
FERC by ICF Consulting, Feb. 26, 2002.
---------------------------------------------------------------------------
    Congress can foster these additional savings by encouraging the 
purchase of the most economically efficient generation and opening up 
access to the transmission system on a non-discriminatory basis. 
Consumers in areas of the country that do not have robust wholesale 
markets, are not reaping the full benefits of competition--if markets 
were established in which the least expensive and most efficient 
generation was deployed first, all electricity customers would save and 
the competitiveness of energy-dependent industries in these regions 
would be improved.

                  THE FRAMEWORK FOR ELECTRICITY POLICY

    Any electricity legislation should build on the successes of 
competitive generation and wholesale markets that have already been 
achieved. Legislative and regulatory policies should recognize the 
opportunities that a competitive and dynamic industry can pursue on 
behalf of consumers of all kinds. Policymakers should complete the job 
of establishing competitive markets with tangible economic and 
environmental benefits that began with the Public Utility Regulatory 
Policies Act in 1978 and was accelerated with passage of the Energy 
Policy Act in 1992.
    Timely action by FERC to consider, improve and bring to a final 
resolution the many issues addressed by the Standard Market Design 
(SMD) proposal and other initiatives is an important way to help 
develop the power resources the nation needs in the most cost efficient 
and environmentally sound manner possible. Congressional intervention 
to halt or delay the SMD process has the potential to increase market 
uncertainty and thus harm consumers. EPSA respectfully suggests that, 
while vigorous congressional oversight is useful, statutory 
intervention to block SMD would not be prudent. Doing so would unduly 
tie the hands of regulators charged with implementing the Federal Power 
Act, leaving pressing electricity regulatory issues unresolved. The 
alternative of detailed congressional legislation runs the risk of not 
being able to anticipate future market conditions and is inherently too 
inflexible to deal properly with a business as dynamic as power 
generation, transmission and procurement.
    EPSA believes that there are several ``myths'' about SMD and 
wholesale competition that should be dispelled. For example, far from 
raising power prices, SMD will more likely have a downward impact on 
overall prices by recognizing the practical reality of regional power 
markets and by removing artificial barriers in order to make them 
function more efficiently. When robust regional markets are in 
operation, we know from real world experience that excess power in a 
given location flows to where it is needed, rather than remaining 
stranded. Both the customers where the excess power exists and those 
where it is needed benefit; those selling power generate revenues to 
help keep their overall prices lower, while those purchasing power 
avoid the higher prices that even a modest shortfall can produce.
    While EPSA members, including Calpine, filed comments on how to 
improve SMD, it is important to point out that its fundamental 
principles are based on what has already worked to benefit consumers in 
major power markets. The tens of millions of ``native load'' customers 
in areas that already have vibrant regional markets have been helped, 
not harmed. Furthermore, making the maximum efficient use of generating 
assets reduces some of the need for transmission lines and power 
generation projects.
    Far from SMD creating a California-like crisis in other states, as 
some suggest, just the opposite is true. By encouraging new investment 
and efficient use of existing resources, SMD and other policies that 
promote competition will prevent what we in California painfully 
experienced a few years ago, the costly effects of which continue to be 
felt. The bottom line is that a state or a regional power market with 
access to ample power supplies from multiple sources will not 
experience shortages, which will deter those who might otherwise try to 
take advantage of tight supply and demand conditions.
    Perhaps the perpetuation of these and other SMD ``myths'' is 
explained by the Schwab Capital Markets Washington Research Group 
report which stated that ``The only losers under SMD are vertically-
integrated utilities that have been using grid congestion and 
manipulating grid access to keep their owned, but less competitive 
generation assets on line.''

               COMMENTS ON DRAFT ELECTRICITY LEGISLATION

    EPSA supports the passage of a comprehensive energy bill, including 
electricity provisions that are carefully crafted and relevant to 
today's market realities. Mr. Chairman, we commend you for tackling a 
difficult subject in a generally balanced and judicious manner in your 
draft legislation.
    Many of the draft's electricity provisions are important to EPSA 
members. For example, the draft extends limited FERC jurisdiction to 
the transmission systems of large municipal utilities and electric 
cooperatives. The competitive wholesale market Congress envisioned with 
passage of the Energy Policy Act of 1992 will not come about and cannot 
function properly unless all market participants in a clearly 
interstate transmission system operate under the same set of basic 
rules. Also in the category of removing barriers, EPSA believes that 
PUHCA repeal is one of the steps that Congress could take to help 
encourage additional investment in the industry by removing artificial 
limits to a range of potential transactions.
    The draft legislation explicitly authorizes federal utilities such 
as TVA and BPA to participate in RTOs; this will facilitate the flow of 
electricity and allow customers in affected regions to reap the 
benefits of wholesale competition. A picture is always worth at least a 
thousand words; one look at the U.S. transmission map demonstrates that 
a national or even regional transmission system will not exist in major 
parts of the country if TVA and BPA are excluded. Furthermore, it is 
incongruous for one federal agency, FERC, to require or encourage non-
federal entities to join a transmission regime that does not apply to 
federally-run transmission systems.
    The draft legislation addresses transmission siting, a thorny issue 
that will not be solved merely by avoiding the complexities of this 
subject. The Department of Energy's ``National Transmission Grid 
Study'' documented the importance of correcting the under-investment in 
transmission assets that has occurred in recent decades. The draft 
suggests a compromise by establishing a federal back-stop for 
``interstate congestion areas'' after states have failed to act; 
authorizing interstate transmission compacts; and permitting states to 
step in when there are undue delays with federal rights-of-way.
    The one serious concern suppliers of power from cogeneration and 
renewable sources have about the draft legislation--and it is a major 
one--is with the provisions to amend the Public Utility Regulatory 
Policies Act of 1978 (PURPA). Calpine has nearly 9,000 megawatts of 
cogeneration and geothermal power in operation or under construction in 
13 states, including California, Texas, Illinois, Louisiana, Maine, New 
Jersey, New York and Virginia, from facilities that qualify under 
PURPA. In considering PURPA issues, it should be noted that the 
president's National Energy Policy calls for doubling the use of 
combined heat and power (or cogeneration) by 2010 and encouraging the 
growth in renewable sources of power, concluding that they will 
increase reliability and improve the environment. A comprehensive 
energy bill should encourage, not discourage, the deployment of these 
technologies.
    While we recognize that, unlike some proposals from years past, the 
draft's intent is to remove PURPA's purchase and sale obligations only 
where there are alternative purchasers and suppliers, the specific 
conditions set out in the draft legislative language are insufficient 
to ensure that PURPA facilities will be able to continue selling their 
efficient, environmentally friendly power on a predictable and 
sustainable basis where there remains only one potential buyer of PURPA 
power and seller of back-up power.
    It was one thing to reconsider PURPA as part of broader legislation 
that would have mandated across-the-board wholesale and retail 
competition, which would have created multiple buyers of PURPA power 
and sellers of back-up power across the country. Given that such is no 
longer the case, it is inappropriate to repeal PURPA's long-standing 
mechanisms that bring beneficial sources of power to market. EPSA and 
Calpine are members of a broad-based coalition on the PURPA issue. Our 
view is that if current law is to be amended, the competitive 
conditions under which PURPA would no longer apply should be carefully 
defined, relevant to the operational and financial needs of PURPA 
facilities (including recognition of their capacity value as well as 
electric energy), and periodically reviewed if competitive conditions 
change.
    Finally, several issues to be taken up in other bills are worth 
mentioning for the record. For example, EPSA supports the netting 
provisions of the bankruptcy legislation and the allowance of 
accelerated depreciation for new power plants because they could be 
helpful to the energy industry and other sectors of the economy.
    Mr. Chairman, we appreciate your knowledge of and dedication to 
competitive electricity markets, and look forward to continuing to work 
with you and your colleagues as you consider these policy issues. Thank 
you, again, for the opportunity to testify.

    Mr. Barton. Thank you, Mr. Walter. We now want to hear from 
Mr. Henson Moore. Your testimony is in the record, and you are 
recognized for 5 or 6 minutes.

                  STATEMENT OF W. HENSON MOORE

    Mr. Moore. Thank you, Mr. Chairman. I am here today 
representing major industrial consumers of energy. Our 
industries are all in the business of making products that 
require energy for production; in some cases, substantial 
amounts of energy. An abundant and affordable supply of energy 
is absolutely critical to our ability to stay in business, to 
be able to make paper, chemicals, steel, plastics and other 
goods that are the mainstays of our economy.
    I want to compliment you on the efforts to increase the 
supply of affordable energy in your bill. We never met a form 
of energy we don't like. The international competitiveness of 
our products are being severely tested by recent energy 
shortages and increases in prices. In our case, in the forest 
products industry, energy is our third highest cost--or the 
third largest cost in our production. And so we basically 
support what you are doing to increase the amount of energy 
that we will have available to us.
    In the interest of time, though, I would like to focus my 
remarks on the electricity title of the bill and specifically 
how it impacts combined heat and power of cogeneration 
facilities. Many of your large industrial consumers of energy 
also produce energy--the chemical industry, the refining 
industry and the forest products industry in particular. 
Currently, combined heat and power, or CHP, accounts for 9 
percent of the electricity generation in this country. The 
President's national energy plan calls for a doubling of that 
by the year 2010. It won't happen unless we have access to the 
grid and a guarantee of backup and standby power.
    CHP plays a dual role in helping expand the supply of 
affordable electricity, but it does so in an environmentally 
friendly way. Cogeneration facilities can be more than twice as 
efficient as a traditional power plant in generating 
electricity with efficiencies up to 80 percent where the 
average in the industry of generation of power is somewhere 
around 35 to 40. In the forest products industry, in addition, 
almost 60 percent of the energy we cogenerate comes from 
biomass fuels, which is recognized as climate friendly.
    To maintain and expand CHP, we have got to have the market 
to sell the power we cannot use in our normal operations. Many 
States continue to have monopoly electric utilities that own 
both the generation and transmission systems. In States where 
monopolies still control the market, CHP cannot get meaningful 
access to the grid or backup or standby power at 
nondiscriminatory rates without the Federal requirements under 
PURPA. Even with PURPA in those kinds of States, our paper 
mills often find it difficult and expensive to satisfy all the 
local utilities' demands for entering into a contract under 
PURPA. While some regions of the country have moved to a more 
competitive environment, many have not. And even in those where 
they have, a few large players can dominate that market which 
really doesn't make it competitive.
    Mr. Chairman, I want to compliment you for recognizing your 
draft bill that the purchase and sale requirements of PURPA 
should not be immediately repealed, there ought to be a truly 
competitive market in place before that happens. We think you 
have the concept right, but we are concerned about some of the 
provisions and how they actually read. Specifically, under 
Section 7062 of your bill, there are three things that can 
trigger the elimination of the current PURPA obligations: A 
FERC finding of competition according to a statutory 
definition, a utility joining an RTO or by FERC otherwise 
finding competition.
    I recognize that legislating the definition of competitive 
market is difficult, but there has got to be more there to be 
able to point out that competitive markets have got to include 
willing buyers and sellers, that QFs can reasonably expect to 
have a market for their power and be able to get backup and 
standby power when they need it. Such markets must offer a wide 
range of products, and the transmission of electricity must be 
completely separated from generation. We strongly support the 
formulation of independent RTOs, but there is no guarantee you 
are really going to have a competitive market for QFs to both 
buy and sell power just because an RTO exists. You could have 
only two companies in it, and those two companies not be 
interested in real competition.
    We also recommend that your legislation includes some 
legislation that is not in it now, something we call a look-
back provision. You have got to recognize that while you may 
have market conditions today, those conditions may change. You 
may have a competitive market today and an uncompetitive one in 
the future. The legislation ought to include a provision 
authorizing FERC to reinstate the purchase and sale obligations 
if it finds at any time that conditions of a fully functioning 
market no longer exist.
    There are many other issues worthy of comment in this 
legislation relating to transmission, as others have testified 
to, and market power issues. I have included those in my 
written remarks. But let me say publicly that we agree fully 
that transmission capacity is needed in some areas of the 
country and believe it should not be held up local 
obstructionism. Your language on transmission siting can make a 
real difference in that regard. Thank you.
    [The prepared statement of W. Henson Moore follows:]

Prepared Statement of W. Henson Moore, President & CEO, American Forest 
 & Paper Association, Also on Behalf of the American Chemistry Council 
               and Electricity Consumers Resource Council

    My name is Henson Moore. I am President and CEO of the American 
Forest & Paper Association. AF&PA represents more than 240 member 
companies and related associations that engage in or represent the 
manufacturers of pulp, paper, paperboard and wood products. America's 
forest and paper industry ranges from state-of-the-art paper mills to 
small, family-owned sawmills and some 9 million individual woodlot 
owners.
    I am here today also representing the Electricity Consumers 
Resource Council (``ELCON''), and the American Chemistry Council 
(``ACC.'') ELCON is the national association of large industrial users 
of electricity. Its membership includes companies from nearly every 
manufacturing industry. ACC is the national association of companies 
engaged in the business of chemistry.
    As the former Deputy Secretary of Energy involved in developing the 
last National Energy Strategy in 1991 and the Energy Policy Act of 
1992, and as a former member of this subcommittee, I know the severe 
challenges that confront you. I appreciate the opportunity to share my 
views, as well as the concerns of industrial energy users and 
producers, as they relate to decisions you will have to make.
    Mr. Chairman and Members of the Committee, our respective 
industries are all in the business of making products that require 
energy for production. An abundant and affordable supply of energy is 
critical to our ability to make paper, chemicals, steel, plastics and 
other goods that are mainstays of the U.S. economy. We haven't seen a 
form of energy we didn't like yet--I compliment you on efforts to 
increase the supply of affordable energy. Our businesses and the 
international competitiveness of our products are being severely tested 
by recent energy shortages and rising prices.
    The U.S. forest products industry is vital to the nation's economy. 
We employ 1.5 million people and rank among the top ten manufacturing 
employers in 42 states with an estimated payroll of $50 billion. We are 
the world's largest producer of forest products. Sales of the paper and 
forest products industry top $230 billion annually in the U.S. and 
export markets.
    Energy is the third largest cost for the forest products industry, 
making up more than 8 percent of total operating costs. Paper mills, 
for example, run their paper machines using electricity largely 
supplied by mill-operated, on-site cogeneration or Combined Heat and 
Power (CHP) facilities. Although the industry is nearly 60 percent 
self-sufficient (using biomass), we also use natural gas, coal, fuel 
oil and purchased electricity to meet the balance of our energy needs. 
Forest products companies spent over $2.1 billion on purchased 
electricity in 2000. Importantly, the industry also sells more than 12 
million megawatt-hours annually of electricity to the transmission 
grid--the equivalent of a mid-sized utility.
    Since 1997, employment at U.S. paper and paperboard mills has gone 
from 222,400 to 178,000--a decrease of almost 20 percent. While these 
losses have been caused by a variety of factors, the additional 
pressure of the current energy crisis could result in further mill 
closures and job losses. This situation would be far worse, had it not 
been for the forest product industry's commitment to fuel efficiency 
and independence over the past three decades. Since 1972, this industry 
has reduced its average total energy usage by 17 percent, reduced its 
fossil fuel and purchased energy consumption by 38 percent, and 
increased its energy self-sufficiency by 46 percent.
    The chemical industry is also a major consumer of virtually all 
types of energy--fuel, power, steam and feedstocks (raw materials) for 
its processes. The $460 billion business of chemistry is a key element 
of the nation's economy. It is the country's largest exporter, 
accounting for ten cents out of every dollar in U.S. exports. The 
industry is also one of the largest and most efficient users of energy 
in the U.S. economy with energy efficiency improvements of more than 44 
percent over the past 30 years. Like the paper industry, the business 
of chemistry has utilized CHP technologies to become more energy 
efficient and to significantly reduce emissions.

         ENERGY POLICY LEGISLATION AND COMBINED HEAT AND POWER

    Any change in energy policy clearly must take into account the 
needs of consumers and producers. It also needs to address the needs of 
those who have already taken positive steps to make energy consumption 
more efficient. The President's National Energy Plan calls for a 
doubling of energy output from CHP units by 2010. CHP is the 
cornerstone of the Administration's plan to improve energy efficiency 
and expand sources of electricity generation in an environmentally-
friendly way. This goal of expanded CHP power, increased efficiency and 
environmentally-friendly power will not be met without the assured 
access to the grid that is afforded by the Public Utility Regulatory 
Policies Act of 1978 (PURPA).
    The primary function of a CHP unit is to support manufacturing 
operations that require both electric power and steam or other useful 
thermal energy. Nonetheless, this electricity represents a critical 
component of the nation's electricity supply portfolio. Currently, CHP 
represents 9 percent of total electricity generated nationwide. Forest 
products, chemicals and oil refining represent 90 percent of the total 
CHP generation in the manufacturing sector. Almost 60 percent of CHP 
generation in the forest products industry is from biomass and, thus, 
is climate friendly. CHP power is also highly efficient power, reaching 
efficiency levels of 80 percent, which is at least twice as efficient 
as conventional power generation. This high level of efficiency occurs 
because our manufacturing processes use both the heat and the steam, 
while traditional generation units vent steam into the atmosphere. 
These efficiencies have also led to significant reductions in air 
emissions.
    Successful development and full implementation of black liquor and 
biomass gasification programs would make the forest products industry a 
net exporter of renewable electricity--removing some 18 million tons of 
carbon emissions from the air and generating nearly 30 gigawatts of 
CHP-based electricity. Mr. Chairman, this represents enough energy to 
power two-thirds of California's summertime peak. These initiatives 
entail substantial risk for an already capital-intensive industry. Much 
R&D remains to be done to prove the technologies can work without 
adversely impacting mill operations. Continued cooperation with the 
federal government is crucial to reducing risk to a level that will 
allow significant industry participation.
    Similar initiatives are underway in the area of coal gasification. 
These technology development programs are essential to creating new and 
diverse sources of clean energy. Importantly, without guaranteed access 
to the grid, these new power sources will not be developed and 
implemented.

                         WHY PURPA IS IMPORTANT

    PURPA was enacted to help reduce U.S. dependence on foreign oil and 
encourage fuel diversity. It is one of the most successful federal 
policies in promoting energy efficient generation and renewable energy. 
CHP technologies make use of diverse fuel resources, including 
renewables, thus lessening the nation's dependence on foreign oil. 
Additionally, CHP units typically are diverse in size and 
geographically dispersed. Their dispersal throughout the grid means 
greater efficiency through reduced line losses, and improved system 
reliability through less dependence upon central generation units. 
Their smaller size also allows for continual adaptation to, and 
adoption of, improving technologies. For these reasons, CHP has been a 
successful addition to the nation's power supply portfolio.
    In order to maintain existing CHP, and expand it in the future, 
facilities must have a market to sell the power they cannot use in 
their operations. Since many states continue to have monopoly electric 
utilities that own and control both the transmission and generation of 
electricity, CHP power would not get meaningful access to the grid 
without the federal requirement under PURPA. In addition, CHP units 
must be able to purchase back-up power at non-discriminatory rates. 
Many industries, such as those I am representing today, responded to 
PURPA by investing billions of dollars in new on-site CHP generation to 
provide electricity primarily for their manufacturing processes and, 
occasionally, to the electrical grid.
    Under PURPA, electric utilities are required to interconnect and 
purchase power from ``Qualifying Facilities,'' or QFs, and they are 
obligated to sell standby, back-up and maintenance power to such 
facilities on a non-discriminatory basis. This dual guarantee of a 
place to sell excess power and to purchase backup power has made it 
possible for more industries to install the necessary equipment and 
develop the ability to generate electricity for their own needs, in 
spite of monopoly utility markets.
    The power production facilities of a manufacturing operation are 
generally sized to meet the optimal demand. When the facility 
experiences a technical problem it must either divert the excess energy 
to the grid or shut down the power plant. When the manufacturing 
production process requires more energy than can be produced on site, 
then electricity is purchased from the local utility. The seamless 
integration of these QFs benefits not only the manufacturer, but also 
the local utility by giving them access to additional power to meet 
unusually high demand for power. If Congress restricts the current 
access to the grid that PURPA provides, many of these facilities will 
be economically harmed.

                 PURPA'S ROLE IN A TRANSITIONING MARKET

    While some regions of the country have moved to a more competitive 
environment, many have not. Even in those regions where competition has 
been introduced, it is often limited to a few players that dominate the 
market, thus depriving small generators of meaningful access to willing 
buyers and sellers. In the face of monopoly and transitioning markets, 
there must be an assurance of access to the grid. Without such a 
requirement, utilities could simply refuse to provide access or make 
the cost of access either so expensive or so difficult that connection 
to the grid would be impossible. Thus, the opportunity to fully utilize 
CHP assets would disappear, and the monopoly utility will dominate the 
market.
    Even with PURPA in place, many QFs, including CHP plants, are still 
having problems selling power into the electric grid. For example, in 
the Northwest and California, utilities have put up roadblocks to power 
being sold to the grid or to transmit power to third parties. In the 
Southeast, where monopolies control vast transmission and distribution 
systems stretching over several states, utilities regularly exercise 
their market power through unreasonable surcharges, interconnection 
standards and fees, and ``shell game'' pricing for backup power sales. 
QFs frequently face obstacles, such as overly burdensome requirements 
for interconnection studies and long delays, resulting in projects 
being cancelled or abandoned because the cost of access is too high.

              OBLIGATION FOR PURCHASE AND SALE OF QF POWER

    FERC has correctly recognized that even in a state that is 
scheduled to be open to retail competition, there is no guarantee that 
a fully functioning competitive market for QFs to sell power into will 
develop. Congressional energy policy legislation should approach PURPA 
from a similar perspective. Care must be taken to ensure that CHP power 
is not blocked from the grid as an unintended consequence of reforms to 
PURPA. The PURPA obligation to purchase is the critical factor that 
allows manufacturers to contribute to a more diverse energy supply for 
this nation. If the purchase requirement is eliminated in advance of a 
truly competitive market place, then many existing CHP assets will 
become uneconomic, and future CHP development will stall because 
financing for CHP units is highly dependent on access to the grid.
    Similarly, the importance of a federal guarantee for back-up power 
at just and reasonable rates cannot be over-emphasized in states that 
remain dominated by monopoly utilities. Without it, QFs would be 
captive to unregulated monopolies that could charge what they wish. 
Even in states that have implemented some form of electric 
restructuring, tariffs and regulations often continue to favor 
incumbent utilities, and viable options for back-up power often are not 
offered by competitive suppliers. The QF must be assured of receiving 
back-up power on a non-discriminatory basis and at just and reasonable 
rates, especially if the utility is the ``provider of last resort'' 
serving retail load. To the extent that utilities have an obligation to 
serve retail loads, they also should continue to have the obligation to 
provide back-up power to QFs on a non-discriminatory basis. Once there 
is a truly competitive retail market, and QFs can buy back-up power in 
the open market, then, and only then, will the back-up power guarantee 
no longer be essential to existing and future CHP power generators.

         ASSESSMENT OF CHAIRMAN BARTON'S DRAFT PURPA PROVISIONS

    Mr. Chairman, I want to compliment you for recognizing in your 
draft bill that the purchase and sale requirements of PURPA should not 
be repealed without regard to the conditions in the market where the QF 
is located. This is a major change from your bill in the last Congress. 
It appears to be intended to ensure that competitive markets must exist 
before the purchase and sale requirements of PURPA are repealed. This 
is a goal we support. We are concerned, however, that the language of 
this new draft does not adequately guarantee that CHP plants will have 
meaningful and continuing access to willing buyers and sellers of power 
before current PURPA provisions are eliminated.
    I recognize that legislating the definition of a competitive market 
is extremely difficult; however, it is essential if CHP power is to 
survive in this country, and it is essential for meeting this 
Administration's objectives on CHP and new power plant construction. 
Specifically what do we mean by a ``fully functioning competitive 
market?'' We mean markets that are comprised of enough willing buyers 
and sellers that QFs can reasonably expect to have a market for their 
power and be able to get backup and standby power when they need it. 
Such markets would include both spot and bilateral transactions 
offering a wide range of products, not only in terms of duration 
(short-term, mid-term and long-term,) but also types of power (capacity 
and energy; peaking, intermediate and baseload) and allow development 
of other products and services. Title VII, Subtitle E, Section 7062 of 
the draft bill encompasses some, but not all of these criteria for FERC 
to use in determining whether the market is truly competitive.
    While paragraph (a)(1)(A) sets out indicia of competition upon 
which FERC can make a finding, paragraph (a)(1)(B) does not. We 
strongly support the formation of large, independently managed Regional 
Transmission Organizations (RTOs) that require separate independent 
ownership of transmission and generation assets. We believe this is the 
linchpin of a competitive market for electricity. Those with financial 
interests in both transmission and generation will always have an 
economic incentive to favor their own generation over other generators. 
However, there is no assurance that this will be the outcome of the RTO 
debate. Legislating in advance of the determination of these rules 
leaves open the very real possibility that the intent behind your 
provision (the assurance of competitive markets for QFs to sell and buy 
power) will not be accomplished. Formation of an RTO in name only could 
satisfy paragraph (a)(1)(B). Similarly, paragraph (a)(1)(c) provides 
FERC with unfettered authority to determine a competitive market exists 
and thus end the purchase and sale obligations. While we may not be 
concerned about the use of this provision under the philosophy of the 
current FERC, there is no guarantee that future Commissions will be as 
committed to bringing about competition in electricity as this one. 
Therefore, it would be helpful to give FERC guidance as to the criteria 
they may use in determining a competitive market.
    As currently written, a FERC finding that competition exists in a 
market will end the utility's obligation to purchase from--and sell 
power to--a QF. The legislation must also recognize that market 
conditions can change over time, and that a competitive market today 
may become uncompetitive in the future. For example, a key player may 
go out of business, or acquire sufficient market share to dominate, or 
they may control key inputs to the production of electric generation 
such as natural gas. In these circumstances, FERC should have the 
authority to reinstate the utility's obligation to purchase and sale 
requirements of PURPA. We recommend that this legislation include a 
provision authorizing FERC to reinstate the purchase and sale 
obligation if it finds that the conditions of a fully functioning 
competitive market no longer exist.
    Finally, with respect to back-up and standby power, the draft 
language should be clarified to ensure that if the local utility is 
required by State law to be the provider of last resort, or still has 
an obligation to serve any and all customers, that obligation should 
not be affected by a FERC finding that triggers elimination of a 
requirement to provide back-up and standby power.

                              OTHER ISSUES

    There are many other issues worthy of comment in this legislation 
such as those dealing with the transmission grid, transmission siting, 
participant funding and market power issues including the repeal of the 
Public Utilities Holding Company Act (PUHCA).
    A transmission grid operated in a fair and non-discriminatory 
manner is essential to industrial consumers whether they produce their 
own power, or whether they are simply a purchaser of electricity. Our 
goal is a transmission system that allows buyers of electricity as much 
access to sellers of electricity as possible. Industrial customers 
recognize that until we achieve the open transmission system, the 
utilities who own monopoly transmission and distribution facilities 
will still possess and exercise market power. These utilities have 
often used their government-granted monopoly power to the detriment of 
industrial users by favoring their own power generation over other--
often lower priced power--produced by others.
    We agree with your assessment that new transmission capacity is 
needed in some areas of the country. Mr. Chairman, I want to commend 
you for including the language on transmission siting. We support the 
language you offer and, in fact, we would support stronger language. 
New transmission, where needed, will produce benefits to many 
consumers, and it should not be held up by local obstructionism. This 
is a serious, problem and you have proposed a fair way to deal with the 
problem.
    Your draft also includes a directive for FERC to implement and 
utilize incentive rates for the construction of new transmission. While 
your goal is a noble one--to bring more investment to transmission--
this directive is unnecessary. FERC currently has the authority to 
order incentive rates on a case-by-case basis under present law. There 
are many areas where new transmission is not needed. Incentive rates 
would be pointless in these areas and would, in fact, do little more 
than increase costs to consumers. Thus, we believe this provision in 
the draft has the potential to increase costs to consumers in certain 
areas without really encouraging additional transmission to be built. 
If incentive rates were effective, FERC would order those more 
frequently to help relieve the congestion where it exists on the grid. 
In my view resolution of the endless delays in transmission siting will 
do a lot more to bring needed investment than will this provision.
    Another transmission issue that we believe is best left to a FERC 
rulemaking is the issue of participant funding. FERC has--and 
frequently uses--the authority to order such funding on a case-by-case 
basis. While the draft bill's language on participant funding is an 
improvement over versions that were considered in the Senate last year, 
we continue to believe this issue is best settled in a regulatory 
arena, perhaps on a case-by-case basis, rather than legislative arena 
where it is difficult to craft a one-size-fits-all-rule when each 
region has a different fact pattern. I would also note that all 
consumer groups and all non-utility generators believe that mandatory 
participant funding will hinder, rather than help, the construction of 
new transmission capacity.
    Finally, while my instincts tell me that PUHCA is an outdated and 
ineffective statute that is no longer useful, energy managers in the 
forest products industry and elsewhere in the manufacturing community 
tell me otherwise. There are almost daily stories in the press about 
utilities allegedly manipulating energy markets. There have been 
countless instances where utilities have shifted debt from unregulated 
affiliates to those affiliates subject to state regulations, thus 
forcing costs to be borne by consumers. While, I support removing those 
restrictions in PUHCA that limit needed investment by American 
companies, I believe that reporting and other requirements in PUHCA 
that protect consumers and investors should remain in place to prevent 
market abuse and manipulation. Rules are needed to address the 
operational unbundling of generation, transmission, system control, 
marketing, and local distribution functions. The need for federal 
authority to address market power and anti-competitive activities is as 
essential today for avoiding such abuses as it was 70 years ago.

                               CONCLUSION

    Industrial users and congenerators recognize and fully support the 
need for more electricity generation and transmission. PURPA has been--
and will continue to--be an essential law. It encourages the adoption 
of new technologies. It has produced a broader, more efficient, more 
environmentally favorable base of electricity generation. Due to PURPA, 
electricity capacity was added in smaller increments, thus not 
burdening users with paying for generation that proved to be much 
larger than necessary. And the cost of building that generation was 
funded by private capital. The National Energy Plan, including the goal 
of doubling CHP units by 2010, will be seriously undermined by efforts 
to repeal PURPA where open markets are not in force and no independent 
party determines access to the grid.
    Any changes to PURPA must be made with a full recognition of their 
potential impact on existing CHP assets as well as plans for future 
expansion of CHP. The access to the grid afforded by PURPA and the 
rights for back-up and standby power, are essential in markets and 
regions of the country where competitive markets are not yet 
functioning effectively. In the spirit of moving toward more 
competitive markets in the future, the Congress should, at a minimum, 
ensure that this power generation is not disadvantaged by monopolistic 
markets by making the changes we have suggested.

    Mr. Barton. Thank you, Mr. Moore. We now want to hear from 
the Honorable Ervin, and I have been asked by Mr. Burr's staff 
to suck up to you a little bit.
    He is thinking about running for a Senate seat that your 
grandfather held down in North Carolina for so many years, and 
his staff just wants me to let you know that he is honored that 
you are here and he thinks you are a great American, and he 
wants to follow in the footsteps of your grandfather. And any 
advice you have on how to help him to do that or any people you 
know that could help him to do that, he would be more than 
willing to listen to.
    Mr. Ervin. Mr. Chairman, I have been over introduced 
sufficiently today already, so I----
    Mr. Barton. You are recognized for at least 5 minutes. In 
all seriousness, we are very pleased to have you here.

                    STATEMENT OF SAM J. ERVIN

    Mr. Ervin. My grandfather used to advise anybody that spoke 
in public not to trespass on eternity. You have got a clock up 
here which I appreciate, and I am well known for my verbosity 
and I will try not to violate my grandfather's admonition.
    I do appreciate the opportunity to come before you this 
morning. I am here representing the other six members of the 
North Carolina Utilities Commission, although most of what I am 
going to say is generally consistent with the views that are 
shared by most of the other State regulators in the southeast. 
Like Mr. Walter, I am going to generally speak about the FERC's 
standard market design initiative, although not surprisingly, I 
suspect that what I am going to say is going to be about 180 
degrees different than what he said.
    Like the others who had spoken this morning, I do very much 
appreciate the opportunity to address the issues that are the 
subject of today's hearing. As the other speakers have 
indicated, the subjects that you are addressing this morning 
are among the most important issues that this Congress will 
confront. As you consider them, I urge you in the strongest 
possible terms to keep in mind that electric service is not 
provided in a uniform manner across the United States and that 
any electricity-related legislation that you ultimately choose 
to enact should take these regional differences into account.
    Electric service in the Southeast continues to be provided 
in large part by vertically integrated utilities. With the 
exception of Virginia, no southeastern State has embraced 
retail competition at the present time. In addition, none of 
these States are likely to abandon the existing industry 
structure in the near future. As a general proposition, 
southeastern regulators tend to believe that rates in our 
region are favorable, that our service is reliable and that our 
infrastructure is in reasonably good condition. For that 
reason, there appears to be little demand for abrupt change in 
southeastern electric markets.
    This general level of satisfaction with the industry 
structure does not, however, mean that the North Carolina 
Utilities Commission is indifferent to the benefits of a 
properly functioning wholesale market. On the contrary, we 
recognize that such a wholesale market can benefit the retail 
customers of our vertically integrate utilities, and I talk 
about some of the ways that that can occur in my written 
statement.
    Despite this fact, the benefits of wholesale market 
improvements are not unlimited given our current industry 
structure. For that reason, any attempt to reform the wholesale 
market should be based upon a careful analysis of the impact of 
any proposed wholesale market changes upon the retail market 
and a recognition that the purpose of the wholesale market is 
to support the retail market rather than the other way around.
    As you know, the FERC standard market design proposal has 
produced considerable controversy in many parts of the country, 
particularly including the Southeast. Although FERC claims that 
standard market design is intended to rectify a perceived 
residual discrimination in wholesale markets, much of what FERC 
views as undue discrimination is something that we at the North 
Carolina Utility Commission see as conduct inherent in the 
operation of a vertically integrated utility of the type that 
is contemplated by North Carolina law. It causes us to wonder 
whether something that for 75 years has been supported by our 
statutes has suddenly somehow become illegal.
    The other justifications that have been offered in support 
of standard market design by FERC don't look to us to have much 
validity when applied to a fully regulated market like that 
which exists in North Carolina. At least as far as North 
Carolina is concerned, standard market design, seems to be, as 
one of my colleagues is fond of saying, a solution in search of 
a problem. The specific components of standard market design 
don't appear to us to fit our existing industry structure very 
well for reasons that I have detailed in my written testimony. 
They seem to us to be much better suited to the restructured 
markets that appear in other parts of the country.
    At bottom, we are just simply concerned that the changes in 
the existing industry structure that have been proposed in the 
standard market design Notice of Proposed Rulemaking, as 
applied to the Southeast, will increase our customers' rates 
while reducing their quality of service. The standard market 
design Notice of Proposed Rulemaking proposes nothing less than 
a fundamental sweeping nationwide restructuring of the way that 
both wholesale and retail service is provided in the United 
States, including significant Federal intrusions into areas 
once thought to be exclusive State domains. As a matter of 
basic constitutional theory, it seems to us that such 
fundamental changes are matters for elected rather than 
appointed officials. As a result, any energy legislation that 
you all choose to adopt should address, at least from our point 
of view, or preferably stop or curtail standard market design.
    [The prepared statement of Sam J. Ervin follows:]

   Prepared Statement of Hon. Sam J. Ervin, IV, Commissioner, North 
                     Carolina Utilities Commission

    My name is Sam J. Ervin, IV. I am a member of the North Carolina 
Utilities Commission, having served on that body for approximately 
three and a half years. I very much appreciate the opportunity to 
appear before the subcommittee this morning to discuss the current 
status of the electricity sector and the role of Congress in addressing 
the issues faced by that sector. The subjects you have asked me to 
address--the development of well-functioning competitive wholesale 
electricity markets, Federal statutory and regulatory barriers to 
wholesale competition, the adequacy of the capacity and operation of 
the interstate transmission grid, the climate for investment in 
critical infrastructure, electric reliability, and identifying any 
statutory or regulatory changes that need to be made concerning these 
issues--are among the most important domestic questions that this 
Congress will be called upon to consider. As you consider the 
appropriate way address these matters, I encourage you to carefully 
consider the impact of any legislation that you choose to enact on each 
region of the country, including the Southeast, because of the 
significantly different manner in which electric power is delivered to 
retail customers in each part of the country.
    The North Carolina Utilities Commission, like other similar bodies 
across the country, is an agency of state government responsible for 
regulating the rates charged and terms and conditions of service 
provided by the entities defined by our General Assembly as ``public 
utilities.'' Under North Carolina law, our electric jurisdiction 
extends to ``persons'' owning and operating equipment and facilities 
for the production, generation, transmission, distribution, and 
furnishing of electricity. Our statutory authority does not, however, 
extend to rural electric cooperatives and municipal distribution 
systems, subject to certain limited exceptions. Put in simple English, 
our electric jurisdiction is focused on the activities of the investor-
owned utilities providing retail service in North Carolina.
    As many of you are aware, electric service in the Southeast 
continues to be provided, in large part, by vertically-integrated 
utilities. These utilities generate much of the power that they sell to 
their retail customers in facilities that they own and operate, 
transmit that power over lines that they own to their own distribution 
facilities, and then deliver that power to individual factories, 
stores, churches, and homes using those same utility-owned 
.distribution facilities. Although I have not made a careful study of 
the statutes enacted in other Southeastern states, North Carolina law 
clearly contemplates the continued existence of such vertical 
integration. The only common exception to this model in most of the 
Southeast exists when retail service is provided by a rural cooperative 
or municipal distribution system. Although the situation varies from 
state to state within the region, some of the rural cooperatives and 
municipal systems in the region own their own transmission and 
generation assets. Others, particularly in North Carolina, are 
completely transmission dependent. With the exception of Virginia, 
retail competition is not authorized anywhere in the Southeast at the 
present time. Arkansas has recently repealed the retail competition 
statute that it enacted a number of years ago. Although I do not claim 
to be omniscient, it is my impression from talking with colleagues 
throughout the region that none of the other Southeastern states are 
likely to move to retail competition in the near future. As a result, I 
believe that the existing industry structure is likely to remain in 
place for the foreseeable future.
    At this point, the general perception among Southeastern regulators 
is that the regional system for providing electric service is, on 
balance, working reasonably well. Our rates are among the lowest in the 
country. We have not experienced any significant reliability problems 
in recent years. Our reserve margins are generally adequate. A study of 
the regional transmission infrastructure performed by the staffs of the 
Southeastern state commissions found no material transmission 
bottlenecks. At bottom, while our electric system is not perfect, the 
available evidence has not led our state legislatures to support 
radical reform of the type adopted in certain other parts of the 
country. Unquestionably, the decision of whether, when, or how to 
restructure retail markets is a decision for each state to make instead 
of a matter to be decided at the federal level.
    The persistence of the traditional industry structure throughout 
most of the Southeast does not, however, mean that we are indifferent 
to the potential benefits of a properly-functioning wholesale market. 
On the contrary, the North Carolina Utilities Commission recognizes 
that a properly-functioning wholesale market can benefit the retail 
customers of our vertically-integrated utilities in a number of ways. 
First, the wholesale market can provide enhanced opportunities for our 
utilities to procure competitive generation from independent power 
producers as an alternative to utility-built options. Secondly, the 
wholesale market can provide opportunities for additional short-term 
economy purchases, allowing our utilities to reduce their costs by 
purchasing power instead of operating more expensive units on their own 
systems. Finally, the wholesale market can allow vertically-integrated 
utilities to share reserves, effectively reducing the costs of 
maintaining system reliability. As a result, I do not believe that any 
of my colleagues disputes the benefits of a properly-functioning 
wholesale market to the operation of a retail market despite the 
continued presence of traditional, vertically-integrated utilities.
    North Carolina pays more than mere lip service to the development 
of a properly functioning wholesale market. Instead, the North Carolina 
Utilities Commission and the utilities we regulate have taken steps to 
facilitate appropriate reliance on the wholesale market in recent 
years. Our jurisdictional utilities have engaged in joint planning 
efforts and reserve sharing through the Southeastern Electric 
Reliability Council. All three of our major electric utilities provide 
retail electric service in more than one State, so they are accustomed 
to performing multi-jurisdictional planning. At the time that our 
utilities procure additional capacity to meet anticipated future load, 
they typically issue a request for proposals for the purpose of 
soliciting wholesale offers that are compared with the cost of self-
build options prior to making a final resource procurement decision. 
The North Carolina Utilities Commission will entertain a complaint from 
a competitor that feels that its proposal was not fairly considered 
during the evaluation process. As a result of such an RFP, Duke entered 
into a purchased power contract with a Dynegy subsidiary several years 
ago. An examination of the records in our fuel adjustment cases since 
1996 indicates that our jurisdictional utilities have purchased power 
from marketers and brokers in lieu of generating power in their own 
facilities. The North Carolina Utilities Commission has adopted 
procedures to facilitate the recovery of the costs associated with such 
purchases in order to avoid deterring our utilities from purchasing 
such less expensive power. A number of years ago, at the request of our 
General Assembly, the North Carolina Utilities Commission revised our 
generating plant certification rules to make it easier to site and 
construct merchant generating facilities. To date, we have not rejected 
any application for the issuance of a merchant plant certificate. As a 
result, it would be completely inaccurate to say that the North 
Carolina Utilities Commission has refused to embrace the opportunities 
for cost savings and reliability improvements available on the 
wholesale market.
    Acknowledging that a properly-functioning, wholesale power market 
can be beneficial to North Carolina electric customers does not, 
however, end the inquiry. The potential benefits of wholesale market 
improvements in a retail market such as that found in North Carolina 
and most other Southeastern states are not unlimited. The ultimate 
purpose of the wholesale electric market is the same as most wholesale 
markets--supporting the retail market. The large majority of the power 
sold at retail by North Carolina's investor-owned utilities is 
generated in utility-owned facilities. The same is generally true of 
the other vertically integrated utilities that provide service 
throughout the Southeast. Although the municipal distribution and rural 
cooperatives appear to place greater reliance on the wholesale market 
than is the case with Southeastern investor-owned utilities, the simple 
fact of the matter is that, for the foreseeable future, the impact of 
wholesale market improvements in the Southeast is likely to be 
relatively limited. While the importance of the wholesale market in the 
Southeast may increase over time, the potential benefits of an improved 
regional wholesale market in the near term should not be oversold. As a 
result, any attempt to reform the wholesale electric market should 
include a careful analysis of the impact of the proposed reform on the 
retail market and should avoid subordinating the retail market to the 
wholesale market.
    At this point, the legal structure governing the operation of the 
wholesale market is generally set out in FERC Order 888, which provides 
for open access transmission service at the wholesale level and for 
unbundled retail transmission, and by Order 2000, which provides for 
the voluntary formation of regional transmission organizations. As you 
aware from your hearings last week and from your work on energy 
legislation in the last Congress, a recent FERC proposal intended to 
implement a standard market design has produced considerable 
controversy in many parts of the country. Along with many of our 
colleagues throughout the country, the members of the North Carolina 
Utilities Commission have vigorously protested the FERC's proposed SMD 
as contrary to existing law and as potentially harmful to the interests 
of the retail ratepayers of the vertically-integrated utilities that 
provide service in our jurisdictions. Our objections to the proposed 
SMD are fundamental, and are shared in whole or in part by many people 
besides Southeastern state regulators.
    According to the FERC, the principal purpose of SMD is to remedy 
what it perceives to be remaining undue discrimination in wholesale 
electric markets. An analysis of the relevant portion of the SMD Notice 
of Proposed Rulemaking indicates that much of the basis for the FERC's 
claim of undue discrimination rests upon conduct that we believe to be 
inherent in the operation of a vertically-integrated utility. When one 
examines the language of the undue discrimination section of the SMD 
NOPR in conjunction with the FERC's pending proposal in the standards 
of conduct NOPR to prohibit individuals performing the generation 
function in a vertically-integrated utility from communicating with the 
individuals performing the transmission function in the same 
vertically-integrated company except through the OASIS system, one 
cannot help but conclude that the FERC is fundamentally hostile to 
vertical integration of the type required by the law of North Carolina 
and most other Southeastern states. Putting it bluntly, the FERC's 
legal analysis appears to assume that the industry structure 
contemplated by North Carolina law and common throughout the United 
States ever since the enactment of the Federal Power Act has somehow 
become illegal. That proposition strikes me and my colleagues as 
exceedingly dubious.
    A number of other justifications for SMD have been advanced at 
various times during the debate over the merits of this proposal. For 
example, Chairman Wood stated in his testimony before you last week 
that SMD would ``provide certainty to all market participants, 
encourage new infrastructure investment, promote fair competition and 
prevent a repeat of the mistakes made previously in California.'' In 
our view, none of these additional justifications has any merit as 
applied to North Carolina and the Southeast. For the reasons that I 
will discuss in a few minutes, we are not convinced that SMD will lead 
to fair competition and are concerned that it will actually harm our 
citizens if implemented as currently proposed. Instead of providing 
certainty for market participants, SMD is an open invitation to years 
of additional litigation over the validity of the FERC's attempt to 
control matters traditionally handled at the state level, such as its 
assertion of jurisdiction over bundled retail transmission, generation 
issues, and resource adequacy matters. If the FERC proceeds with SMD in 
its current form, such litigation is virtually inevitable. In my 
opinion, the resulting uncertainty will deter, rather than encourage 
additional infrastructure investment. I might add, parenthetically, 
that North Carolina law gives the North Carolina Utilities Commission 
the power to compel the construction of needed generation, 
transmission, and distribution facilities, so that SMD will do little 
to assure adequate infrastructure in our State. Finally, North Carolina 
and the other states that have retained the traditional industry model 
are not at risk of a California-type debacle because our rates remain 
regulated and are not significantly exposed to wholesale price 
volatility. As a result, none of the remaining justifications for SMD 
offered by Chairman Wood in his testimony before you last week have any 
real application to North Carolina and the Southeast.
    As I indicated a moment ago, a number of the components of the 
FERC's SMD proposal are potentially harmful when considered in the 
context of the facts on the ground in the Southeast. Although I won't 
subject you to a detailed analysis of the entire SMD proposal, please 
keep in mind that the ``best practices'' on which SMD is based were 
primarily developed in markets that developed voluntary from tight 
power pools in the Northeast over a period of many years. We are not at 
all sure that experiences there are directly and immediately 
transferable to the situation in the Southeast. At any absolute 
minimum, the transferability of that experience is not intuitably 
obvious, at least to those of us with experience in the current 
Southeastern markets.
    First and foremost among our concerns with SMD is the FERC's 
attempt to assert jurisdiction over the transmission component of 
bundled retail service and its related decision to abolish the existing 
native load priority. I recognize that there is an inevitable tendency 
to think that arguments among state and federal regulators about 
jurisdiction are mere turf protection battles. In some instances, that 
may be exactly what they are. In this instance, however, I do not 
believe that to be the case. After all, jurisdiction is a means to an 
end. At bottom, the issue of jurisdiction is the issue of who decides. 
In this area, that issue is of ultimate importance, as can be seen from 
the question of the treatment of the native load priority. Under 
existing FERC precedent and under North Carolina law, our vertically-
integrated utilities are required to give priority service to the 
native load customers who have paid for the construction and operation 
of the existing transmission systems in their retail rates. As we use 
the term, the retail customers of the municipal distribution systems 
and rural cooperatives as well as the retail customers of the 
vertically-integrated utilities are entitled to be treated as ``native 
load.'' FERC proposes to eliminate the existing native load priority in 
the interests of facilitating the development of more competitive 
wholesale markets. We believe that that implementation of this proposal 
will result in a diminished quality of service for North Carolina 
electric consumers. In the event that FERC is unable to assert 
jurisdiction over bundled retail transmission, this inequity will not 
occur. In the event that FERC is able to assert jurisdiction over 
bundled retail transmission, native load customers will be deprived of 
their right of priority access to the transmission system. As a result, 
resolution of this jurisdictional issue is more than deciding who wins 
a turf battle between two sets of bureaucrats; it is, at least in this 
instance, a choice between competing visions of the manner in which 
electric service should be provided in each region of the country.
    As a corollary to the abolition of the native load priority, the 
FERC proposes in the SMD NOPR that all transmission service, including 
that included in bundled retail service, be provided under the same 
open access tariff. Although FERC clearly states that this means that 
all transmission service should be provided in accordance with the same 
terms and conditions, it is not clear whether this will ultimately 
result in FERC determination of the cost of all transmission service 
nationwide. Although this proposal may seem, at first blush, eminently 
equitable, it suffers from the same defect as the proposed abolition of 
the native load priority. Contrary to the FERC's assumption, all 
transmission load is not created equal. The effect of the FERC's 
proposal would be to subject the bundled retail load of a vertically-
integrated utility to an increased risk of curtailment or bearing new 
congestion costs as a result of additional uses of the transmission 
system made by new market participants. Although we certainly favor the 
most efficient use of the transmission system reasonably possible, we 
believe, at bottom, that the native load customers of the transmission 
owning utility have paid for the existing transmission system and ought 
to retain their existing priority right to the use of that system. The 
FERC's proposal would eliminate that existing right without any 
offsetting benefit.
    An integral part of FERC's SMD proposal is its requirement that 
each transmission-owning public utility surrender control of its 
transmission assets to an independent transmission provider or ITP. An 
ITP can be anything from an RTO of the type with which we are all 
familiar to a single-utility transmission provider. Although each of us 
understands the arguments in favor of independent operation of the 
transmission system and understands their potential merit, we also 
understand that those benefits come at a cost. The simple fact of the 
matter is that setting up and operating an ITP is not an inexpensive 
proposition. The problem with the mandatory independent operation 
provisions of the SMD NOPR is that the FERC's proposal totally 
overlooks the possibility that, in at least some circumstances, a 
particular ITP proposal may not be cost-effective. As a result, the 
mandatory independent operation provisions of the SMD NOPR, unlike the 
voluntary RTO provisions of Order 2000 construed in conjunction with 
Order 888, creates a real risk that the costs associated with an 
inefficient ITP will be imposed on native load customers.
    The SMD NOPR proposes to manage congestion through the use of 
locational marginal pricing, or LMP. Under FERC's proposal, LMP would 
replace the existing system of physical transmission rights. 
Transmission customers entitled to firm service under the existing 
system have both price and deliverability certainty. The implementation 
of LMP requires the ITP to operate certain bid-based markets through 
which load serving entities may procure power, must resolve congestion 
problems, and are required to procure certain ancillary services. 
Although I have many concerns about those portions of the SMD NOPR that 
require the use of LMP and define the operation of these bid based 
markets, let me focus on just two of them. First, the principal method 
available to load serving entities for protecting themselves from 
additional costs associated with this new congestion management system 
is the procurement of financial instruments known as congestion revenue 
rights. The FERC indicates a preference for auctioning congestion 
revenue rights to the highest bidder, with the revenues going to the 
load serving entities responsible for paying the fixed costs of the 
system. The problem with this approach is, of course, that there is no 
assurance that these load serving entities will be able to win the 
auction or that the auction revenues will match actual congestion 
costs, thus exposing the load serving entity to the payment of 
congestion costs which that entity does not currently have to pay. As 
an alternative, the FERC proposes an allocation formula that deprives 
the load serving entity (and its customers) of existing capacity for 
growth and existing capacity that fails to pass a simultaneous 
feasibility test. For all of these reasons, the FERC's proposal risks 
depriving bundled retail customers of currently-available price and 
deliverability certainty. Secondly, the ITP-operated markets are bid-
based, which means that the prices charged for power purchased from 
these markets, will be based on bids submitted by participating 
generators. Given that the bulk of the generation in North Carolina is 
owned by the vertically-integrated utilities subject to our regulatory 
jurisdiction, it seems to me that there is a risk of market power in 
these bid-based markets solely because of the design of the markets 
mandated by the SMD NOPR. As a result, the SMD NOPR creates a 
congestion management system and various bid-based markets that could 
raise costs for Southeastern electric customers. This is a prime 
example of the way in which the new market structure envisioned by the 
FERC conflicts with the regulated retail structure that persists in the 
Southeast.
    A final matter of great concern to many in the Southeast is the 
issue of cost-causer or participant funding. The concept of cost-causer 
funding arises from the notion that transmission expansion projects 
should be financed by those who benefit from such projects. Although 
virtually everyone agrees that the cost of transmission enhancements 
that serve regional reliability purposes should be borne by all 
customers taking service from the system, there is considerable concern 
that those same ratepayers will be forced to bear the costs of other 
transmission improvements that provide them with little or no benefit. 
Although the SMD NOPR provides rhetorical support for participant 
funding, there is considerable concern among Southeastern state 
commissions that the preconditions for implementing this change in the 
FERC's existing transmission pricing policy as stated in the NOPR will 
not occur until significant additional costs have been imposed upon 
naive load customers. As a result, many Southeastern regulators remain 
concerned about the treatment of participant funding in the SMD NOPR.
    The concerns felt by Southeastern regulators about the policies 
espoused in the FERC's SMD NOPR and related pronouncements were so 
significant that the Southeastern Association of Regulatory Utility 
Commissioners commissioned a study of the potential impact of those 
policies on our region. I served on the steering committee responsible 
for overseeing the performance of this cost-benefit study along with a 
number of my colleagues from other SEARUC states. After reviewing 
several outstanding proposals and interviewing a group of well-
qualified consulting firms, we ultimately retained Charles River 
Associates to perform the study, which was intended to examine the 
impact of RTO formation and the implementation of SMD on the Southeast. 
I am satisfied from my own work on the steering committee and my 
conversations with others familiar with CRA's credentials that there is 
no consulting firm in the United States with greater integrity or more 
impressive qualifications. After performing an enormous amount of work 
in an attempt to fully understand Southeastern electric markets and 
modeling a number of different scenarios, CRA released the results of 
its work last fall. The principal conclusion of the SEARUC study was 
that ``[t]here is considerable uncertainty as to whether RTOs and SMD 
would provide greater benefits to the southeast than the implementation 
costs.'' As a result, the general thrust of the concerns that I have 
expressed in my testimony have support in the SEARUC cost study, which 
is available for review on the SEARUC website.
    I understand that the Chairman Wood attempted to utilize this study 
to claim that SMD would result in net benefits for the Southeast during 
his testimony last week. Despite my great personal respect for Chairman 
Wood, I disagree with his description of the results of the SEARUC 
study. I did not hear Chairman Wood testify, and am not for that reason 
able to comment directly on what he said. In looking at the most 
optimistic scenario shown in the study, CRA found the existence of 
approximately $1.3 million in total regional benefits out of total 
regional production costs of approximately $114 billion. In other 
words, the total benefits were approximately one percent of total 
production costs, which strikes me as a relatively small number. As if 
that were not enough, a significant portion of this benefit stems from 
the study's assumption that a certain level of merchant generation will 
come into operation and that participant funding will come be 
implemented by 2004; these assumptions are almost certainly optimistic 
at this point. Furthermore, the SEARUC study makes the further 
optimistic assumption that Southeastern load serving entities will be 
perfectly hedged against congestion costs and that there will be no 
market power in regional wholesale markets. In the event that either of 
these assumptions turns out to be erroneous, the benefits shown in this 
scenario are overstated even further. In other words, under this 
scenario, the FERC's SMD proposal might produce quite minor benefits 
for the Southeast assuming everything works perfectly. As a result, I 
submit that CRA rather than Chairman Wood has correctly summarized the 
implications of FERC's proposal for our region as revealed in the 
SEARUC study.
    The North Carolina Utilities Commission has filed comments in the 
FERC's SMD proceeding in which we have advanced many of the arguments 
that have I have presented here this morning. On the other hand, we 
have also tried to hard to play a constructive role in this process. We 
do not have any desire to prevent the implementation of reforms that 
would benefit other regions of the United States so long as no legal 
precedent is established that would allow the imposition of policies 
that would harm the Southeast. We do not, by any stretch of the 
imagination, contend that absolute nirvana has been achieved in our own 
regional wholesale electric power markets. We do not countenance 
violations of the open access rules adopted by the FERC in Order 888, 
and are willing to join with our federal colleagues in working to 
remedy existing market defects. We are willing to seriously consider 
cost-effective RTO proposals and other market design changes so long as 
those ideas do not result in potentially harmful structural alterations 
in Southeastern regional markets or unduly hamper our ability to 
protect the interests of the retail ratepayers in our region. About 
three weeks ago, all seven members of the North Carolina Utilities 
Commission joined 36 of the 48 Southeastern state commissioners in 
sending a letter to Chairman Wood setting out the preconditions under 
which we would work with the FERC to identify problems in wholesale 
markets and implement appropriate solutions to such problems as exist. 
We look forward to receiving a response from him in either the form of 
a reply to our letter or a substantial modification to the existing SMD 
proposal in the white paper that the FERC has indicated will be 
released sometime in April.
    At the time that I examined the draft legislation that the Chairman 
circulated approximately two weeks ago, I did not see anything that 
directly addressed the Standard Market Design issue. I was, however, 
concerned by a number of provisions that I discovered in reviewing that 
draft in preparation for appearing here today. The transmission 
infrastructure improvement rulemaking provisions of proposed FPA 
Section 215(a) seem to be limited to transmission assets used for 
wholesale transactions and to new transmission facilities. If I am 
correctly interpreting this language, then I do not believe that I have 
any objection to it. On the other hand, if this language is intended to 
allow FERC to provide a higher return for existing transmission assets 
or to provide an incentive for the transfer of existing transmission 
assets to RTOs or other novel entities regardless of the impact of such 
transfers on end-users, then I would question the wisdom of such a 
proposal. Similarly, while the North Carolina Utilities Commission has 
expressed support for cost-causer funding as I have already indicated, 
proposed FPA Section 215(b) could be construed to limit cost-causer 
funding to situations involving an RTO or some similar institution. 
Given our belief that the principles embodied in participant or cost-
causer funding represent the correct policy regardless of whether 
operational control of transmission assets has been transferred to an 
RTO, an ITP, or some similar entity, I would suggest that proposed FPA 
Section 215(b) be revised to ensure that those who cause costs to be 
incurred are the ones who pay those costs whether an RTO exists or not, 
since the ultimate goal should be imposing costs based on principles of 
cost causation. The subject of FERC transmission siting authority has 
been widely discussed in recent years, and I do not intend to debate 
the issue at length here today. Consistently with the position adopted 
by many other state commissions, the North Carolina Utilities 
Commission does not believe that the case has been made for federal 
transmission siting authority and would oppose the enactment of 
proposed FPA Section 216. As I have already indicated, the absence of 
any recognition that RTOs may be beneficial in some regions and not in 
others suggests that the sense of the Congress findings in proposed 
Sections 7022(a) and 7022(b) would not be appropriate. I will be happy 
to discuss any of these comments in more detail if that would be 
helpful to members of the Subcommittee.
    The ultimate issue that I respectfully suggest that the 
Subcommittee confront in drafting any energy legislation that it deems 
appropriate in this Congress is what should be done about SMD. Although 
the issues addressed in the Chairman's draft legislation are important, 
those issues pale in importance compared to those raised by the SMD 
NOPR. The SMD proposal represents nothing less than a fundamental 
restructuring of the electric industry in the United States. As a 
matter of basic constitutional law, I believe that fundamental policy 
decisions should be made by the elected representatives of the people 
rather than appointed officials like the members of the FERC. In 
addition to addressing the other issues that are to be discussed by the 
various witnesses that testified last week and today, I would urge you 
to give serious consideration to addressing the SMD issues as well in 
any legislation you choose to mark up and report to the full Committee. 
While the North Carolina Utilities Commission would obviously prefer 
that any legislation that you approve preclude the FERC from moving 
forward with SMD in its current form, compel the FERC to recognize 
current state-federal jurisdictional boundaries, and require the FERC 
to give serious consideration to the significant differences in 
regional electric markets that exist across the country in a way not 
reflected in the current SMD proposal, we also believe that the issues 
raised by the SMD NOPR are so important that they call for a decision 
by the Congress regardless of the substantive outcome. I certainly 
appreciate your taking these thoughts into consideration as you 
undertake the important work that lies ahead.

    Mr. Barton. We thank you, Mr. Ervin. The Chair is going to 
recognize himself for the first 5-minute question rounds. We 
are only going to have one round of questions because we do 
have two other panels. We are also going to take a 15 to 20 
minute recess beginning at 11 a.m.
    Mr. Walter, I am told that your company has a number of 
high efficiency plants that are currently idle that if we had a 
law similar to what is in my draft bill, those plants could be 
providing power at much cheaper prices to certain high-cost 
regions of the country. Is that true?
    Mr. Walter. That is correct. The power plants that we are 
constructing are modern natural gas plants that are combined 
cycle and generally have an efficiency that is 40 percent 
greater than older technologies that currently exist in a lot 
of regions of the country. In some regions where we have built 
these power plants, economic dispatch does not exist, and there 
is not a regional transmission organization that independently 
operates the system. And utilities that are in a situation like 
this where they own the transmission systems as well as their 
own generation they are obviously going to look out for their 
own best interests. And so some of these older power plants are 
operating where some of ours are not operating, and if we were 
to operate, the obvious cost/benefits would be there of less 
fuel consumption.
    Mr. Barton. Mr. Moore, you mentioned some improvements that 
your association would like to see on PURPA in a competitive 
market. Do you have legislative language that your group would 
be prepared to present to us so we could try to improve our 
draft?
    Mr. Moore. Yes, Mr. Chairman, we do. I will have that by 
the end of the day.
    Mr. Barton. Okay. Because we are going to put out a bill--
we hope to put out a bill on Monday so that we have a markup 
vehicle, so I would encourage you to do that.
    Mr. Moore. Thank you.
    Mr. Barton. Ms. Schori, you indicated in your testimony 
that there are some changes to the FERC-lite language that is 
in the current draft, that if those changes were made, if I 
understood you correctly, your association could support. Just 
so that I am clear on what this would mean, can you describe 
the service that your group, the people you represent, do 
provide to yourselves and what service you could then be able 
to provide to others if we made the language change that you at 
least alluded to? And turn the microphone on.
    Ms. Schori. Sorry. Yes. We hope to have possible language 
to the committee by the end of today, if not today, very 
quickly for your consideration. The issue that we are seeking 
to address is to have express recognition of our service 
obligation to our existing customers and load and the need to 
reflect that in the draft language to assure that with respect 
to assets that we own or control that we will be allowed to 
continue to make use of those to serve our own load. And that 
is the language that we need to have clarified.
    We are proposing that with respect to surpluses, as we have 
been doing voluntarily, to make that surplus available to 
market participants on the same terms and conditions that we 
serve our own customers. In the language that was originally 
negotiated over probably 3 or 4 years ago now, the concern that 
we have had is that we do have--obviously, we are in support of 
local control. Our own elected officials at the local level set 
our rates. There is concern about both that rate setting 
authority, impacts on our bonds that we use to finance 
facilities, and we want to assure that we are talking about 
surplus transmission, transmission that is not already 
dedicated to the service of our own----
    Mr. Barton. You are going to have some specific language 
that your group provides us.
    Ms. Schori. Yes. Thank you.
    Mr. Barton. Okay.
    Mr. English, if my little ugly bill had feelings, they 
would be hurt.
    But, fortunately, my ugly little bill has got armadillo 
skin, and it is pretty hard to get through it. But I just want 
to try to make sure I understand where your group is coming 
from. Congressman Dingell and I went to a Kyoto global warming 
conference in Japan several years ago, and we met with the 
communist Chinese leaders, and the communist Chinese leadership 
at that conference was saying they supported the concept of the 
Global Warming Treaty and at some point in time they would want 
to be supportive. So Mr. Dingell said, ``Well, do you think 
that is going to be in 10 years?'' And they said, ``No.'' He 
said, ``Well, how about 20 years?'' And they said, ``No.'' And 
he said, ``How about 100 years.'' And they said, ``No.'' And he 
said, ``How about 1,000 years?'' And they said, ``No.'' So I 
want to ask you on behalf of your coops, will there ever be a 
time that you think your coops might be supportive of a 
comprehensive electricity title that created a national grid 
that everybody had open access to?
    Mr. English. What about this year? I would support it this 
year, Mr. Chairman, and so would the electric cooperatives. 
Here is the issue that we are dealing with, and I pointed out 
don't look at all what we described as the bad and ugly because 
we also had some good, if you want to call it the beautiful, 
and there are several--quite a number of features in your bill 
that we would describe along that line.
    The difficulty that we see is this: Standard market design 
is a real problem with regard to legislating this legislation 
in a number of those items that I pointed out. The reason being 
this: That the standard market design is not in final form, and 
as I mentioned, with the so-called FERC-lite provisions, as we 
had talked abut with an earlier piece of legislation, which we 
in fact felt we could live with, works under 888, but when you 
get to the standard market design we have got a whole new set 
of rules and suddenly it doesn't work under that, and it 
presents difficulties. We have got 200 distribution 
cooperatives as a result of standard market design with these 
provisions that are going to be drawn in. Now, I don't think 
that is the intention of this committee. I don't think the 
distribution systems, the small electric cooperatives, are 
really what you are getting at. I don't think you want to see 
those resources used in that area.
    Mr. Barton. You are right.
    Mr. English. So the problem comes in this legislation 
coming before we know what the final outcome with the standard 
market design is is a real problem. Now, unless this committee 
wants to, and can, legislate and prohibit the FERC from 
implementing the standard market design, which I think in all 
reality they can get around anyway because all they have to do 
is change the rules a little bit and they get around the 
legislative aspect of it, and I know the frustrations of that 
as a legislator. But the other side of this is the fact that we 
are hopeful that we are going to see some major changes in the 
standard market design proposal that FERC is advancing. We 
won't know that till April at the earliest. There are over 600 
pages of that standard market design, we filed over 200 pages 
of changes, and we are hopeful that will come about. But we 
can't say that whatever they end up with is in fact going to 
exempt those 200 electric cooperatives or not.
    The additional issue is this question of incentive rates. 
It doesn't make any sense to us, because FERC already has the 
authority to provide incentive rates, and FERC is in some cases 
doing incentive rates, and one of the frustrations that every 
legislator has is you can't pass a law specific enough to apply 
justice to each and every situation as it is going to happen 
around this country. But, basically, that is what this is an 
attempt to do. It completely disregards the fact in testimony 
from the investment community that you can reach the same 
conclusion of getting more investment what you say that you are 
after, Mr. Chairman, by reducing risk. This completely ignores 
that aspect of it. And as I said, the industry itself through 
its own task force with, I should say, the Department of 
Energy's task force, came to that very conclusion. There are 
different options we can do, and why we would want to force 
FERC to take only one option, ignore anything else doesn't make 
any sense to us.
    The participant funding thing, I know, Mr. Chairman, you 
are in favor of competition and you would like to see that. 
Well, why within a given region would we discourage the 
building of transmission? Why would we discourage the 
improvement of transmission? Why would it make it more 
difficult? But just as we have in North Carolina and we have in 
a lot of other States, you do have a vertically integrated 
utility that in fact is benefiting by the lack of transmission, 
and we know that this exists. This is something that is 
building that into law. We don't understand why that is the 
case. We don't think that is the intent, we don't think that is 
the aim, certainly, of the chairman, but----
    Mr. Barton. We need to let Mr. Boucher ask his questions. 
You are in the process of giving us about a 6-minute beautiful 
answer.
    Mr. English. We can do it this year, Mr. Chairman.
    Mr. Barton. We are going to put you down as undecided with 
hope.
    Mr. Boucher is recognized for 5 minutes.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. 
Actually, I was enjoying Mr. English's presentation. I thought 
he was doing quite well.
    Let me say thank you to all of the witnesses for your 
informative testimony this morning and for spending some time 
with us. Mr. Walter and Mr. Moore, I was very pleased to hear 
both of you underscore in your testimony the value to the 
country of combined heat and power operations, both in terms of 
the addition to overall energy efficiency that CHP offers to 
the generation base and also to the environmental benefits that 
arise from that increased level of efficiency.
    Last year, the subject of PURPA was considered in the 
Senate, and the Senate in its wisdom decided, as it was 
addressing electricity legislation, to craft an alternative to 
the rather draconian repeal of PURPA which had arisen in the 
House. And that approach was fostered by Senators Carper and 
Collins. And I have two questions to you. First, I would like 
to hear your view of the Carper/Collins provisions with regard 
to PURPA, which offer an opportunity for PURPA to sunset market 
by market as the market becomes full competitive and offers an 
opportunity for the qualified facilities and their industrial 
hosts to be able to sell electricity into a competitive market 
when they have excess power to sell and also to be able to buy 
it from the general market whenever they have those needs. That 
was the essence of the Carper/Collins provision. And I would 
like to have your comments on that.
    The second thing I would like to have your comment 
concerning is the provision that is contained in Chairman 
Barton's draft that moves beyond Carper/Collins and offers 
other opportunities for PURPA to sunset market by market, and I 
would focus attention specifically on the provision that says 
that if the investor-owned utility locally joins an RTO and 
places its transmission in the RTO, that that would be deemed 
sufficient to enable to PURPA to sunset in that market. Explain 
to us if you would why the mere fact of joining an RTO does not 
guarantee the kind of competitive market in that community that 
gives the QFs the assurances that the QF would have to have in 
order to continue operation. Which one of you would like to 
begin? Mr. Walter.
    Mr. Walter. Let me just make a couple of comments about 
Carper/Collins. We generally supported the intent, I believe, 
of what happened last year in that, but I wanted to point out 
one thing that is very important for cogeneration facilities. 
In many cases, these facilities need to operate 24 hours a day, 
7 days a week in order to supply the necessary thermal needs 
and electric needs of industrial hosts. So I think the focus 
last year was much more on real-time, short-term markets. What 
we really need here is a focus on the access to the ability to 
enter into long-term agreements, ones that are baseload, around 
the clock and with that sort of an aspect I think that would be 
an improvement on what happened last year.
    With respect to the question in regards to RTOs, I think 
you stated it very well, in order for a PURPA facility to be 
able to operate to sell its electricity to a customer and to 
buy backup power, one needs a customer. Just having a regional 
transmission organization with access to the transmission grid 
does not give you a customer. It doesn't provide for multiple 
customers, it simply gives you a pathway. And so the RTO aspect 
of this would not be I think a test at all with respect to 
whether PURPA facilities are entering into a fair and open and 
sustainable competitive market.
    Mr. Boucher. Mr. Moore, would you like to add to that?
    Mr. Moore. Yes, Mr. Chairman, thank you. Yes, certainly, we 
supported Carper/Collins last year, and a great effort was made 
in a short heat of battle timeframe to craft that language and 
it probably could be improved upon, but we certainly supported 
it. The problems--and we think that Chairman Barton has moved a 
long way from where he once was in prior legislative drafts 
into where we think the spirit he is trying to get to now, 
which would be basically a Carper/Collins kind of an 
arrangement. We are worried for the same reasons Mr. Walter is 
about subparts B and C of Section 7062. This looks like it 
could be an RTO in name only, and so you really don't have the 
ability to really get into that and figure out if you really 
have competition or have you gotten a couple of people who 
control the market to get together and call themselves an RTO? 
I don't think that is what the chairman intends.
    And then, third, the Commission, the last part C, we have 
no problems with this Commission and its understanding of 
competition, but we worry about a future one, and we think 
since it is not defined some language here indicating what the 
chairman has in mind about a competitive market would probably 
be very helpful.
    Mr. Boucher. Yes. Well, thank you both. I have some other 
questions regarding the Public Utility Holding Company Act and 
the FERC's merger review authority, but time will not permit 
those to be asked at this point. I may submit some questions to 
members of this panel in writing, and, Mr. Chairman, I would 
ask unanimous consent that the record remain open for a 
reasonable period in order to accommodate any answers they 
might provide.
    Mr. Barton. Without objection.
    Mr. Boucher. Thank you.
    Mr. Barton. And if you want to ask one more question 
certainly on your PUHCA, I think it would be helpful for you to 
do that before we recess.
    Mr. Boucher. All right. Well, thank you. Let me, instead of 
asking about PUHCA, just ask a brief question about the FERC's 
merger review authority. I appreciate the time.
    We had a very interesting hearing last week in which Mr. 
McSlarrow, representing the administration, strongly opposed 
the repeal of the FERC's merger review authority and in fact 
recommended that that authority be enhanced. And when the 
repeal of that merger review authority is teamed with the 
perspective repeal of PURPA--I am sorry, PUHcA, which is also 
contained in the draft bill, I think some major problems arise, 
because repealing PUHCA will necessarily increase industry 
consolidation and mean that somebody is going to have to be at 
the gate in order to look out for the consumer interest. That 
is what the FERC typically does.
    The provision that is in the draft that I have heard the 
most objection to, if any, is the repeal of the FERC's merger 
review authority, and let me just ask if there is anybody on 
this panel that would like to speak out in favor of repealing 
the FERC's merger review authority? Does anybody want to speak 
out in favor of that? Somebody? Anybody?
    Mr. Owens. I do.
    Mr. Boucher. Mr. Owens, you actually want to speak in 
favor.
    Mr. Owens. I will speak up, not because I am the minority 
on the panel but because I think I have some persuasive 
elements here.
    Mr. Boucher. Thank you.
    Mr. Owens. We believe that it is important to remove 
duplicative regulatory functions. As you may recall, when the 
Federal Energy Regulatory Commission considers a merger they 
look at three factors: The effect on competition, the effect on 
rates and the effect on regulation. When the Department of 
Justice and the Federal Trade Commission consider mergers they 
look at the effect on competition. And we are simply saying 
that it makes no sense to have two agencies, two Federal 
agencies, look at the same set of issues in separate records. 
It makes more sense to consolidate a review on the impact on 
competition.
    I make the same argument with respect to the impact on 
rates. Any merger, State commissions have the responsibility of 
looking at the impact on utility rates as a result of a merger. 
We would not suggest that that authority be weakened in any 
way; in fact, we would encourage it to be strengthened. And in 
particularly, as we were arguing for the repeal of the Public 
Utility Holding Company Act, the States would have greater 
access to books and records. And so there again we think it 
makes no sense to have two reviewing entities. The FERC would 
continue after a merger, however, to have rate-making authority 
and oversight.
    Mr. Boucher. So, Mr. Owens, your view is that the 
Department of Justice is fully as capable as the FERC in order 
to evaluate the effects of a merger on the market itself and 
also on the consumer interest? Is that your view?
    Mr. Owens. That is my view.
    Mr. Boucher. Yes. I think a lot of people differ with that, 
but I respect your expression of it. Would anybody briefly like 
to counter that? Mr. English, I saw you seeking the microphone.
    Mr. Barton. And be very brief because I was a good guy.
    Mr. Boucher. He was a good guy.
    Mr. Barton. No good deed goes unpunished.
    He asked a totally different question than I thought he was 
going to ask, so let us have a brief answer so we can take----
    Mr. Boucher. Bait and switch.
    Mr. Barton. [continuing] a little time out here.
    Mr. English. Mr. Boucher, I think bottom line is it is 
anti-competitive. It allows those with deep pockets to in fact 
dominate markets. We have seen this in industry after industry, 
and so if we are not going to apply any kind of review to these 
mergers, then you are going to wipe out competition.
    Mr. Boucher. Okay. Thank you, Mr. English. Thank you, Mr. 
Chairman.
    Mr. Barton. All right. We are going to take a brief recess. 
If there are no votes on the floor, we should reconvene around 
11:30. If there is a vote on the floor, we will reconvene 
within 10 minutes after the bell expires, the time expires on 
the floor vote. So we are in recess, subject to the call of the 
Chair, which should be between 11:30 and 11:45. Yes, I 
definitely want this panel back, especially you, Mr. English.
    [Whereupon, at 11:07 a.m., the subcommittee recessed, to 
reconvene at 12:18 p.m., subject to the call of the Chair.]
    Mr. Barton. When we had recessed at 11 o'clock, Mr. Boucher 
had had his questions. We are now ready to resume the question 
period and in order of appearance it appears that Mr. Whitfield 
was here before Mr. Norwood. It really does. Yes. And Mr. 
Whitfield deferred, so Mr. Whitfield is recognized for 8 
minutes for questions.
    Mr. Whitfield. Thank you very much, Mr. Chairman. I 
probably won't take up my entire 8 minutes, but I just wanted 
to clarify a few things. Of course, I represent a State that 
has some of the lowest electrical rates in the country, and any 
time we have discussions about significant changes, we are very 
much concerned about the impact that would have on our rates. 
And I have a lot of small municipal systems and electric coops, 
and certainly we want to explore to see how many of those would 
be exempt under some of the changes that have been made in this 
legislation. But most of these coops in my area and municipal 
systems receive their electricity supply from TVA, and as a 
result of that, they distribute that electricity, of course, to 
their customers. But under the TVA Act, these distributors are 
guaranteed preferential transmission service.
    It is my understanding that just looking at Section 702 of 
the draft that DOE would be given the authority to determine 
whether or not TVA's transmission assets would be turned over 
to an RTO. That is my understanding. Now, if DOE makes the 
determination that TVA's transmission should be turned over to 
an RTO, I am assuming that the munis and the coops that buy 
from them would possibly lose their preferential treatment, and 
I would like to ask Mr. English, for example, do you know 
whether or not that is true? Is that your understanding or do 
you have an opinion on that?
    Mr. English. It is my understanding. There is one other 
point that I would add to that, though. It even goes beyond 
that. As you know, when the PMAs, the dams, were built, when it 
was constructed in the first place, there were a number of 
different functions that it had. Some of it had to do with 
obviously flood protection, it had to do with recreation, it 
had to do with environment. There is a whole list of things. 
And as we understand the way this legislation is set up it 
would abrogate those contracts that have been set to perform 
all these other functions. So it certainly would be very broad 
sweeping as far as what the potential is, and I am not sure 
that is the intent of the authors to go that far, but that is 
what it would do.
    Mr. Whitfield. Okay. Would anyone else care to comment on 
that at all? Okay.
    Also, I have some coops in my district that have higher 
voltage distribution lines that allows them to move this 
electricity over longer distances but certainly not across 
State lines. Under Section 7021 of this draft, it is my 
understanding that FERC would be allowed to reclassify those 
distribution lines because of their high voltage and that they 
would be able to require those coops to transfer operational 
control over their distribution lines to an independent 
transmission provider, or mini-RTO. Is that your understanding 
as well, Mr. English?
    Mr. English. It is indeed, and that is, again--I don't want 
to put words in the chairman's mouth, but I notice he was 
nodding his head when he said he didn't want to regulate 
distribution coops. And in these cases, we are talking about 
cooperatives, distribution cooperatives, and that line is just 
to feed the power to them, to get the power to them and to no 
one else.
    Mr. Whitfield. Yes.
    Mr. English. Now, if the objective is to use up a lot of 
FERC assets trying to regulate folks that this has no impact--
that this would have no benefit as far as the country concerned 
or any kind of interstate system, then this might be a good 
device to do that, but I don't--again, I don't think that that 
is probably what the objective is. And we would hope that the 
committee would take a very hard look at that and make sure 
that you are using those resources to the maximum benefit to 
protect the system and make sure the system works well. This 
does absolutely nothing to it with those distribution systems.
    Mr. Whitfield. Right. Thank you, Mr. English. I was trying 
to find my list of witnesses here. Is it Ms. Schori from 
Sacramento? I think during your testimony you had talked about 
trying to protect your particular customers. That was one big 
concern that you had. And would you elaborate on that for me 
just a little bit?
    Ms. Schori. Yes. The concern that we have right now is that 
public power systems are non-profit, they are customer-owned, 
we don't have shareholders, we don't build assets as merchant 
generation or merchant transmission or to earn a rate of return 
in the traditional private sector sense. Instead we are owned 
by our customers, the assets that we do have--and in my case in 
Sacramento we have both generation assets and transmission 
assets--have been built to serve our load, our customers, they 
are the ones paying for it, it is all embedded in our rates. 
The concern that we have, and I am kind of narrowly focused 
recognizing this bill is much broader and covers many topics, 
is in reviewing the compromise language on the new FERC 
jurisdiction that is being proposed over public power systems, 
such as the members of the Large Public Power Council.
    The concern that we have is that right now, in light of 
some recent court decisions as well as some of the rulings that 
are coming out of FERC, the old--what I will call the old Order 
888, open access language relating to comparability, meaning if 
you have surpluses on your system, make them available to other 
participants in the market on the same terms and conditions 
that you serve your own load, what I still think of as the 
golden rule of Order 888. That appears to be changing, moving 
in the direction of full FERC regulation and potentially even 
going so far as potentially impacting--the language could 
potentially open the door to full standard market design type 
regulations. So what we want to do is work with the committee 
to attempt to shape the language back to the original 
compromise wording that we had all agreed to.
    Mr. Whitfield. Okay. And you all are going to bring forth 
language to address that issue; is that correct?
    Ms. Schori. Yes. We do not have any language ready right 
now that I can present the committee with. We are working very 
hard to try and put that together and come in with something 
that hopefully could be supported on a consensus basis. But we 
have a number of different drafts, and we are trying to put 
something together, and we will try and work very quickly to do 
that.
    Mr. Whitfield. And so you would expect that to be here 
maybe in the next couple of days or so?
    Ms. Schori. That is my hope. Let us see, it is Thursday, so 
it might not be until early next week. We hope to have--we are 
floating different drafts and trying to put things together.
    Mr. Whitfield. Okay. Okay. Thank you very much. I waive 
back the 10 seconds I have remaining.
    Mr. Norwood [presiding]. Thank you, Mr. Whitfield. Mr. 
Allen, you are now recognized for 8 minutes.
    Mr. Allen. Thank you, Mr. Chairman. I want to thank you all 
for your testimony today. It has been very helpful to old 
members and new members like me, in particular. Mr. Moore, as 
you know, the Maine pulp and paper industry uses a fair bit of 
biomass in generating electricity, both for the plants 
themselves and for sale back into the grid. And what I would 
like to know from you is how do you--I don't know how familiar 
you are with those particular plants, but I am interested in 
knowing whether the biomass power facilities like them will 
survive if this bill is enacted into law. And I am also curious 
about what other options there might be to protect those kinds 
of plants from continuing.
    Mr. Moore. We are very concerned that if--and the 
chairman's bill is not talking about outright appeal now of 
PURPA as was the thought in the last Congress, and that is good 
news. But we are still worried that there are some loopholes 
here you can drive somebody's big trucks through. And in the 
wrong hands those trucks could greatly jeopardize the future of 
cogeneration. And as you pointed out, 60 percent of our 
cogeneration is from biomass, and we think it is going to grow. 
But we have to have access to the grid, and where you don't 
have real competition in the marketplace that access will not 
exist without a PURPA protection.
    We are working now, Congressman, on a--have been working 
with the Department on Energy now for about a dozen years on a 
new technology to gasify all of our liquid waste in a paper 
mill. That gasification, if all the plants that are doing that 
throughout the country that have that liquid waste, would 
amount to 30 gigawatts of new power, all of which are favored 
under Kyoto, all of which are not using gas, not using oil, all 
of which are reducing the cost of the operation of our plants 
so that we are competitive and we can keep those jobs, but then 
totally is a byproduct, putting as much as 30 gigawatts of new 
electricity on the market. We can't see that happening unless 
changes are made in the legislated language we have now. That 
is not going to happen. We can't get the money from the 
financial markets if we can't get that kind of power to the 
market.
    Mr. Allen. And can you talk a little bit about how ISO New 
England operates with respect to your interest as compared to 
another RTO or another type of RTO?
    Mr. Moore. I have to do some checking into that and get 
back to you on that, see if we are having any complaints. I am 
not aware of that being a problem are for us.
    Mr. Allen. Okay. Good. Thank you. Mr. Walter, in your 
testimony you talk about--you say that many regions do not yet 
have fully competitive conditions with respect to transmission 
and power procurement and that in those areas residential, 
commercial and industrial consumers have suffered. And you also 
talk about the key issues today revolving around the 
availability of adequate capital and the evolution of open and 
fair competition. Could you talk to us a little bit about which 
regions you think are competitive and which regions are not 
doing so well? That is question No. 1.
    And question No. 2 is with respect to these different 
regions around the country, you also said at one point that 
everyone wants a reliable source of energy, and they want it to 
be affordable. And I would like you to comment on the question 
of one piece of the affordability component, which is not just 
the price at a particular moment but the stability of prices 
over time. So if you are talking about different regions, I 
would be very interesting in knowing which ones seem to be 
successful at maintaining the stability of price over time.
    Mr. Walter. I would be happy to address both of those. We 
are also happy to have the Westbrook Power Plant in the great 
State of Maine, along with a couple of other facilities.
    Mr. Allen. I fly over it every time I come into the 
airport.
    Mr. Walter. That is good. As far as good and bad, if you 
want to characterize it that way in respect to markets that are 
operating well from our perspective and have a good sense of 
open competition, I think there are a couple of very good 
examples. I think Pennsylvania, Texas are operating quite 
nicely. In fact, I think any efforts to forestall SMD or RTOs 
might be damaging to markets that have sort of evolved in this 
fashion before we ever started this language on standard market 
design. Those are good examples, and I think we can look to 
learn a lot from them as we go forward here.
    As to markets where they aren't yet operating, operating 
well, in my view, I think I would focus on the general region, 
say the Southeast part of the country where RTO does not exist, 
where there is a dominance in the marketplace of vertically 
integrated utilities that not only own transmission and 
distribution but also generation. And it is difficult for 
companies like Calpine and others who are building new 
generation units to break into that market, if you will, to get 
access to customers and offer a product that we think is a very 
desirable product. And so that would be my answer to your first 
question.
    Second, how do you create stable pricing for electricity? I 
think----
    Mr. Allen. In a deregulated market.
    Mr. Walter. In a deregulated market. I think there is a 
very simple answer to that: Willing buyers and willing sellers 
ought to be able to enter into bilateral, long-term agreements 
for the provision for and the taking of power. And we have 
encouraged this all along and are willing and able and 
motivated to do that in any area of the country where a 
wholesale entity that has end-use customers wants to enter into 
a long-term agreement to stabilize that cost of electricity. We 
have entered into many agreements where it is simply a fixed 
price for a period of time. We have entered into agreements 
where the electricity prices index to the local cost of fuel. 
But long-term agreements are the way to stabilize the 
volatility of electricity costs.
    In California, one of the first things that we did before 
this whole crisis really got out of control was to encourage 
the State to enter into long-term power purchase agreements, 
either the State themselves or the utilities. It just turned 
out it was the States that ended up doing that. We think that 
is a good way to stabilize prices.
    Mr. Allen. And you can do that both for the residential 
market with a State as well as industrial customers?
    Mr. Walter. No, not particularly. In retail----
    Mr. Allen. Retail is different.
    Mr. Walter. [continuing] it is not a common thing in the 
country yet. We do have about 9,000 megawatts of cogeneration 
facilities. In a sense, that is going directly to the end user 
in the sense that these industrials we have a direct 
relationship. But retail, in general, it is not widely applied. 
We focus on the wholesale markets, as I think most of this 
discussion here is based on.
    Mr. Allen. Thank you very much. Thank you, Mr. Chairman.
    Mr. Norwood. Thank you, Mr. Allen. I recognize myself now 
for 8 minutes, and I would like to take just a second to 
commend Chairman Barton. There is not total agreement on the 
bill, but I would like for everybody to know that Mr. Barton 
and his staff, I think, have run this process probably as well 
as any committee I have ever been associated with in my years 
in Congress, and I have some good feeling that we will perhaps 
be able to come to agreement next week.
    Just a quick follow-up on Mr. Whitfield's question to you, 
Mr. English, because he basically--or you basically said that 
it is your opinion this legislation is going to abrogate the 
contracts between power marketing and rural electric coops and 
therefore interfere with the contracts that you have that I am 
aware of about furnishing of electricity, flood control, 
recreation, et cetera. And what I presume by that is that your 
attorneys are telling you that the wording in this bill will do 
this, and the problem for people like us is our attorneys are 
saying, no, that is wrong, that isn't going to do that. And, of 
course, the difficulty is then a judge gets to decide. But I 
would invite you not to answer a question but to simply put in 
writing exactly why you think this language will do that, 
because I am hearing from other lawyers who say that it won't.
    Mr. Ervin, thank you for being here today. I wasn't sure 
from--other than your name, I wasn't sure if you were from 
Georgia or Louisiana or Tennessee. I wasn't certain what public 
service commission you might have served on, because all of 
them sound alike. But, obviously, with your name, we know----
    Mr. Ervin. I think only North Carolina would claim me, Mr. 
Chairman.
    Mr. Norwood. Well, we know by Ervin where it must be. And 
the reason we all sound alike is that we all enjoy low-cost 
electricity and reliable services, and all of us want it to 
continue, and that is typically where those of us in the 
Southeast come from and apparently the public service 
commissioners as well.
    Last week, the FERC commissioners were before this very 
subcommittee and Chairman Wood and I were having, if you would 
like to call it, a discussion discussing my concerns and those 
of many, frankly, in the Southeast, as outlined by the 
Southeastern Association of Regulatory Utility Commissioners in 
the letter that was sent to the chairman February 21. You are 
aware of the letter of which I speak.
    Mr. Ervin. Yes, sir; I signed it.
    Mr. Norwood. Well, I appreciated that letter, and I believe 
it did lay out our concerns about our region very accurately 
and in a fair fashion and simple enough for even chairman to 
understand. But I ran out of time last week, and I would like 
to get right at the meat of this.
    Has Chairman Wood responded to this letter to you 
officially?
    Mr. Ervin. I have not received any indication that he has 
to date; no, sir.
    Mr. Norwood. If and when he responds, particularly in 
writing, I would be very grateful if you would furnish a 
response to this committee.
    Mr. Ervin. Yes, sir.
    Mr. Norwood. You have seen no actual response by his 
actions either, so actually he has been silent on this subject?
    Mr. Ervin. To date, yes, sir. It appears to us that there 
are two ways that he could respond to it. One would be by 
return post, the other way would be through the white paper 
that I think has been alluded to at least once in our hearing 
this morning. Presumably, one way that a response could be made 
would be through a modification to the standard market design 
proposal that is laid out in the white paper. It is my 
understanding that that document is supposed to be released 
sometime in April.
    Mr. Norwood. Well, that document is nice. I am glad they 
are going to release it. But it has no force of law behind it 
at all, and therefore it is a little bit meaningless to 
people----
    Mr. Ervin. One thing that we have suggested in some of our 
comments was that one thing that the FERC might want to 
seriously consider, given some of the vagueness of the NOPR as 
originally issued was instead of issuing a white paper the one 
thing that might legally preferable would be to issue a second 
NOPR if they decided to persist and to eliminate some of the 
vagueness and lack of clarity in the original proposal. I don't 
know that anybody has suggested that they actually will do 
that, but that would be preferable from my point of view to a 
white paper, but a white paper is better than nothing.
    Mr. Norwood. Well, from my point of view, I would like to 
see it spelled out in the language, then there can't be any 
confusion on anybody's part. What is your view, Mr. Ervin, 
regarding what constitutes discrimination with respect to 
transmission reserve capacity?
    Mr. Ervin. It is our belief, Mr. Chairman, that 
discrimination with respect to transmission reserve capacity 
would be something which constitutes a direct violation of 
existing law. The NOPR, as I read it at least, would tend to 
indicate that somehow that reserving capacity for native load, 
which has paid for the system that exists, is somehow 
discriminatory, that treating native load as if it has--that it 
does not have a right to first call on that capacity is somehow 
discriminatory. I think one of the fundamental differences 
between the commissions, of which the North Carolina Commission 
is one, and FERC is, that FERC somehow seems to think that 
existing native load priority that gives retail customers--and 
we consider the IOU customers to be in this group, the mini 
customers to be in this group and the coop customers to be in 
this group--priority call on those assets, preferential access 
to them somehow to be discriminatory. We just don't understand 
that concept, but FERC somehow seems to think there is 
something wrong with that idea. We just don't agree with that.
    Mr. Norwood. Sort of an obligation to serve.
    Mr. Ervin. Yes.
    Mr. Norwood. And it is a real stretch to use that word. He 
and I discussed that last week.
    Mr. Ervin. And we just fundamentally don't agree with that.
    Mr. Norwood. Very quickly, in your view, what should the 
role of State commissions be in all of this? How will this role 
change if FERC is successful in implementing the standard 
market design?
    Mr. Ervin. We believe that if FERC is successful in 
implementing the standard market design as it is proposed in 
NOPR, it will be very difficult for the State commissions to 
implement State law as it exists now, because FERC will 
effectively have taken total control over the transmission 
system, which is currently subject to Sate regulation.
    Under the existing regulatory model, FERC controls the 
wholesale market, the States control the retail market. If the 
States lose control over the transmission component of bundle 
retail rates, FERC will have the authority to interfere with 
things that are traditionally subject to State jurisdiction, 
will be able to mandate changes in the existing retail rate 
structure, including the terms and conditions of service. We do 
not think that is a good idea because it will allow FERC to 
invade areas that are traditionally subject to State regulation 
and will enable them to do things that may or may not be 
consistent with existing State retail policies. We do not agree 
that they ought to be able to do that and would hope that this 
committee would not adopt measures that would allow them to do 
that.
    Mr. Norwood. Well, you implied that in your statement about 
it being a constitutional issue. I can't remember exactly what 
you said in there, but it--what did you say? It was in the last 
paragraph?
    Mr. Ervin. What I said, in essence, was the following: That 
it seems to me under constitutional structure that fundamental 
policy decisions are matters for Congress. And I recognize that 
the Constitution allows the delegation of some administrative 
functions to agencies. But fundamental policy decisions are 
matters for our elected officials. This NOPR goes to such 
fundamental matters that it appears to me at least that 
Congress should take an interest in this issue and that 
Congress should be the one to acts, if anybody acts, in this 
area.
    Mr. Norwood. Rather than the regulatory body.
    Mr. Ervin. Rather than a regulatory body, yes.
    Mr. Norwood. Well, my time is up, Mr. Ervin, but I could 
not agree with that statement more, not just electricity but 
the entire running of the Federal Government, and I appreciate 
you bringing that up.
    Mr. Hall, are you ready? You are now recognized for 5 
minutes.
    Mr. Hall. Mr. Chairman, I am ready, but I have not been 
here. I have been in another committee, and I don't know what 
questions have been asked. I will submit with your permission 
letters to these gentlemen for the things that I want to ask of 
them. I yield back whatever time I have not used.
    Mr. Norwood. Mr. Hall yields back. Mr. Shimkus, I believe 
you are now recognized for----
    Mr. Shimkus. Should be 8 minutes, Mr. Chairman.
    Mr. Norwood. [continuing] 8 minutes. That will work.
    Mr. Shimkus. Yes. And I can wait.
    Mr. Norwood. My word, did I skip my buddy down there? Mr. 
Doyle, you are recognized for 5 minutes. Sorry about that.
    Mr. Doyle. Thank you, Mr. Chairman. I thought maybe you 
couldn't see me hiding behind Ralph here. Mr. Chairman, I have 
a very interesting and informative opening statement that I 
didn't get a chance to deliver, so if I could have that entered 
into the record, I would appreciate it.
    Mr. Norwood. So ordered.
    Mr. Doyle. Thank you. Mr. Walter, how are you? And welcome 
to all the panelists. Mr. Walter, we have been hearing for 
quite some time and repeatedly throughout this morning that 
FERC's efforts to move toward RTOs and create competitive 
regional electricity markets will lead to less control of the 
transmission grid or an increase in speculation in higher 
prices. But in the area where I am from, I represent 
Pennsylvania where we are several years into a deregulated 
market and I have heard quite different reports in recent 
years. And I believe your company is involved in the 
Pennsylvania market, and I was wondering if you could just take 
some time to discuss the record of PGM where many of these 
policies are in place today and whether they have been good or 
bad. How is that for a softball?
    Mr. Walter. Thank you. I do have a few statistics that we 
gathered up on PJM, because, as I said earlier, I think it is a 
good place and a good model for other regions in the country. 
Average prices in PJM were 13 percent lower in 2002 than 2001, 
despite three new all-time peak use records in 2002. The PJM's 
regional planning process currently has in its budget $726 
million of transmission upgrades, so even though independent 
companies like ourselves often have to pay for upgrades in PJM, 
it is actually going on in the planning sort of process.
    Hourly average systemwide locational measure pricing in PJM 
in 2002 was approximately the same as in 1999 and 2000. Rising 
fuel prices are the most significant contributor to those 
increases, not the implementation of SMD-like features in PJM. 
And, finally, since 1999, PJM has connected over 7,000 
megawatts of new generation. I might add, Ontowannee is a 
facility that we own near Reading in Pennsylvania. We are proud 
to have that in operation as of late last year. And 4,000 
megawatts are presently under construction. So I think from a 
transmission perspective, from a pricing perspective and from a 
generation perspective, it is a good model.
    Mr. Doyle. Thank you. Mr. Moore, I appreciate many of the 
comments in your testimony today and share your interest in 
expanding utilization of the CHP systems. I have seen how these 
systems, I think, can be effective in increasing the diversity 
of our portfolio, which is a core goal of mine in our efforts 
to formulate a comprehensive national energy policy. Now, in 
your testimony, you mention that you support the formation of 
RTOs but you have concern with PURPA reform provisions in the 
draft bill we are examining. But as I understand the bill's 
provisions, it would terminate the mandatory purchase 
obligation only in certain cases, such as the qualifying 
facility as a member of an RTO, which you say you favor. And I 
know you have already expanded on your concerns with PURPA in 
response to Mr. Boucher's question but you also suggested that 
you would like to see us give FERC guidance on how to determine 
a competitive market. And I guess I am not sure if that is a 
proper or frankly achievable legislative goal, so I wonder if 
maybe you could expand a bit on why you see that as appropriate 
and how we would achieve it if you think it is appropriate?
    Mr. Moore. Legislative language explaining what a 
competitive market is we recognize the difficulty of that, and 
the chairman has challenged me to get language back to the 
committee staff and try to do that, which we will do by the end 
of the day. We just simply think when you put in legislative 
language that FERC can do that, FERC would probably appreciate 
some guidance as to what constitutes a competitive market. That 
is what we are pointing at. The current FERC I don't think we 
would have a problem with them being able to figure that out. 
We don't know what a future FERC would think like. And so we 
think that some legislative language might be helpful to 
further flesh out what the chairman means when he says that.
    Mr. Doyle. Thank you. Mr. Chairman, that is all the 
questions I have. I yield back.
    Mr. Barton. We thank the gentleman from Pennsylvania. We do 
now recognize the gentleman from Illinois for 8 minutes, Mr. 
Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. This is a great 
hearing, and I have been--I am on my seventh year of being in 
the committee, and I think I have sat through about 40 hearings 
on energy, not only here in Washington but I know I attended 
one in Chicago a long time ago. So for those who have said that 
we haven't fully vetted out energy issues, I don't know where 
they have been. But is has been fun, and I have made a lot of 
friends along the way and learned a lot of stuff.
    Let me ask a first question. Mr. Owens, you represent the 
IOUs. Do they generate power that is sold across State lines?
    Mr. Owens. Yes, they do.
    Mr. Shimkus. Ms. Schori, Sacramento Utility District, do 
you generate your own electricity?
    Ms. Schori. Yes. We own about enough generation at this 
point to serve close to half of our load. We also have long-
term contracts that take us up to about 70 percent of our load.
    Mr. Shimkus. Those long-term contracts are with who?
    Ms. Schori. We have some in the Pacific Northwest, and we 
are also----
    Mr. Shimkus. They are outside the State of California?
    Ms. Schori. Yes.
    Mr. Shimkus. Okay. Thank you. How about you, Mr. Twitty? Do 
you fulfill all your baseload by internal generation?
    Mr. Twitty. We are capable of doing so; however, we do also 
have outside contracts as well.
    Mr. Shimkus. And are they across State lines?
    Mr. Twitty. In some cases, yes, sir.
    Mr. Shimkus. Thank you. Mr. English, good friend, we have 
seen you traveling all around the country. Do the Rural 
Electric Cooperatives rely on other generation other than 
baseload to fulfill the needs of the members?
    Mr. English. We do.
    Mr. Shimkus. Are they in other States?
    Mr. English. In some cases, yes.
    Mr. Shimkus. Thank you. Mr. Walter, obviously I don't need 
to ask you this question. Mr. Ervin, also, is any utility 
within the State of North Carolina do they have contracts that 
go outside the State to provide basic electricity generation?
    Mr. Ervin. Absolutely.
    Mr. Shimkus. Great. This is my problem with this whole 
debate: Transmission--and I am glad we talked about the 
Constitution, because obviously we know the interstate commerce 
clause.
    Mr. Ervin. Certainly.
    Mr. Shimkus. And it addresses the issue, and I would say 
that electrons that are being used across State lines easily 
falls into interstate commerce. Would anyone disagree with 
that?
    Mr. Ervin. If I can maybe anticipate where you are going, 
Mr. Shimkus. The question, it seems to me, on the table is not 
necessarily what is the constitutional power of the Congress, 
because----
    Mr. Shimkus. It is who designs that? And let me interrupt 
here because even though I have got 8 minutes it goes pretty 
quick.
    Mr. Ervin. Right.
    Mr. Shimkus. But I was interested in the exchange that you 
had with my friend Charlie Norwood, because he was pretty 
revved up about your constitutional quote, as he should be. And 
I think the point is we ought to make those decisions on 
interstate commerce as elected officials----
    Mr. Ervin. Right.
    Mr. Shimkus. [continuing] which I concur. But I would also 
say that what we are addressing here is interstate commerce 
issues and there is a role for us. As much as I have friends 
across the board to say that this is not a role of the Federal 
Government, I don't think would be correct with the intent of 
the founding fathers or as how we have evolved.
    Let me tell you why the concern is here. I have a hard time 
understanding for the individual consumers how expansion of the 
grids for any of you is not helpful.
    Mr. Ervin. All right. May I say a couple of things?
    Mr. Shimkus. It depends on how quickly you can say it.
    Mr. Ervin. All right. I will try to say it very quickly. 
There are two questions, it seems to me. One is the issue of 
what is the constitutional power of the Congress, and you 
talked about the commerce clause, and I am not going to discuss 
with you what is the extent of Congress' power if you choose to 
exercise it. The second question is given what the extent of 
the Congress' power is, you have the prudential issue of given 
the extent of Congress' power, what should be the manner in 
which Congress chooses to exercise it? Our argument then 
becomes, and I am not going to make it because it is in my 
written argument----
    Mr. Shimkus. Okay. Let me ask this question----
    Mr. Ervin. [continuing] there are significant regional 
differences and they should be recognized----
    Mr. Shimkus. Yes. Well, you made that statement--you made a 
statement in your opening comments, ``Electricity is not 
performed in a uniform manner.''
    Mr. Ervin. Yes, sir.
    Mr. Shimkus. Now, if it is interstate commerce on 
transmission, my question is why shouldn't it be?
    Mr. Ervin. Because to go back to the----
    Mr. Shimkus. Okay. Go ahead, I am sorry.
    Mr. Ervin. Because we have different models in different 
parts of the country. We have the PJM model in Pennsylvania, we 
have the vertically integrated model in the South.
    Mr. Shimkus. Okay. Let me cut in there, and let me tell you 
why I have a concern on this. I think--and, again, I have 
friends there--I don't see how any consumer is harmed when they 
are given more choices and there is more access to the grid. I 
don't see how any coop is harmed when they don't have the 
ability to buy more power from multiple choices. I see the 
country as more protective the more we expand the grid. There 
is less of an ability to exercise market power over the grid 
when you have an expanded grid. In Illinois, we got hit 2 or 3 
years ago because a transmission grid--a line went down here, 
power generation fell down, and because of the inability to get 
power from point A to point B, that hurt an escalation of 
prices. I think the best way that we address market power 
concerns, which are credible market power concerns out there, 
is to expand the grid.
    Mr. Ervin. All right. And I guess the answer that my region 
would give you to that argument would be that we believe that 
is a question that is appropriately determined by our State 
legislatures because retail electric service has traditionally 
been a State matter. And our State general assemblies have, to 
date, looked at the question of whether they prefer to have 
retail competition or----
    Mr. Shimkus. Yes. But with all due respect, for you to have 
competitive retail competition, you need to have competitive 
wholesale purchasing ability.
    Mr. Ervin. And my point, I guess----
    Mr. Shimkus. And when we don't expand the grid we don't 
have that.
    Mr. Ervin. And to finish up what I was going to say, and we 
may just have a fundamental disagreement and that is, I 
believe, okay, our general assemblies have concluded that they 
believe they are better off with the existing system, and our 
argument is that we ought to be allowed----
    Mr. Shimkus. Isn't the bigger concern by the constituents 
of areas is that they don't feel there is going to be any 
increased competition, they don't think there is going to be 
more generation, and they feel that the low-cost power will 
shift outside of the regional boundaries, thus causing 
increased prices for your individual consumers?
    Mr. Ervin. I think--to put it differently, I think our 
argument would be that we believe that our existing system 
works for us, and we are not persuaded that it needs to change.
    Mr. Shimkus. And with that, I would like to----
    Mr. Ervin. And that is fine.
    Mr. Shimkus. [continuing] Mr. English and give you a 
chance, but my time has run out. I have taken full----
    Mr. Barton. No. We want a full hearing record. If Mr. 
English wishes to comment on that, just try to be as brief as 
possible.
    Mr. Shimkus. As you prefer, Mr. Chairman.
    Mr. English. I will be very, very quick. If that is what 
you are after, you have got two provisions in this bill that 
are giving you real problems. One is incentivary provision 
because it completely ignores the fact by reducing risk you in 
fact can encourage the building of transmission. The second one 
is the participant funding provision, which within a region 
discourages the building and improvement of transmission. So 
you have got some real problems if that is what your aim and 
objective is, and I think you need to go through the bill and 
look at that.
    Mr. Shimkus. Thank you. Since Mr. Walter is shaking his 
head, no, in reference our ability to make sure everything is 
on the record, I think it would be appropriate to have Mr. 
Walter respond.
    Mr. Barton. Well, before I recognize Mr. Strickland, just a 
follow-up to Mr. Shimkus' question. Mr. Ervin, what if we 
mandated--no, let me back away from that. What if we allowed a 
provision for economic dispatch that if a market provider, a 
generator, could guarantee lower-cost power to your State, is 
that a good thing or a bad thing?
    Mr. Ervin. I guess, Mr. Chairman, it is my belief that if a 
lower-cost producer can sell power to a utility in North 
Carolina now, it is my belief that our utility is obligated to 
buy it under----
    Mr. Barton. Not if you have closed State and don't allow a 
merchant plant to have access to the transmission grid.
    Mr. Ervin. We allow merchant--we have certificated a number 
of merchant plants in North Carolina within the last 2 years.
    Mr. Barton. Mr. Walter says Calpine has got plants that are 
idle that are the most effective and efficient generation of 
electricity plants in the country. I bet his company would love 
to send some power into your State if they were given the 
opportunity to do so.
    Mr. Ervin. Calpine would be welcome to come file an 
application to site a plant in North Carolina.
    Mr. Barton. No, no. We didn't say site a plant in North 
Carolina. We said have power that is available to be shipped to 
North Carolina so that Mr. Moore's consumers that use it could 
buy from Mr. Walter's generators and use the transmission lines 
that your State public utility commission controls. Economic 
dispatch. We are not taking away anything from the State, we 
are just saying if somebody can give your consumers a better 
deal, maybe that is okay.
    Mr. Ervin. And we may be quibbling over economic dispatch, 
and I don't mean to do that, Mr. Chairman, if I am, I 
apologize.
    Mr. Barton. You learned a lot from your grandfather.
    I watched those hearings when he was chairman.
    Mr. Ervin. And I don't mean to be quibbling over economic 
dispatch, but in the event that power from one of Mr. Walter's 
plants can be economically delivered to North Carolina under--
and wholesale transmission rates are set by FERC, we don't 
control those. The terms and conditions of wholesale 
transmission are controlled by FERC now, we don't control that.
    Mr. Barton. Well, my understanding is----
    Mr. Ervin. If they can be delivered to North Carolina at an 
economic rate and at a price more economical than our utilities 
can dispatch them now under our existing rules, our utilities 
would be obligated to buy from Mr. Walter's plants and not----
    Mr. Barton. But apparently only if they are sited within 
your State boundaries.
    Mr. Ervin. No, no. And I don't mean to be under--if you 
interpret me as having said that, that would be inaccurate. Our 
utilities are obligated to use the least cost resource, be it 
their own plant or----
    Mr. Barton. But they have to have access to it.
    Mr. Ervin. Correct.
    Mr. Barton. If they don't have access to it, there is no 
obligation for them to use it.
    Mr. Ervin. That is correct. But if the access--if there 
is--and the only problem that would prevent them form having 
access to our utility system would be the lack of transmission 
capacity. That is not a problem that results, in our view at 
least, from the existence of the native load priority, which is 
the thing that I have defended here today, because we do not 
believe that the existence of the native load priority is any 
kind of impropriety.
    Mr. Barton. Well, I think there are a lot of people that 
are classified as native loadees who would love the opportunity 
to lighten the load on their pocketbook if we could find a way 
within the various constraints to make it happen. We are going 
to recognize Mr. Strickland for 5 minutes. Eight? Five minutes? 
Okay, 5 minutes.
    Mr. Strickland. Five minutes, and Mr. Chairman, I will not 
take the 5 minutes; I only have one question for Mr. English. 
As you are aware, FERC has issued a standard market design 
proposed rule, and I am just interested in your opinion as to 
what impact this would have on the rural cooperatives?
    Mr. English. Well, as written, it could have significant 
impacts on electric cooperatives. We are all across the Nation, 
we are in 47 States in different regions that would impact far 
more than it would others. We are very hopeful that FERC is 
going to amend that. We have got 200 pages of specific 
amendments we are requesting, and we are hopeful that is going 
to change. What we are very concerned about is that there are 
some provisions, not all, some provisions in this legislation 
that will become intertwined with this standard market design 
and as it is ultimately written. And until we know the final 
outcome of that standard market design, these provision 
complicate the situation. We would hope that this committee 
would consider targeting those provisions that would be 
affected by the standard market design and set those aside for 
the time being until this whole matter has been resolved.
    Mr. Strickland. Thank you. I yield back my time, Mr. 
Chairman.
    Mr. Barton. Gentleman from Oregon for 5 minutes.
    Mr. Walden. Thank you, Mr. Chairman. I have a question for 
all of you, I guess, on this issue. I know one of the things 
that is going on in the Northwest are merchant power plants 
being sited, and one of the issues that comes up in that 
process is there is a limited supply of air shed, there is a 
limited supply in some cases of water, there are limits to how 
much gas is available, and certainly to the distribution grid. 
We have a real capacity issue in the Northwest; in fact, this 
Congress just this year in the 1903 omnibus approved $700 
million bonding authority for Bonneville to be able to try and 
keep pace with building out the grid, because we don't want to 
be like California and have a lack of capacity.
    So I guess my question gets to this issue of the native 
load. How do you see the provisions in this bill affecting the 
local ratepayers, because I can envision a situation where you 
have merchant power plants that seek out areas where there may 
be easy and cheap access to a gas pipeline, which happens in my 
district. But as they such up that gas, that means heating 
prices are going up because of the competition for that same 
gas. The water rights, the air shed rights, how does this 
affect that? How do the proposals of this legislation affect 
that? And if you can keep your answers fairly short, because I 
have another one after that. Let us start with Mr. Owens and 
then work across if you would.
    Mr. Owens. Let me take a crack at it, Congressman. I 
compliment the bill from the standpoint of recognizing that 
there is a need for infrastructure expansion.
    Mr. Walden. Right.
    Mr. Owens. One of the areas that you elaborated on, and 
other witnesses and many of the members of this fine 
subcommittee have elaborated on, is the need to expand our 
transmission system. At the heart of this bill is the 
desirability and the need to do that. We have a transmission 
system that substantially congested, as other witnesses have 
indicated today, and as I understand and read the electricity 
title very carefully, it suggests way, to enhance the 
construction of transmission through proper pricing incentives, 
through expediting the construction of transmission in 
congested areas that have been identified by the Department of 
Energy as representing the public interests and eventually 
lowering rates. It facilitates the siting of transmission 
across Federal lands. So it does a lot to deal with a resource 
constraint that we have.
    Mr. Walden. Well, I hate to cut you off, but we are under 
2\1/2\ minutes, so if we could be just quick and maybe we can 
follow-up after the hearing. Push your microphone button in if 
you would, please.
    Ms. Schori. Sorry, thought it was on. Yes. Thank you. Just 
very quickly, I would say that there are many parts of the 
overall energy bill that I think will be beneficial, but there 
are a number of questions about how do we figure out if 
ultimately the cost/benefit analysis in good things happening 
for consumers? If you look at the industry right now, the key 
issue, nobody is credit worthy, simply increasing the rate of 
return is not going to cause Wall Street to want to loan money 
to PG&E and Edison in California. We need to get to the 
fundamentals, reestablish a market where long-term contracts 
are valid and valuable, recognize that we have very scarce 
resources, as you mentioned--air, water. Simply creating a 
Federal decisionmaking process, if I--and I am involved in 
hydro relicensing. That does not necessarily mean you get a 
speedy decision.
    Mr. Walden. Okay.
    Mr. Twitty. I think our concern would be, as I mentioned 
earlier, if you repeal PUHCA, if you take away FERC's merger 
authority, you do limit the opportunities for customers to 
benefit. And as community-owned utilities, we are interested 
only in customer benefits. And if you don't have more 
competition, that is going to be negative for customers.
    Mr. Walden. All right. Mr. English?
    Mr. English. The chairman referred to a national grid 
earlier today, and I think that he is on the right track with 
regard to an issue of a national grid. We desperately think 
that there needs to be some kind of addressing of this fact, 
and our membership is very dependent on that. But in addition 
to that, you also have got to determine how are you going to go 
about doing that. And we need to use all of the options, not 
just limit ourselves to one or two.
    Mr. Walden. Okay.
    Mr. Walter. As one of the few companies that actually built 
merchant generation in the Northwest, we would say this: There 
aren't going to be anymore hydroplants built. I don't believe 
that Washington and Oregon want to have more coal generation. 
There is growth that is going on in the Northwest, they need 
natural gas-fired power plants. Now, as to emissions and water, 
as you know, the power plants we are building have 99 percent 
less SO2 than coal, they have 95 percent less 
NOX, they have 60 percent less CO2. As to 
water, we are prepared, and we have in many areas of the 
country, built air-cooled plants if municipal waste water or 
other water supplies are not available. So that to us is not an 
issue in the Northwest.
    Mr. Walden. Okay. Mr. Moore?
    Mr. Moore. Congressman, basically, the protection of the 
consumer is a national grid, as the chairman was trying to get 
to, so you can move power where it is needed and do it 
efficiently and cheaply. And, second, it is increased 
generation of all forms of power and all forms of power, which 
the bill tries to get to. You need more alternative forms of 
energy, more forms of energy and be able to get it to the 
consumer.
    Mr. Walden. Mr. Ervin?
    Mr. Ervin. I feel like I have talked enough today already, 
but one protection that we have at least in our structure is 
that under the regulated markets that we have, we have the 
authority, assuming that we provide an appropriate return on 
the investment, to compel the construction of appropriate 
facilities. And our companies have been perfectly willing to 
make the necessary investment----
    Mr. Walden. Right.
    Mr. Ervin. [continuing] in needed generation and in 
transmission and in distribution infrastructure without the 
necessity for that power to be even be invoked. So that we have 
had a good cooperative working relationship with our utilities, 
and the studies that we have done have indicated that that 
system has worked pretty well.
    Mr. Walden. Thank you. My time has expired. Thank you.
    Mr. Barton. The gentleman from New Jersey, Mr. Pallone, is 
recognized for 5 minutes.
    Mr. Pallone. Thank you, Mr. Chairman. I don't think I will 
use it all, but I know that Mr. Walter previously gave an 
overview of the PJM system, and, Mr. Walter, you mentioned in 
your testimony that timely action by FERC to bring to a final 
resolution the issues addressed by standard market design is an 
important way to help develop power resources. I represent New 
Jersey, which is within the PJM interconnection, and this 
electricity market works well for us in my State, frankly. We 
have adequate generation supply today, and companies are 
willing to invest in the future, because we have clear rules 
and a stable regulatory environment.
    I understand, though, that not everyone likes everything 
about FERC's standard market design, and I too have some 
concerns. I also understand that some members of the House may 
wish to see Congress step in and block FERC from moving forward 
on its proposed rule. So my question, Mr. Walter, if Congress 
acts in a way that prevents FERC from continuing its work to 
ensure electricity markets function well across the country, 
what kind of harm do you think would come or come to 
electricity consumers in my State within the PJM? If you could 
respond to that?
    Mr. Walter. Well, my response would be that it would be a 
negative impact. We are in favor of open markets throughout the 
country, and so we have been supportive of the principles, not 
necessarily SMD and the 600-page form that has been sent out 
but something that supports those key principles. So it would 
be negative for markets that aren't yet having open 
competition. But as you point out, in Texas and in Pennsylvania 
and in New Jersey and Maryland, if they were to start to 
unravel the good works that have already been done and created 
and functioning now, that would definitely be negative, and it 
would not only hurt consumers there, it would create insecurity 
and instability that is now not there.
    Mr. Pallone. Okay. I see Mr. Ervin wants to answer the 
question too or comment.
    Mr. Ervin. And I think that that is an extremely valid 
point, which goes to something I said earlier. The PJM market, 
according to a lot of my colleagues that I have talked to up 
there, has worked well for the citizens of those States. The 
markets that we have in the Southeast most of us feel have 
worked reasonably well for our citizens. And so when I call 
upon this committee to take action to deal with this, indeed 
one of the things that I think that I would ask you to consider 
is how do we take action, how do I ask you to take action in 
such a way that we accomplish what you suggest at the same time 
that we accomplish what I suggest.
    PJM works well for the citizens of the region that you 
represent. However, we are concerned that because we don't have 
the history of tight power pools in the Southeast, that what 
works well in PJM would not work well in the Southeast, just 
like what works well in the Southeast might work well for PJM. 
These regional differences are important and we need to 
recognize them and move forward in working on these problems in 
such a way that your interests are protected and our interests 
are protected. And so I think we need to work cooperatively so 
that these differences are recognized.
    Mr. Pallone. Thank you. Thank you, Mr. Chairman.
    Mr. Barton. The gentleman from North Carolina, Mr. Burr, is 
recognized for 5 minutes.
    Mr. Burr. Thank the Chair. Commissioner Ervin, in your 
testimony, you cited an exchange that I had with Pat Wood at 
our last hearing, which he claimed that the study, I think it 
was the Southeastern Regulators commissioned by Charles River 
Associates, actually proved that the Southeast would see 
savings from the standard market design if implemented as 
currently written. I asked him if this was one of many 
scenarios that was in fact brought up in that study. Can you 
shed some light on what the conclusions were of that study and 
how it affected the Southeast?
    Mr. Ervin. The ultimate conclusion of the study was that it 
was not clear that the assertion that Chairman Wood made before 
you is in fact the case. The actual statement by the consultant 
was, ``There is considerable uncertainty as to whether RTOs in 
the SMD would provide greater benefits to the Southeast in the 
implementation costs.''
    Mr. Burr. They modeled this under several different 
scenarios, didn't they?
    Mr. Ervin. I don't have--didn't bother to count up exactly 
how many scenarios they ran, but there were at least 10 
discussed in the body of the report.
    Mr. Burr. One assumed that if everything were perfect, you 
might, and I stress the word, ``might.''
    Mr. Ervin. I think that is a fair conclusion.
    Mr. Burr. Ms. Tezak will testify in the next panel, and----
    Mr. Ervin. That is my understanding.
    Mr. Burr. [continuing] in her testimony, she says that New 
York v. FERC in the spring court case is a crystal clear, and I 
quote, ``ruling from the court that FERC has ultimate 
jurisdiction over the transmission but has the authority to 
delegate it when it chooses.'' Let me ask you if that is your 
opinion?
    Mr. Ervin. No, it is not.
    Mr. Burr. What is your opinion on whether that----
    Mr. Ervin. My opinion after having read that case a number 
of times is that it leaves the ultimate issue raised by 
standard market design undecided. The court held that FERC did 
not err by failing to exercise as a matter of policy decision 
jurisdiction over an unbundled retail transmission. FERC, in 
essence, in Order 2000 said that it had jurisdiction over 
unbundled retail transmission but that it did not choose assert 
jurisdiction over bundled retail transmission. The court held 
that FERC did not err in choosing to proceed to exercise 
jurisdiction over bundled retail transmission. One of the 
reasons that the court said that FERC did not err in making 
that choice was because to do so would raise serious 
jurisdictional questions or something to that effect and 
pointed out that the issues raised by the State of New York, 
which challenged the FERC's exercise of jurisdiction over 
unbundled retail transmission itself raised serous 
jurisdictional issues. So that I think there are serious legal 
issues raised by the FERC's decision in this and the NOPR to 
assert jurisdiction over bundled retail transmission.
    Mr. Burr. So the term, ``crystal clear,'' would not be 
something that you would----
    Mr. Ervin. That would not be the way I would choose to 
characterize it. I made the mistake perhaps going to law school 
a number of years ago, and I would not choose to characterize 
the New York decision as crystal clear in FERC's favor.
    Mr. Burr. Mr. Chairman, let me also exercise the fact that 
in my opening comments, I missed the opportunity to acknowledge 
our former colleague who is on the panel and certainly want to 
welcome him. I would also ask for unanimous consent to enter 
into the record additional questions for these witnesses.
    Mr. Barton. Without objection.
    Mr. Burr. I yield back.
    Mr. Barton. The Chair recognizes the gentleman from 
California, Mr. Waxman, for 5 minutes.
    Mr. Waxman. Thank you, Mr. Chairman. Unprecedented market 
abuses have come to light over the past year, and I want to 
give the panel two examples that cost consumers millions of 
dollars. In May 2002, internal Enron documents were revealed 
that described how the company manipulated the California 
electricity market to increase prices artificially. Through 
market manipulation strategies that Enron called fanciful 
names, like Get Shorty and Death Star, Enron gouged western 
families and businesses. Earlier this year, transcripts from 
Reliant Energy revealed a coordinated strategy to shut down 
power plants in order to drive up electricity prices in June 
2000. Cynically, Reliant decided to wage a campaign to blame 
the Clean Air Act for the power plant shutdowns. I am concerned 
that the legislation that the chairman is proposing does 
nothing meaningful to address these problems. To stop market 
abuses, energy companies need to believe that there is a 
credible possibility of enforcement, and to have a credible 
possibility of enforcement you need clear prohibitions with 
sufficient penalties. Do any of the witnesses believe that 
fraudulent or manipulative behavior of Enron and Reliant should 
be condoned? None of you responded that you do. Would everyone 
agree that fraudulent behavior should be prohibited? All the 
members of the panel seem to be nodding in the affirmative. 
Would everyone agree that FERC should be able to issue 
regulations to prohibit fraudulent or deceptive ads? Anybody 
disagree with that?
    Mr. Owens. I would add, Congressman, FERC should be able to 
do it and it should be able to apply to all participants of the 
marketplace.
    Mr. Waxman. Okay. Now, let me ask about penalties. Section 
7084 of the discussion draft increases the amount of penalties 
that FERC can assess under Section 316 of the Federal Power 
Act. However, it does not provide for discouragement of 
profits. Without fear of having discouraged profits, bad actors 
can continue their bad behavior, confident that market abuses 
remain profitable as long as they generate more income than the 
penalties that could be assessed under Section 316 of the 
Federal Power Act. I want to ask each witness should a bad 
actor be permitted to keep the profits it makes from 
fraudulent, manipulative or deceptive behavior? Starting with 
you, Mr. Owens. Do you agree that there ought to be 
discouragement of profits?
    Mr. Owens. That is a tricky question. No, I don't believe 
that a bad actor should be able to keep profits that have been 
determined to be unjust and unreasonably achieved. I think that 
the Power Act deals with that.
    Mr. Waxman. Well, let me put it this way: We have a 
proposal that Mr. Dingell, Mr. Markey and Mr. Boucher and I are 
making that penalties be no greater than $1 million or three 
times the profits made. Would you support such a proposal?
    Mr. Owens. I would have to see it in context.
    Mr. Waxman. Okay. Let us go down the list.
    Ms. Schori. Actually, today I am here on behalf of the 
Large Public Power Council, so I don't have a position on 
behalf of LPPC----
    Mr. Waxman. Okay.
    Ms. Schori. [continuing] on the bill that you have 
proposed. I do think that the characterization of the 
marketplace is accurate that you have described, and obviously 
being from California, having been hammered, having taken a 22 
percent rate increase in Sacramento ourselves in terms of what 
we went through, I personally lived through what you are 
talking about and experienced it.
    Mr. Waxman. But is it fair to say--I appreciate that, but I 
want to get everybody in.
    Ms. Schori. Excuse me, all I----
    Mr. Waxman. Is it fair to say do you think a bad actor 
should not be permitted to keep profits it makes from 
fraudulent, manipulative or deceptive behavior?
    Ms. Schori. I think that is a fair statement. I think it is 
critical that we define what a bad actor is. We need to get the 
structure right, set the rules and not be still trying to 
figure it out 2 years after we did the contract, though.
    Mr. Waxman. Mr. Twitty?
    Mr. Twitty. I think it is certainly something that should 
be seriously considered. However, I do think that it is 
difficult to legislate all the specific kinds of bad actions 
that can go on. I think you do have to give some broad idea 
about the things that ought to not occur and then let whoever, 
the regulator or the courts, have some say in that.
    Mr. Waxman. Should we let FERC do that?
    Mr. Twitty. I think FERC is as good a remedy as any.
    Mr. Waxman. Mr. English?
    Mr. English. On behalf of the consumer on not-for-profit, I 
say right on.
    Mr. Waxman. Okay. Thank you. Mr. Walter?
    Mr. Walter. Mr. Waxman, I am not familiar with the draft of 
your bill. Wrongdoing should be punished and punished, 
according to others, that I can't judge exactly what the rules 
ought to be, and it has got to be defined, but I think the 
punishment should be appropriate to the wrongdoing. I would 
like to take this opportunity to point out that Calpine as a 
company has performed very much differently than I think a lot 
of the accusations that have been made. We were not mentioned 
in the California report that was issued to FERC last week. We 
decided early on that we would continue to operate our power 
plants, and we have a number of them in the State of 
California. If there was a ever a possibility of an emergency, 
we operated our power plants. And I should remind----
    Mr. Waxman. Mr. Walter----
    Mr. Walter. [continuing] you that that was in light of the 
fact that in many cases we weren't even getting paid and we 
continued to operate. And so I just want to make the record 
clear that Calpine is a very much different company in how they 
approach this whole situation in California.
    Mr. Waxman. Thank you very much. Mr. Moore, Mr. Ervin, do 
you want to answer the question that I have asked all the other 
members: Should a bad actor be permitted to keep their profit 
it makes from fraudulent, manipulative or deceptive behavior? 
And whether you have any sense of whether you would support a 
penalty that is no greater than $1 million or three times the 
profits made?
    Mr. Moore. Mr. Chairman, our members were badly hurt in 
California by what went on out there, and certainly we are with 
everybody else, that nobody ought to profit from it. The 
specifics we haven't looked at, we don't know anything about.
    Mr. Waxman. Thank you.
    Mr. Ervin. Congressman, I think I would echo what Mr. Moore 
said. Without endorsing the specifics, the general sense of 
what you say makes sense to me.
    Mr. Waxman. Thank you very much. I thank the panel for 
responses to the questions.
    Mr. Barton. Before I recognize Mr. Otter, Mr. Walter, if 
the State of California at the time Mr. Waxman was asking his 
questions had allowed bilateral contracts outside of the power 
exchange and the required market transparency provisions such 
as are in the current bill, in your opinion, would you have had 
the problem that you had in California?
    Mr. Walter. If the utilities were encouraged and not 
actually not allowed to enter into long-term power agreements, 
it would have mitigated a lot of the difficulties that we 
experienced that year.
    Mr. Barton. And the reason they couldn't do that was 
because of the California law; isn't that correct?
    Mr. Walter. My understanding, and I am not a lawyer, my 
understanding is that its utilities were discouraged from 
entering into long-term agreements and in certain cases by the 
PUC not allowed to.
    Mr. Barton. Okay. Mr. Otter is recognized for 8 minutes.
    Mr. Otter. Thank you, Mr. Chairman. I would kind of like to 
follow-up on that, because the last term I served on the 
Government Reform Committee, and in our subcommittee we had 
considerable hearings relative to that. We were told by the 
witnesses that they were not only discouraged from it but they 
were specifically told that they could not. In fact, the city 
of San Diego had an opportunity just several months prior to 
the crisis hitting of optioning a long-term contract for $25 
and they ended up paying $300 because they were told that they 
could not engage in the--because, ``This was the Governor's 
idea of deregulation.'' Do any of you--and just yes or no is 
fine--do any of you believe that what California went through 
was the result of deregulation?
    Mr. Walter. I think it was----
    Mr. Otter. Yes.
    Ms. Schori. We ended up with a dysfunctional market 
structure, and there is 100 percent agreement in California on 
that point.
    Mr. Otter. I don't doubt that, but did you think that that 
was a result of the free market working?
    Ms. Schori. It was a result of a defective structure that 
then was compounded by a number of additional mistakes 
including, to be frank, the failure of FERC to act promptly to 
address the problem.
    Mr. Otter. Do any of you believe that there wouldn't have 
been considerable conservation had the retail price floated 
with the cost of the market?
    Mr. Walter. There would have been a response on the demand 
side if they were able to respond, and in many cases they were 
not. I want to focus on one thing if I might.
    Mr. Otter. Okay.
    Mr. Walter. One of the biggest issues that we have in 
California then, today and tomorrow is the fact that there is 
not enough generation in California to supply the consumers 
there. That is one of the fundamental issues that we continue 
to talk about manipulation, we continue to talk about 
dysfunctional market structures. The fact of the matter is 
there is not enough electricity in California to supply the 
demand.
    Mr. Otter. Thank you. Have any of you ever shut down an 
operation in order to qualify or in order to make sure that you 
were obeying some of the--or had to take actions within those 
operations in order to obey the Clean Air Act?
    Ms. Schori. Virtually all power plants in California, if 
not across the country, have operating hours restrictions 
related to how many pounds of pollution you are entitled to 
emit, and you are in violation of the Clean Air Act if you 
operate in excess of those limitations. So SMUD does own 
cogeneration plants in our service area that are subject to 
those kinds of limitations. We cannot operate in excess of 
that, and we try to plan to make sure the hours will be 
available when we most need the plants.
    Mr. Otter. Well, my point was----
    Ms. Schori. We haven't been ordered to shut down.
    Mr. Otter. My point is is that there are--operating plants 
shut down all the time in order to qualify for some Federal 
regulation, and it just doesn't have to be power plants. But 
the Clean Air Act is pretty broad. It gives you certain 
windows, and once you reach a certain level of pollution, to 
use your term, well, you have to shut it down. Otherwise you 
are in violation of the law; isn't that true?
    Ms. Schori. Yes.
    Mr. Otter. Okay. I would like to go to Mr. Moore now if I 
might briefly. Many of your comments were made relative to 
PURPA. Under PURPA, I think we still use the avoided cost in 
trying to establish a term for power; am I not right?
    Mr. Moore. That is still the law. I don't think that 
happens in the marketplace.
    Mr. Otter. What does happen in the marketplace?
    Mr. Moore. Most all the contracts go into market prices, 
and that is the way it ought to be. The voided cost thing was 
created 20 years ago or whatever when nobody knew how to get 
into this. It is still in the law. There may be some examples 
of that still going on around the country, but I had a 
conversation with Mr. Wood of FERC and we looked over recent 
transactions in many parts of the country and they were all 
market priced, and that is the way they ought to be.
    Mr. Otter. Are you aware of any operations that had a cogen 
contract that was selling substantially higher than the market 
so they sold all their power at that price and then bought back 
power at a much cheaper price?
    Mr. Moore. No, I am not. There were some rumors of that 
during the California crisis where it was cheaper to shut a 
mill down and sell the power at outrageous rates, but that was 
a special----
    Mr. Otter. Most of that was under take or pay, though, 
wasn't it?
    Mr. Moore. Right.
    Mr. Otter. And take or pay is much different than what we 
operate under PURPA in cogeneration.
    Mr. Moore. Right.
    Mr. Otter. I guess I see my time is running out, and I 
would like to get a response from everybody on the panel. In 
Idaho, we have what we call the Administrative Procedures Act. 
The Administrative Procedures Act says that whenever the 
legislature passes its duty or its responsibility to legislate, 
to make rules and regulations under the power to enforce clause 
of a particular act, to carry out a particular function, and 
that generally reads, ``and the director shall promulgate such 
rules and regulations which are necessary in order to carry out 
the provisions of this act.'' But under our Administrative 
Procedures Act in Idaho, before those rules and regulations can 
continue more than a year, they must be brought back to the 
oversight, the germane, committee, to make sure that the 
committee agrees with all the rules and regulations that were 
provided. And I see, however, we don't have that oversight--
that kind of oversight in Congress for not only FERC but I 
suspect many other Federal agencies. Do you think that that 
would be a good idea for us to adopt that process in Congress? 
Yes, Mr. English?
    Mr. English. Having been a member of this body and 
attempted that back in the 1970's, the Supreme Court told us 
that that violated separation of powers.
    Mr. Otter. So then should we write the rules and 
regulations and not then grant our legislative power to the 
bureaucracy?
    Mr. English. I certainly had a great deal of sympathy with 
that when I was a member of this body, there is no question 
about that, but I think the thing you get down to, bottom line, 
is that there is no way that the Congress can legislate for 
each individual situation in different regions of the country. 
The problem is someone is going to have to be in a position to 
make sure that intent--and this is where we get into another 
issue--the intent of the law is carried out, and that is where 
I think as legislators, certainly I used to and I suspect that 
you all do, have a great deal of frustration as making certain 
the intent behind the law is carried out.
    Mr. Otter. At the cost of taking up all my time to continue 
in this vein, Mr. English, then I would ask you don't we do 
that all the time, legislate for the entire country? Does the 
Clean Air Act mean one thing in the Northeast and something 
else in Idaho?
    Mr. English. I believe about every law that we have got 
that works, though, has some flexibility for regulators to make 
judgments with regard to situations. So if it is drawn so 
narrow that it is so tight that it allows no room for any kind 
of regulation anywhere, then we find ourselves in a situation 
where it doesn't apply to most of the people.
    Mr. Otter. Right. But what do we do about the laws, as you 
qualified, that work? What do we do about the laws that don't 
work?
    Mr. English. That is where I think Congress has an 
oversight responsibility. That is the reason I think you have 
hearings before the Congress. You bring regulators before this 
Congress, and you make the determinations whether they are 
carrying out the intent of the law. Unfortunately, the Supreme 
Court told us that those regulations have the same force as the 
law, so you are going to have to change the law to do that.
    Mr. Otter. Right. Very quickly then, in light of the 10th 
Amendment, the States' Rights Amendment, how do you feel about 
the eminent domain portion of the electricity title?
    Mr. English. I think the issue we are not in opposition to 
what the chairman has done as far as the siting provisions of 
this legislation. We think it is a good start.
    Mr. Barton. That is a good answer.
    Mr. English. Mr. Chairman, I have been searching all day 
to----
    Mr. Barton. And it is about time.
    The gentleman from Arizona is recognized for 5 minutes.
    Mr. Shadegg. Thank you, Mr. Chairman. I want to focus my 
questions on the issue of transmission line siting. Eighty-
seven percent of Arizona is owned by the Federal Government at 
one level or another, whether it is outright ownership of 
Federal land or military bases or Indian lands or otherwise, 
BLM, Forest Service, you name it. That creates a serious 
problem for us. For example, recently, in a line siting case 
involving a 345-kilovolt line for Tucson Electric Power Company 
last year, our corporation commissions met almost a year 
reaching a decision to site a particular power line, held 
extensive public hearings, and the U.S. Forest Service waited 
until the entire process was finished and didn't appear at any 
proceeding whatsoever, and then it simply dropped a letter 
saying, ``Oh, by the way, we object.'' They had never made 
their objections known before that in any way, shape or form.
    Mr. Owens, I would like to begin with you, though. I would 
be happy if other witnesses want to comment. How do you think 
we should approach the problem of coordinating line siting with 
Federal agencies when they have the ability to sit back and do 
what the Forest Service did in that circumstance?
    Mr. Owens. The approach or the goal that the Barton draft 
seeks to achieve and say that I think there are some gaps that 
could be readily addressed. I think it is appropriate to have a 
lead agency that would seek to coordinate with the input from 
all Federal agencies that you have to consult with when you are 
seeking to get across Federal lands and to, at the same time, 
in consultation with those agencies, to set deadlines and at 
the same time develop an environmental record that would be 
required for them to all use as they sought to expedite their 
decisionmaking on access across Federal lands. Right now there 
is no lead agency.
    As you have correctly pointed out, the process is 
frustrating, it leads to an inappropriate decision process. In 
addition, I would have this lead agency also coordinate with 
independent agencies, the State commission, the tribal units. 
If you do it in that context, what you would do is you would 
have a clear and compelling record that would suggest more 
forcefully that there are issues that are dealt with a 
coordinated way, that there are environmental issues that are 
coordinated in an appropriate way, and that deadlines would be 
achieved so Federal siting would be expedited.
    Mr. Shadegg. Does anybody on the panel strongly disagree 
with that or want to comment? The Barton draft proposes to use 
a Memorandum of Understanding process. Do you think that is 
going to be adequate to deal with this kind of situation, and 
do you think it is expeditious enough?
    Mr. Owens. I think Memorandums of Understanding are 
approaches, and they really--I think it is a step in the right 
direction, but, quite candidly, it really relies on the good 
faith of the participants. It also suggests to some degree that 
there will be--that the participants in a Memorandum of 
Understanding have decisional authority. So it really is not a 
binding outcome that you would have through a Memorandum of 
Understanding.
    Mr. Shadegg. Can you give us--or give the panel some idea 
of how long it takes, how long in your experience or in your 
member company's experience it takes to get siting decisions 
out of the Federal Government?
    Mr. Owens. Yes. There have been--I can cite several 
examples where it has taken as long as 10 years. There are some 
examples where it has taken as long as 18 months and some 
examples where we are talking about very small transmission 
corridors where it has taken 4 months. Ten months isn't 
extreme, but it seems to be moving toward the norm where it 
takes substantially longer than 2 years.
    Mr. Shadegg. You suggest that there be a lead agency. Is 
there a particular agency you think that should be vested in?
    Mr. Owens. Yes. I think the Department of Energy, as an 
example, because they have an experience in dealing with access 
across land such as Canada and Mexico. They certainly have the 
expertise, they have created an Office of Transmission that I 
believe is very much up to speed on the need to expand the 
grid. So I think they would be an appropriate agency.
    Mr. Shadegg. As you envision a lead agency, would it have 
the ability to say to other Federal departments, ``You must 
meet these deadlines?''
    Mr. Owens. I think it would have the responsibility of 
working with those other departments, coordinating its 
decisionmaking, setting the deadlines, making sure that there 
is a complete environmental record for review that can be 
relied on and proceeding appropriately.
    Mr. Shadegg. Mr. English?
    Mr. English. I think that there is an issue here that needs 
to be recognized. Again, I want to refer to what the chairman 
was talking about as far as a national grid. If we truly are 
attempting to make a national grid and if we are attempting to 
focus what the Federal Government is doing on that national 
grid and that is where our attention is, then we are talking 
about selecting out certain portions of the transmission system 
that meets that. And if we establish that truly as a national 
goal, then obviously the Federal Government should be expected 
to be very cooperative, the agencies of the Federal Government. 
And it may very well require more.
    I think the Department of Energy, without question, is a 
good one to call attention as to what has to be done, where the 
bottlenecks are, where the difficulties and the restrictions 
are. And I think that it is a question of how much the Congress 
is willing to do. But even if the Congress is only willing to 
say--go along with 20 or 25 sites a year and then providing 
FERC with the authority to deal with those, I think that would 
be a huge step forward. But I think you are on the right track. 
The Federal Government has to be a part of this, all of it.
    Mr. Shadegg. My time is expired but I certainly want to 
make a comment. I agree with you, the Federal Government, if we 
are going to create a national grid, should be a cooperative 
participant in that process. I have no confidence that without 
doing something in this legislation to assure that that it 
will.
    Mr. Barton. We want to thank the gentleman from Arizona for 
his questions. Believe it or not, over 4 hours after we 
started, there are no other members present to ask questions, 
so we are going to release this panel. We want to thank you. I 
want to make an apology to Mr. English. I used an analogy in 
asking you a question where I referred to Chinese communists. I 
in no shape, form or fashion think that coops are anywhere 
close to Chinese--the best people I know are coopers, and I 
have had the pleasure of meeting your State chairman in Texas, 
almost all the coop regional presidents. They are the very best 
people and patriotic Americans.
    Mr. English. Mr. Chairman, if I might respond.
    Mr. Barton. Sure.
    Mr. English. My daughter is a constituent of yours.
    Mr. Barton. And I am blessed to have her.
    Mr. English. And I knew you would be thrilled.
    Mr. Barton. I am.
    Mr. English. But I want to make another point that you 
misspoke. You are stating would we ever; we have already done 
it. We supported the Senate legislation last year and----
    Mr. Barton. We didn't have anything to do with the Senate 
legislation.
    Mr. English. That is correct. But you did have something to 
do with 2944. And if you remember correctly, I delivered you a 
letter pertaining to----
    Mr. Barton. You all supported a bill either one or two 
Congresses ago, and that is why I hold out hope that you will 
yet come into the fold.
    Mr. English. And I am sure that if we sit down and reason 
together, in the words of a Texan who rose to some stature in 
this town, that we could reach some kind of understanding, Mr. 
Chairman.
    Mr. Barton. We are going to try.
    Mr. English. Reasonable people. Thank you very much.
    Mr. Barton. Reasonable people. This panel is released, and 
we want to welcome our second panel as soon as they vacate the 
premises. We need to expedite the transfer here.
    All right. If our audience would resituate themselves. If 
we could shut the outer doors. Okay. The subcommittee will come 
to order. We want to welcome our second panel. We have Mr. 
Michehl Gent, who is the president and chief executive officer 
of the North American Electric Reliability Council, which we 
call the NERC. We have Mr. Gerald Norlander, who is the 
executive director of the Public Utility Law Project of New 
York, and he is the chairman of the National Association of 
State Utility Consumer Advocates. We have Ms. Christine Tezak, 
is that correct, who is an electricity analyst for the 
Washington Research Group. We have Mr. Marty Kanner, who has 
testified before this subcommittee before. He is the 
coordinator for Consumers for Fair Competition. We have Ms. 
Sharon Buccino, is that correct, who is a senior attorney for 
the Natural Resources Defense Council.
    Ladies and gentlemen, your testimony is in the record in 
its entirety. We are going to start with Mr. Gent, ask each of 
you to try to summarize it verbally in around 5 minutes, and 
then we will have some questions. Welcome to the subcommittee, 
Mr. Gent.

 STATEMENTS OF MICHEHL R. GENT, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL; GERALD A. 
NORLANDER, EXECUTIVE DIRECTOR, PUBLIC LAW PROJECT OF NEW YORK, 
   CHAIRMAN, NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER 
ADVOCATES; CHRISTINE L. TEZAK, ELECTRICITY ANALYST, WASHINGTON 
   RESEARCH GROUP, SCHWAB CAPITAL MARKETS, LP; MARTY KANNER, 
    COORDINATOR, CONSUMERS FOR FAIR COMPETITION; AND SHARON 
  BUCCINO, SENIOR ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL

    Mr. Gent. Thank you, Mr. Chairman.
    Mr. Barton. You have got to push that button, make sure it 
is on.
    Mr. Gent. Thank you, Mr. Chairman. Good afternoon, 
committee members and staff. I appreciate the invitation to 
testify this afternoon. I am going to address the reliability 
portions of your discussion draft, as distributed by Chairman 
Barton.
    A cascading outage on the bulk power system in 1965 in the 
Northeast left 33 million people in the dark, and there are 
probably people in this audience today that can even remember 
that. Thirty years later, a similar cascading outage in 1996 in 
the West left over 15 million without electricity. It happened 
in the daytime so they weren't in the dark. The North America 
Electric Reliability Council's mission is to avoid such as 
cascading outages, and we have been extremely successful in the 
past, as witnessed by that basic 30-year gap. However, that 
mission to keep the lights on is becoming more difficult, 
mainly because of our reliability rules have no enforcement 
mechanism. NERC and a very broad coalition support the 
reliability provisions in Chairman Barton's draft legislation 
and strongly urge this subcommittee to approve legislation as 
soon as possible.
    With or without congressional guidance, the electricity 
industry is changing and changing in very fundamental ways. 
These changes are disrupting the mechanisms that ensure that 
the reliability of the North America electric grids remain 
reliable. In order to prevent these changes from jeopardizing 
the reliability of our systems in the future, we must establish 
a mandatory system of rules and rules that are enforceable. We 
believe that the best way to do this is through an independent, 
industry-based, self-regulatory organization with oversight in 
the United States by the Federal Energy Regulatory Commission 
and in Canada by similar regulators. This is exactly what is 
proposed in your legislation.
    NERC has been successful in ensuring the reliability and 
the security of North America's three interconnections because 
we have been able to marshal the industry's very best experts 
to design and operate the electric transmission systems in 
North America. And we have been successful because we have 
served as the industry's point of contact with agencies in the 
United States such as FERC, DOE, the FBI and the new Department 
of Homeland Security. Yet our continuing ability to serve this 
function cannot be taken for granted. We need this legislation 
to continue to be successful. We believe an industry self-
regulatory system with its inherent stakeholder expertise is 
far superior to a system of direct government regulation for 
setting and enforcing compliance with greater reliability 
rules. The language of your bill presents a sound approach for 
ensuring the continued reliability of North America's electric 
interconnections.
    Everyone would like to have an abundant supply of 
electricity at reasonable prices. What is often overlooked, 
however, is the value of reliability of that supply. If someone 
is operating outside the NERC reliability rules, because the 
rules are only voluntary and there is no sanction for not 
following those rules, an upset of the system could very easily 
cause you to lose a supply of electricity unexpectedly during a 
critical stage of your manufacturing process, it could spoil 
your food and your tropical fish could die. And I say that with 
knowledge that my son runs a pet store, and in the western 
outage they nearly lost all their fish.
    Then if this happens, then the price you pay for 
electricity or the choices you have for electricity supplier 
will be irrelevant. The reliability provisions of your draft 
legislation go a long way toward ensuring whatever 
restructuring occurs in the electric supply infrastructure in 
North America, whatever you do as Congress in addition to 
passing these reliability rules will allow us to keep the 
lights on by enforcing the reliability rules. I thank you for 
this opportunity to support this reliability part of your 
legislation.
    [The prepared statement of Michehl R. Gent follows:]

 Prepared Statement of Michehl R. Gent, President and Chief Executive 
          Officer, North American Electric Reliability Council

    Good morning, Mr. Chairman and members of the Subcommittee. My name 
is Michehl Gent and I am President and Chief Executive Officer of the 
North American Electric Reliability Council (NERC).
    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. NERC works with all segments of the 
electric industry as well as consumers and regulators to ``keep the 
lights on'' by developing and encouraging compliance with rules for the 
reliable operation and planning 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.
    NERC supports the reliability provisions (Title VII, Subtitle C, 
Section 7031) of the draft legislation that Chairman Barton released on 
February 28 and strongly urges the Subcommittee to approve this 
legislation as soon as possible. With or without Congressional 
guidance, the electricity industry is changing in fundamental ways. 
These changes are disrupting the mechanisms that ensured the 
reliability of the North American electricity grid. In order to prevent 
these changes from jeopardizing the reliability of our electric 
transmission system, we must shift how we deal with reliability of the 
bulk power system. NERC and a substantial majority of other industry 
participants believe that the best way to do this is through an 
independent, industry self-regulatory organization to set and enforce 
mandatory reliability rules, subject to oversight within the United 
States by the Federal Energy Regulatory Commission.
    Section 7031 of the draft legislation embraces this concept and 
contains the same language that we understand the House and Senate 
conferees agreed to during the conference on H.R. 4 in the last 
Congress. NERC requests that you make one minor change to the language 
in Section 7031, to clarify that a regional entity with delegated 
enforcement authority may be governed by either an independent board, 
or a balanced stakeholder board, or a combination independent and 
balanced stakeholder board. This change will allow flexibility from 
region to region as to how such regional entities are governed. I have 
attached specific suggested language for the revision to this 
testimony.
    NERC will be pleased to work with Committee members and Committee 
staff on the language (Attachment 1).
    NERC has appeared before this Subcommittee on a number of 
occasions, testifying in support of reliability legislation. Today I 
will focus on two questions: (1) why reliability legislation is needed 
now; and (2) how Section 7031 meets this need.
Why Is Reliability Legislation Needed Now?
    NERC sets the standards by which the grid is operated from moment 
to moment, as well as the standards for what needs to be taken into 
account when one plans, designs, and constructs an integrated system 
that is capable of being operated reliably. The NERC standards do not 
specify how many generators or transmission lines to build, or where to 
build them. They do indicate what tests the system must be able to meet 
to ensure that it is capable of reliable operation, regardless of what 
is built.
    Bad things happen on the interconnected bulk power system as a 
matter of course. Severe weather may knock down transmission lines, 
lightning strikes may cause short circuits, mechanical equipment may 
fail due to fatigue or overloading, generating plants may have 
breakdowns, or we may inadvertently operate in an unstudied state. To 
that list of everyday occurrences, we now have added the threat of 
terrorist activity directed at the bulk electric system. The bulk 
electric system is designed and operated generally in what we refer to 
as a ``first contingency'' status, that is, the system must be able to 
withstand the loss of any large element and remain stable and secure. 
Otherwise we risk cascading outages with severe economic and public 
safety consequences that can occur in a matter of seconds.
    I have attached to my testimony a table describing five notable 
occasions when we did have such a cascading outage: November 9, 1965 in 
the Northeast; July 13, 1977 in New York City; July 2, 1996 in the 
West; August 10, 1996 in the West; and June 25, 1998 in Northern Mid-
Continent Area Power Pool. (Attachment 2) The scope and duration of 
these outages underscore why we must take all reasonable steps to 
assure that we do not have more such outages, and why we must have 
solid restoration plans against the possibility that we will in fact 
have more. Mandatory, enforceable reliability rules are one major 
component of those reasonable steps.
    NERC's rules, which are not now enforceable, have generally been 
followed, but that is starting to change. As economic and political 
pressures on electricity suppliers increase and as the vertically 
integrated companies are being disaggregated, NERC is seeing an 
increase in the number and severity of rules violations. Moreover, new 
issues are arising that demand an institution focused on reliability 
that can act fairly, but decisively, and in a timely manner.
    Let me give you an example. Traditionally, integrated utilities 
operated their generators to supply both the ``real'' (MW) and 
``reactive'' (MVar) power necessary to maintain reliable operation of 
the transmission system, and charged for these services as part of the 
regulated cost of service. (It's worth noting here that control of 
flows on an electric system is not accomplished by valves and switches, 
as in gas or telecommunications systems, but by controlling the outputs 
of generators.) These ``services'' provided by generators included such 
things as spinning and non-spinning reserves and system voltage 
support. Now, with the generation function separated from the 
transmission function in many cases, these ``services'' are no longer 
provided by a single, integrated entity, but must be arranged and paid 
for separately through tariffs and contracts with generators. To assure 
that this is done, we need enforceable standards that require 
transmission operators (including RTOs) to make adequate provision in 
their tariffs and contracts for these essential reliability services. 
How these arrangements are made can be the subject of filings with FERC 
or other regulators, but they must be made. Absent such enforceable 
standards, the reliability of our interconnected grids will be at 
serious risk.
    As a result of these changes in the industry, NERC is rewriting all 
of its reliability standards according to a new ``functional'' 
reliability model that sets out measurable and, under Chairman Barton's 
proposed legislation, enforceable requirements for entities that are 
responsible for performing critical reliability functions. These new 
standards will place uniform requirements on those that have the 
responsibility for maintaining the minute-to-minute balance between 
supply and demand, for seeing that power flows remain within the 
physical limits of the system, and that grid voltages stay within 
tolerance.
    Let me give you another, very different example of why this 
legislation is needed. NERC plays a critical role in protecting the 
security, as well as the reliability, of the North American grid. Since 
the early 1980s, NERC has been involved with the electromagnetic pulse 
phenomenon, vulnerability of electric systems to state-sponsored, 
multi-site sabotage and terrorism, Year 2000 rollover impacts, and most 
recently the threat of cyber terrorism. At the heart of NERC's efforts 
has been its ability to marshall the industry's best experts on the 
design and operation of electricity transmission systems in North 
America, and serve as the industry's point of contact with various 
federal government agencies, including the National Security Council, 
the Department of Energy, the Nuclear Regulatory Commission, the 
Federal Bureau of Investigation, and now the new Department of Homeland 
Security, to reduce the vulnerability of interconnected electric 
systems to such threats.
    I know that this subcommittee understands how vitally important 
this function is. Yet NERC's continuing ability to serve this function 
cannot be taken for granted. NERC traditionally has been funded by 
contributions from its Regional Councils. New entrants and the pressure 
of competitive markets have made this funding mechanism increasingly 
unsatisfactory. A new funding mechanism is needed that properly and 
fairly supports NERC's activities, including its activities related to 
security. Section 7031 would address this issue by authorizing FERC to 
certify an electric reliability organization that, among other things, 
has established rules that ``allocate equitably reasonable dues, fees 
and other charges among end users for all activities under this 
section.'' See proposed new Federal Power Act section 217(c)(2)(B).
Section 7031 Would Provide for an Organization Capable of Protecting 
        the Reliability and the Security of the North American 
        Electricity Grid
    We need legislation to change from a system of voluntary 
transmission system reliability rules to one that has an industry-led 
organization promulgating and enforcing mandatory rules, backed by FERC 
in the United States and by the appropriate regulators in Canada and 
Mexico. Section 7031 would do this. Under its provisions:

 Reliability rules would be mandatory and enforceable.
 Rules would apply to all owners, operators and users of the 
        bulk power system.
 Rules would be fairly developed and fairly applied by an 
        independent, industry self-regulatory organization drawing on 
        the technical expertise of industry stakeholders.
 FERC would oversee that process within the United States.
 This approach would respect the international character of the 
        interconnected North American electric transmission system.
 Regional entities would have a significant role in 
        implementing and enforcing compliance with these reliability 
        standards, with delegated authority to propose appropriate 
        regional reliability standards.
    A broad coalition joins NERC in supporting this approach to 
legislation, including the Western Governors Association, the National 
Association of Regulatory Utility Commissioners, the National 
Association of State Utility Consumer Advocates, the American Public 
Power Association, the Canadian Electricity Association, the Edison 
Electric Institute, the National Rural Electric Cooperative 
Association, the Institute of Electrical and Electronics Engineers, and 
the Western Electricity Coordinating Council.
    Right now a hole exists in the Federal Power Act, because FERC does 
not have direct authority over reliability matters and does not have 
jurisdiction over the entities that own almost one-third of the bulk 
power system. Having an industry self-regulatory organization develop 
and enforce reliability rules applicable to all owners, operators and 
users of the bulk power system under government oversight, as Section 
7031 would do, takes advantage of the huge pool of technical expertise 
that the industry has been able to bring to bear on this subject over 
the last 30 plus years. Having FERC itself set the reliability 
standards through its rulemaking proceedings, even if based on advice 
from outside organizations, would require FERC to develop or acquire 
technical expertise that it does not now have, and would dramatically 
expand FERC's workload at perhaps the worst possible time.
    The electric industry is in a great state of flux, as regional 
transmission organizations are forming and reforming, and vertically 
integrated companies are separating and selling off various portions of 
their business. Change is happening at different paces in different 
places. With all the uncertainty as to who will ultimately operate and 
plan the interconnected transmission system, it is more important than 
ever that an industry-led self-regulatory organization be created to 
establish and enforce reliability standards applicable to the entire 
North American grid, regardless of who owns or manages it, and 
regardless of whether it is being used for the new markets that are 
emerging or in more traditional ways. Both are likely to exist side by 
side for a considerable period of time. The self-regulatory reliability 
organization authorized in Section 7031 can help assure that grid 
reliability is maintained, even while new market structures and new 
RTOs are being formed. Because FERC will provide oversight of the 
electric reliability organization in the U.S., FERC can ensure that the 
organization's actions and FERC's evolving market policies are closely 
coordinated.
    The industry self-regulatory organization authorized in Section 
7031 also addresses the international character of the interconnected 
grid. There is strong Canadian participation within NERC now. Having 
reliability rules developed and enforced by a private organization in 
which varied interests from both countries participate, with oversight 
in the United States by FERC and with equivalent activity by provincial 
regulators in Canada, is a practical and effective way to develop the 
common set of rules needed for the international grid. Otherwise, U.S. 
regulators would be dictating the rules that Canadian interests must 
follow--a prospect that would be unacceptable to Canadian industry and 
government alike. Or, regulators on either side of the border might 
decide to set their own rules, which would be a recipe for chaos. There 
are also efforts under way to interconnect more fully the electric 
systems in Mexico with those in the United States, primarily to expand 
electricity trade between the two countries. With that increased trade, 
the international nature of the North American electricity market will 
take on even more importance, further underscoring the necessity of 
having an industry self-regulatory organization, rather than FERC 
itself, set and enforce compliance with grid reliability standards.

                               CONCLUSION

    NERC commends the drafters of Section 7031 for attending to the 
critical issue of ensuring the reliability of the interconnected bulk 
power system as the electric industry undergoes restructuring. A new 
electric reliability oversight system is needed now. The continued 
reliability of North America's high-voltage electricity grid, and the 
security of the consumers whose electricity supplies depend on that 
grid, is at stake. An industry self-regulatory system is superior to a 
system of direct government regulation for setting and enforcing 
compliance with grid reliability rules. The language of Section 7031, 
with the clarification of the regional governance issue, presents a 
sound approach for ensuring the continued reliability of the North 
American electricity grid. It is also an approach that has widespread 
support among industry, state, and consumer interests. The reliability 
of North America's interconnected transmission grid need not be 
compromised by changes taking place in the industry, provided 
reliability legislation is enacted now.

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[GRAPHIC] [TIFF OMITTED] T6052.055

    Mr. Barton. And we thank you for your testimony and for 
your group's support. Mr. Norlander, you are recognized for 5 
minutes.

                STATEMENT OF GERALD A. NORLANDER

    Mr. Norlander. Thank you, Mr. Chairman and committee 
members. First, I would like to clarify that I am speaking as 
chairman of the Electricity Committee of NASUCA. The actual 
chairman of NASUCA is from the State of Ohio, named Robert 
Congren. I am the director of the Public Utility Law Project in 
New York, and we represent residential consumers in matters 
affecting energy and utility policy. And we have been in 
existence for approximately 25 years.
    NASUCA is a national association of members from 42 States, 
mainly consisting of members who are appointed as State 
officials to look out for the interests of small consumers on 
energy policy issues. Numerous NASUCA members are from States 
that have restructured their electric industries, and a number 
of other NASUCA members are from States that have put it on 
hold, and still other members are from States that, like North 
Carolina, remain vertically integrated and do not have current 
plans to restructure in accordance with the retail competition 
model that was in vogue for a few years.
    And I want to make clear that today we are speaking--I am 
speaking on behalf of all of NASUCA's members in opposition to 
the electricity title that is in this bill. This unified 
opposition represents a national consensus of consumer 
advocates that the bill would be detrimental to the public 
interest and to the interest of small consumers. What I think I 
would like to focus on in my remaining time here is NASUCA's 
opposition to the transmission incentives provision in the 
bill. Section 7011 of the proposed bill would add a new section 
of the Federal Power Act that would authorize FERC within 1 
year to establish new years for incentive-based and 
performance-based rate treatments to promote capital investment 
by transmission utilities in order to support economically 
efficient markets for the sale of electricity at wholesale.
    This language would authorize a pending FERC proposal that 
has been floated and comments just came in this week. The FERC 
proposal was made without the benefit of any enabling 
legislation. And that proposal would allow automatic increases 
in the return on equity for transmission investments well 
beyond the normal level allowed and allowable under the Federal 
Power Act in the development of just and reasonable rates. 
These ROE adders are intended to reward utilities for divesting 
control over transmission assets to RTOs, for outright 
divestiture of transmission assets to new independent 
transmission providers and for building new transmission 
facilities. And these FERC bonuses would be--if cumulative, 
could be up to 300 basis points in added return on equity.
    NASUCA commissioned an examination of that particular 
proposal, and we filed comments this week. Calculating that the 
cost of the pending FERC proposal, and, again, I note it was 
made before there was any enabling legislation for it, the cost 
of that would be approximately $13 billion. And this was a 
conservative estimate of the potential cost of these investment 
incentives, and it would virtually offset the punitive $725 
million per year benefit of forming RTOs, which is a fairly 
optimistic assessment that FERC had commissioned.
    NASUCA believes that the $13 billion incentive is 
unnecessary and really provides no incremental benefit in many 
areas where transmission owners already have agreed to turn 
over control of their system. PJM, New York ISO, New England 
ISO and other areas the ISOs and RTOs already have control of 
the transmission system. And so we are therefore compensating 
people, giving extra returns for people for something they have 
already done. On the other hand, if Congress is seeking to 
encourage a voluntary migration of systems into a national grid 
such as has been mentioned, States that haven't approved a 
divestiture may be less likely to do so as these incentives 
will clearly raise the cost of the transmission component of 
the retail service.
    NASUCA also opposes repeal of the PUHCA and the merger 
review authority. I would just note that one of the functions 
of creating this larger grid is so that buyers can reach more 
sellers. And these markets are not well understood by FERC that 
have been created, and it is conceivable that all the expense 
of creating a large geographic market could be merged away 
unless FERC has its independent review to determine whether the 
mergers would interfere with the proper functioning of the 
markets it has created. Thank you, and I would be happy to 
answer questions.
    [The prepared statement of Gerald A. Norlander follows:]

   Prepared Statement of Gerald Norlander on Behalf of the National 
            Association of State Utility Consumer Advocates

    Chairman Barton And Members Of The United States House of 
Representatives Subcommittee on Energy And Air Quality: Thank you for 
inviting me to testify today for the National Association of State 
Utility Consumer Advocates (NASUCA) regarding the proposed Energy 
Policy Act of 2003. My name is Gerald Norlander. I am the Chairman of 
the Electricity Committee of NASUCA, and I am the Executive Director of 
the Public Utility Law Project of New York, Inc. (PULP).1 
NASUCA is a national association of consumer advocate offices with 
members in 42 states and the District of Columbia. NASUCA members are 
charged by their respective state laws with the responsibility to 
represent consumers in utility proceedings before state and federal 
regulatory commissions and courts.
---------------------------------------------------------------------------
    \1\ PULP, a non profit organization representing the interests of 
low income utility consumers, is an Associate Member of NASUCA , with 
offices at 90 State Street, Suite 601, Albany, New York 12207.
---------------------------------------------------------------------------
    Numerous NASUCA members are from states that restructured their 
wholesale and retail electricity industries, others are from states 
that have halted or slowed industry restructuring, and still others are 
from states with traditional vertically integrated utility industry 
structures. Today, I am speaking on behalf of all NASUCA members in 
opposition to Title VII of the proposed Energy Policy Act of 2003, the 
electricity title of the bill. This unified opposition reflects a 
national consensus of state consumer advocates that the bill, if 
enacted, would be detrimental to the public interest and interests of 
retail consumers.

1. Rate Incentives to Promote Capital Investment in New Transmission 
        Facilities are Unnecessary and the Costs are Not Justified.
    Section 7011 of the proposed Energy Policy Act of 2003 bill would 
add a new Section 215 of the Federal Power Act requiring the Federal 
Energy Regulatory Commission (FERC) within one year to establish new 
rules for ``incentive-based and performance-based rate treatments to 
promote capital investment'' by electricity transmission utilities, 
``to support economically efficient markets for the sale of electricity 
at wholesale.'' This language would authorize a pending FERC proposal 
to increase interstate electricity transmission rate 
allowances.2 The bill allows FERC to set the amount of the 
financial incentives. The pending FERC proposal, made without the 
benefit of any enabling legislation to change the way electricity 
transmission rates are set under the Federal Power Act, is to allow 
automatic increases in the return on equity (ROE) for transmission 
investments, well beyond the level normally allowed in the development 
of just and reasonable rates. These ROE ``adders'' are intended to 
reward utilities for divesting control over their transmission assets 
to regional transmission organizztions (RTOs), for outright divestiture 
of these assets to newly created ``Independent Transmission Provider 
(ITP)'' utilities, and for construction of new transmission facilities. 
Control and ownership of the facilities would shift to regional 
transmission organizations and the new transmission service utilities 
which would operate new and expanded transmission service spot markets. 
Cooperating utilities will receive ROE bonuses, well above the normally 
calculated reasonable rate of return on equity invested, of 200 basis 
points--2%--for existing transmission facilities, and 300 basis 
points--3%--for new investments in transmission. Nothing in the 
proposed FERC rule requires any showing that these bonus-conferring 
actions are cost effective, and nothing in the proposed bill places any 
upper limit on the rate making incentives.
---------------------------------------------------------------------------
    \2\ Proposed Pricing Policy for Efficient Operation and Expansion 
of the Transmission Grid, FERC Docket No. PL03-1-000.
---------------------------------------------------------------------------
    In response to the FERC proposals for ROE ``adders,'' NASUCA 
commissioned an examination of the cost and policy implications, and is 
filing comments this week in the pending FERC proceeding. I would like 
to highlight several conclusions of those comments, which are attached 
to my testimony as an exhibit:

 NASUCA calculates the cost of the current FERC initiative, if 
        fully utilized by transmission owners, will cost consumers over 
        $13 billion, or approximately $711 million per year for the 19 
        year time horizon in the FERC proposal. This is a conservative 
        estimate of the potential cost of these investment incentives, 
        and it virtually offsets the putative $725 million per year 
        benefit of forming Regional Transmission Organizations, a 
        benefit estimate that is controversial for its optimism.
 The $13 billion incentive is unnecessary and will provide no 
        incremental benefit in many areas where transmission owners 
        already have agreed to turn over control of their systems to 
        regional transmission organizations (RTOs) or independent 
        system operators (ISOs).
 If Congress seeks to encourage national adoption of the system 
        proposed by FERC, such ROE incentives may only impede that 
        result. States that have not approved divestiture of 
        transmission facilities owned by state-regulated utilities may 
        be more reluctant to do so if automatic cost increases are the 
        result, without any clear, offsetting benefits.
PUHCA Should Not be Repealed
    Section 7043 of the bill would repeal the Public Utility Holding 
Company Act (PUHCA). PUHCA is a statutory bulwark against reassembly of 
vast utility holding company empires, abuse of captive ratepayers to 
subsidize failing unregulated ventures, and inappropriate transactions 
between regulated utilities and unregulated affiliates. NASUCA has 
adopted the following resolution on this subject:
        ``in considering action affecting regulation or the structure 
        of the electric industry, including PUHCA repeal or reform, 
        Congress should require federal regulatory agencies to: 1) 
        prevent abusive or preferential affiliate transactions, 2) 
        continue oversight and protection over corporate and market 
        structure to prevent abuses to consumers and competition, 3) 
        disallow costs which are not prudent and reasonable from 
        wholesale rates, 4) exercise sufficient regulatory authority to 
        prevent ratepayers from bearing any risk of utility 
        diversification and to prohibit cross-subsidies between 
        regulated and nonregulated subsidiaries . . .'' NASUCA 
        Resolution 1996-04, Urging the Congress and Federal Agencies to 
        Address Market Power as a Component of Any Federal 
        Restructuring Action.
    The Enron debacle and its aftermath reveals the recurring tendency 
of holding companies in financial trouble to look to regulated 
affiliates as a source of credit, cash, or other resources, all at the 
expense of captive utility consumers. The bill would eliminate current 
PUHCA ownership restrictions on non geographically contiguous 
utilities, would limit state and federal regulatory agency access to 
books and records of the holding company to the costs of regulated 
entities, would require a showing of necessity for regulators to 
examine holding company books, and could make much information 
regarding holding company affiliate transactions, obtained in 
regulatory proceedings, confidential. PUHCA remains an essential 
consumer protection which should be vigilantly enforced, not repealed. 
A copy of NASUCA's resolution on PUHCA is attached.
FERC Merger Review Authority Should Not be Repealed.
    Section 7101 of the bill would repeal Section 203 of the Federal 
Power Act, which includes FERC review of proposed utility mergers. The 
rationale for the repeal is that review of a merger of electricity 
utilities is performed by other agencies and that any further review by 
FERC would be redundant. FERC review of mergers of electricity 
utilities under its jurisdiction should be preserved. There is a 
growing understanding that the nature of electricity and evolving 
electricity markets may permit the subtle exercise of market power, 
without overt collusion, even by entities with market shares typically 
allowed by regulators in other industries. Many of the benefits 
projected by FERC in its efforts to create broader geographic markets 
for electricity, at significant expense, rest upon the assumption that 
flaws in existing markets will be mitigated if buyers can find more 
sellers in the expanded trading areas. If, however, industry 
consolidation is allowed to occur simultaneously with costly expansions 
to marketing areas, that goal may be frustrated if mergers result in a 
concentration and reappearance of market power. FERC should have 
continued authority to scrutinize and reject proposed electric industry 
mergers, under evolving standards for measuring market power in 
electricity markets, and Section 203 of the FPA should not be repealed.
Reliability
    Subtitle C of the bill addresses the issue of system reliability by 
allowing FERC to recognize a standards-setting Electric Reliability 
Organization. At the present time, reliability standards for the bulk 
electric grid system are set by a voluntary organization, the North 
American Electric Reliability Council. Placing the development and 
review of electric system reliability on firmer statutory ground has 
been supported by NASUCA as an independent measure in recent years. In 
1998 NASUCA adopted the following resolution, in recognition that the 
cooperative and voluntary underpinnings of NERC standards need 
strengthening, particularly in areas where competitive concerns may 
weaken traditional cooperation among utilities, and thus threaten 
reliability:
        * * * NASUCA supports efforts to develop a national reliability 
        organization that will continue the vital functions now 
        performed by NERC, and will do so in a manner that is 
        competitively neutral and recognizes the paramount concerns of 
        consumers in a reliable electric system;
        * * * NASUCA supports efforts to establish an independent Board 
        of Directors that will govern NERC (or any successor national 
        organization) in a competitively neutral manner that will 
        benefit all consumers and that will not be dominated or 
        controlled by any particular industry participant or segment;
        * * * 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* * * NASUCA Resolution 1998-07, 
        Urging the Establishment of an Independent Board to Govern 
        Electric Reliability Matters and the Enactment of Federal 
        Legislation to Ensure FERC Jurisdiction Over the Actions of 
        Such a Board in the Future.
The provisions in Section 7031 are consistent with NASUCA's position 
regarding reliability. Their inclusion, however, is not sufficient 
justification to enact any of the other remaining provisions of the 
electricity title of the proposed Energy Policy Act of 2003.
Conclusion
    In conclusion, the bill would allow large and unwarranted rate 
allowances for owners of existing electricity transmission lines and 
facilities under FERC jurisdiction. Ultimately these allowances will be 
translated into rate increases borne by end-use consumers unless the 
increased allowances are demonstrated to be cost effective. NASUCA has 
shown in the attached comments regarding FERC's pending transmission 
incentive proposals that the proposed ROE adders may cost $13 billion, 
are unnecessary windfalls for utilities that have already done the acts 
intended to be induced, and are not likely to be cost effective.
    The bill would eliminate longstanding protections of the Public 
Utility Holding Company Act (PUHCA) intended to protect consumers from 
utility holding company abuses, and would eliminate existing authority 
of FERC to review proposed utility mergers. In light of recent 
instances of energy market manipulation, holding company abuses, and 
the possibility of further industry consolidation in the aftermath of 
major losses incurred by energy generation and trading companies, it is 
clear the consumers need continued, not less, protection from the 
exercise of market power in the electricity markets under FERC 
jurisdiction. For these reasons, NASUCA has concluded that passage of 
the Electricity title of this bill is not in the interests of utility 
consumers. NASUCA thererefore urges that the electricity title be 
eliminated.
    I want to thank Chairman Barton and the subcommittee again for 
permitting me to share NASUCA's views on these important issues. I 
would be happy to answer any questions you may have at this time.
    [Attachments to statement are retained in Subcommittee files.]

    Mr. Barton. Thank you. Ms. Tezak, we welcome your 
statement. Try to make it between 5 and 6 minutes.

                 STATEMENT OF CHRISTINE L. TEZAK

    Ms. Tezak. I usually have portfolio managers who give me 
0.3 nanoseconds so I am grateful for your time. My name is 
Christine Tezak, and I am an electricity analyst for Schwab 
Capital Markets, Washington Research Group. Schwab Washington 
Research analyzes for institutional investors the impact 
Washington makes on the financial markets through politics, 
legislation and regulation. My clients are institutional equity 
investors, the majority of whom manage dedicated utility funds. 
My perspective, therefore, may not include all of the concerns 
that may be unique to bond holders or to the holders of public 
power company debt.
    Our analysis of the draft legislation in its current form 
says that the majority of its provisions do not appear to 
frustrate the FERC's ability to accomplish the unfinished 
mandate to restructure wholesale markets that Congress gave it 
in the 1992 Energy Policy Act. We believe that the escalating 
conflict between the States and FERC, however, poses a problem 
for investment in this sector if Congress becomes mired in the 
middle of this fray and the net result is continued delay and 
debate over restructuring. We believe that capital will be less 
expensive for all participants in the market if FERC continues, 
and is permitted to continue, its efforts to provide clear and 
consistent rules for this business. Merrill Lynch, Solomon 
Smith Barney, T. A. Creff and Goldman Sachs articulated 
precisely this opinion as well--that means it is not my idea--
at FERC's January 16 technical conference.
    The capital markets are, for the most part, disinterested 
in the specifics of the political fights that are of such great 
importance to regulators and congressional members. The capital 
markets, however, will likely demand higher costs of capital to 
offset the unresolved risks and perceived uncertainty if such 
disputes persist. I am not going to offer you what we would 
like to see in the bill, because it is not the appropriate role 
of markets to make that decision. It is more helpful for us to 
stay out of the political debate and help you by providing 
differential pricing according to risk.
    We view the draft legislation proposed by Chairman Barton 
to be generally positive for the industry. This is because the 
intent of Congress and FERC would appear to be in alignment. 
Details on our analysis are furnished in the written testimony. 
Therefore, it is our current assessment that the investment 
climate for the electricity sector, generally, and for 
transmission, specifically, can be enhanced somewhat by the 
provisions in this bill. However, the investment climate would 
be most dramatically improved in our view if rates were 
unbundled and if this information were provided to consumers. 
This is not forced retail choice but the provision of clear 
information to consumers and to their regulators. In fact, we 
believe that only through unbundling because we as investors, 
indeed, we as consumers could determine if the incentive rates 
proposed are indeed offset by the generation savings that are 
widely anticipated. Otherwise, the concerns that others have 
voiced here about their usefulness and their appropriateness 
cannot be assessed.
    The $73 billion in market capitalization decline that Mr. 
Owens cited applies to the investor-owned utility group, not 
the IPPs but the utility holding companies. And it is heavily 
related to Wall Street's concerns and investors' confusion as 
to whether you, Congress, will reregulate this business or not. 
Congress needs to determine, in our view, whether it still 
supports the 1992 Energy Policy Act as written and as upheld by 
the Supreme Court in March 2002. If so, we believe Congress 
could hopefully support FERC's efforts to provide regulatory 
clarity and eliminate discrimination, not subvert FERC with 
endless debate and a fruitless search for what we fear is the 
search for a risk-free solution to energy infrastructure needs. 
If everyone is upset, perhaps FERC is doing it right.
    The longer this debate drags out, the more expensive 
overall costs will be. We are even seeing it in the utility 
holding companies whose corporate spreads used to be tighter 
than they are now. Wall Street hates uncertainty and opacity. 
Resolving these are both in your power. Please allow FERC to 
work full-time on your behalf to implement the 1992 Policy Act. 
We would like to see the disclosure of unbundled rate 
information so that once and for all we all can assess what we 
are working with. Thank you.
    [The prepared statement of Christine L. Tezak follows:]

 Prepared Statement of Christine L. Tezak, Electricity Analyst, Schwab 
              Capital Markets LP Washington Research Group

    The following testimony expands upon Schwab Capital Markets LP 
Washington Research Group's Electricity Bulletin authored by Christine 
Tezak (Electricity and Environment Analyst) and distributed to the 
firm's institutional investor clients on March 3, 2003. Schwab Capital 
Markets LP Washington Research Group (Schwab WRG) has provided 
institutional investors with investment analysis of the electricity 
sector since late 1999. Further information or prior analyses will be 
made available to the subcommittee and/or committee upon request.
    Introduction: House Energy and Air Quality Subcommittee Chairman 
Joe Barton (R-Texas) has initiated the debate on energy legislation by 
circulating draft energy legislation Feb. 28, including a title on 
electricity restructuring. Our analysis indicates that many of the 
electricity provisions are based on compromises reached during last 
year's conference on an energy bill. More importantly, the draft 
language does not currently include language that would substantially 
thwart the Federal Energy Regulatory Commission's (FERC) current 
efforts for continued industry restructuring. In its current state, we 
would view this draft language as predominantly positive from an 
investment perspective. Both chambers of the federal legislature have 
professed an interest in energy legislation; however, we're not yet 
convinced that sufficient consensus exists to get an energy bill done. 
The electricity title has been a sticking point in earlier rounds of 
energy legislation; however at this early stage, the draft electricity 
language appears to be less controversial than we had initially 
expected.
    The Federal Energy Regulatory Commission's (FERC) efforts to 
continue restructuring of the electricity industry have caused 
considerable concern on Capitol Hill; however the draft legislation 
circulated by House Energy and Air Quality Subcommittee Chairman Joe 
Barton (R-Texas) does not yet appear to contain any onerous provisions 
that could thwart FERC's current efforts to develop its Standard Market 
Design rulemaking. Schwab WRG continues to view continued efforts to 
move forward with the restructuring of the electricity industry to be 
the best investment environment for the widest variety participants in 
the electricity marketplace--whether they provide generation, 
transmission, distribution or a combination of these services--and most 
importantly, the most likely to provide sustained long-term benefits to 
consumers.
    Friction between the FERC and states (expressed through the 
concerns articulated by state regulators, legislators at both the 
federal and state levels, governors and others) has been a concern to 
investors looking at companies in the electric utility space. 
Uncertainty over the course of continued restructuring has been cited 
by credit rating agencies among other reasons in their downgrades of 
various members of the sector, not exclusively independent power 
producers.

                        TRANSMISSION INCENTIVES

    In its present form, the electricity title of the draft legislation 
calls for incentive ratemaking to encourage buildout of the 
transmission grid. This is an effort already underway at FERC, which 
released a proposed policy Jan. 15, 2003, that has this specific goal 
in mind.
    The Department of Energy and the Edison Electric Institute have 
both documented the declining investment rate in the nation's 
transmission grid. As early as the notice of proposed rulemaking for 
Order 888, the FERC has made it clear that a robust transmission system 
was, in its view, a necessary prerequisite to robust and functional 
wholesale markets. However, a multi-year court battle followed, 
culminating in a Supreme Court decision in March of 2002 that affirmed 
FERC's regulatory direction.
    While New York v. FERC and Enron v. FERC were being litigated, the 
industry incrementally and consistently lowered the level of investment 
it dedicated to transmission resources while the judiciary branch 
reviewed who had ultimate jurisdiction over transmission--FERC or the 
states. In spite of the crystal clear ruling from the Supreme Court 
that FERC a) has ultimate jurisdiction over transmission, b) has the 
authority to delegate it when it chooses, and c) never abdicated 
regulatory jurisdiction over retail transmission, substantial friction 
between the states and the federal agency remain, casting a pall over 
investment in the sector. Were it not for this unresolved friction on 
jurisdiction, in spite of a clear ruling from this nation's highest 
level of the judiciary, we believe that incentives to build out the 
transmission grid may not even be necessary, as the natural tendency of 
business in a free market is to put capital to work to resolve 
inefficiencies. Only in the electricity markets is the attempt to lower 
supply costs through the addition of more efficient supply, and the 
attempt to lower transaction costs through better transmission access 
to generation so vigorously opposed in the name of ``consumer 
protection.'' Consumers have benefited from restructuring and 
deregulation in the telecom and natural gas industries, why is it so 
staunchly opposed in this sector?
    It is difficult for investors to understand why, when its 
regulatory approach has been held up by the highest court in the land, 
the FERC remains under attack by some state regulators and their 
elected representatives for attempting to fulfill the mandate that 
Congress itself had laid before it. When uncertainty exists, investment 
atrophies. Congress either needs to legislate and clarify that it does 
not agree with the Supreme Court's interpretation of the Federal Power 
Act and its subsequent amendments, or it must allow FERC to continue 
implementing the instructions Congress has issued to it. Must we have 
catastrophic grid failures before regulators and legislators 
acknowledge that our electricity infrastructure has atrophied? Will a 
population center have to withstand a terrorist attack before political 
leaders realize that regionalization can facilitate infrastructure 
security? Will the same legislators who are now questioning the 
implementation of the 1992 Energy Policy Act and the restructuring of 
wholesale markets be the first to complain again that the regulator was 
asleep at the switch, when Congress itself has been party to 
frustrating a clear investment horizon?
    The concern over states rights is worry that investors do not 
share. Frankly, it is viewed as a political ploy fanned by the 
interests of incumbents who feel their business model may be at risk. 
The extent to which this impacts the cost of capital is determined by 
the assumptions investors make about the ability of companies to manage 
their regulatory environment.
    FERC has made a concerted, well-documented effort to incorporate 
feedback of states throughout the nation into the RTO program and into 
Standard Market Design rule development. In fact, one of the primary 
criticisms of the FERC in the capital markets is that it has been too 
accommodating of the political obstruction undertaken by state 
regulators and their elected representatives. Institutional investors 
are extremely frustrated that the FERC is moving so slowly and with 
such political deference and has not yet provided the clear market 
rules and policy calls on structural parameters that Wall Street would 
like to see before substantially deploying capital into this sector. 
FERC has had an unending circus of outreach and meetings with concerned 
regulators from the Southeast and the West. However, in spite of all 
this effort, we as observers have seen only a paranoia driven by 
vaguely defined risks now manifesting itself as incremental risk to the 
regulatory outlook in the federal legislature in the form of continued 
delay.
    Wall Street is fatigued with opacity at all levels of corporate 
structures and in virtually all industries. Opacity increases the cost 
of capital. Uncertainty in the regulatory outlook, too, is a form of 
opacity, and while it may not seem evident now, it is likely to 
increase costs to consumers over the long term through higher costs of 
capital and higher rates of return demanded to offset the murky 
jurisdictional problem that remains perniciously unresolved.
    While we believe that the transmission incentive language proposed 
in this legislation and FERC's transmission incentive policy proposal 
are encouraging for investment, we do believe that the most compelling 
incentive that would stimulate investment interest in transmission 
would be unbundling of rates. While transmission rate incentives are 
useful, we remain skeptical that they will really be sufficient to 
offset the risk proposed by continual friction over jurisdiction. 
Unbundling of transmission and a clear definition of what must be 
recovered in wholesale versus retail transactions would be very useful 
to investors assessing the wisdom of investment in generation and 
transmission assets. Congress needs to decide whether or not it still 
believes in the 1992 Energy Policy Act. Today, Congress is becoming and 
increasing part of the reason capital is hard to attract to this 
business. Congress is calling for FERC to slow down, Wall Street is 
frustrated FERC won't move faster.

                       EMINENT DOMAIN PROVISIONS

    Barton's current draft includes what is often referred to as 
``FERC-lite.'' These provisions would allow the federal government to 
invoke eminent domain to site transmission assets only if a state fails 
to act on an application in a timely fashion, or denies siting to a 
project that the Department of Energy has determined is in the national 
interest. It would also permit states to force the issue if a federal 
agency is holding up a siting approval. FERC Chairman Pat Wood III has 
not sought eminent domain authority in electric transmission for the 
commission, even though the FERC has such authority when it comes to 
natural gas pipelines. Such authority for FERC in electric 
transmission, however, was part of Vice President Dick Cheney's May 
2001 energy plan and is reflected in Barton's draft. We do not feel 
that it is essential for FERC's efforts to improve regulatory certainty 
to force the issue on eminent domain in legislation, and would view it 
as neutral if this provision did not ultimately survive in a final 
bill. This is conflicting interest that Congress can remedy by opting 
not to act on eminent domain for electric transmission.
    At a recent meeting of the National Association of Regulatory 
Utility Commissioners, Congressman Rick Boucher (R-Va.) discussed his 
concerns over eminent domain authority with an example of a 
transmission line sought by American Electric Power. The state forced 
the re-siting of this line based on environmental and social concerns 
raised by the local communities. The RTO planning structures hold 
appeal for investors because regional planning has the potential to 
provide a forum in which such siting issues can be thrashed out early 
in the project development phase. Economic, social and environmental 
considerations absolutely should be weighed carefully in the siting of 
both generation and transmission infrastructure. Here, too, unbundled 
rates can give empowering information to state regulators and project 
developers. However, we are still in the early stages of RTO 
development and large-scale projects have not been proposed.
    If a transmission project is proposed that impacts customers who 
are not direct beneficiaries of that investment, (i.e., that state 
regulators are now identifying with the pejorative moniker of 
``economic improvements'' instead of native load accommodation or 
reliability improvements), there is nothing in the RTO construct that 
deems those impacts to be without cost. Ideally, the additional costs 
of remedying environmental and social concerns should be part of the 
stakeholder vetting of any project.
    If resolving such concerns makes the ``cost'' of the project too 
high, then the customers seeking the benefit would then have economic 
incentive to seek an alternative solution. If customers in a load 
pocket want a transmission line to them that would cross 
environmentally sensitive areas, however the cost of breaching those 
areas is too ``expensive'' in terms of the appropriate remediation of 
local concerns in the areas in between, then perhaps the solution to 
the load pocket is not transmission, but siting generation in its own 
neighborhood. This is sound regulatory policy, fair to both communities 
and precludes one city or state from forcing another to subsidize its 
policy decisions.
    Without the benefits of unbundled rates to make the assessment of 
costs and benefits feasible on a project-by-project basis, and without 
the establishment of regional decision-making through the RTO program, 
the electricity sector will continue to be starved for investment. 
Transmission enhancement beyond small incremental additions for retail 
service will not take place, and generation will not get built where it 
is needed, in our view.
    Again, we believe that the real incentive that transmission needs 
is clear regulatory policy. Congress either needs to revise the law 
that was upheld by the Supreme Court if it objects to the court's 
interpretation or it must facilitate, not obstruct, FERC's efforts to 
implement regional markets based on unbundled rates.

                          PARTICIPANT FUNDING

    One of the most significant issues for Southeast state politicians 
and regulators who staunchly oppose the imposition of FERC's 
restructuring issues in their states is the question of participant 
funding. Although the 1992 Energy Policy Act (1992 EPAct) required open 
access to all utilities' transmission systems, there has been a 
backlash from some incumbent utilities, some of which believe that the 
costs of hooking up all independent generators are more prohibitive 
than the law intended. It is true that a large amount of unregulated 
generation has been sited near the gas pipelines that emanate from the 
Gulf of Mexico.
    Participant funding is shorthand for a program under which 
independent generators would contribute to the buildout of the grid at 
the time of interconnection. Southeast incumbents Entergy and Southern 
Co. have been the staunchest advocates of participant funding. It is 
their position that independent generators have been siting capacity 
throughout the Southeast in a manner that burdens the incumbent's 
transmission system beyond the requirements of the 1992 EPAct mandate 
for open access and would result in unnecessarily expensive upgrades to 
the existing transmission and rate hikes for local ratepayers.
    For their part, independent generators and their investors are not 
opposed to the concept of participant funding, however, they have 
serious concerns about the allocation of transmission capacity they 
have paid to build. Sen. Trent Lott (R-Miss.) proposed legislative 
language last session that suggested that generators fund 100 percent 
of network upgrades, but fully half of the capacity created by such 
upgrades would be given free to the incumbent utility. Such a proposal 
is a poor investment proposition for the party funding it and therefore 
would likely be, in our view, impossible to defend as a good business 
strategy in execution. The net result would be no incremental 
investment in the grid by generation participants, and such behavior 
would solve no transmission investment concerns. Newer efficient 
generation would continue to have trouble getting access to the grid in 
some parts of the country.
    Barton's draft, however, directs FERC to permit participant funding 
when an approved RTO requests such approval of FERC. The current 
language does not require FERC to use this funding methodology in all 
cases, nor does it require its consideration simply upon the request of 
a market participant (i.e., a transmission owner). We find this to be 
consistent with where FERC is currently headed in its Standard Market 
Design development discussions. FERC has made room in its political 
philosophy for participant funding, and was even included in the 
agency's much maligned July Notice of Proposed Rulemaking.
    Further, participant funding in an environment of unbundled rates 
has the potential to help stimulate more technologically innovative 
investment in the transmission grid, and we would consider this an 
incentive for the industry to really begin experimenting with new 
technologies for transmission improvements. If a generator is faced 
with high congestion costs to reach customers, then a generator will be 
motivated to find the most cost efficient remedy to this fact. New grid 
technologies in development by American Superconductor, Composite 
Technology Corporation, and 3M (Minnesota Mining & Manufacturing) have 
the potential to dramatically increase grid capacity through the 
installation of new cable on existing right of ways. CTC's product--
which proposes to double line capacity for one-fifth the cost of 
existing cable, can be strung on existing power lines and promises one 
half the electromagnetic field disturbance of current cables--will be 
tested at the Tennessee Valley Authority this summer. American 
Superconductor's pilot projects continue to be successful and draw 
interest in urban settings. However, transmission owners need to be 
rewarded for improving the grid and under the current regulatory 
paralysis, transmission owners--whether vertically integrated or 
unbundled--have little reason to invest in the grid when their 
regulators oppose it because it might benefit ratepayers outside of the 
immediate service area.
    Transmission owners today do not have the incentive to make 
``economic'' transmission improvements, as they do not benefit from 
higher throughput or the relief of congestion. Therefore, under the 
current regulatory outlook, most transmission owners will continue to 
make legacy-technology grid additions, as this larger capital layout 
will earn a higher regulated return. That, or they will not invest in 
the grid as they are currently benefiting from preferential dispatch of 
their own generation or congestions charges earned thereon. Participant 
funding has the potential to change this dynamic, as do performance-
based rates for transmission operators and owners.
    On Feb. 20, the FERC declined a request to authorize participant 
funding in a four-docket batch, when it chose to implement existing 
interconnection policy (which does not include participant funding). 
The commission based this exercise of discretion on the fact that the 
participant funding methodology under the Standard Market Design 
proposal is precisely that--a proposal; and secondly, the current 
situation in the referenced dockets does not meet the criteria expected 
in the Standard Market Design proposed treatment of participant funding 
(specifically, an independent system operator and locational marginal 
pricing, one of the rate methodologies that emerges when transmission 
rates are unbundled). From an investment perspective, this appears to 
be the correct course of action.
    Only in an unbundled environment with a way to evaluate the costs 
of congestion (in this case through the evaluation of locational 
marginal pricing information) would a party with the burden to 
participant fund be able to present the necessary economic information 
to defend this investment to Wall Street. Blanket obligations to build 
capacity without guaranteed access to that capacity or offsets that 
reflect the contribution made to the overall grid system through the 
reduction of congestion and transaction costs are simply indefensible 
as investments.
    Barton's legislation appears to be consistent with FERC's approach 
that the availability of the participant funding methodology would be 
contingent on an RTO being in place. The proposed Barton language 
tracks closely with FERC's current policy position, and for this reason 
we find the similarity in policy direction to be an incremental 
positive for the sector's investment outlook if it remains close to its 
current form.

             PUHCA REPEAL AND REPEAL OF FERC MERGER REVIEW

    When electricity restructuring legislation was considered in the 
105th, 106th and 107th Congresses, it was our sense that broad-based 
consensus existed to repeal the outdated Public Utility Holding Company 
Act (PUHCA) and substitute these restrictions with the authority for 
FERC to summon books and records to ensure that ratepayers are not 
inappropriately subsidizing unregulated operations through regulated 
rates.
    As a practical matter, investors view repeal of PUHCA as a 
positive. The reality however, is that PUHCA notwithstanding, companies 
that are exempt of PUHCA requirements have drawn the attention of both 
state and federal regulators who have been concerned that companies 
facing difficult financial outlooks could attempt to subsidize overall 
operations with the loans backed by the assets of regulated businesses 
and guaranteed by rates. At the federal level, the concern has been 
predominantly focused on natural gas, and on cross financings 
undertaken by Enron ahead of its bankruptcy. Lately FERC has been 
looking closely at the capital restructuring underway at El Paso Corp.
    In electricity, California regulators were and remain frustrated 
that PUHCA exemption permitted Edison International and PG&E Corp. to 
dividend regulated returns to the parent companies that were later 
unavailable to the regulated subsidiary during the California power 
crisis to the extent they believed was appropriate.
    Indeed, the repeal of PUHCA could facilitate merger and acquisition 
(M&A) activity among the regulated businesses; however, we caution 
investors that free flowing funds between regulated and nonregulated 
affiliate companies are not likely to be in the offing. Current policy 
development on financial transactions and cash management practices 
have signaled that FERC does not intend to be less vigilant in managing 
the exposure of regulated assets, and in fact the commission has been 
strongly encouraged by representatives of the fixed income sector that 
holds long-term utility debt to be more vigilant of their interests. 
Further in meetings we had just this week, jaded utility investors said 
they see precious few companies left that have the balance sheet to do 
M&A anyway, and the spreads on the assets in the cash strapped 
unregulated businesses are still too wide.
    FERC review of M&A of electricity assets is defined under Section 
203 of the Federal Power Act. The Barton legislation would repeal this 
section of the law. Ironically, the General Accounting Office, the 
investigative arm of Congress, recommended last June that FERC 
oversight authority be broadened not narrowed, and merger review is one 
way better oversight can be actualized. In combination with PUHCA 
repeal, we would expect that the repeal of Section 203 might be 
difficult to achieve. We view PUHCA, and not Section 203 approvals, to 
be the primary obstacle to greater M&A activity in the group.

                          PURPA MODIFICATIONS

    The Barton draft also includes modifications to the Public Utility 
Reform Policy Act (PURPA). In its current form, the legislation would 
require that real-time metering be provided to any customer that 
requested it.
    The language proposed would terminate mandatory purchase and sale 
requirements for cogeneration (qualifying) facilities, also known as 
QFs. Support for this measure depends on the asset owner. QF owners who 
have the opportunity to sell power at a premium through green power 
providers such as Green Mountain Energy (private), advocate the 
termination of mandatory purchase and sale provisions. Those who have 
no obvious customer base willing to pay a premium for their energy may 
not.

                RENEWABLE ENERGY NET METERING PROVISIONS

    These provisions would facilitate the ability of a renewable fuels 
generator to interconnect to the grid. Such treatment would be 
beneficial to wind and solar generating companies which often provide 
power on an intermittent basis.

                          RELIABILITY LANGUAGE

    Making participation in reliability organizations and observance of 
their rules mandatory has been a consensus item since the last 
Congress. The primary opponent of the legislation in the Barton draft 
is likely to be the existing North American Electric Reliability 
Council (NERC), which almost certainly will bristle at the prospect of 
being put under FERC jurisdiction. Mandatory reliability provisions 
impacting transmission owners are not generally a hotly debated topic 
within the industry; as such ``mandatory'' spending is usually quite 
easily recovered in regulated transmission rates.

          MARKET TRANSPARENCY, POWER TRADING, AND ENFORCEMENT

    The Barton draft would order FERC to develop rules establishing an 
electronic information system that would provide the commission and the 
public with data to facilitate understanding of the markets and price 
transparency. These obligations appear to be substantially met already 
by Order 2001 released by FERC last April mandating the filing of 
electronic quarterly reports of wholesale electricity generation and 
transmission sales.
    FERC's Office of Market Oversight and Investigation and its Office 
of Markets, Rates & Tariffs, however, have not yet begun posting this 
information on the FERC website or educating consumers how to use it. 
Neither office has provided any public analysis of this data either, 
something that we find very frustrating during the debate over the 
quality of natural gas and electricity price indices. In our view, it 
would be enormously useful to the industry generally and to that debate 
specifically if the FERC were able to cross reference actual data with 
reported prices and assess whether there is correlation between the 
two, or whether indeed, the trade publication price indices are truly 
out of whack with reality. Therefore, the good news for FERC is that 
this legislative requirement echoes efforts it is already pursuing, if 
slowly. Again this legislative proposal suggests harmony with the 
direction the FERC is taking, not opposition.
    The proposed legislation would put a prohibition on wash trades 
executed with ``a specific intent to distort reported revenues, trading 
volumes or prices.'' The industry is already taking measures to police 
itself better, and we view the legislating of such a provision to be 
redundant. However, if it ``plays well in Peoria,'' so be it, we do not 
view such a provision as having incremental adverse investment impact 
as currently written.
    The Barton legislation would increase criminal penalties that can 
be assessed under the Federal Power Act, and would extend their 
applicability to any market participant, not just utilities. The 
language would also increase civil penalty authority; however, it 
appears to remain short of the expansion of civil penalties sought by 
legislators such as Sen. Dianne Feinstein (D-Calif.).

                     CONSUMER PROTECTIONS (REFUNDS)

    The proposed legislation would change the refund effective date for 
complaints from 60 days subsequent to the date of filing, to the date 
of filing. This is a direct reflection of the frustration California 
parties experienced when the refund date for the California power 
crisis was set for Oct. 2, 2000, and thereafter. The original compliant 
filed by Sempra was filed on Aug. 2, 2000. We do not believe that 
shortening the refund effective date is a serious threat to the 
industry's ability to do business.
    The proposed language also prohibits slamming and cramming of 
retail customers in open access states, a relatively non-controversial 
measure.

     WHAT CAN/SHOULD CONGRESS DO TO HELP THE ELECTRICITY INDUSTRY?

    Electricity today is not an attractive arena for investment. Wall 
Street is fully capable of healing from the excesses of the merchant 
power frenzy and the overvaluations that have since been viciously 
corrected, and can manage through the losses associated with the fraud 
perpetrated by Enron and the misbehavior of other firms both within and 
outside of the electricity business. However, it cannot, with any sense 
of fiduciary responsibility, pour the billions of dollars in investment 
into the transmission grid that it appears we could so clearly benefit 
from when the argument over who will pay for it remains a fight to the 
death between FERC, the states and now their representatives on Capitol 
Hill.
    For all of the value destruction that has taken place in the 
electricity sector in the shares of independent power producers, 
traders, marketers and even some regulated utility concerns, the losses 
borne by investors far outweigh those that will be assessed on 
ratepayers. This is simple math. The state of California claims that it 
is owed $8.9 billion in refunds for excessive power costs in 2000-2001. 
The market cap of six independent power producers coughed up a combined 
$30 billion in market capitalization over the two days that FERC acted 
on price caps in June of 2001. In spite of the criticism levied against 
the FERC, California ratepayers are going to see at least part of their 
$8.9 billion outlay refunded, and frankly, the $43 billion in forward 
contracts the state signed are likely to continue to see modification, 
if not by FERC then in state proceedings under the California Business 
and Professional Code (our research on this topic was published in two 
Electricity Bulletins, dated Feb. 24, and March 6, 2003). We believe 
that ratepayers are still coming out far ahead relative to investors in 
the wake of this market dysfunction. Certainly no small part of the 
risk of this business has been transferred to the investment community 
from ratepayers, and isn't that what Congress intended in the 1992 
Energy Policy Act?
    Differences of opinion on policy will always take place, but 
investment is paralyzed by the fact that the highest court ruled on 
this issue 12 months ago, yet the FERC remains under attack in a 
variety of venues. Frankly, the industry would be best served if 
Congress would either endorse the interpretation of the Supreme Court 
in March 2002 and let FERC get on with its job, or have the intestinal 
fortitude to go in and change the law if it does not agree.
    The regulators and legislators from the Southeast and the West are 
demanding that Congress decree that any implementation of the RTO 
program must be made on a risk-free basis. This is preposterous. Since 
when is zero risk the only prerequisite for sound regulatory policy? 
Are regulators omniscient when it comes to defining a path that 
precludes risk? The colossal cost overruns of the investment in this 
nuclear generation capacity were made under the aegis of a fully 
regulated environment and paid for out of the pockets of ratepayers.
    Independent power and merchant trading sector losses have not been 
transferred to the ratebase except where state regulators have 
permitted it to happen. California's regulators refused to allow their 
incumbent utilities to contract power on a bilateral basis, in spite of 
repeated pleas for that ability. When FERC imposed price caps and 
dramatically changed the business outlook for traders and independent 
power companies, these companies experienced losses on business 
transactions and in the capital markets. Yet these independent power 
companies and failed merchant traders have not come running to 
regulators or to Capitol Hill to recoup their losses.
    They have asked for fair treatment in the marketplace in the form 
of clear rules, but they have not requested absolution from their 
business risk. In fact at every turn, FERC has been vigilant, as 
witnessed in the scrutiny afforded inter-affiliate lending by Enron and 
El Paso Corp. over the last year, in its efforts protect ratepayers 
from precisely that risk. The failure by the Public Utilities 
Commission in California, however, to permit bilateral contracting was 
a regulatory decision and unfortunately it will be recovered in rates.
    There is no risk-free proposition in this country. The request to 
prove that no harm could come to anyone under a proposed standard 
market design strikes us as equivalent to saying that a newly elected 
official should not be allowed to assume office until it is proven that 
he or she will never offend a single member of his or her constituency. 
It verges on the absurd. We take risk in this country every day, all 
the time, in every single sector of the economy and in every aspect our 
social environments. We do our best to manage these risks. We do not 
sit around and do nothing waiting for them to subside for they do not.
    To say that FERC should be arrested in its efforts to resolve the 
problems clearly presented by the California crisis and by incomplete 
restructuring reminds me of a captain's excessive concern for the ship 
and its crew such that it never leaves port. That is no way to oversee 
our energy infrastructure, and puts the nation as a whole at risk to 
higher energy prices jeopardizing any economic recovery that Congress 
is dedicated to facilitating.
    Several companies that are performing well at this date are 
considered ``overvalued'' relative to their growth rates. Investors are 
not rewarding these companies or indicating their positive view of the 
vertically integrated utility model, they are parking cash until 
something better comes along because it pays better than treasuries. It 
will be their fiduciary duty to diversify out of these positions as 
soon as something else looks better. Several of the stocks trading at 
the top of the sector's valuation range are vulnerable to the downside 
for this reason.
    From 1999 onward until late 2001, fund managers outside of the 
classic utility fund arena began to hold shares in the electricity 
sector. This was net new investment interest. Today, however, I can 
tell you that the list of clients that I call because they hold 
positions in the electricity sector has decreased dramatically. Even in 
utility funds, managers are uncomfortably ``overweight'' in low-growth 
but relatively well-performing shares, and have indicated that as soon 
as telecom and or natural gas local distribution companies or anything 
else in the economy begins to show some more life they will be 
diversifying away from even these electricity assets because of the 
intractable regulatory situation and the poor capital structure common 
to so many participants. I am not speaking here of the independent 
power companies, I am speaking of the large integrated (some 
vertically, some unbundled) utility holding companies.
    On Jan. 16, FERC hosted a technical conference to collect financial 
industry feedback on the status of the electricity market. This was yet 
another meeting, through which FERC continued to study, define and 
improve its policy development. At this meeting, every representative 
of the financial community present stated that it would benefit the 
industry if FERC continued its work on restructuring the power markets 
and developing consistent rules and improving regulatory certainty. 
This happens to be in stark opposition to the political considerations 
that are hamstringing the development of precisely such policies.
    Investors can accommodate regional differences; however, they do 
like consistency wherever it is feasible and appropriate. The capital 
markets do not require the risk free solution that is currently sought 
by regulators and state representatives in the Southeast and West. Nor 
is there a widespread call in the capital markets for re-regulation of 
the industry. While re-regulation would cause a reversion back to the 
prior norm, there is no indication that the industry cannot manage to 
survive in a new, restructured form.
    Otherwise, investors are confronted with the following conundrum. 
In the Southeast, for example, incumbent utilities' CEO's have begun 
bragging to Wall Street about their plans to buy assets presently owned 
by financially distressed independent power producers and put them into 
rate base. It is interesting for investors, who are familiar with the 
business plans of both types of participants, that the independent 
generation assets when owned by an independent can't seem to get 
transmission capacity to move power today, yet these same assets are 
being touted as a productive part of an incumbent-owned portfolio. 
Where should dollars be invested--which story is the truth?
    From a capital markets perspective, we would ask that Congress 
approach the problem like Hippocrates with the mantra: ``First, do no 
harm.'' If Congress is not inclined to make a call on jurisdiction for 
transmission once and for all, then help FERC do the job that Congress 
itself directed it to do, not frustrate it with never-ending 
deliberation and paralysis. The fastest way to get information into the 
hands of state regulators who are concerned about restructuring is to 
give them unbundled rate analysis. Then Wall Street can ascertain the 
capital requirements needed for each course of investment to 
rationalize both generation and transmission, empowering consumers and 
their regulators to make better decisions.

    Mr. Barton. Thank you. We now want to hear from Mr. Kanner.

                    STATEMENT OF MARTY KANNER

    Mr. Kanner. Thank you, Mr. Chairman, members of the 
committee. I thought the last panel near the end had a very 
healthy and thoughtful discussion on what we need to do to 
foster competitive markets to give consumers access to lower-
cost power supplies. We heard some of the elements. Mr. 
Shimkus, you talked about the need for enhanced transmission 
investment, as did Mr. Walden. And frequently there was mention 
of PJM and how the system is working there. And I think all of 
us would probably agree that that system has a history of being 
operated in a coordinate fashion, having the economic dispatch 
generation. That has been talked about today. I think it is 
also important to look at it and realize that in fact it is not 
perfect.
    Noted economist Paul Jaskow, in his comments to FERC on 
standard market design, looked at the PJM interconnection and 
had these observations: That during the period 1998 to 2001 the 
hours in which transmission constraints occurred increased 661 
percent despite the fact that transmission congestion charges 
increased by 500 to 1,000 percent; that PJM during that time 
period also experienced increases in wholesale spot energy 
prices and despite all of these price signals, investment in 
transmission in PJM stagnated. Well, I think that tells us the 
lessons we can draw from that is even in a region that has 
tremendous experience in dealing with central dispatch, in 
dealing with competitive wholesale supplies and operating an 
integrated grid, that achieving workable competitive markets 
isn't an easy task.
    So the question I think before you is what do we do, what 
are the steps that are needed if in fact we want to foster 
sustainable, effective competition in wholesale power markets?
    Let me share with you the recommendations of Consumers for 
Fair Competition. First of all, as was discussed a little 
earlier today, we need to band fraudulent and manipulative 
practices and take those actions necessary to provide effective 
remedies. This is not simply a question of one bad actor. If 
you look at the trade press, the general press from virtually 
every region of the country, you will realize that there have 
been instances of market manipulation and abuse. Part of the 
reason it is a complex system and that complexity creates 
opportunities for parties looking to make money, to do things 
that with hindsight many of us would agree are not the right 
thing to do.
    We need to facilitate effective market oversight. If we are 
going to treat electricity as a commodity, then just like other 
commodities the regulators need to have access to transactional 
data in order to see whether or not abuses have occurred. 
Third, we need real market transparency. Participants in the 
market will benefit if they know how much is available, what 
things are being sold for, at what times and what volumes and 
at what price? Relying on aggregated information, statistical 
data or delays in the filing of that information won't work.
    Fourth, we need to separate the regulated and unregulated 
utilities in terms of their investments or regulated and non-
regulated activities of utilities. Another financial analyst 
was quoted recently in the general press as saying, ``Utility 
investments rarely go wrong and utility unregulated investments 
rarely go right.'' If that is the case, then we need to make 
sure that when the consumers of those regulated utilities that 
they are not on the hook for those investments gone bad. So we 
need strict financial firewalls between the affiliates and the 
operating utilities, and we need to make sure that they stand 
alone.
    We need to review all outstanding PUHCA exemptions. I think 
the last couple years have shown us that Congress was prescient 
in 1935 when it enacted PUHCA, that the reasons for PUHCA 
remain valid today and that there are parties that currently 
have exemptions, not subject to the same restrictions as the 
registered holding companies, that a thoughtful review of those 
exemptions are needed to make sure that they remain in the 
public interest.
    We also need to recognize that there is gaps in merger 
review. There are certain types of mergers, mergers at the 
holding company level, convergence mergers are between electric 
and gas utilities that escape regulation, and we need to close 
those gaps. And, last, we would recommend that Congress look at 
the private power exchanges where third party deals are 
facilitated and whether there needs to be a separation to 
ensure that those are truly independent and not run by parties 
that have an interest in the energy markets, avoid the intent 
we saw before where Enron received proprietary information from 
Enron Online, it exchanged platform, and used that to choose 
what positions to take in the market.
    There is a gap between what CFC recommends and what is 
contained in the Barton bill. It is not an insignificant gap, 
but we, as always, pledge to work with the members of the 
committee to try and craft legislation that does what I think 
is the desire of everyone here, which is to facilitate those 
effective competitive markets, but it is a real challenge.
    [The prepared statement of Marty Kanner follows:]

  Prepared Statement of Marty Kanner on Behalf of Consumers for Fair 
                              Competition

    Mr. Chairman, members of the Subcommittee, my name is Marty Kanner; 
I am testifying today on behalf of the Consumers for Fair Competition 
(CFC), an ad hoc coalition of small and large electric consumer 
representatives, small business contractors, consumer owned utilities 
and others. Consumers for Fair Competition was formed to advance 
policies necessary to promote effective wholesale competition and has 
been active in the restructuring debate and efforts to block repeal of 
the Public Utility Holding Company Act (PUHCA) absent sufficient 
replacement provisions designed to protect consumers and investors.
    Much has transpired since this Committee last discussed electricity 
legislation. CFC believes it is important to reflect on the turmoil 
that has occurred in the utility industry over the past few years and 
proceed cautiously, focusing on those provisions needed to prevent 
market manipulation and abuse and, thereby, restore consumer and 
investor confidence in the industry.
    At previous hearings, CFC testified about the difficulties 
associated with transitioning the wholesale market from cost-of-service 
rate regulation to reliance on competitive market pressures. The 
features of the utility industry--the historic dominance of vertically 
integrated utilities, the financial and regulatory barriers to market 
entry and the physics of the electric system--pose significant hurdles 
for effective competition and numerous opportunities for consumer 
abuse. As witnessed over the past few years, these hurdles are real and 
the consequences are severe.

                            LESSONS LEARNED

    What are the ``lessons'' we can learn from events of the past few 
years?
    1. It's not just Enron. When the full breadth of the Enron scandal 
became known, some discounted the revelations as an anomaly--the 
distasteful actions of a rogue market player. Regrettably, the problems 
are much broader. A cursory review of the general and trade press--
compiled as an attachment to my testimony--underscores the breadth of 
the problem. A significant number of market participants, both 
traditional utilities and new market entrants, have been accused of, 
confessed to or been sanctioned for engaging in questionable 
activities, market manipulation and consumer abuse.
    2. It's not just California. Again, a common assumption was that 
the problem was isolated to California (and those states with the bad 
fortune to be located close to it) and the result of California's ill-
conceived market rules or failure to foster construction of new 
generation. While California's overly complex system and short supply 
certainly created opportunities for abuse, similar problems have 
occurred throughout the country--in Oregon, Minnesota, Kansas, Ohio, 
Pennsylvania, New England, Louisiana and elsewhere.
    3. Good Markets Need Good Information. Efficient markets require 
complete, accurate and timely information. Reports of phantom ``wash 
trades'' intended to boost perceived revenues, trading volume and 
prices were fairly common in the electric industry. Similarly, there 
have been multiple instances of parties reporting false information on 
gas prices to private clearinghouses. Without good information, 
effective market oversight is compromised, market confidence and 
liquidity are shattered and consumers run the risk of paying excessive 
prices.
    4. Utility Diversifications Can Harm Consumers, Stockholders and 
Competition. The record of utility diversification efforts is far from 
stellar. An analyst with Williams Capital recently noted that ``utility 
investment rarely goes terribly wrong; non-utility investment rarely 
goes right.'' But, unlike other industries, it's not just the utility 
and its investors that suffer from bad investment decisions. As 
detailed in a December 26, 2002 Wall St. Journal front-page article 
(which is attached to my testimony), utility customers suffer the 
consequences. Utilities have inappropriately sought to charge consumers 
of their regulated entities for the costs of unrelated diversifications 
(i.e., buying unregulated assets at inflated prices and tap utility 
assets to back the debt of nonutility ventures). Utility affiliates 
must stand on their own: utility consumers should not subsidize 
diversifications--either through cash infusions, backing affiliate 
debt, or receiving inadequate compensation for services or assets 
provided by the utility for the benefit of unregulated affiliates.
    5. Enhanced Tools Are Needed to Oversee Markets. As noted by 
Chairman Barton in a recent interview and FERC-nominee Joe Kelliher at 
his recent confirmation hearing: Reliant's intentional withholding of 
generation in California was not illegal under the Federal Power Act. I 
hope we all agree it should be. If we are going to rely increasingly on 
markets, then FERC needs market oversight authorities and tools akin to 
those of the SEC.
    6. PUHCA Does Matter. PUHCA includes a series of structural 
requirements designed to maintain financially healthy utilities, 
prevent abusive affiliate transactions and protect consumers and 
investors. A central thesis of PUHCA--that investors and consumers are 
better off when utilities concentrate on providing utility service--has 
been borne out by recent events. In fact, an October 2002 report by 
Moody's Investors Service noted ``a growing sense that the more 
traditional power company business model, once considered outdated, is 
again in fashion'' and that the credit ratings of these traditional 
utilities have ``remained relatively stable as they have exhibited 
solid financial flexibility''.
    7. We May Only Have Seen the Tip of the Iceberg. The allegations of 
market abuses are numerous. There may be much more occurring under the 
surface--but we may never know. It is troubling that the two most 
glaring ``smoking guns''--the Enron memo detailing abusive trading 
schemes and the transcripts of Reliant traders and plant operators 
engineering artificial shortages in order to raise prices--where 
disgorged by the offenders, not uncovered by any regulatory oversight 
body. If such blatant manipulative tactics have evaded federal and 
state regulators, how many more covert abuses are occurring?
    You are faced with an enormous challenge. The problems plaguing the 
utility industry and its consumers and investors are numerous--real and 
perceived market abuse, soaring and highly volatile prices, sinking 
financial conditions and a lack of consumer and investor confidence. 
CFC would urge you to only take those steps that you are confident will 
address the shortcomings of the industry and our current system of 
regulatory oversight and provide the needed structural protections for 
consumers and investors.

            CFC RECOMMENDATIONS FOR ELECTRICITY LEGISLATION

    Given the anticipated timeline for action, deferring action on 
electricity legislation may be the wise course of action. However, if 
you choose to include electricity provisions in the pending energy 
bill, CFC believes that the following elements must be included:

 Bar fraudulent and manipulative practices. If Reliant's 
        activities were not illegal, they should be. Rather than 
        attempting to ban specific trading practices, any electricity 
        legislation must make it unlawful for any entity, directly or 
        indirectly, to undertake fraudulent, manipulative, or deceptive 
        actions in wholesale energy markets.
 Facilitate effective market oversight. Today, the nation's 
        financial markets require the recording and submission of 
        transactional data. This information provides an ``early 
        warning system'' for potentially inappropriate trading 
        practices and an audit trail for any resulting investigation. 
        FERC must have similar access to transactional data in utility 
        markets.
 Provide genuine market transparency. Efficient markets require 
        timely and effective price discovery. In addition, market 
        transparency alerts market participants and market overseers 
        with indications of anomalous trends that might suggest 
        manipulative activities. Actual--not statistical or average--
        price information must be required on a real-time basis.
 Separate regulated utilities and their unregulated affiliates 
        and prohibit cross-subsidization. Markets are distorted and 
        consumers and competitors are harmed when utilities charge 
        ratepayers for the costs of unregulated ventures or tap 
        ratepayers' revenues and ratepayer-financed tangible and 
        intangible assets to fund their diversification. FERC recently 
        took a step in the right direction by barring the issuance of 
        utility-backed debt for unregulated ventures. While only a 
        first step, this initiative should be codified and expanded to 
        shield consumers from the risks and costs of utility 
        diversifications. In addition, federal law should clearly 
        prohibit cross-subsidization and consideration should be given 
        to the proper form of separation needed to truly protect 
        consumers and investors and preserve competition.
 Review All PUHCA Exemptions. Enron, after its acquisition of 
        Portland General Electric, self-certified that it qualified for 
        an intrastate exemption under Section 3 of PUHCA. CFC has 
        previously questioned Enron's qualification for that exemption 
        and noted that--had Enron been subject to the stricter PUHCA 
        requirements for Registered Holding Companies--many of Enron's 
        improper activities could have been prohibited or detected. 
        Interestingly, an SEC judge recently ruled that Enron did not 
        qualify for the intrastate exemption based on the percent of 
        revenues Portland General Electric earned from interstate 
        sales. A mandated review of all outstanding Section 3 PUHCA 
        exemptions is needed to ensure that those exemptions are still 
        appropriate and in the public interest. In addition, CFC would 
        support amending the statutory PUHCA exemptions for merchant 
        generation and telecommunications affiliates to require PUHCA 
        Section 10(b) review to ensure that the interests of investors 
        and consumers are protected.
 Gaps in the review of utility mergers must be closed. The 
        weakened financial condition of the utility industry may 
        translate into a significant increase in mergers and 
        acquisitions (in fact, low stock prices of some utilities may 
        well encourage further acquisition efforts). Such activities 
        may be economically beneficial--but that can be determined only 
        after careful review. Certain M&A activities--disposition of 
        generation-only assets, mergers between holding companies and 
        acquisitions of gas utilities by electric utilities--may not be 
        subject to review by FERC. Congress must close this gap.
 Private exchanges must be run independent of market 
        participants. Enron benefited from the proprietary information 
        it received from its private brokerage platform: Enron online. 
        The integrity of private trading platforms to facilitate third-
        party trading is dependent on their market neutrality. The best 
        means of achieving this neutrality is to bar utility ownership 
        of exchanges that are designed to facilitate third-party 
        transactions.

                      COMMENTS ON DISCUSSION DRAFT

    I have shared with you the views of CFC on what provisions should 
be included in any electricity legislation. I would now like to share 
our comments on Title VII of the February 28 Discussion Draft.
    While CFC commends Chairman Barton for his interest in promoting 
wholesale competition, Title VII of the Discussion Draft, 
unfortunately, does not include the needed provisions outlined in my 
testimony--and in fact eliminates existing consumer protections in 
several key respects. Consequently, CFC cannot support Title VII in its 
current form.
    Most significantly, CFC opposes the proposed repeal of FERC merger 
review and repeal of PUHCA.
    As we have testified, CFC believes that PUHCA should not be 
repealed--and numerous national organizations join us in this view (see 
attached letter). If PUHCA is to be repealed, it must be accompanied by 
strong consumer protections--outlined above--that are, regrettably, 
absent from the Discussion Draft. Moreover, it is discouraging that the 
lone ``protection'' touted by repeal advocates--access to books and 
records--is an empty promise under the provisions of the Discussion 
Draft, which includes an expansive exemption that is likely to swallow 
the rule.
    Mr. Chairman, our position on PUHCA repeal is clear. Nonetheless, 
if the subcommittee is committed to lessening this important consumer 
protection statute, we would encourage you to consider targeted 
revisions designed to address specific limitations contained in PUHCA 
that the Committee finds unreasonably restricts a valuable activity. 
This is the general approach taken by Congress in 1992 and 1996--and is 
a far preferable model to outright repeal.
    We are similarly troubled by the legislation's repeal of FERC 
review of proposed utility mergers. As the primary utility regulator, 
it is appropriate and necessary for FERC to review proposed mergers. 
This oversight is all the more important if we are to successfully 
transition to a competitive market. Only FERC has the expertise to 
assess the competitive impacts of a proposed merger on regional power 
markets, and FERC is in the best position to condition a proposed 
merger to mitigate anti-competitive impacts and oversee the merged 
entity's compliance with those conditions. Given the limited resources 
and utility expertise of the Justice Department and Federal Trade 
Commission, reliance on those agencies for utility merger review is 
inadequate. Moreover, the simultaneous repeal of merger review under 
PUHCA is likely to create a regulatory black hole in which few proposed 
mergers receive the necessary scrutiny.
    CFC appreciates that the proposal includes provisions intended to 
discourage or prevent abusive practices--increased penalties, 
transparency and a prohibition on round-trip trades. However, as 
outlined above, these provisions are not enough:

 Increased penalties will have little effect if, like in the 
        Reliant case, those actions are not illegal. Moreover, without 
        strong market oversight and enforcement, imposition of 
        occasional penalties is a minor cost of business when companies 
        can reap millions on profits from manipulative schemes.
 CFC supports transparency requirements--and the language in 
        the Discussion Draft is an improvement over prior proposals by 
        removing the explicit submission of statistical data and 
        narrowing the exclusion for ``sensitive'' information. However, 
        we remain concerned that the provision could still result in 
        submission of averaged prices if volumetric reporting is not 
        also explicitly required. In addition, Congress must also 
        require transparency--and accuracy--in gas price data 
        submission.
 Barring a specific trading practice--such as round-trip 
        trades--is unlikely to have the needed remedial impact. In 
        fact, it may be seen as a tacit suggestion that other shady 
        transactions--not specifically banned--are deemed 
        ``acceptable''. What is needed is a strong and unambiguous 
        prohibition on any and all fraudulent, deceptive and 
        manipulative practices. I have heard some suggest that 
        ``manipulative practices'' is an ill-defined term. I would 
        submit that so was the phrase ``just and reasonable'' when 
        Congress passed the Federal Power Act in 1935.
    The provisions on incentive- and performance-based transmission 
rates, as well as participant funding, are less prescriptive than those 
included in prior legislation. While we appreciate those changes, we 
remain troubled by the tension created between these provisions and 
Sections 205 and 206 of the Federal Power Act. Under accepted case law, 
FERC sets rates of return that reflect the risk of the relevant 
investment and sufficient to attract needed capital. Admonishing FERC 
to set rates to reflect those factors--as directed by the Discussion 
Draft--and then require adherence to Sections 205 and 206 creates an 
ambiguity that could lead to unnecessarily high transmission rates. I 
would note that, in an effort to encourage participation in the Midwest 
ISO, rates of return as high as 36 percent were proposed. Simply 
inflating transmission costs will foster neither competition nor 
consumer benefits. I will also note that the provisions on incentive 
rates and participant funding are in conflict: would a transmission 
owner receive an inflated rate of return for a transmission line that 
is participant funded? CFC would urge you not to adopt an inflexible 
system on participant funding.

                               CONCLUSION

    There are significant differences between what CFC believes is 
needed in electricity legislation and what is included in the 
Discussion Draft. As always, Mr. Chairman, we are committed to working 
with you, your staff and the members of the Committee. However, we are 
skeptical that appropriate and beneficial electricity legislation can 
be negotiated and crafted at this time. If Congress cannot include the 
provisions needed to detect, prevent and mitigate the opportunities for 
market manipulation and consumer and investor abuse, then CFC would 
urge deferral of action on electricity legislation until those 
provisions can be included.
    On behalf of Consumers for Fair Competition, I thank you for this 
opportunity to testify.

                              March, 2003
                 Allegations of Market Flaws and Abuses

    February 20, 2003--The Federal Energy Regulatory Commission 
launched an investigation into whether Enron illegally retained 
ownership of two cogeneration plants after it no longer qualified for 
sole ownership once it bought the Portland General Electric utility. 
(Source: The New York Times)
    February 19, 2003--Federal regulators asked California's grid 
operator for more information on energy companies that may have engaged 
in questionable electricity trading tactics to avoid the state's price 
caps in mid-to-late 2000. (Source: The Wall Street Journal)
    February 6, 2003--A Securities and Exchange Commission (SEC) judge 
rejected Enron's request to retain its exemption from the Public 
Utility Holding Company Act (PUHCA), concluding that the company's 
significant revenues from sales outside the state of Oregon--where it's 
utility subsidiary is located--disqualified the company for the 
exemption. (Source: Reuters News Service)
    February 5, 2003--Reliant Resources Inc. was fined $13.8 million in 
a settlement over allegations that the company intentionally withheld 
power in the California market in order to drive up prices during the 
state's electricity crisis. (Source: The Energy Daily)
    January 30, 2003--Staff for the Federal Energy Regulatory 
Commission concluded that natural gas markets remain ripe for potential 
gaming this year despite stepped-up federal and industry scrutiny. The 
report concluded that ``without proper monitoring, the likelihood of 
successful manipulation could increase under current tight supply 
conditions.'' (Source: The Energy Daily)
    January 7, 2003--The California ISO released a report charging that 
other companies engaged in Enron-like market manipulation tactics, 
including the creation of phantom transmission congestion. (Source: Low 
Angeles Times)
    January 6, 2003--FERC Chairman Pat Wood has decided to bring before 
the Commission an appeal that companies seeking to join the PJM 
Interconnection and Midwest ISO are earning enormous rates of return--
as high as 63 percent--on their transmission assets. (Source: The 
Energy Daily)
    January 6, 2003--In a December report, the General Accounting 
Office determined that federal regulators are unprepared to police the 
deregulated market for natural gas. (Source: Public Power Weekly)
    December 26, 2002--Energy companies, burned by disastrous forays 
into commodities trading and other unregulated businesses, are 
increasingly seeking to pass some of the financial burden of these 
failed ventures on to their utility units--and some experts are worried 
that this could lead to higher electricity rates for consumers in 
coming years. For instance, Duke Energy Corp. agreed to pay $25 million 
to its utility customers to settle regulators' accusations that the 
company improperly stuck its utilities with expenses that rightfully 
belonged to unregulated affiliates. Similarly, Kansas regulators found 
that Westar Energy quietly shifted more than $12.95 billion of debt 
from unregulated affiliates onto the utility side of the business. 
(Source: The Wall Street Journal)
    December 20, 2002--The Commodities Futures Trading Commission 
(CFTC), in the first enforcement action over energy date reporting 
scandals, issued an order in which Dynegy Inc. agreed to pay a $5 
million fine to settle charges that two affiliates--for more than two 
years--deliberately reported false gas market data to manipulate 
published price indexes. (Source: The Energy Daily)
    December 5, 2002--A former El Paso Corp. vice president and natural 
gas trader has been arrested and charged with knowingly providing false 
data to an energy industry newsletter that develops and publishes a 
monthly index of gas prices. (Source: The Energy Daily)
    December 4, 2002--In a letter to the Financial Accounting Standards 
Board (FASB), Florida-based Teco Energy said current price quotes are 
``unreliable'' and ``misleading'' due to the lack of effective 
mechanisms to ensure accurate reporting by energy companies and data 
collection by publishers. (Source: The Energy Daily)
    November 19, 2002--A former energy trader and one-time employee at 
one of the country's best-known index publishers told California 
legislators that misreporting of energy prices by large companies was 
routine, underscoring the scope of a practice now under review by 
federal regulators. (Source: The Wall Street Journal)
    November 16, 2002--A report by federal energy regulators--made 
public after the Wall Street Journal sued to obtain the full record of 
the Federal Energy Regulatory Commission investigation--details how two 
power companies, Williams Cos. and AES Corp. may have conspired to 
drive up prices during California's 2000-2001 energy crisis. The report 
lends credence to allegations that California's generators colluded to 
withhold power from the state. (Source: The Wall Street Journal)
    November 13, 2002--A federal grand jury investigating the 
California energy crisis appears to be focusing on whether major 
electricity suppliers in the state worked together to rig prices--in 
violation of the antitrust laws. (Source: Los Angeles Times)
    October 28, 2002--Williams reported that employees ``misreported 
natural gas trades'' to industry publications that compile price 
indices. The same story also reported that earlier in October Dynegy 
fired six people for similar actions. (Source: Platts Power Markets 
Week)
    October 28, 2002--A class action lawsuit has been filed against 
AEP, claiming that AEP investors were misled about the value of AEP 
stock based on false information created by AEP ``wash trades'' and 
manipulation of gas index prices through false transaction reporting. 
(Source: Platts Power Markets Week)
    October 24, 2002--FERC initiated an investigation to determine if 
ENRON improperly certified three wind generation facilities as 
Qualifying Facilities in 1997. (Source: FERC Order Initiating 
Investigation and Hearing)
    October 23, 2002--The Commodity Futures Trading Commission's 
inquiry into U.S. energy markets involves many companies and includes a 
review of intentional reporting of false price data to publications 
that produce indexes against which energy contracts are pegged. 
(Source: The Wall Street Journal)
    October 17, 2002--The head of Enron's energy trading operation in 
the West, Timothy Belden, agreed to plead guilty to a criminal charge 
for his role in manipulating electricity prices in California. (Source: 
Los Angeles Times)
    October 9, 2002--American Electric Power dismissed five employees 
in their gas-trading unit for providing ``inaccurate price 
information'' to industry trade publications. (Source: AEP News 
Release)
    October 7, 2002--Standard & Poor's Rating Services has long held a 
view that the lack of regulatory insulation of a regulated utility from 
the nonregulated operations of the Parent company is the cause of many 
credit ratings downgrades over the past few years. (Source: Standard & 
Poor's)
    October 7, 2002--The Securities & Exchange Commission opened an 
inquiry to determine whether Enron should maintain its exemption from 
the Public Utility Holding Company Act. (Source: The Oregonian)
    October 2, 2002--The Securities & Exchange Commission charged 
Andrew Fastow, former ENRON CFO, with fraud. The SEC filed in civil 
court ``seeking disgorgement of all ill-gotten gains.'' (Source: SEC 
News Release 2002-143)
    October 1, 2002--An official with the Federal Energy Regulatory 
Commission said that owners of U.S. power plants and transmission lines 
may be required to take ``personal responsibility'' and certify that 
plant outages which impact market prices occur due to legitimate 
reasons.
    September 24, 2002--Dynegy settled fraud charges with the 
Securities & Exchange Commission. The SEC alleged Dynegy engaged in 
``wash trading'', selling and purchasing equal amounts of energy for 
the same price from the same counter party, and improper accounting for 
special purpose entities. Dynegy agreed to a cease and desist order and 
paid $3 million, but was not required to admit to any wrongdoing. 
(Source: SEC News Release 2002-140)
    September 23, 2002--El Paso Pipeline was found to have withheld gas 
line capacity. The Chief Judge found that El Paso had market power into 
the California markets and exercised that market power by withholding 
gas line capacity. The Chief Judge went on to recommend that FERC 
impose penalties. (Source: Initial Decision Docket # RP00-241-006)
    September 18, 2002--The California Public Utility Commission 
alleges that five power generators deliberately withhold output during 
the state's energy crisis in order to drive up prices. (Source: The 
Wall Street Journal)
    September 13, 2002--The Commodity Futures Trading Commission 
reached a settlement with a former Avista Energy trader regarding his 
role in the alleged manipulation of forward electricity prices in 
California on the New York Mercantile Exchange. The illiquidity in the 
market enabled price manipulation through large volume trades in the 
closing minutes of the exchange. (Source: The Energy Daily)
    September 10, 2002--IdaCorp admits violating FERC affiliate rules, 
saying that its trading unit did not always buy transmission access 
from its regulated utility affiliate on a third-party basis. (Source: 
The Energy Daily)
    August 19, 2002--Bill Hederman, the first director of the new FERC 
Office of Market Oversight and Investigation, said that the Commission 
does not yet have a clear definition of market power, and that a ``a 
hard and fast definition will be closer to a year away.'' (Source: 
Clearing Up)
    August 16, 2002--Utility regulators in several states are moving to 
ensure that the financial problems that decimated companies in the 
wholesale-energy sector don't unduly hurt consumers of the electric 
companies they regulate. (Source: The Wall Street Journal)
    August 14, 2002--The market monitor for the PJM Interconnection LLC 
said certain companies repeatedly created congestion in the Mid-
Atlantic electricity grid by gaming the system. Faulty incentives 
induced market participants to shift power flows to capture more 
profit, the monitor said. (Source: The Energy Daily)
    August 13, 2002--The Federal Energy Regulatory Commission launched 
a formal investigation into instances of possible misconduct by five 
companies alleged to have manipulated short-term electric and natural 
gas prices in the West. (Source: FERC Press Release)
    July 23, 2002--The PJM Interconnection found discrepancies in 
prices sold from energy providers in neighboring regions, with 
marketers booking transactions along transmission paths that were 
different from the actual path used in order to distort congestion 
pricing. (Source: The Energy Daily)
    July 16, 2002--Duke Energy acknowledged that it made 23 ``round 
trip'' energy trades over the Intercontinental Exchange electronic 
trading platform, of which Duke is one of 13 equity owners. (Source: 
The New York Times)
    June 28, 2002--The biggest reason Californians paid $7 billion more 
for electricity in the summer of 2000 was the ability of power 
suppliers to ask for and get high prices, says a new study by 
university economists. (Source: Los Angeles Times)
    June 24, 2002--A report by the Pennsylvania Public Utility 
Commission alleged that PPL EnergyPlus deliberately withheld 
electricity from the capacity market in early 2001 to create an 
artificial shortage. (Source: Public Power Weekly)
    June 18, 2002--A study by the General Accounting Office concluded 
that the Federal Energy Regulatory Commission is not yet up to the task 
of protecting consumers and ensuring that electricity is sold at just 
and reasonable rates. The report determined that FERC is hobbled by 
antiquated procedures, legislation and perhaps a mind-set more suited 
to the old days when energy producers were regulated monopolies. 
(Source: The New York Times)
    June 10, 2002--Traders at Xcel Energy and Mirant discussed 
``games'' to profit from California's chaotic electricity market in 
2000 as they negotiated energy transactions, according to transcripts 
Xcel has given to federal regulators. The Xcel and Mirant traders 
discussed schemes to schedule nonexistent power use and to take 
advantage of congestion payments on California's overburdened electric 
grid.
    June 8, 2002--Perot Systems was peddling ways to exploit market 
loopholes in the California energy market, which the company had helped 
develop. (Source: Los Angeles Times)
    May 27, 2002--As noted by the head of the PJM market-monitoring 
unit: ``I don't think any energy market is immune to manipulation''. 
(Source: Business Week)
    May 15, 2002--In a 2001 probe of Enron's online trading system, 
FERC did not uncover either the looming financial collapse or its 
manipulative trading practices. Senate Governmental Affairs Committee 
Chairman Joseph Lieberman faulted the investigation for being 
``incomplete'' and ``more noteworthy for what it overlooked than for 
what it scrutinized, leaving consumers unprotected''. (Source: Wall 
Street Journal)
    May 8, 2002--Electricity industry analysts warned yesterday that 
the memos showing how Enron Corp. manipulated California's power supply 
in the past two years demonstrate that smart, very detailed market 
rules have to be devised and enforced. (Source: The Washington Post)
    May 7, 2002--Internal Enron documents outline trading strategies to 
manipulate prices in California's power market. (Source: Wall Street 
Journal)
    May 2, 2002--Coal plant developer alleges that Illinois Power is 
frustrating plant interconnection of the plant to favor a competing 
coal plant owned by an affiliate of the utility. (Source: The Energy 
Daily)
    March 5, 2002--Cambridge Energy Research Associates issued a report 
that noted ``we're a decade into deregulation and most power markets 
remain ill-defined''. (Source: Wall Street Journal)
    March 4, 2002--Staff of the Public Utility Commission of Texas 
accuse six (unnamed) market players of manipulating the market in Texas 
by intentionally mis-scheduling power needs to reap more than $1 
million in load imbalance credits. (Source: The Energy Daily)
    January 11, 2002--A coalition of major generators complained to 
FERC that Entergy is charging excessive rates and deny comparable 
service to competitors. (Source: The Energy Daily)
    January 8, 2002--A coalition of generators (including Calpine, 
Exelon, Mirant and Reliant) charged that Entergy is abusing market 
power through its generator energy imbalance program, overcharging 
independent generating facility customers for imbalances resulting from 
generation under-deliveries. The coalition alleged that Entergy claimed 
its incremental costs of meeting the imbalance were more than $100/mwh 
greater than the prevailing market rate. (Source: Public Power Weekly)
    October 5, 2001--FERC accused Exelon of illegally manipulating the 
transmission system in the Pennsylvania-New Jersey ``Maryland (PJM) 
Interconnection to enrich its power marketing affiliate (PECO Energy). 
(Source: Energy Daily).
    July 12, 2001--The Federal Energy Regulatory Commission (FERC) 
decided to develop new tests to determine whether power providers 
should be allowed to charge market rates for electricity. (Source: Dow 
Jones Newswires)
    June 29, 2001--a General Accounting Office study found that FERC 
lacked the information or analysis needed to conclude that generators 
in California had intentionally withheld electricity supply to 
influence prices. (Source: GAO Report)
    June 21, 2001--The New York Independent System Operator asked FERC 
for emergency action on a plan to police the market and guard against 
abuse in the wholesale electricity market. (Source: Energy Daily)
    May 24, 2001--NSTAR, a Boston utility, accused two independent 
power producers of charging excessive rates in the New England market 
during times of power grid congestion. (Source: Energy Daily)
    February 1, 2001--Consumer Federation of American and Consumers 
Union write President Bush claiming that FERC ``has repeatedly allowed 
sellers to charge ``market-based rates' when the underlying market 
conditions are highly concentrated and the level of competition is far 
from sufficient to discipline abusive and anticompetitive behavior by 
electricity suppliers, or to ensure effective market functioning.'' 
(Source: CFA/CU Letter)
    January 13, 2001--Leading economists Paul Jaskow and Edward Kahn 
conclude that ``high wholesale prices observed in summer 2000 [in 
California] cannot be explained as the natural outcome of ``market 
fundamentals' in competitive markets since there is a very significant 
gap between actual market prices and competitive benchmark prices''. 
(Source: CATO Policy Analysis)
    September 6, 2000--Economists on the California ISO Market 
Surveillance Committee conclude that ``uncorrected market design flaws 
. . . have enhanced the ability of market participants to exercise 
market power in the California electricity market'' and that these 
flaws caused or contributed to the June 2000 price spikes. (Source: 
Market Surveillance Committee report)
    July, 2000--The staff of the Federal Trade Commission found that 
``as regulation is reduced and competition is encouraged, there is a 
significant potential that these utilities [vertically integrated 
utilities] will use their existing market power in generation, 
transmission and distribution services to deter competition that could 
benefit consumers''. (Source: FTC Staff Report)
    May 24, 2000--New York State Electric and Gas claims that 
Consolidated Edison can use Local Reliability Rules to require use of 
its own generators--regardless of price--to relieve congestion and 
raise prices in the area in which NYSEG operates. NYSEG claims a 
proposed merger between ConEd and Northeast Utilities will exacerbate 
this problem. (Source: Energy Daily)
    May 5, 2000--An analysis by Tabors Caramanis & Associates alleges 
that two transmission owning utilities, American Electric Power and 
Entergy, claim more transmission capacity than necessary to serve 
retail load in order to block competitive entry. (Source: Dow Jones 
Newswire)
    December 21, 1999--The East Central Area Reliability (ECAR) 
executive committee asserted that Cinergy showed ``blatant disregard'' 
for reliability rules. The action was prompted by Cinergy ``leaning'' 
on the transmission grid and taking as much as 1,600 MW of power--which 
they had not purchased--during high-price periods. The power would be 
``returned'' when prices were lower.

    Mr. Barton. Thank you. Now we would like to ask Ms. Sharon 
Buccino from the Natural Resources Defense Council. You have 5 
minutes for opening statement. Thank you for being here.

                   STATEMENT OF SHARON BUCCINO

    Ms. Buccino. Thank you. I appreciate the opportunity to 
testify today. The Natural Resources Defense Council is a non-
profit organization with 500,000 members across the country 
dedicated to the protection of public health and the 
environment. My testimony addresses the siting of electric 
transmission facilities on Federal lands. NRDC acknowledges the 
importance of removing bottlenecks and ensuring reliability in 
the Nation's electricity grid. Improvements to the grid are 
necessary to encourage development of renewable resources, such 
as wind and geothermal power, and to serve consumers better, 
including those on tribal lands. Solving these problems, 
however, does not require the reallocation of authority over 
Federal lands proposed in the draft bill.
    In my brief time this morning, I would like to focus on one 
particular provision in the bill, it is Section 216(j) which 
allows a State to trump decisions by Federal land managers 
regarding the siting of transmission facilities on Federal 
lands. This provision would override fundamental protections 
that Congress put in place almost 30 years ago to balance 
competing interests in deciding how to use the public's land 
and most importantly to give the public a say in the decision. 
Such drastic steps are unnecessary to ensure affordable and 
reliable electricity.
    Efforts are already underway among utilities, States and 
the Federal Government to increase the efficiency of siting 
transmission facilities. For example, last summer, the Western 
Governors Association signed a protocol with four Federal 
agencies designed to streamline siting decisions. Legislative 
changes are not necessary to make this work. Section 216(j) of 
the draft bill will result in more conflict and controversy, 
not less.
    The Federal public lands are owned by all Americans and are 
to be managed to the benefit of us all. The Federal Government, 
not an individual State, is in the best position to manage 
these lands in the national interest. These lands have 
tremendous value for a variety of purposes, including energy 
development and distribution but also recreation and the 
preservation of the natural historic and cultural resources 
that help shape our American identity. The Federal Land Policy 
and Management Act of 1976, also known as FLPMA, explicitly 
provides for rights-of-way across public lands for transmission 
facilities, but it does so in a way intended to protect the 
many other values of these lands and to give the public a say 
in how their lands are managed.
    Section 216(j) of the draft bill would remove the public 
participation guarantees provided by Federal law. FLPMA, 
together with the National Forest Land Management Act and the 
National Environmental Policy Act, provides citizens the 
opportunity to lend their voice in making decisions about how 
their land should be used. State requirements simply do not 
substitute for the loss of Federal participation requirements. 
State agencies do not provide citizens the same guarantees to 
participate that apply to Federal agency decisions.
    There is a savings clause in the bill, but in my view, this 
does not adequately preserve Federal protections. The simple 
fact is that FLPMA and NEPA only apply to Federal decisions. So 
once you take the decision away from Federal hands, it is 
difficult to argue that the protections of NEPA and FLPMA 
apply. Even if the savings clause did in fact preserve the 
application of NEPA and other Federal protections to State 
decision, the result would not be desirable from any 
perspective. Presumably, the Federal land manager has already 
completed or at least started a NEPA review when a State steps 
in under the bill. It makes little sense for the State to then 
conduct a separate review under NEPA once it takes over the 
right-of-way decision.
    Furthermore, one of the key elements of NEPA is the 
consideration of alternatives to the proposed decision, 
including a no action alternative. Yet this portion of NEPA 
would be rendered meaningless under Section 216(j), for the 
only reason a State would step in and trump the Federal land 
manager's decision to approve a right-of-way is where the 
Federal Government had not done so. And in these circumstances 
there can be no meaningful consideration of alternatives or any 
meaningful opportunity for members of the public opposed to the 
project to influence the decision.
    Cooperation and resources, not legislative changes are what 
is needed to accelerate siting of transmission lines on Federal 
lands. Federal land managers are the right officials to make 
decisions regarding the use of Federal lands. There is little 
evidence that Federal land managers prevent the siting of 
transmission facilities. In fact, of the hundreds of rights-of-
way applications of the Bureau of Land Management and the 
Forest Service each year, only a handful are denied. And I 
would, again, like to refer the committee to the ongoing 
efforts to address these issues. I mentioned the protocol of 
the Western Governors Association. These efforts should be 
given a chance to work before drastic changes to the management 
responsibilities for Federal lands are made.
    And I would just like to make one final point, which is it 
is very important to remember that what we are talking about 
here are Federal lands. They are lands that belong to all of 
us. And if you look at the bill, it seems that things are all 
mixed up, because at the same time you give States authority 
over Federal lands, the bill gives FERC the authority to make 
decisions on State lands. And in my view, even the most ardent 
advocate of State rights is unlikely to support such 
divestiture of authority from the entities most entitled to 
make decisions about land use, and that is the owner of the 
property. Thank you.
    [The prepared statement of Sharon Buccino follows:]

    Prepared Statement of Sharon Buccino, Senior Attorney, Natural 
                       Resources Defense Council

    My name is Sharon Buccino. I am a Senior Attorney with the Natural 
Resources Defense Council. NRDC is a non-profit organization with over 
500,000 members across the country dedicated to the protection of 
public health and the environment. I appreciate the opportunity to 
testify today. My testimony addresses the siting of transmission 
facilities on federal lands. NRDC acknowledges the importance of 
removing bottlenecks and ensuring reliability in the nation's 
electricity grid. Improvements to the grid are necessary to encourage 
development of renewable resources such as wind and geothermal power, 
and to serve consumers better including those on tribal lands. Solving 
these problems, however, does not require the reallocation of authority 
over federal lands proposed in the draft bill.
    The draft bill's proposal to allow a state to trump decisions by 
federal land managers regarding the siting of transmission facilities 
on federal lands would have severe consequences. See Title VII, 
Sec. 7012 (adding Section 216(j) to the Federal Power Act). The federal 
public lands are owned by all Americans and are to be managed to 
benefit us all. The federal government, not an individual state, is in 
the best position to manage these lands in the national interest. These 
lands have tremendous value for a variety of purposes. Section 216(j) 
would override federal protections that ensure a balancing of competing 
interests in deciding how to use the public's land and, most 
importantly, give the public a say in the decision.
    Such drastic steps are unnecessary to ensure adequate, affordable 
and reliable electricity. In fact, efforts are already underway among 
utilities, states and the federal government to increase the efficiency 
of siting transmission facilities. For example, just last summer the 
Western Governors Association signed a protocol with four federal 
agencies designed to streamline siting decisions. Legislative changes 
are not necessary to make this work. Section 216(j) of the draft bill 
will result in more conflict and controversy, not less.

   A. VALUE OF THE PUBLIC LANDS/FEDERAL RESPONSIBILITY TO MANAGE FOR 
                        BENEFIT OF ALL AMERICANS

    The Federal Land Policy and Management Act of 1976 (``FLPMA'') 
declared that ``the public lands be retained in Federal ownership.'' 43 
U.S.C. Sec. 1701(a)(1). After years of disposal of federal land to the 
states and private interests, Congress recognized that the remaining 
federal lands were of tremendous value and should not be transferred 
except under specific, limited circumstances. FLPMA was designed to 
ensure that taxpayers receive fair market value for the use of public 
resources and that these resources are managed in a way that protects 
their scenic, historical, ecological, environmental, and archeological 
values. 43 U.S.C. Sec. 1701(a)(8) & (9).
    The federal estate contains 630 million acres.\1\ The vast majority 
of the federal public lands are managed for multiple use by the U.S. 
Forest Service and the Bureau of Land Management (``BLM'').\2\ They 
provide boundless recreational opportunities, sustain diverse 
ecosystems and species, and preserve historic and cultural resources 
that help shape our American identity. The overwhelming majority of 
Americans participate in outdoor recreational activities,\3\ and 
increasingly they are heading for the public lands. In 2001, Forest 
Service lands received over 214 million visits.\4\ The total number of 
visits to BLM lands was over 60 million.\5\ These recreational 
resources in turn provide major economic benefits to businesses, 
including recreation-based businesses and communities adjacent to the 
public lands.
---------------------------------------------------------------------------
    \1\ U.S. Department of the Interior, Public Land Statistics (2000), 
available at www.blm.gov/natacq/pls00/.
    \2\ Id.
    \3\ See, e.g., Bureau of Land Management, Recreation 2000: A 
Strategic Plan, at 12.
    \4\ U.S. Department of Agriculture, National Forest Service Use 
Monitoring National and Regional Project Results (September 2002), 
available at http://www.fs.fed.us/recreation/programs/nvum/reports/
year2/2002__national__report__final.htm.
    \5\ U.S. Department of the Interior, Public Land Statistics (2001), 
www.blm.gov/natacq/pls01.
---------------------------------------------------------------------------
    FLPMA explicitly provides for rights of way across public lands, 
including national monuments, for transmission facilities. 43 U.S.C. 
Sec. 1761(a)(4); see also 43 C.F.R. Part 2800 (BLM right of way 
regulations); 36 C.F.R. Part 251, Subpart B (Forest Service right of 
way regulations). But it does so in a way intended to protect the many 
other values of these lands and to give the public a say in how their 
lands are used. It is the federal government, not an individual state, 
that can determine the best way to manage these lands in the national 
interest, that is to benefit us all.
    Section 216(j) of the draft bill abandons this responsibility. The 
provision transfers to the states the authority given by Congress to 
the Secretary of Interior (for BLM lands) and the Secretary of 
Agriculture (for Forest Service lands) to determine when rights of way 
should be granted across federal lands. Nothing in the provision 
requires the state to balance competing interests. The purpose of the 
provision is get projects approved. Section 216(j) provides that a 
state can trump the decision of federal land managers where a ``right-
of-way has not been issued within one year after the date on which [an] 
application was submitted.'' Sec. 216(j)(1). The provision creates a 
one-way street. States get to trump the failure of federal land 
managers to approve a right of way. No provision exists for state 
action where state interests oppose the proposed right of way. Even if 
a state were to try to determine what was in the national interest, it 
simply is not in a position to do so. This is precisely why these lands 
have been retained in federal ownership.

                    B. PROMOTING PUBLIC INVOLVEMENT

    Section 216(j) would remove the public participation guarantees 
provided by federal law. The provision would remove decisions about how 
federal lands are used from federal decision-makers. The provision 
allows the state to make a right of way decision in place of the 
Secretary of Interior or Secretary of Agriculture. Federal requirements 
that apply to federal decisions would arguably not apply to the state's 
decision.
    Federal laws lay out a planning process for federal lands. FLPMA 
governs lands managed by the BLM. 43 U.S.C. Sec. 1712(a). The National 
Forest Management Act (``NFMA'') governs planning in the national 
forests. 6 U.S.C. Sec. 1604. Although the details vary between 
agencies, the basic process is the same. First, federal agencies must 
write long-range plans that identify how areas of land will be managed. 
If these uses will cause significant environmental impacts, agencies 
must also write environmental impact statements evaluating the impacts 
and considering alternatives. National Environmental Policy Act 
(``NEPA''), 42 U.S.C. Sec. 4332(C). Based on these written land use 
plans, federal land managers then make decisions about how individual 
pieces of land will be used--for preservation, recreation, or the 
siting of transmission facilities, for example.
    FLPMA, NFMA and NEPA provide citizens the opportunity to lend their 
voice at each stage of the process. 43 U.S.C. Sec. 1712(a) & (f) (land 
use plans under FLPMA must be written ``with public involvement'' 
including ``adequate notice and opportunity to comment''); 16 U.S.C. 
Sec. 1604(d) (NFMA requires ``public participation in the development, 
review, and revision of land management plans''); 43 C.F.R. 
Sec. 2802.4(d)(1), citing to NEPA's requirements for public involvement 
in authorizing right of way, see 40 C.F.R. 1503.1(a)(4); 36 C.F.R. 
Sec. 251.54(g)(2)(ii). Citizens unhappy with the plans, or with 
specific decisions, can challenge them in hearings before the agency 
and in court. 5 U.S.C. Sec. Sec. 702, 706 (provides right to challenge 
agency decisions in federal court that are arbitrary and capricious or 
not in accordance with the law); 43 C.F.R. Sec. 2804.1 (providing for 
appeal of BLM right-of-way decisions to Interior Board of Land 
Appeals); 36 C.F.R. Part 251, Subpart C (providing for appeal of Forest 
Service special use decisions).
    State requirements simply do not substitute for the loss of federal 
public participation requirements. State agencies do not provide 
citizens the same guarantees to participate that apply to federal 
agency decisions. Many of the processes for public involvement in state 
land decisions are informal, rather than formal ones required by law. 
In addition, the ability of citizens to challenge state agency 
decisions varies across states. Some states lack a formal 
administrative appeals process to provide citizens the right to 
challenge state land management decisions. Even where citizens have the 
right to go to state court to challenge state agency decisions, the 
public's ability to get a court to overturn an agency decision varies 
across states.
    The attempt at a savings clause in the draft bill (Section 
216(j)(2)) does not adequately preserve federal protections. The simple 
fact is that NEPA, as well as protections under the Endangered Species 
Act and the National Historic Preservation Act, apply to federal 
decisions. Once the decision has been removed from federal hands it is 
difficult to argue that these laws apply. Congress arguably does not 
have the authority to impose the requirements of NEPA and other federal 
protections on state decisions.
    Even if Section 216(j)(2) did in fact preserve the application of 
NEPA and other federal protections to state decisions under 216(j)(1), 
the result would not be desirable from any perspective. Presumably, the 
federal land managers already completed or at least started a NEPA 
review. It makes little sense for the state to then conduct a separate 
review under NEPA once it takes over the right of way decision. 
Furthermore, one of the key elements of NEPA is the consideration of 
alternatives to the proposed decision including a no action 
alternative. 42 U.S.C. Sec. 4332(C)(iii); 40 C.F.R. Sec. 1502.14. Yet, 
this portion of NEPA would be rendered meaningless under Section 
216(j). The only reason that a state would step in and trump the 
federal land manager's decision is to approve a right of way where it 
was rejected, not acted on or conditioned in a way that makes the 
proposed construction or modification ``not economically feasible.'' 
Section 216(j)(1)(C). In these circumstances, there can be no 
meaningful consideration of alternatives nor any meaningful opportunity 
for members of the public opposed to the project to influence the 
decision.

       C. ASSURING DEVELOPMENT IN ENVIRONMENTALLY RESPONSIBLE WAY

    Section 216(j) would also circumvent the process created by federal 
law to ensure that development of public land resources, including for 
electric transmission facilities, is done in an environmentally 
responsible way. FLPMA allows for a variety of uses of the federal 
public lands, but directs that they be managed in ``a manner that will 
protect the quality of scientific, scenic, historical, ecological, 
environmental, air and atmospheric, water resource, and archeological 
values.'' 43 U.S.C. Sec. 1701(a)(8). NEPA sets up a process for the 
analysis of potential environmental impacts of a proposed federal 
decision, such as approval of a right of way for transmission lines. 42 
U.S.C. Sec. 4332(C). As part of this process alternatives to the 
proposed action are considered and ways to mitigate the adverse impacts 
are identified. 40 C.F.R. Sec. 1502.14.
    Other federal laws ensure that federal land managers assess the 
impacts of a proposed right of way on endangered and threatened 
species, as well as cultural resources. The Endangered Species Act 
requires federal land managers to consult with the U.S. Fish & Wildlife 
Service prior to approving an action that may affect an endangered or 
threatened species. 16 U.S.C. Sec. 1536(a)(2). Likewise, the National 
Historic Preservation Act requires federal agencies analyze the impacts 
of their decisions on historic and cultural resources. 16 U.S.C. 
Sec. 470. These requirements are not intended to prevent the siting of 
transmission facilities on public lands, but instead to ensure that the 
siting is done in a way that preserves other values of these lands.
    As previously discussed, the draft bill's attempt at a savings 
clause does adequately preserve these federal protections. Once the 
decision becomes a state decision, requirements that govern federal 
decisions arguably would not apply. Furthermore, the direction of 
Section 216(j) is clear. Its goal is to get transmission facilities 
approved. The provision leaves no room for balancing competing 
interests or consideration of impacts on natural or cultural resources.
  section 216(j) is unnecessary to provide affordable, reliable energy
    Cooperation and resources, not legislative changes, are what is 
needed to address bottlenecks in the nation's electricity grid. Federal 
land managers are the right officials to make decisions regarding the 
use of federal lands. There is little evidence that federal land 
managers prevent the siting of transmission facilities. Of the hundreds 
of rights of way applications BLM and the Forest Service receive each 
year, only a handful are denied. The existing regulations of both 
agencies require them to work with applicants to help develop proposals 
that can be approved. 43 C.F.R. Sec. 2802.1(a); 36 C.F.R. 
Sec. 251.54(e). The regulations also explicitly require consultation 
with state and local agencies. 43 C.F.R. Sec. 2802.4(d)(3); 36 C.F.R. 
Sec. 251.54(g)(2)(ii) & (iii).
    Current efforts are in fact underway to enhance coordination and 
cooperation among utilities, states, and the federal government in 
addressing transmission siting proposals. In June 2002, the Western 
Governors Association signed a protocol with the U.S. Department of 
Interior, the U.S. Department of Agriculture, the U.S. Department of 
Energy and the Council on Environmental Quality governing the ``Siting 
and Permitting of Electric Transmission Lines in the Western United 
States.'' \6\ The purpose of the protocol is ``to establish a framework 
that will enable affected states, local governments, federal agencies 
and tribal governments to participate in a systematic, coordinated, 
joint review process for siting and permitting of interstate 
transmission lines'' in the West.\7\
---------------------------------------------------------------------------
    \6\ Available on the Western Governors Association website at 
http://www.westgov.org/wieb/electric/Transmission%20Protocol/
wtp__page.htm.
    \7\ Id.
---------------------------------------------------------------------------
    In addition, the BLM has initiated an effort to identify priority 
corridors that once incorporated into land management plans will 
simplify the environmental review for transmission lines within these 
corridors. From the environmental perspective, permitting can proceed 
more quickly by expanding capacity along existing rights of way and 
avoiding environmentally sensitive areas such as roadless areas, 
critical habitat, and national monuments.
    None of these efforts require the dramatic shift in management 
responsibilities over federal lands contained in Section 216(j) of the 
draft bill. Instead of promoting existing cooperative efforts, the 
draft bill promotes conflict and controversy. It is important to come 
back to the fundamental point that the provision deals with federal 
lands. As mentioned already, the federal government, not an individual 
state, is in the best position to determine whether a right of way 
application is in the national interest. It is the federal government, 
not an individual state, that can best assure that all interested 
members of the public have a say in the decision, including those who 
treasure the scenic and recreational values of the lands involved but 
may not reside in the state in which the proposed project would be 
located.
    In fact, the draft bill seems to have things all mixed up. At the 
same time the bill gives states decision-making authority over federal 
lands, it gives the Federal Energy Regulatory Commission the authority 
to make decisions on state lands. See Title VII, Sec. 7012 (adding 
Sections 216(b)-(d) to the Federal Power Act). Even the most ardent 
advocate of state rights is unlikely to support such divesture of 
authority from the entity most entitled to make decisions about land 
use--the owner of the property.
    Thank you again for the opportunity to testify on these important 
issues.

    Mr. Shimkus [presiding]. Thank you. And, Ms. Buccino, let 
me ask you one question. All Federal lands are not national 
forest or national parks; is that correct?
    Ms. Buccino. That is correct.
    Mr. Shimkus. Thank you. I would like to--Ms. Tezak, do you 
agree with the State commissioner's characterization that we 
had in the first panel of the Supreme Court decision and the 
Cirrus cost/benefit study?
    Ms. Tezak. No. I will take them in order. I based my 
analysis on my reading of the Supreme Court decision, which is 
something that is freely available to any member of the 
investment public. And I would say that the statutory text, I 
am quoting now, ``This statutory text thus and unambiguously 
authorizes FERC to assert jurisdiction over two separate 
activities--transmission and selling. It is true that FERC's 
jurisdiction over the sale of power has been specifically 
confined to the wholesale market. However, FERC's jurisdiction 
over electricity transmissions contains no such limitation. 
Because the Federal Power Act authorizes FERC's jurisdiction 
over interstate transmissions without regard to whether the 
transmissions are sold to a reseller or directly to a customer, 
FERC's exercise of this power is valid.'' And I would say that 
based on the questions you asked earlier, specifically Mr. 
Shimkus, you got nothing but affirmation from the 
representatives in the previous panel of the relevance of the 
Interstate Commerce Clause.
    Second, on the Cirrus study, when it was presented at the 
National Association of Regulatory Utility Commissioners' 
annual meeting in November, I was present and I asked the 
gentleman from Charles River Associates who prepared that study 
to help me understand why $2.8 billion of transmission is 
required in the Southeast. And I asked him whether or not that 
assumed any retirements or any rationalization of the alleged 
over build capacity in the Southeast. The answer to that 
question in front of about 100 people was no. My follow-up 
question to him then was, is it possible that the benefits that 
you have defined in this study then may be moderately expressed 
or modestly expressed, they could be higher? His answer to that 
was, ``Why, yes.''
    Mr. Shimkus. Thank you. Let me also follow up with you on--
there was obviously the debate on repeal of PUHCA. How would 
you feel that that would affect capital markets, especially 
with the expansion of the opportunity for the transmission 
grid?
    Ms. Tezak. Eighteen months ago I think that I could tell 
you that every one of my clients would have said unequivocally 
it would facilitate merger and acquisition activity. However, 
the damage that has been sustained on balance sheets probably 
makes that reality less feasible than it would have 18 months 
ago. Generally, I would say Wall Street looks favorably on the 
repeal of PUHCA, and I would also tell you that Wall Street is 
also looking very carefully at taking its own measures to limit 
the ability of companies to use regulated assets as security 
for unregulated benefits, regulated activities. In fact, Kara 
Silver from MBIA testified at both the Senate hearing and at 
FERC that they are taking steps as bond holders to tighten up 
those from their side. So I believe that you can repeal PUHCA 
and not be absent completely of addressing the concerns that 
people have regarding rate based.
    Mr. Shimkus. Thank you. Mr. Kanner, I appreciate your 
comments. In the draft bill, have you looked and are you 
satisfied with the transparency provisions that are listed 
there?
    Mr. Kanner. I think the transparency provisions are an 
improvement over last year where in conference the language had 
statistical information. I think it could be clarified in terms 
of making clear that it is volumetric as well as price 
information so that by price we don't end up with the same sort 
of averaging that statistical information would be problematic 
on. But I think there is also an important absence, which is 
price data on gas prices. As we have seen, everyone from the 
CSTC to GAO, to the investment community, to participants in 
the market have said we cannot rely on the submission of gas 
data to these data clearinghouses, and we need to have a 
standardized systemic and honest system.
    Mr. Shimkus. Thank you. I want to get this last one in. Mr. 
Gent, based upon my line of constitutional questions earlier, 
isn't--talk to me about the constitutional aspect of the 
delegation of the Federal Regulatory Authority to a private 
organization, and has that been done before and where, and how 
does that fall in line with this whole constitutional debate?
    Mr. Gent. The delegation of authority from the FERC to the 
organization presumably authorized by this legislation is 
enabled by Congress. There are other organizations that do 
this. I think the security exchanges, NASDAQ, NASD and others 
operate under similar type arrangements. We model this 
organization after NASD.
    Mr. Shimkus. Thank you. My time is up. I would like now to 
turn to the ranking member, Mr. Boucher, for 5 minutes.
    Mr. Boucher. Well, thank you very much, Mr. Chairman, and 
thanks also to the witnesses for sharing their expertise with 
us this afternoon. Mr. Norlander, let me begin with you. We 
have heard calls from some members of this subcommittee and 
some externally interested parties also for a repeal of the 
FERC's merger review authority. The administration, I would 
note, does not support removing FERC review of mergers, and in 
fact is arguing that the FERC's jurisdiction to do that be 
enhanced and that it have even a greater review of mergers. 
That also happens to be my position.
    You have testified to the general subject during the course 
of your commentary, and so let me get you to explain to us, if 
you will, why with the Department of Justice reviewing mergers 
from an antitrust perspective the review of that single Federal 
agency is not sufficient in order to protect the range of 
interests that Federal review is designed to protect? In other 
words, with the DOJ reviewing mergers, why is it necessary that 
we also have another review independently taking place at the 
FERC?
    Mr. Norlander. I think that one reason has to do with the 
unique nature of electricity. It can't be stored, it is not 
fungible in the same way that corn flakes or other commodities, 
other substances might be. And so therefore the expertise of 
FERC in looking to see whether markets are going to be affected 
by a merger should be retained at the FERC.
    Second, I think that the FERC even now is changing its 
understanding of what it means to exercise market power in the 
markets that have been created. It has changed its standards 
for market power assessments. It has an interim standard now 
that is quite different from the sort of basic market share 
approach, which is like if no one has more than 20 percent or 
so, you have got 5 or more participants, everything should kind 
of get the green light at the other agencies. And now we know, 
both from experience in every one of these markets, and we know 
from laboratory research on trying to model behavior of people 
in these markets, in game simulation, and we know from the 
mathematicians that these types of markets encourage a Nash 
Equilibrium among the participants, that playing by the rules, 
no collusion, none of the traditional kinds of antitrust 
behavior. Many more participants may be needed to have a 
market--to create a market that doesn't have market power.
    So as we go on--as FERC is spending $13 billion to increase 
the size of these geographic markets, if the number of sellers 
condense, we will have merged away any gains that were achieved 
by expansion.
    Mr. Boucher. Okay. Thank you, Mr. Norlander. Ms. Tezak, let 
me ask you, does Wall Street have an opinion about whether or 
not FERC remains in a position to review mergers?
    Ms. Tezak. Not specifically. I would say that on the topic 
of mergers----
    Mr. Boucher. Well, it wouldn't do any harm to the----
    Ms. Tezak. Right.
    Mr. Boucher. [continuing] efforts to attract capital or to 
carry out effective mergers where they are appropriate if FERC 
reviews these.
    Ms. Tezak. I have never had a discussion with a single 
client regarding Section 203 merger authority. PUHCA is their 
focus.
    Mr. Boucher. Okay. Thank you. Mr. Kanner, let me ask you 
this: You have suggested in your statement that there might be 
some amendments to the Public Utility Holding Company Act that 
you would find to be appropriate, and you are recommending to 
this committee perhaps targeted amendments to PUHCA rather than 
wholesale repeal. What are the targeted amendments you would 
suggest?
    Mr. Kanner. Congressman, actually what my testimony says is 
if there are specific impediments that PUHCA poses on needed 
investment or needed activities, then we should look at those. 
In our review of the Holding Company Act, there are really--if 
you take both the statutory exemptions that have been created 
and the SEC's rules, there are really two types of activities 
in which PUHCA may be an inhibitor. One is the acquisition of 
one utility by another, and I would question whether that 
provides competitive benefits or not. And the second is 
investments in transmission, certain types of investments in 
transmission if a utility on one coast wanted to create a 
subsidiary to build transmission to relieve congestion on the 
west coast.
    Congress, in the past, in 1992 and 1996, had targeted 
amendments to the Holding Company Act designed to address 
specific concerns. If there is a specific concern, we are more 
than happy to entertain targeted fixes, making sure that it is 
structured in a way that provides consumer benefits.
    Mr. Boucher. Thank you. Mr. Chairman, with your permission 
I just have one additional brief question I would like to 
propound, and it shall be brief. Ms. Buccino, let me ask you if 
anything is happening within the purview of your study that 
would serve to facilitate the siting of transmission lines? I 
think you mentioned some activity among the western Governors. 
Could you take just a minute, and I mean really just 1 minute, 
to tell us about that?
    Ms. Buccino. Yes. I did mention the protocol that was 
signed just last summer by the Western Governors Association 
and the U.S. Department of Interior, the Department of 
Agriculture, the U.S. Department of Energy and the Council on 
Environmental Quality which is designed specifically to 
coordinate the various reviews and accelerate the siting of 
transmission facilities on public lands. The Bureau of Land 
Management is also moving forward to identify priority 
corridors and incorporate those within the land use plans and 
therefore streamline and coordinate the environmental review 
that is necessary. So I think it is very important to recognize 
that these efforts are moving forward. Legislative changes are 
not necessary, and in fact these efforts should be given a 
chance before these drastic changes are made.
    I would, if I could, just like to quickly respond to a 
couple of comments that were made in the last panel on this 
issue of siting transmission facilities, because Mr. Walden 
referred to the bill containing and MOU process, and as I read 
the bill, that is not what it does, it is much more than that. 
These exercises, like the WGA protocol, is an MOU approach. But 
what the bill does is drastically change the process that 
Congress put in place a while ago to manage these lands and to 
balance competing interests and to include the public. And 
those drastic steps are not necessary to address these 
problems, the siting problems.
    Mr. Boucher. Thank you very much. Thank you, Mr. Chairman.
    Mr. Barton Thank you, Mr. Boucher. The Chair recognizes 
himself for the last 5-minute question period. Ms. Tezak, the 
coop representative on the earlier panel, and several others, 
have expressed displeasure about incentive rates for 
transmission lines, even though the incentive language in the 
current draft simply makes it discretionary, it is not 
mandatory. And it would only be in the areas that the FERC 
rules are highly congested areas or areas that it has been 
difficult to raise the private capital, to get the new line 
built. What is your industry's view of incentive rates? Do you 
think that would encourage more transmission which over time 
the more capacity you have, the lower the unit cost to use that 
capacity should be if the market is truly functional, or do you 
agree with the coops that the incentive language in the current 
draft would be a negative?
    Ms. Tezak. I believe that the reason a lot of people are 
concerned about the negative impact of increased transmission 
rates under an incentive schedule is because if remains in the 
minds of many very clear whether or not the generation offsets 
that are promised--the generation savings that should be 
offsetting those expenditures are being realized. And so I 
think for that perspective, they do have a valid point.
    What I would say that is investors feel that the playing 
field for transmission extremely, extremely slanted against 
them. And a lot of that has to do with the ambiguity of the 
jurisdiction over transmission and whether an expenditure is 
defined as being related to wholesale or being related to 
retail. Retail transmission is relatively easy to site and 
recover. Wholesale transmission is not, and I believe that all 
we view this as is an attempt to compensate for the fact that 
the jurisdictional issue has not been revolved, that wholesale 
ratemaking has not been fully refined, and it is a way of 
attempting to keep the ball rolling while those disadvantages 
are in place.
    Mr. Barton. But in general you think your group would be 
supportive.
    Ms. Tezak. Absolutely.
    Mr. Barton. Okay. what is your electricity analyst view 
this concept of economic dispatch where the generation that is 
the most economic and the least cost to develop gets some sort 
of a priority to be used first before you go to the less 
economically, which tends to be the older, plants that have 
been in the--basically, in the baseload for a number of years. 
Does your group have a view of this concept of economic 
dispatch?
    Ms. Tezak. Bring it on.
    Mr. Barton. Oh, you are for it.
    Ms. Tezak. Absolutely, because not only is there the 
opportunity for a variety of generation owners to compete to 
provide the most efficient power, but the spill-off effects 
into the economy to us seem rather compelling because it makes 
it incrementally less expensive for every consumer, whether 
they be retail or industrial, to consume energy, and that has 
got to be good for the economy.
    Mr. Barton. Well, what would your answer have been to the 
gentleman from North Carolina, the Honorable Mr. Ervin, when I 
was asking him some questions he seemed to indicate that at 
least within North Carolina either they didn't need it or it 
could be utilized now even though North Carolina is a closed 
State. How you have responded to him when I was asking him 
about that?
    Ms. Tezak. Well, my question, first, would be is what is 
the cost of the generation that is being dispatched? Because 
what is not clear to consumers that are in--not always clear to 
vertically integrated utility customers is that there is 
cheaper generation available, and particularly in the cases of 
much older generation that has been fully recovered in rate 
base already, there may be an opportunity to substitute away 
from a plant that is in rate base, eligible for retirement and 
use it for something else.
    Mr. Barton. Mr. Norlander, I think you wanted to make a 
comment.
    Mr. Norlander. Just briefly. New York before we had our 
utilities put there divested generation, we did have efficient 
dispatch through a tight power pool. And so the plants would 
run in the order of their cost. Today, we have a situation 
where plants are dispatched based on the bidding behavior in 
the stock markets. And I think that has actually led to 
situations where we have coal plants with hockey stick bidding 
where they break the plant up into 10 or 20 segments, and they 
bid some of it based on what they think tomorrow's real-time 
market will be. And that is evidenced in an arbitration 
decision.
    Mr. Barton. But you have a bidding system, which----
    Mr. Norlander. Yes.
    Mr. Barton. [continuing] should, by definition, if it is a 
true auction market, get the most----
    Mr. Norlander. That is the problem. That system--if you 
wanted a marginal cost dispatch, then they should bid in their 
marginal cost, but instead they are bidding what they think 
they can get. and that kind of gaining behavior is the kind of 
market analysis that FERC needs to get into.
    Mr. Barton. Mr. Kanner, did you want to make a comment?
    Mr. Kanner. I just wanted to add on, Mr. Chairman, that in 
a constrained system, you don't necessarily have bidding 
reflecting cost but rather what price you think you can get.
    Mr. Barton. Well, I agree. In a constrained system, 
obviously it is a demand price as opposed to a cost base price.
    Mr. Norlander. Right. And, unfortunately, there are more 
constraints throughout the country than I think is generally 
realized, so there are more opportunities----
    Mr. Barton. Which is the whole purpose of our bill, to 
minimize some of those constraints. I mean that is why we are 
here--less constraint, more capacity.
    Mr. Norlander. If I might, Congressman, my----
    Mr. Barton. My time is expired, so I am going to have--but, 
sure.
    Mr. Norlander. My suggestion to Mr. Ervin afterwards was 
that he should have suggested to you that he might have looked 
to Texas for some----
    Mr. Barton. Oh. I don't think he would--and he is in the 
audience so we are not talking behind his back--or he was in 
the audience earlier. He is right--he is in the front row in 
the audience. And he will have a chance on the record if he 
wants to put in written rebuttal to what we are talking about, 
we will give you that.
    Well, I am going to let this panel go. You all have been a 
delight, and--oh, I am sorry, we have a member who I did not--
Mr. Shimkus has already asked questions. Yes. All right. Then 
we are going to release this panel and go to our third and last 
panel. But thank you and appreciate your testimony.
    If I could have our third panel seat themselves, the 
audience resituate. While we are getting resituated, I am going 
to take a point of personal privilege. My cousin from 
Spigotville, Texas and his wife and son are here, Lee Ray Bice 
and Regina and their son, and they are visiting Washington, DC, 
I think, for the first time and wanted to see how friendly we 
do these hearings and how everyone loves each other, so we are 
glad to have them here. She is in the green, he is in the green 
and he is in the blue coat there in the front row.
    Okay. We are going to have our panel on ethanol and MTBE 
and ETBE. We have still got a couple of people that are not 
here, but we are going to start with those that are here. This 
is our last panel of the day. We have Mr. Edward Murphy, who is 
the general manager for Downstream Activities with the American 
Petroleum Institute. We have Mr. Bob Slaughter, who is the 
president of the National Petrochemical & Refiners Association. 
We have Mr. Bill Douglass, who is CEO of Douglass Distributing 
Company, who is here on behalf of the National Association of 
Convenience Stores and the Society of Independent Gasoline 
Marketers of America. We have Mr. Blakeman Early, who is an 
environmental consultant for the American Lung Association, who 
is here on behalf of the Northeast States for Coordinated Air 
Use Management. We have Mr. Erik Olson, who is a senior 
attorney for the Natural Resources Defense Council. And we have 
places if they attend for Mr. Bob Dinneen, who is president and 
CEO of Renewable Fuels Association, and Mr. Scott Segal, who is 
the counsel for the Oxygenated Fuel Association.
    We are going to start with you, Mr. Murphy. Your testimony 
is in the record in its entirety, and we would welcome you to 
summarize it in 5 minutes. And you need to push that button to 
turn the microphone on.

   STATEMENTS OF EDWARD MURPHY, GENERAL MANAGER, DOWNSTREAM, 
    AMERICAN PETROLEUM INSTITUTE; BOB SLAUGHTER, PRESIDENT, 
 NATIONAL PETROCHEMICAL & REFINERS ASSOCIATION; BILL DOUGLASS, 
 CEO, DOUGLASS DISTRIBUTING COMPANY, ON BEHALF OF THE NATIONAL 
     ASSOCIATION OF CONVENIENCE STORES AND THE SOCIETY OF 
 INDEPENDENT GASOLINE MARKETERS OF AMERICA; A. BLAKEMAN EARLY, 
ENVIRONMENTAL CONSULTANT, AMERICAN LUNG ASSOCIATION, ON BEHALF 
OF NORTHEAST STATES FOR COORDINATED AIR USE MANAGEMENT; ERIK D. 
OLSON, SENIOR ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL; BOB 
 DINNEEN, PRESIDENT AND CEO, RENEWABLE FUELS ASSOCIATION; AND 
     SCOTT M. SEGAL, COUNSEL, OXYGENATED FUELS ASSOCIATION

    Mr. Murphy. Thank you very much, Mr. Chairman and members 
of the subcommittee. My name is Edward Murphy, and I am the 
downstream general manager for the American Petroleum 
Institute, a trade association representing more than 400 
companies from all sectors of the oil and natural gas industry.
    API appreciates the opportunity to address the fuels supply 
problems facing U.S. providers and consumers. Time is of the 
essence because individual State MTBE bans will start to take 
effect soon, with Connecticut's starting in October and New 
York's and California's beginning in January of next year. 
Differing start dates and gasoline requirements from various 
states, combined with a Federal oxygen content requirement for 
reformulated gasoline, will complicate an already tight fuel 
supply system and increase the potential for disruptions in the 
supply and distribution system.
    As Congress considers a comprehensive national energy bill, 
we urge it to address problems with fuel supplies that have 
plagued the petroleum industry and energy consumers over the 
last 8 years. Those problems were underscored in recent days by 
the decision of the New York Mercantile Exchange to suspend 
gasoline futures trading beginning in 2004 due to uncoordinated 
State MTBE bans. The New York Mercantile Exchange decision can 
be seen as a shot across the bow regarding the worsening fuel 
problems we will face in the future if Congress fails to act.
    We believe Congress should repeal the oxygen content 
requirement for RFG that is in the Clean Air Act and require a 
national phasedown of MTBE. As part of a package that meet 
these objectives, we also support a renewable fuels standard 
that phases up to 5 billion gallons over several years 
nationally, with an averaging and credit and trading program to 
allow the use of renewable fuels where most feasible and cost-
effective. In addition, we support provisions that would 
protect and enhance the environmental benefits already achieved 
from RFG.
    Finally, we support limited liability protection that 
recognizes that when Congress mandates the use of fuel 
components, it is quite reasonable to disallow defective 
product claims for introducing that product into commerce. This 
limited liability relief would not affect liabilities for 
cleanup costs, and the legal regime for cleanup of hazardous 
spills would be left in full force.
    These steps are a much better solution than the 
alternative, which is continued State MTBE bans and further 
aggravation of the already troublesome situation of a patchwork 
of fuels requirements across the country. A solution that 
relies on state-by-state MTBE bans to fix the problem is not 
efficient and will exacerbate supply problems that are likely 
to arise out of uncoordinated and disjointed State 
requirements. Unique State fuel requirements isolate affected 
markets and in the event of a supply disruption, could cause 
shortages and price volatility, as experienced in 2 of the last 
4 years in Chicago and Milwaukee. Sixteen States already have 
enacted MTBE bans or caps and additional States are considering 
bans.
    The carefully crafted provisions I have discussed are 
supported by an historic coalition, including API, numerous 
farm and ethanol interests, Northeast State air quality 
officials and environmental interests. They offer carefully 
considered solutions to the fuels problems that have challenged 
fuel providers and burdened American consumers. They protect 
important environmental benefits achieved by reformulated 
gasoline. API and its member companies stand ready to work with 
Members of Congress to help ensure expeditious enactment of 
this urgently needed legislation.
    In short, the members of API are asking Congress to change 
the law to allow us to produce the clean, affordable, 
environmentally friendly supplies of gasoline that consumers 
want and deserve to have. Thank you.
    [The prepared statement of Edward Murphy follows:]

Prepared Statement of Edward Murphy on Behalf of the American Petroleum 
                               Institute

    Thank you, Mr. Chairman and members of the Subcommittee. My name is 
Edward Murphy and I am the Downstream General Manager for the American 
Petroleum Institute (API), a trade association representing more than 
400 companies from all sectors of the oil and natural gas industry.
    API appreciates this opportunity to address the fuels supply 
problems facing U.S. fuel providers and consumers. Time is of the 
essence because individual state MTBE bans will start to take effect 
soon, with Connecticut's starting in October and New York's and 
California's bans beginning in January 2004. Differing start dates and 
gasoline requirements from various states, combined with a federal 
oxygen content requirement for reformulated gasoline (RFG), will 
complicate an already tight fuels system and increase the potential for 
disruptions in the supply and distribution system.
    As Congress considers a comprehensive national energy bill, we urge 
them to address problems with fuel supplies that have plagued the 
petroleum industry and energy consumers over the last eight years. We 
believe Congress should repeal the oxygen content requirement for 
reformulated gasoline that is in the Clean Air Act and require a 
national phasedown of MTBE. As part of a package that meets these 
objectives, we also support a renewable fuels standard that phases up 
to 5 billion gallons over several years nationally, with an averaging 
and credit trading program to allow the use of renewable fuels where 
most feasible and cost-effective. In addition, we support provisions 
that would protect and enhance the environmental benefits already 
achieved from reformulated gasoline. Finally, we support limited 
liability protection that recognizes that when Congress mandates the 
use of fuels components, it is quite reasonable to disallow defective 
product claims for introducing that product into commerce. This limited 
liability relief would not affect liabilities for cleanup costs and the 
legal regime for cleanup of hazardous spills would be left in full 
force.
    Repeal of the oxygen requirement and a significant reduction in the 
use of MTBE were two of the key recommendations of the U.S. 
Environmental Protection Agency's 1999-2000 Blue Ribbon Panel on 
Oxygenates in Gasoline. The report is also important because it 
recognizes that refiners today can provide clean-burning reformulated 
gasoline without the oxygen requirement. Three years have passed since 
those recommendations were made.
    These steps are a much better solution than the alternative--which 
is continued state MTBE bans and further aggravation of the already-
troublesome situation of a patchwork of fuels requirements across the 
country. A solution that relies on state-by-state MTBE bans to fix the 
problem is not efficient and will exacerbate supply problems that are 
likely to arise out of uncoordinated and disjointed state requirements. 
Unique state fuel requirements isolate affected markets and, in the 
event of a supply disruption, could cause shortages and price 
volatility, as experienced in two of the last four years in Chicago and 
Milwaukee. Sixteen states already have enacted MTBE bans or caps and 
additional states are considering bans.
    In addition, there needs to be recognition that even without 
federal legislation, ethanol is going to be in our gasoline system in 
increased amounts--at a minimum to fulfill the federal oxygen content 
requirement for RFG. But the current rules allow little flexibility in 
how, when, and where ethanol would be used. We need a federal solution 
that phases down MTBE in a uniform manner and allows the use of 
renewable fuels where it makes the most economic sense.
    API believes the provisions I have mentioned would provide a 
solution to the serious problems affecting fuels supplies vital to the 
motoring public. They would ensure needed flexibility in our fuels 
policies. They would maintain stringent air quality requirements. And 
they would serve the best interests of American consumers.
    Let me briefly review the situation we face: In 1990, Congress 
amended the Clean Air Act to require the use of RFG in areas with the 
worst ozone pollution. Congress decided that RFG had to meet certain 
emissions performance standards but also had to include a specific 
amount of oxygen. The two most widely used oxygenates at the time were 
MTBE and ethanol. Most of the RFG oxygenate demand was on the coasts, 
where ethanol use faced significant economic, transportation, and 
handling challenges relative to MTBE. As a result, as Congress full 
well expected, MTBE became the most commonly used oxygenate in areas 
near the coast. Ethanol became the oxygenate of choice in the Midwest 
due to favorable economics and proximity to ethanol supply. However, 
when gasoline was spilled or leaked and MTBE came into contact with 
water supplies, odor and taste issues arose with even very small 
concentrations of MTBE.
    Many state governments reacted by banning the use of MTBE. 
Unfortunately, there is considerable variation in the start dates and 
requirements for these laws. For example, Connecticut's ban starts on 
October 1, 2003, while neighboring New York's starts on January 1, 
2004. Some allow incidental amounts of MTBE to remain, while others do 
not. Differing state gasoline requirements will complicate and increase 
the likelihood of disruptions in the supply/distribution system; this 
will place considerable stress on the efficiency and, therefore, the 
reliability of the gasoline distribution system--unless federal 
legislative changes are made to the fuels provisions of the Clean Air 
Act.
    In the absence of federal legislation, consumers will be subject to 
the costs of uncoordinated state actions. Individual states are 
restricting the use of MTBE, but they cannot change the federal RFG 
oxygen content requirement. That requirement is unnecessary, 
uneconomical and inflexible. It requires the use of an oxygenate in 
each gallon of gasoline in RFG areas. It is driving New Hampshire, for 
example, to opt-out of the federal RFG program and try to impose a 
state oxy-flexible RFG program, which could add yet another boutique 
fuel to the system if they are successful. Maintaining the status quo--
with the federal RFG oxygen requirement in place and states continuing 
to ban MTBE--will require using ethanol in RFG areas where it may not 
be cost-effective. Alternatively, other states may pursue solutions 
that further fragment the market in new and different ways.
    Currently, most of the RFG is required on the east and west coasts, 
yet ethanol is predominantly manufactured in the Midwest. As additional 
state MTBE bans start to take effect, RFG markets will, by default, 
need to use ethanol in each and every gallon of RFG in order to meet 
the federal oxygen content requirement. The Connecticut, California and 
New York MTBE bans alone are expected to result in ethanol demand in 
those states of about 1.1 billion gallons in 2004. There are no 
assurances that the full extent of the infrastructure needed to 
transport the added amount of ethanol will be in place in time to 
assure a smooth transition. As states get closer to the implementation 
date for their fuel programs, the greater the temptation to change the 
date rather than deal with the uncertainty. California has already 
delayed its ban once. Such a changeable environment does not make the 
investment decision process easier. A federal solution would remove 
much of the uncertainty that exists now.
    Individual state bans have the effect of balkanizing the fuels 
markets, requiring that fuels with different characteristics be moved 
through the limited distribution system. With more types of fuels comes 
more complexity and less flexibility as the fuels used under one set of 
requirements cannot be used to supply an area with other requirements. 
This is a problem where adjacent states require different grades. It is 
also harder to ensure that gasoline with MTBE does not intermingle with 
other gasoline volumes since all gasoline is moved via the same 
pipelines.
    These factors all argue for a national phasedown of MTBE. In order 
for such a phasedown to have the least impact on supply, it needs to be 
done over a four-year timeframe.
    While oxygenates are not necessary to make clean-burning fuels, 
there is a public desire to increase the use of renewable fuels, such 
as ethanol. We believe this goal and that of a flexible gasoline 
distribution system can be met by a repeal of the federal oxygen 
requirement, a uniform nationwide phasedown of MTBE, and a renewable 
fuels standard rising to 5 billion gallons over several years. However, 
for the renewable fuels standard to function effectively, it is 
absolutely critical that refiners be allowed to freely buy and sell 
credits for renewable fuels under a national average and credit-trading 
program. That would allow for flexible and economical use of renewable 
fuels.
    Let me emphasize that the cost of an approach that includes a 
federal phasedown of MTBE, repeals the federal RFG oxygen content 
requirement and includes a renewable fuels standard with a flexible 
national averaging, banking and trading program, would be less than 
maintaining the status quo of state MTBE bans and maintaining the 
federal RFG oxygen requirement. A study by the U.S. Department of 
Energy (DOE) revealed that the cost of the renewable fuels standard 
would be minimal, between 0.5 and 1.0 cents per gallon and likely less 
with an effective banking and trading system. Importantly, a state-of-
the-art study in 2002 by MathPro, Inc., a leading economic analysis 
firm, concluded that replacing the 2 percent oxygen requirement with 
the renewable fuels standard would be less costly than the status quo 
outcome of continued state MTBE bans and continuation of the federal 
RFG oxygen requirement.
    To conclude: If Congress fails to enact the proposed legislation, 
consumers are going to face the increasing costs of uncoordinated state 
MTBE bans--leading to increased strains on the fuel distribution 
system. While individual states are restricting use of MTBE, they 
cannot change the inflexible federal RFG oxygen requirement. 
Maintaining the status quo of the federal oxygen requirement and state 
MTBE bans will force the use of large volumes of ethanol in a very 
inflexible and unnecessarily costly fashion--and it could severely 
burden, if not disrupt, fuels distribution and supply.
    The carefully crafted provisions I have discussed, as part of a 
package that meets our objectives, are supported by an historic 
coalition including API, numerous farm and ethanol interests, Northeast 
state air quality officials and environmental interests. They offer 
carefully considered solutions to the fuels problems that have 
challenged fuel providers and burdened American consumers. They protect 
important environmental benefits achieved by reformulated gasoline. API 
and its member companies stand ready to work with members of Congress 
to help ensure expeditious enactment of this urgently needed 
legislation.

    Mr. Shimkus [presiding]. Thank you, Mr. Murphy. I will now 
turn to Mr. Bob Slaughter, president of the National 
Petrochemical & Refiners Association. It is good to have you 
here, and you are recognized for 5 minutes.

                   STATEMENT OF BOB SLAUGHTER

    Mr. Slaughter. Thank you, Ms. Shimkus. NPRA thanks the 
subcommittee for the opportunity to offer recommendations on an 
updated national energy policy. NPRA is a national trade 
association with more than 450 members who own or operate most 
U.S. refineries and petrochemical manufacturing facilities. I 
am Bob Slaughter, NPRA's president.
    NPRA favors a supply oriented national energy policy with 
the twin goals of energy supply and energy security. Our energy 
policy should also recognize the importance of a healthy and 
diverse domestic refining industry that produces most products 
consumed here in the United State. NPRA recommends that the 
subcommittee reaffirm many of the positions in last year's 
House bill or in the subsequent conference.
    NPRA supports quick elimination of the 2 percent RFG 
oxygenation requirement. This will give refiners greater 
flexibility to manufacture and distribute this important 
environmental product in the most efficient and cost-effective 
manner and also allow refiners to respond to State and local 
concerns about MTBE without subjecting those areas to mandatory 
use of ethanol, which is inappropriate during the summer ozone 
season.
    NPRA also urges the House to maintain its position in 
opposition to a Federal MTBE ban. EIA has pointed out, and we 
agree, that MTBE volumes and desirable blending attributes will 
hard to replace leading to potential gasoline supply problems. 
The States where most MTBE is used are already dealing with 
this matter. Several have already delayed or are expected to 
delay their target dates to limit MTBE use because of supply 
concerns. There is no reason why these few States cannot deal 
with this problem on their own. DOE and EPA can monitor the 
supply and environmental impacts with the oversight of this 
subcommittee.
    NPRA strongly opposes a national ethanol mandate in 
gasoline because fuel mandates are inefficient, inflexible and 
costly policy mechanisms. Many NPRA members already use large 
quantities of ethanol in their gasolines. They, along with 
other industry experts and analysts, expect ethanol markets to 
increase substantially because of the shortage of available 
gasoline blend stocks. Thus, there is no need to impose a 
national ethanol mandate on gasoline consumers to expand the 
ethanol market. A mandate will stimulate only extra ethanol 
usage that is economically inefficient, and it will increase 
the cost of ethanol that would have been used in gasoline 
without the mandate.
    One size does not fit all in diverse America. There is no 
need to force gasoline consumers in places like Main, 
Massachusetts and Washington, DC, to name just a few, to either 
use ethanol in their gasoline or pay for the privilege of not 
doing so. This mandate really just creates a new tax on 
consumers who live in parts of the United States where ethanol 
use makes no sense. Some seem to view adoption of this unfair 
tax as a great victory and boon to those who will pay it. It 
would be of much greater benefit to repeal the 2 percent RFG 
requirement, reject the ethanol mandate and allow consumers to 
decide for themselves what gasoline is most appropriate for 
their region's supply profile and environmental requirements. 
The argument that the only alternative is a rigid ethanol 
mandate in all our RFG areas looks like a straw man to us. It 
would have been very controversial and hard to implement.
    The Senate language even encouraged ethanol use in the 
summer months, which creates environmental and potential 
gasoline supply problems. As Mr. Douglass points out, that is 
another remarkably bad idea. The national ethanol mandate is 
already responsible for one miracle. It has succeeded in 
uniting the editorial pages of the New York Times, Wall Street 
Journal and Washington Post in firm opposition to the idea. And 
they are right, and we urge the subcommittee to reject an 
ethanol mandate.
    NPRA supports the position taken by House conferees to 
extend product liability protection to MTBE. Those who comply 
with the government mandate should not be penalized and 
subjected to large punitive damages for obeying the law. We ask 
the committee to use care in evaluating the impact of boutique 
fuels programs. State and regions have varying fuel needs. 
Attempts to legislate fuel conformity could place additional 
investment burdens on refiners who are concentrating on sulfur 
reduction in gasoline and diesel. The impact on supply and 
distribution of any proposed new boutique fuel problems should 
be carefully considered, however.
    The committee should also reject the Senate language 
liberalizing opt-in requirements to RFG due to continuing 
supply and investment concerns. The energy bill should also 
stimulate additional gas supply, natural gas supply as soon as 
possible. Natural gas usage has increased with little or not 
thought given to supply availability. This places traditional 
users of gas for feed stocks, like the domestic petrochemical 
industry and those employed in it, to great risk. Natural gas 
supply and demand must come back into balance.
    In closing, we would urge you to maintain also the 
viability of combined heat and power cogeneration systems 
during the electricity market's transition to full competition. 
We thank you again for the opportunity, and we look forward to 
your questions.
    [The prepared statement of Bob Slaughter follows:]

Prepared Statement of Bob Slaughter, President, National Petrochemical 
                         & Refiners Association

    Mr. Chairman and members of the Subcommittee, thank you for the 
opportunity to appear before you today to discuss the need for a 
comprehensive U.S. energy policy. My name is Bob Slaughter, and I am 
President of NPRA, the National Petrochemical & Refiners Association.
    NPRA is a national trade association with about 450 members who own 
or operate virtually all U.S. refining capacity, as well as 
petrochemical manufacturers who operate similar manufacturing 
processes. NPRA's refining members include large integrated refiners, 
large independent refiners, and regional independents as well as small 
refiners.
Needed: A Focus on Increased Supply
    To summarize our message today, NPRA urges policymakers in Congress 
and the Administration to encourage production of an abundant supply of 
petroleum products. A healthy and growing U.S. economy needs a steady 
secure and predictable supply of petroleum products, at reasonable 
cost. NPRA believes that federal policy in recent years has drifted 
away from the need to emphasize the supply side of the energy equation, 
and that an adequate energy supply has been largely taken for granted. 
We need to reinstitute an energy supply ethic in federal policy to 
provide both national energy security and maintain U.S. economic 
growth.
    To summarize our energy policy recommendations, NPRA urges Congress 
to: repeal the 2% RFG oxygenation requirement; avoid a federal ban or 
mandatory phase-out of MTBE; reject calls for an ethanol mandate; 
extend product liability protection to MTBE and ethanol; avoid 
unnecessary changes in fuel specifications; take steps to increase 
natural gas production and supply; and ensure the continued viability 
of combine heat and power systems in transitioning energy markets. We 
will discuss these recommendations in more detail in subsequent 
sections of this statement.
Domestic Refining is a Critical Asset, But a Challenging Business
    We also ask policymakers to extend the concern over petroleum 
product supply to include the domestic refining industry. Total daily 
U.S. demand for petroleum products is approximately 20 million barrels, 
and only 17 million barrels of this is supplied by U.S refineries. The 
remaining 3 million barrels of demand is supplied from a combination of 
several sources: the Caribbean, South America, Canada, Europe, and more 
rarely, the Middle East and Asia.
    No new refinery has been built in the United States since 1976, and 
it is unlikely that one will be built here in the foreseeable future, 
due to economic and political considerations, including siting costs, 
environmental requirements, industry profitability and public concerns.
    U.S. refining capacity has increased somewhat in recent years, but 
it is increasingly hard to keep pace with growth in demand for 
petroleum products. As it is, refiners have increased capacity at 
existing sites to offset the impact of capacity lost elsewhere due to 
refinery closures.
    It is becoming more difficult to add capacity at existing sites due 
to increasingly stringent environmental regulations and the challenging 
economic climate faced by the refining industry. EIA projects that U.S. 
refining capacity may increase by 2 million barrels per day by 2010; 
this would still not keep pace with the increase in U.S. demand for 
petroleum products, which EIA estimates will grow by 1.6% per year each 
year through 2025.
Product Imports Could Increase
    This means that the United States, which has had a hard time 
adjusting to the fact that 60% of its crude is now imported, may have 
to become accustomed to another unpleasant fact: an increasing 
percentage of petroleum products such as gasoline, diesel, jet fuel and 
heating oil may also come from imports.
    NPRA suggests that balanced and temperate actions, adopted now, can 
prevent excessive dependence upon foreign refined products. It seems 
clear that it is in the nation's best interest to manufacture a 
significant portion of the petroleum products we need here in domestic 
refineries. Reduced U.S. refining capacity clearly affects the amount 
of control we have over our supply of refined petroleum products and 
the flexibility of the supply system, particularly in times of stress 
or disruption.
    Currently, about 95% of such products are manufactured in U.S. 
refineries. (U.S. exports of refined products to non-U.S. destinations 
are relatively insignificant.) This indicates that we are at a good 
time to adopt a policy to maintain a healthy and diverse U.S. refining 
industry. Although the precise percentage of refined product 
manufactured here will vary, adopting this policy now will help 
mitigate or prevent any abrupt slide in U.S. refining capacity and any 
adverse impact on the nation's energy security. And that policy is 
founded in good common sense.
Refiners Are Investing Billions to Improve the Environment
    Refiners currently face a massive task of complying with four 
regulatory programs with significant investment requirements, all in 
the same timeframe. Refiners must shortly invest about $20 billion to 
sharply reduce the sulfur content of gasoline and both highway and much 
of off-road diesel. Refiners face additional investment requirements to 
deal with state and possible federal limitations on ether use, as well 
as compliance costs with Mobile Source Air Toxics reductions and other 
limitations. This does not include additional significant investments 
needed to comply with stationary source regulations affecting 
refineries.
    On the horizon are other environmental requirements which will 
necessitate significant investment. They are: the challenges and cost 
of increased ethanol use, expected federal or state programs mandating 
changes in diesel fuel properties (cetane and aromatics content, lower 
gravity), and the potential for significant proliferation of new fuels 
caused by the need to comply with the new 8 hour ozone NAAQS. These 
factors will also significantly impact fuel manufacture and 
distribution.
Average Refining Returns Are Modest
    Refining earnings have recently been more volatile than usual, but 
refining returns are generally quite modest when compared with other 
industries. The average return on investment in the industry is about 
5%; this is about what investors could receive by investing in 
government bonds, with little or no risk. This relatively low level of 
return, which incorporates the cost of investments required to meet 
environmental regulations, is one reason why domestic refinery capacity 
additions are modest and new facilities are unlikely to be constructed 
here.
A Key Government Advisory Panel Urged Prudent Regulation
    The National Petroleum Council (NPC) issued a landmark report on 
the state of the refining industry in 2000. Given the limited return on 
investment in the industry and the crushing investment required for 
environmental regulations, the NPC urged policymakers to pay special 
attention to the timing and sequencing of any changes in product 
specifications. Failing such action, the report cautioned that adverse 
impacts on the industry with supply ramifications could result. As the 
above discussion shows, this warning has been widely disregarded.
Refiners Face Additional Facility Investment Requirements
    In fact, release of the NPC report was roughly concurrent with an 
ill-considered ``enforcement effort''' under the New Source Review 
Program, an effort to add additional billions of unanticipated cost to 
refiners just to stay in business. The enforcement initiative went 
forward despite near-universal agreement that the NSR program 
requirements were hopelessly confused and thus fertile ground for 
arbitrary enforcement. The refining industry has been struggling to 
resolve the enforcement issue on top of the many other challenges it 
faces. (Going forward, the recently effective final rule reforming NSR 
will add much-needed clarity and consistency to that program's 
requirements. That rule, and the current proposal to clarify the 
definition of routine maintenance under NSR, are rare instances in 
which policymakers heeded the NPC's warning.)
Refiners Will Meet the Challenges, But Some Facilities May Close
    Petroleum refining has never been an industry for the faint of 
heart.
    Domestic refiners will rise to meet the challenges of the current 
situation. They have demonstrated the ability to adapt to new 
challenges and keep the flow of products going to consumers across the 
nation. But certain economic realities cannot be ignored and they will 
impact the industry. Thus, refiners will, in most cases, make the 
investments necessary to comply with the environmental programs 
outlined above. In some cases, however, where refiners are unable to 
justify the costs of investment at some facilities, those facilities 
may close.
    EIA summarizes the impact of past and future refinery 
closures:``Since 1987, about 1.6 million barrels per day of capacity 
has been closed. This represents almost 10% of today's capacity of 16.8 
million barrels per calendar day . . . The United States still has 1.8 
million barrels of capacity under 70 MB/CD (million barrels per 
calendar day) in place, and closures are expected to continue in future 
years. Our estimate is that closures will occur between now and 2007 at 
a rate of about 50-70 MB/CD per year . . . All refineries face 
investments . . . But smaller refiners may find their lack of economies 
of scale and the size of the investments required put them at a 
competitive disadvantage and would keep them from earning the returns 
needed to stay in business.'' (EIA, J. Shore, ``Supply Impact of Losing 
MTBE & Using Ethanol,'' October 2002, p. 4.)
Reasonable Regulation Will Help Refiners Maintain Supply
    As the Committee can plainly see, the domestic refining industry 
has major challenges ahead. NPRA's members ask that policymakers help 
by insisting that future fuel specification changes be carefully timed 
and sequenced consistent with the National Petroleum Council's 
recommendations. This should be adopted as part of the nation's energy 
policy revisions.
    In addition, NPRA asks that an updated energy policy adopt the 
principle that in the case of new environmental initiatives the 
environmental objectives must be balanced with energy supply 
requirements. As explained above, the refining industry is in the 
process of redesigning much of the current fuel slate to obtain needed 
improvements in environmental performance. This trend will persist 
because consumers desire higher-quality and less-polluting fuels. And 
our members want to satisfy their customers. We ask only that the 
programs be well-designed, appropriately timed and cost-effective. The 
Committee can advance both the cause of cleaner fuels and preservation 
of the domestic refining industry by adopting this principle as part of 
the nation's energy policy.
Industry Diversity Benefits Consumers and the Nation
    As demonstrated above, a healthy and diverse U.S. refining industry 
best serves the nation's interest in maintaining a secure supply of 
energy products. Rationalizing and balancing our nation's energy and 
environmental policies will protect a key American resource, the 
domestic refining industry. Given the challenges of the current and 
future refining environment, the nation is fortunate to retain a 
refining industry that has many diverse and specialized participants. 
Some of the largest companies in the world maintain their positions in 
U.S. refining, while a vibrant set of entrepreneurial independents, 
among the largest in the industry, are increasing their prominence and 
importance in that industry. At the same time, regional and smaller 
independents reliably and conveniently serve regional or smaller niche 
markets. The U.S. refining industry has experienced difficult periods 
before, but the continuing diversity within the industry suggests that 
it has more than enough vitality to continue the industry's important 
work, especially with the help of a supply-oriented national energy 
policy.
The Market Situation Demonstrates a Need to Focus on Supply
    NPRA believes that a new national energy policy initiative is long 
overdue. And our testimony thus far has shown why that new policy must 
be supply-oriented, and why it should view the need for a healthy and 
diverse domestic refining industry as a cornerstone of a pro-supply 
policy. We believe that any neutral observer would see the wisdom of 
these two policy elements, especially because current events in the 
crude oil and product markets demonstrate the need for them.
    As this testimony is written, speculation about crude and product 
price and supply is a hot topic in the media. Once again, the supply of 
crude and products is stretched tight due to a confluence of external 
factors. In this case, those factors are: the consequences of a strike 
in Venezuela that crippled that country's export capability for months; 
weather much colder than normal in parts of the country where energy 
use is extremely sensitive to temperature; and uncertainty over crude 
oil supply in the immediate future due to the international situation 
involving Iraq.
The Energy Information Administration (EIA) Explains the Market
    NPRA urges anyone interested in how we got where we are to take a 
look at EIA's webpage and read the articles ``This Week in Petroleum'' 
since the beginning of this year. You will find each step in the 
process explained, along with accurate predictions of subsequent 
developments.
    In summary, according to EIA, these are the facts: the strike in 
Venezuela deprived the U.S., that country's largest customer, of a 
significant amount of crude imports for several weeks. This happened 
when crude oil inventories were at modest levels because OPEC lowered 
production quotas for most of 2002. That action had already limited the 
supply of crude.
    Refiners tried to keep up refinery runs, and hence production, by 
utilizing the crude available in the market and by drawing on crude 
stocks. This delayed the impact of the Venezuelan disruption for a 
short period and helped meet strong product demand. That is a 
considerable achievement, given the extent of the crude supply impact 
and the difficult time of year in which it occurred. It is another 
example of the expertise and resourcefulness of the domestic refining 
industry.
    As crude inventories fall, crude runs to refineries decrease 
because less crude is available. When crude runs are reduced, product 
output declines. This may require tapping product inventories to meet 
demand. The reduced product inventories then give rise to concerns 
about the sufficiency of gasoline, diesel and heating oil supplies. EIA 
refers to these possible occurrences as ``Dominos'' in its January 15 
``This Week in Petroleum.'' Subsequent issues of that analysis 
described what happened as the domino scenario unfolded. We have 
attached the January 15 publication for your information.
    Strong evidence such as this, and broad agreement that these are 
the key factors should answer questions about the genesis of today's 
crude and product supply situation. The fact that the nation is 
possibly on the brink of war in Iraq certainly offers an additional 
reason to believe that these are uncertain times when concern about 
crude availability and supply are understandably present. And those 
concerns have impacts in the marketplace.
Refiners are Working Hard to Supply Needed Products
    Unfortunately, some of the media and a few policymakers have 
alleged that industry misconduct is somehow responsible for the current 
situation. This is not so now, just as it was proven not so in past 
supply disruptions and uncertainties. Refinery runs are close to where 
they were last year at this time, despite general agreement that crude 
supplies are tight. Slightly lower utilization rates this time of year 
are often due to planned maintenance when product demand is usually 
low. Refinery maintenance is often non-discretionary and scheduled well 
in advance of a largely inflexible date. The need for the refining 
industry to run at high rates of utilization, 92-93% on average, well 
above the 85% utilization rate considered full utilization in other 
industries, is an important reason why the time available for 
turnarounds is at a premium and hard to change. Another factor is that 
some maintenance cannot be postponed for safety reasons, which cannot 
be compromised.
    This is also a difficult time of the year for refiners to face so 
many market uncertainties. They will soon implement the required 
changeover from winter to summer grade gasoline, which often requires a 
delicate balance as winter product is drawn down to make way for summer 
gasoline in time for the required certification date.
    Many California refiners will experience the first seasonal 
turnaround involving CARB3 and California RFG with ethanol, due to the 
partial phase-out of MTBE in California this year. Please do not 
misunderstand this point. It is not clear that today's market 
conditions reflect problems involving seasonal changeovers. We mention 
this subject to remind non-industry observers that this time of year is 
an especially sensitive one if available crude supplies are stretched 
thin and demand remains high, which is the case at present.
    The current situation is not totally dissimilar to the summer of 
2000 and early summer of 2001, when supply problems surfaced due to 
market-related and operational difficulties beyond industry's control. 
Investigations conducted of industry behavior at that time found no 
basis for legal action against the industry. We are certain that the 
investigations now being called for will result in the same findings 
which exonerate the industry.
    We note that one investigation, conducted by the Senate Permanent 
Subcommittee on Investigations, made several recommendations regarding 
imposing mandatory product inventory levels and restricting mergers. No 
action has been taken on the findings and recommendations of that 
investigation. The most prominent suggestion, regarding mandated 
inventories, would actually increase the cost of business operations 
for refiners, which might be passed on to consumers.
    Refiners are constantly responding to difficult situations like the 
present one, which make it a challenge to maintain adequate product 
supplies. Modern energy policy has given them a tool which helps them 
determine the most efficient way to continue meeting consumer demand. 
The free market swiftly provides the industry with price and supply 
information which they can respond to. Refiners also need maximum 
flexibility to respond to this market information in their decisions 
about product manufacture and distribution. Mandates and other command-
and-control policy mechanisms reduce flexibility and add unnecessary 
cost to gasoline manufacture. Congress should remove existing mandates 
and avoid legislating new ones, such as the proposed ethanol mandate.
    A modern, supply-oriented fuels policy would give refiners greater 
flexibility to meet fuel demand within broad performance standards. 
Such a fuels policy would also rely on the free market to determine 
appropriate product supply and allocation. It would avoid inflexible 
command-and-control regulation such as prescriptive mandates, and 
emphasize the development of new fuel legislation and regulation 
through an open process involving all stakeholders, aimed at obtaining 
the best practical answer rather than one that satisfies temporary 
political aims. But most importantly, such an energy policy must focus 
on balancing the duel goals of increased energy supply and continued 
environmental progress.
NPRA Policy Recommendations
    With this concept of a supply-oriented energy policy as a backdrop, 
NPRA has reviewed the National Energy Policy legislation approved by 
the House in 2001 and by the Senate last year. The Association offers 
the subcommittee these specific recommendations regarding the fuels 
provisions that may be under consideration for inclusion in this year's 
energy bill.
    First: Repeal the 2% by weight RFG oxygenation requirement [Clean 
Air Act section 211(k)] to provide refiners with more flexibility to 
meet supply and air quality requirements.
    Elimination of this 2% requirement will give refiners increased 
flexibility to deal with changing market conditions. It will also allow 
them to blend gasoline to meet the standards for reformulated gasoline 
most efficiently and economically, without mandated oxygenate content. 
In some cases, refiners would probably continue to use some MTBE, 
because of its good blending qualities and demonstrated ability to 
reduce air emissions. The overall volume of MTBE in gasoline would very 
likely decline, while providing relief to those who are concerned about 
MTBE usage.
    Second: Avoid a federal ban or mandatory phase-out of MTBE use in 
order to maintain adequate gasoline supplies at reasonable cost; direct 
DOE and EPA to work with any states that implement limitations on MTBE 
usage to coordinate the implementation of these restrictions and to 
maintain adequate supply.
    NPRA is concerned about proposals to ban MTBE nationally or to 
mandate a national phase-down of MTBE. Last year's Senate bill called 
for an MTBE ban in four years. (A Governor could allow continued use of 
MTBE in his own state, but this would be unlikely.) EIA predicts that 
an MTBE ban would raise the national average price of RFG in 2006 by 
several cents per gallon and reduce supply. (``Supply Impacts of an 
MTBE Ban,'' September 2002)
    MTBE elimination may cause an 11% reduction in some gasoline 
volumes when fully implemented. (MTBE provides over 10% of RFG volume 
in many RFG areas.) NPRA is concerned about the possible impact of this 
change on supply and manufacturing costs. The supply and demand balance 
in the nation's gasoline market is increasingly tight. Supply and price 
can be affected by weather, unforeseen outages, and accidents, 
resulting in economic losses and negative public reaction, and we are 
seeing this happen with increasing frequency.
    We should not exacerbate a tight supply situation by arbitrarily 
eliminating a significant contributor to the nation's gasoline supply. 
If concerns about MTBE usage continue, more deliberate but responsive 
measures can be taken. But recent experience in the gasoline market 
suggests that such significant changes should be taken only with 
caution, and with full disclosure to the public regarding any possible 
supply and cost impacts.
    NPRA also does not believe that current evidence warrants the 
drastic step of a national ban on MTBE. Taking such action based on 
limited current knowledge would set a dangerous precedent for all 
chemicals in widespread commerce. EPA is currently evaluating MTBE's 
status under TSCA (the Toxic Substances Control Act), and NPRA suggests 
that is the only appropriate course of action based on the evidence 
today.
    As EIA noted in a presentation last October: ``MTBE is a very clean 
component from an air emission standpoint. It contains oxygen and has 
no sulfur, no aromatics, no olefins and an RVP that is very close to 
the RVP of the remaining gasoline components.''
    The author also wrote: ``What is not appreciated by many people 
outside of the petroleum business, is that losing MTBE is more than 
just losing the volumes of this blending component . . . no other 
hydrocarbon or oxygenate equals the emission and engine performance 
characteristics of MTBE. Hence, losing a barrel of MTBE results in 
losing more than a barrel of gasoline production. When you remove a 
clean, high performance gasoline stream from the gasoline pool, it is 
difficult to find material to replace its volume and quality 
contributions.'' (EIA, J. Shore, ``Supply Impact of Losing MTBE & Using 
Ethanol,'' October 2002, pp. 10, 12)
    Recent EIA studies confirm that elimination of MTBE will also 
affect many refiners' abilities to comply with the Mobile Source Air 
Toxics rule, which requires refiners to maintain their average 1998-
2000 gasoline toxic emission performance levels. Loss of MTBE would 
make it difficult to match historical toxics performance, and the 
result might be that those refineries would have to reduce their 
production of RFG to achieve compliance.
    NPRA believes that these circumstances support a policy of 
considerable caution towards any proposal to eliminate the option of 
continued MTBE use, at least until there is certain and convincing 
evidence that adequate supplies of replacement fuel components are 
available.
    Some stakeholders advocate a federal ban or phase-down of MTBE as a 
means of securing an ``orderly'' market transition away from that 
product in states where large quantities of MTBE are currently used. 
This is a largely theoretical argument that assumes that federal 
regulators and those who seek to eliminate MTBE can choose the one 
appropriate date when MTBE usage should end. This argument ignores 
actual experience in which affected states have modified their plans to 
limit MTBE usage as they become aware of the difficulties inherent in 
replacing it without adverse impact on gasoline supply.
    In short, imposition of a uniform federal scheme to restrict or 
eliminate MTBE usage runs a considerable risk that the decision will be 
uniformly wrong. Experience with the 2% RFG oxygenation mandate has 
taught us that if this occurs, political power can be brought to bear 
to block the changes necessary to meet unanticipated problems.
    For example, even the largest state in the nation found it 
impossible to obtain a waiver of the 2% provision under similar 
conditions, when it was clear to most observers that a waiver was 
justified. This suggests that supply problems arising from an arbitrary 
federal phase-out or ban of MTBE might be difficult or impossible to 
correct, or that they might only occur accompanied by dubious new 
policy initiatives influenced by the politics of the moment.
    Third: Reject calls for an ethanol mandate--Imposing an ethanol 
mandate on gasoline suppliers will make it more difficult and expensive 
to manufacture gasoline and provides no compensating benefit to 
consumers or the environment. An ethanol mandate immediately creates 
winners and losers among fuel providers and regional consumers based on 
their geographic location and history of ethanol usage or non-usage. 
Thus it is both highly arbitrary and unfair. Inclusion of a credit 
trading mechanism in the mandate scheme does nothing to temper the 
injustice and economic inefficiency of the provision, because it 
requires fuel manufacturers and their customers to pay for the 
privilege of not using ethanol in their gasoline.
    Many NPRA members already use significant volumes of ethanol, and 
they expect to increase their ethanol usage in the years ahead. EIA and 
other policy analysts also predict a significant increase in ethanol 
markets in coming years, without a mandate. In short, given the 
relative scarcity of quality gasoline blend stocks, ethanol has a 
bright future without any need to resort to the outrageous expedient of 
a national ethanol mandate.
    Ethanol already enjoys a generous subsidy in the form of a 52 cent 
exemption from the gasoline excise tax; this subsidy costs the Highway 
Trust Fund in excess of $1.2 billion annually. A federal tariff offsets 
the benefit of the gasoline tax exemption for most imports, making them 
uncompetitive with domestic ethanol production. Ethanol also receives 
tax incentives in 17 states.
    The 5 billion gallon ethanol mandate included in last year's Senate 
ethanol bill was the product of private discussions among a limited 
group of stakeholders. It was never considered by the Committee of 
jurisdiction in the Senate. NPRA opposes that provision. We urge the 
subcommittee to make a clean break with the market intervention theory 
typified by both the existing 2% requirement and calls for a 
cumbersome, expensive and unnecessary ethanol mandate.
    The Senate-approved language goes so far as to include language 
intended to require widespread usage of ethanol even in the summer 
months, when ozone concerns are most severe. This despite the fact that 
the increased volatility of ethanol blends requires additional 
investment and extraordinary measures to allow ethanol use in gasoline 
during these periods. Extra pollution caused for the local environment, 
supply problems for fuel suppliers or cost problems for consumers 
apparently are of less importance than the desire of the ethanol 
industry for consistent demand.
    Few proposals on any subject unite the editorial pages of the Wall 
Street Journal, New York Times and Washington Post. But the ethanol 
mandate is one of them. All three papers have denounced the ethanol 
mandate proposal in no uncertain terms. NPRA agrees with this unusual 
consensus, and hopes that the House will put principle above political 
considerations and reject the mandate proposal.
    Fourth: Extend product liability protection to MTBE and ethanol--
When it passed the Clean Air Act Amendments of 1990 with the 2% RFG 
oxygenation requirement, Congress clearly understood that MTBE would be 
widely used to comply with that provision. In fact, the percentage of 
oxygen required by weight was selected to allow MTBE and perhaps other 
ethers to be used for that purpose. It was so clear that MTBE usage 
would predominate, in fact, that the Clinton Administration came 
forward with a rule that would have required some of the oxygen content 
to be met by ``renewable'' oxygenates, i.e. ethanol, to ensure usage of 
that product in the RFG pool. [That attempt, a clear end-run of the 
statute and subsequent reg-neg agreement, was overturned by the U.S. 
Court of Appeals for the District of Columbia in the case API and NPRA 
v. EPA, 52 F.3d 1113, 1119 (D.C. Cir. 1995). In the decision, the court 
also noted that U.S. EPA had ``conceded that use of ethanol might 
possibly make air quality worse.''
    The amendment establishing the reformulated gasoline program was 
added to the Clean Air Act amendments in the Senate by Senator Daschle. 
When the 2% requirement became part of the final bill, the refining 
industry acted to comply. As foreseen, MTBE became the oxygenate of 
choice because of its good blending characteristics, the fact that, 
unlike ethanol, it could be shipped in pipelines, and the reality that 
the higher volatility of ethanol blends made their use in RFG during 
the summer ozone season problematic.
    U.S. MTBE production increased from 146 thousand barrels per day in 
1993 to roughly 230 thousand barrels per day in both 2001 and 2002. The 
air quality improvements made possible by RFG use in the cities where 
it has been required are well known. MTBE has contributed to those air 
quality improvements.
    In recent years, product liability suits have been brought against 
refiners and petrochemical manufacturers due to MTBE contamination 
found in groundwater. Those suits seek to overlook the fact that the 
Clean Air Act amendments clearly required and contemplated widespread 
usage of MTBE in the RFG program. As discussed above, Congress was also 
aware that large quantities of MTBE would be needed in the RFG program.
    No one should be penalized for obeying the law. Yet this is the 
position in which refiners and petrochemical producers find themselves 
because of these liability suits. Money spent to defend against these 
unfair suits could be better used to produce additional supplies of 
petroleum and petrochemical products for consumers and the nation's 
economic benefit.
    During the energy bill conference last year, Chairmen Tauzin and 
Barton recognized the need for product liability language that would 
help fuel suppliers defend themselves against these unfair charges. 
This language was approved by the House conferees with bipartisan 
support. NPRA encourages the subcommittee and full committee to include 
the same or similar language in the House energy bill this year. It is 
only fair that any fuel producer who responds to a congressional 
mandate for use of a product be protected against legal action based 
solely upon production or use of the mandated product.
    Fifth: Avoid unnecessary changes in fuel specifications--As 
discussed previously, the refining industry faces significant 
investment requirements in order to comply with regulations to improve 
the environmental performance of both gasoline and diesel fuel in 
coming years. Significant investments will also be required to respond 
to regulations affecting facilities. NPRA urges the subcommittee and 
committee to limit additional fuel specification changes while work is 
in progress to comply with these existing requirements. Although we do 
expect a proposed rule this year to reduce the sulfur level in off-road 
diesel over the period 2007-10, industry has been consulting with EPA 
in the hope of coordinating the off-road requirements with the existing 
highway diesel rule. We hope that this subcommittee will monitor 
developments on that regulation.
    Particular care should be used in considering so-called ``boutique 
fuel'' gasoline programs. In many cases these programs represent a 
local area's attempt to address its own air quality needs in a more 
cost-effective way than with reformulated gasoline. NPRA welcomes 
further study of the ``boutique fuels'' phenomenon, but urges members 
of the committee to resist imposition of additional fuel specification 
changes in a vain attempt to curtail state and local experimentation.
    NPRA is also concerned about provisions in last year's bill that 
facilitated certain opt-ins to the reformulated gasoline program. In 
creating the RFG program, Congress established requirements for RFG 
opt-ins that recognized the need to limit access to that program due to 
supply and investment considerations. If anything, the reasons 
underlying those concerns are stronger now than they were ten years 
ago. Therefore, NPRA urges that current Clean Air Act language 
regarding access to the RFG program be retained, rejecting any changes 
to current language that limits participation in the RFG program to 
those areas with a demonstrated need for that fuel.
    Sixth: Take steps to increase natural gas production and supply--
NPRA's members include many petrochemical producers who depend on 
natural gas supplies at a reasonable price for use as feedstock. Recent 
price spikes for this product threaten the continued competitiveness of 
the domestic petrochemical industry. We believe that quick action is 
necessary to increase the supply of natural gas through expanded 
domestic drilling opportunities.
    NPRA also recommends that the subcommittee and committee explore 
additional ways to expand gas supply through expedited siting of LNG 
facilities and pipeline expansion, including the building of an 
appropriate pipeline to make Alaskan natural gas available at 
reasonable prices. We also encourage members to examine the overall 
economic impact on the U.S. of the rapid expansion of natural gas use 
as a utility and industrial process fuel in recent years. The impact on 
feedstock users of this additional demand should be taken into 
consideration, as should the ability of the available supply to meet 
this new demand. We do not believe that this analysis is occurring, to 
the detriment of traditional users of natural gas for feedstocks.
    Seventh: Ensure the continued viability of combined heat and power 
systems in transitioning energy markets--Many refineries and 
petrochemical facilities have adopted combined heating and power (CHP) 
technology as a way to improve their energy efficiency and reduce air 
emissions. These systems provide the electricity and steam needed for 
their industrial operations. Today's state of the art systems can 
achieve efficiency ratings as high as 70%, which is more than twice as 
efficient as conventional utility generators, with half the emissions 
per BTU. NPRA urges the subcommittee and full committee to maintain 
PURPA provisions that help CHP plants survive in an electricity market 
that has not yet made the transition to full competition.
    NPRA looks forward to working with the subcommittee and full 
committee to accomplish these and other objectives as part of a supply-
driven national energy policy. I would be glad to answer any questions 
raised by our testimony today.

    Mr. Shimkus. Thank you very much. Now we would like to have 
Mr. Bill Douglass, CEO, Douglass Distributing Company, and you 
are recognized for 5 minutes, sir.

                   STATEMENT OF BILL DOUGLASS

    Mr. Douglass. Thank you, Mr. Chairman, Congressman Boucher 
and members of the subcommittee. We appreciate the opportunity 
to testify today about the impact of national energy policy 
legislation on the Nation's petroleum marketers. As you heard, 
my name is Bill Douglass. I am CEO of Douglass Distributing 
Company, headquartered in Sherman, Texas. Our company operates 
10 convenience stores and has a distributorship that sells 
gasoline and diesel fuel through 110 other retail outlets in 
the Dallas-Fort Worth market.
    I appear today on behalf of the National Association of 
Convenience Stores, which we call NACS, and the Society of 
Independent Gasoline Marketers of America, which is known as 
SIGMA. Collectively, the members of these two associations sell 
approximately 80 percent of the gasoline consumed in the United 
States every year. Today, I intend to focus on the key 
priorities that NACS and SIGMA believe should be included in a 
national energy bill in order to promote one common objective: 
To enhance the supply of motor fuel for the American motorist.
    Ensuring a sufficient supply of gasoline and diesel fuel 
will benefit individual consumers and the economy as a whole. 
It is with this objective that we present the following policy 
recommendations. First, Congress should repeal the oxygenate 
mandate of the Reformulated Gasoline Program. Second, Congress 
should provide for the orderly phase-out of MTBE in a manner 
that does not impact overall gasoline supplies negatively. 
Finally, Congress needs to address boutique motor fuels. Last 
year, the House included a provision in its energy bill 
requiring a Federal study into this boutique motor fuel issue. 
Unfortunately, the timing of such a study will not serve to 
assist this committee in developing a national energy policy 
this year.
    To help your efforts this year, NACS has commissioned a 
study into this very subject that will be completed next month, 
April 2003. This study is taking an in-depth look into the 
current market conditions generated by today's overlapping 
Federal, State and local fuel regulations and is assessing the 
impact of potential changes to these regulations on overall 
fuel supplies, product fungibility, cost and environmental 
impact. NACS looks forward to sharing the results of this study 
with this subcommittee.
    Renewable fuel standard. The debate in the last Congress 
seemed to focus on a different issue: The establishment of a 
renewable standard, RFS, also referred to an ethanol mandate. 
Last Congress, NACS and SIGMA strongly opposed this ethanol 
mandate. This opposition continues today. We simply cannot 
support a provision to replace one mandate, the oxygenate 
mandate, with another, an ethanol mandate. NACS and SIGMA 
recognize, however, that there is substantial political support 
in the House and the Senate for the adoption of an ethanol 
mandate. Therefore, if Congress decides to adopt an RFS in this 
year's energy bill, we urge the committee to adopt the 
following modifications, which will benefit overall gasoline 
supplies and environmental protection, reduce the number of 
boutique fuels, maintain the competitive position of 
independent marketers and ease the introduction of the RFS.
    First, NACS and SIGMA urge the subcommittee to adopt a 
legislative provision to permit the commingling of divergent, 
compliance fuels. EPA regulations currently prohibit a marketer 
from blending compliance fuels if their mixture would result in 
a non-compliant product. This prohibition reduces the 
flexibility of the gasoline market to respond to supply 
disruptions while having little or no environmental benefit. 
Furthermore, it makes it considerably more difficult for a 
marketer to sell ethanol-blended gasoline.
    By allowing us to blend or commingle the ethanol and non-
ethanol fuels in our tanks, we will be better able to respond 
to the shortages of one fuel or another. This will reduce the 
price volatility and greatly ease the stress on the gasoline 
distribution system. The environmental impacts of this action 
will be minimal and will be far outweighed by the benefits to 
supply and price stability. Therefore, NACS and SIGMA urge this 
subcommittee to permit the commingling of compliant product in 
order to provide the extra flexibility necessary to avoid 
market disruptions and price spikes when these market 
conditions develop.
    Second, the RFS considered last year required the use of 
ethanol throughout the year. This provision should be deleted. 
Use of ethanol during the summer months will require refiners 
to produce sub-RVP blend stocks, further reducing the overall 
supply of gasoline, creating spot shortages and promoting 
retail and wholesale gasoline price volatility.
    Third, NACS and SIGMA are concerned deeply about the 
proposed RFS credit and trading system considered last year. 
Given the concentration and market power in the gasoline 
refining and ethanol production industries, there is cause for 
concern that some parties may attempt to hoard RFS credits in 
order to disadvantage their competitors. NACS and SIGMA urge 
this subcommittee to include a provision to assure----
    Mr. Shimkus. You need to wrap it up real quick.
    Mr. Douglass. [continuing] a competitive and open market 
for RFS credits.
    Finally, Congress should adopt a comprehensive Federal 
Leaking Underground Storage Tank Program reforms. Last year's 
House and Senate energy bills contained a modest provision on 
UST reform, but NACS and SIGMA urge that this subcommittee not 
to adopt half measures on this but they should enact 
comprehensive underground storage tank legislation similar to 
that being considered by this committee's Environment and 
Hazardous Materials Subcommittee.
    Thank you for this opportunity to share in the NACS and 
SIGMA concerns and recommendations.
    [The prepared statement of Bill Douglass follows:]

Prepared Statement of Bill Douglass, Chief Executive Officer, Douglass 
     Distributing Company Representing The National Association of 
Convenience Stores and The Society of Independent Gasoline Marketers of 
                                America

                            I. INTRODUCTION

    Good morning, Mr. Chairman and members of the Subcommittee. My name 
is Bill Douglass. I am Chief Executive Officer of Douglass Distributing 
Company, Inc., headquartered in Sherman, Texas. Our company operates 10 
convenience stores and a distributorship that sells gasoline and diesel 
fuel in the Dallas-Fort Worth area.
    I sincerely appreciate the invitation to present testimony before 
you this morning on the issue of national energy policy legislation and 
motor fuels. I appear this morning on behalf of the National 
Association of Convenience Stores (``NACS'') and the Society of 
Independent Gasoline Marketers of America (``SIGMA'').

                          II. THE ASSOCIATIONS

    NACS is an international trade association comprised of more than 
1,700 retail member companies operating more than 100,000 stores. The 
convenience store industry as a whole sold 124.4 billion gallons of 
motor fuel in 2001 and employs 1.4 million workers across the nation.
    SIGMA is an association of more than 270 independent gasoline 
marketers operating in all 50 states. Last year, SIGMA members sold 
more than 48 billion gallons of motor fuel, representing more than 30 
percent of all motor fuels sold in the United States in 2002. SIGMA 
members supply more than 28,000 retail outlets across the nation and 
employ more than 270,000 workers nationwide.

                        III. FOCUS ON MOTORISTS

    My testimony this morning will focus on one simple message. As this 
Subcommittee, and this Congress, debates national motor fuel policy, 
NACS and SIGMA urge you to consider the impact this legislation will 
have on our members' customers--your constituents.
    The average motorist does not know or care whether gasoline 
contains MTBE or ethanol; they simply want competitively-priced 
gasoline and diesel fuel to power their automobiles and trucks. In 
general, motorists favor environmentally-friendly fuels, and favor 
strong environmental protections to assure that the use of motor fuels 
does not harm air quality and does not pollute our nation's water 
supplies.
    These motorists' interests are closely matched by the interest of 
independent motor fuel marketers, like myself. My company sells motor 
fuels, but we do not make either the gasoline or the diesel fuel we 
sell. Consequently, from a business perspective, I have little interest 
in what my refiner-supplier puts into these products, be it ethanol or 
MTBE. My primary concern is supply. My customers, and therefore my 
company, benefit from plentiful supplies of gasoline and diesel fuel 
from diverse sources, thereby assuring a competitive marketplace for 
motor fuel. Furthermore, like our customers, we also support the 
production of motor fuels that do not harm air quality and the strong 
and effective enforcement of regulations to prevent petroleum releases 
from underground storage tanks. We support these issues for the benefit 
of our communities as well as for the benefit of our business.
    Therefore, as you consider a fuels title to national energy policy 
legislation this year, I strongly urge you to keep in mind the 
interests of your constituents, and our customers, the motoring public. 
NACS and SIGMA believe that this Subcommittee will have served its 
constituents well if it puts aside special interest pressures and 
instead develops energy policy legislation that focuses on expanding 
overall motor fuel supplies, easing the pressures on the motor fuel 
distribution system, and reducing motor fuel price volatility.

                IV. KEY COMPONENTS OF FUELS LEGISLATION

    For these reasons, NACS and SIGMA strongly support efforts in 
Congress to adopt national energy policy legislation in 2003. To 
accomplish these objectives, we urge this Subcommittee to include, at a 
minimum, the following core provisions in the motor fuels title of a 
2003 energy bill.
    First, we support the repeal of the reformulated gasoline (``RFG'') 
program's oxygenate mandate contained in Section 211(k) of the Clean 
Air Act. Numerous studies have concluded that oxygenates, including 
MTBE and ethanol, are not necessary for the production of clean-burning 
gasoline. The oxygenate mandate is not environmental protection; 
rather, it is political protection for the MTBE and ethanol industries 
and should be repealed. Doing so will enhance the ability of America's 
refiners to efficiently produce gasoline for America's consumers.
    Second, we support an orderly phase-out of MTBE as a gasoline 
additive in a manner that does not impact overall gasoline supplies 
negatively. The contamination of ground water supplies by MTBE has been 
documented widely. To address this problem, NACS and SIGMA support a 
nation-wide phase-out of MTBE over a period of years Doing this at the 
federal level will avoid the further segmentation of the market as 
individual states proceed with their own bans. A phase-out over several 
years will permit the orderly transition from MTBE to other fuel 
components and mitigate the impact on overall gasoline supplies. In 
addition, we also strongly support increased enforcement of federal 
petroleum underground storage tank laws to help prevent any future 
petroleum releases. I will return to this subject later.
    Third, we support the adoption of legislative provisions to slow, 
and ultimately reverse, the ``balkanization'' of the gasoline and 
diesel fuel markets into islands of ``boutique'' motor fuels. Twenty 
years ago, our nation had the most efficient fuel distribution system 
in the world. Today, with the proliferation of boutique fuels, the 
distribution system is under constant stress which has led to spot 
supply shortages, wholesale and retail price volatility, and consumer 
complaints. Congress must tackle this important issue in order to 
improve gasoline and diesel fuel supply and reduce price volatility. 
Any federal initiative that does not substantially restore fungibility 
to the motor fuel supply and distribution system will only contribute 
to the continued supply dislocation and price volatility witnessed over 
the past several years.

                 V. CONSIDERATION OF AN ETHANOL MANDATE

    During the consideration of energy policy legislation last year, 
there was spirited debate over the proposed adoption of a mandate to 
include ethanol in much of the nation's gasoline. NACS and SIGMA 
strongly opposed, and continue to oppose, an ethanol mandate. We simply 
cannot support a provision to replace one mandate--the oxygenate 
mandate--with another--an ethanol mandate.
    The details of this issue have been debated for several years as 
representatives of the ethanol industry and the MTBE industry have 
competed for federal market support. NACS and SIGMA are not concerned 
with the rivalry between these two industries, but we are very 
concerned about the impact the proposed resolution could have on 
consumers.
    The ethanol mandate proposed last Congress places the motor fuels 
market in serious jeopardy. Our central concern is the delivery of 
product to all markets throughout the country in a cost-efficient 
manner. Because ethanol is predominantly a regionally produced product, 
it must be shipped from its Midwest-production facilities to all 
markets. The problem is that our pipeline system cannot transport the 
product. This forces the market to rely on rail and truck deliveries, a 
much more expensive method of liquid product transport. In addition, it 
adds yet another level of potential disruption to the system. These 
factors alone could lead to increased regional supply shortages and 
even greater price volatility.
    NACS and SIGMA do not oppose increased market opportunities for 
ethanol; in fact, our members are the leading retailers of ethanol-
blended gasoline. However, we believe it would be a mistake for the 
federal government to mandate its use on a national basis.
    NACS and SIGMA recognize, however, that there is substantial 
political support in the House and Senate for the adoption of an 
ethanol mandate. Therefore, if Congress is intent on adopting a 
renewable fuels standard (``RFS'') as part of an energy bill, we urge 
that the following modifications be made to the fuels title offered by 
the House to the Senate last fall. These suggested modifications will 
benefit overall gasoline supplies and environmental protection, reduce 
the number of boutique fuels, maintain the competitive position of 
independent marketers, and ease the introduction of the RFS.

              VI. COMMINGLING OF DIVERGENT COMPLIANT FUELS

    First, Congress should adopt a legislative provision to permit the 
commingling of divergent compliant fuels. Currently, EPA regulations 
specifically prohibit the blending of ethanol-additized RFG with MTBE-
additized RFG during much of the year. In addition, the regulations 
generally prohibit the blending of any two compliant fuels if the 
resulting mixture would have a higher RVP (generated by the presence of 
ethanol) than allowed in a specific market. These prohibitions 
balkanize the gasoline markets and increase supply shortages during 
market disruptions, while having little or no environmental benefit. 
Furthermore, the requirements make it considerably more difficult for a 
marketer to proactively sell ethanol-blended gasoline. There are a 
couple of scenarios that last year's proposed fuels title would create 
that could be improved by allowing the commingling of compliant fuels.
    If the oxygenate requirement is repealed, MTBE is banned, and an 
ethanol mandate is created, there will be at least two primary 
varieties of reformulated gasoline sold across the nation--oxygenated 
gasoline with ethanol and non-oxygenated gasoline. Existing regulations 
would permit the blending of these fuels in the tanks of motorists' 
cars, but not in the underground storage tanks (``USTs'') of gasoline 
marketers. This limitation will impair the ability of marketers to 
efficiently sell RFG and will make it more difficult for marketers to 
offer ethanol-blended RFG to their customers.
    Another complication raised by the implementation of the ethanol 
mandate is the loss of fungibility for conventional fuel. Currently, 
many states and localities impose volatility controls on gasoline to 
control for pollution. Ethanol-blended conventional gasoline is 
afforded a one-pound volatility waiver to accommodate for the increased 
volatility contributed by the ethanol. However, if marketers begin 
selling ethanol-blended conventional and non-ethanol blended 
conventional, the mixture of the two products will result in non-
compliant product.
    In both conventional and RFG markets, therefore, a marketer must 
drain his storage tank in order to sell ethanol-blended product. If 
that same mixture is not available at a later date, the marketer would 
again be forced to drain his tank in order to refill it with non-
ethanol product. This places an undue burden on the marketer by 
hindering his ability to provide uninterrupted service to his customers 
and will cause temporary supply shortages at certain retail outlets. 
Permitting the blending, or commingling, of these fuels in marketers' 
USTs will increase marketer flexibility to respond to shortages of one 
fuel or another, will reduce price volatility caused by such shortages, 
and will reduce stresses on the gasoline distribution system.
    Some may argue that allowing a marketer to commingle products will 
increase the environmental impact. I submit that any impact on the 
environment is likely to be minimal and will be far outweighed by the 
benefits to supply and price stability. Even today, divergent compliant 
fuels are being commingled in consumer's gasoline tanks throughout the 
country. It will be rare that a marketer will be forced to commingle 
product in his tank, certainly less frequently than a consumer will 
fill his or her vehicle with divergent product. In fact, most of 
America's gasoline retailers are branded marketers, locked into supply 
contracts, who will not be faced with this situation except in extreme 
supply situations. Unbranded marketers, which comprise approximately 30 
percent of the market, are also unlikely to switch terminal suppliers 
except in tight market conditions. The provision NACS and SIGMA are 
advocating will simply provide extra flexibility to avoid unnecessary 
market disruptions and price spikes when these market conditions 
develop.

                  VII. UNDERGROUND STORAGE TANK REFORM

    Second, Congress should adopt comprehensive federal leaking 
underground storage tank (``LUST'') program reforms. Last year's House 
and Senate energy bills both contained modest provisions on UST reform. 
NACS and SIGMA urge that these provisions be expanded to accomplish 
comprehensive UST reform. The Senate Environment and Public Works 
Committee recently approved unanimously S. 195, Senator Chafee's UST 
reform bill. In addition, this Committee's Environment and Hazardous 
Materials Subcommittee is considering similar legislation.
    This year's energy bill should not contain half-measures on UST 
reform. Whether the issue is full enforcement of existing UST rules, 
preventing future MTBE leaks, or providing States with more funding for 
their UST enforcement and remediation programs, comprehensive UST 
reform legislation should be an integral part of a 2003 energy bill 
and, at the very least, must not be compromised by the enactment of 
half-measures.

              VIII. SEASONAL VARIATION PROTECTION FOR RFS

    Third, the Senate's 2002 RFS proposal required the use of ethanol 
throughout the year. This provision should be deleted. Use of ethanol 
during the summer months will require refiners to produce sub-RVP 
blendstocks, further reducing the overall supply of gasoline, create 
spot shortages, and promote retail and wholesale gasoline price 
volatility. If Congress is intent on mandating the use of ethanol in 
gasoline, then Congress should permit industry to meet that goal in the 
most cost-effective manner that causes the least disruption to gasoline 
supplies. Mandating that a certain portion of the RFS be satisfied 
during the summer months runs counter to this goal.

                     IX. CREDIT AND TRADING SYSTEM

    Fourth, NACS and SIGMA are concerned deeply about the proposed RFS 
credit and trading system contained in the 2002 Senate energy bill 
fuels title. Given the concentration of market power in the gasoline 
refining and ethanol production industries, there is cause for concern 
that some parties may attempt to ``hoard'' RFS credits in order to 
disadvantage their competitors. For example, if a Mid-West refiner with 
national marketing interests uses more ethanol than it needs for 
compliance and generates RFS credits, what incentive would that refiner 
have to sell these credits at a reasonable, competitive rate to an East 
or West Coast refiner that is a competitor? If that East or West Coast 
refiner cannot physically obtain ethanol or locate affordable RFS 
credits, it will be in violation of the RFS program.
    NACS and SIGMA urge this Subcommittee to consider the adoption of a 
provision to incentivize refiners who are ``long'' on RFS credits to 
tender these credits to other refiners at a reasonable price. One 
solution might be to penalize refiners that are ``long'' on RFS credits 
in the same way refiners that are ``short'' on credits are to be 
penalized if there is unmet demand for RFS credits in the marketplace . 
Whatever solution Congress arrives at, assuring a competitive and open 
market for RFS credits must be examined.

                            X. OTHER ISSUES

    Many other issues are under consideration with respect to a fuels 
title in an 2003 energy bill. NACS and SIGMA have adopted the following 
positions on several of these additional issues.
    First, independent marketers support the adoption of a provision to 
shield MTBE users, manufacturers, and refiners from product liability 
claims that MTBE is a defective product. The 2002 Senate energy bill 
contained such protection for ethanol producers. Such protection should 
be afforded to MTBE, as provided in the House counter-offer. It must be 
noted that such liability protection will not shield marketers from 
potential liability for MTBE releases--which generally is governed by 
negligence law. Instead, this provision would simply move MTBE release 
claims out of the product liability area of law.
    Second, NACS and SIGMA support strongly a federal solution to 
address the problems associated with the proliferation of boutique 
fuels. To date, virtually all stakeholders have criticized the 
balkanization of the motor fuels markets, but there have been no 
studies completed to provide policy recommendations to halt, or 
reserve, the introduction of boutique fuels. Last year, the House 
included a provision in its energy bill requiring a federal study into 
this issue. We continue to support a federal assessment of the problem. 
However, the timing of such a study will not serve to assist this 
Committee in developing a national energy policy.
    Therefore, I am pleased to inform the Committee that one of the 
associations I am representing today, the National Association of 
Convenience Stores, has commissioned a study into this very subject 
that will be completed next month, in April 2003. This study is taking 
an in-depth look into the current market conditions generated by 
today's overlapping federal, state and local fuel regulations and is 
assessing the impact of potential changes to these regulations on 
overall fuel supplies, product fungibility, cost and environmental 
impact. NACS looks forward to sharing the results of this study with 
this Subcommittee as soon as it is available and we hope that it will 
prove a useful tool as you work to complete an energy bill this 
Congress.

                             XI. CONCLUSION

    Mr. Chairman, members of the Subcommittee, thank you for this 
opportunity to comment on America's national energy policy. NACS and 
SIGMA appreciate the chance to share our concerns and recommendations 
with you as you prepare a new energy bill. I hope to have provided some 
insight into the impact certain policies will have on the petroleum 
marketplace and some provisions that could help mitigate those impacts. 
We look forward to working with the members of this Subcommittee to 
craft energy policy legislation that meets the goals outlined in this 
testimony.
    I would be pleased to answer any questions that my testimony may 
have raised.

    Mr. Shimkus. Thank you, sir. I want to move us forward. 
There are going to be votes relatively soon, so if we can move 
rapidly, then we can get to questions after we get back. Mr. 
Early, environmental consultant for the American Lung 
Association. You have 5 minutes, sir.

                 STATEMENT OF A. BLAKEMAN EARLY

    Mr. Early. Good afternoon, Mr. Chairman. Thank you for 
inviting me. My name is Blakeman Early. I am here on behalf of 
the American Lung Association, and I am also presenting the 
views of the NESCAUM, the Northeast States for Coordinated Air 
Use Management, and I thank NESCAUM for allowing me to appear, 
and they chose not to take a seat at the table.
    I am appearing and presenting both their views because both 
ALA and NESCAUM were on the Blue Ribbon Panel for Oxygenation 
in Gasoline, convened under the last administration, that 
studied very intensively the problems of oxygenates in fuels. 
Both these organizations endorsed the recommendations of the 
Blue Ribbon Panel, and both have been advocating legislation 
based on those recommendations ever since.
    Three important elements of those recommendations have long 
been, we think, critical to the legislation that we think we 
need. First is that MTBE be eliminated from all gasoline, not 
just reformulated gasoline. Second is that the mandatory oxygen 
requirement for reformulated gasoline be eliminated. And, 
third, that Congress adopt an anti-backsliding provision that 
ensures that when oxygen and MTBE are removed from reformulated 
gasoline, the air toxics reduction potential of that, the 
actual toxics that are reduced, is at least as effective as the 
gasoline that is produced with oxygen and MTBE in it. These 
were the three foundation blocks for legislation that both ALA 
and NESCAUM have endorsed.
    But in the spirit of compromise, the Lung Association and 
NESCAUM have also endorsed legislation that included a 
renewable fuel standard. We endorsed it in the 106th Congress 
as well as in the 107th. The Blue Ribbon Panel recommended 
other things, including the reform of the Underground Storage 
Tank Program, augmenting EPA's authority to control fuel 
additives that cause water pollution. And these elements were 
included in a Senate-compromised bill that was passed 
overwhelmingly by the Senate last year.
    When that bill was being considered and we had been 
negotiating with our friends in the oil industry and the 
ethanol industry, the ethanol and the oil industry came 
together and came up with their list of priorities for 
legislation and for the first time introduced a new concept 
they said was a necessary element in the legislation, which is 
this safe harbor that shields industries from defective product 
liability under Federal and State law. This was a new concept 
that was introduced late in the negotiations. It is a concept 
that both the Lung Association and NESCAUM oppose. We both 
opposed it but notwithstanding the fact that the Senate adopted 
a liability shield or a safe harbor that applied only to 
renewable fuels, NESCAUM endorsed the Senate bill without 
reservation. The American Lung Association endorsed the bill 
except for that title of the bill, and I will explain why in a 
minute.
    We think it is very important to get rid of MTBE because, 
as Mr. Olson will explain in great detail in his testimony, 
there is widespread contamination of groundwater and drinking 
water from MTBE. It is estimated that over 18 million people 
are served by drinking water contaminated by MTBE. We also 
understand that the continued use of MTBE is significantly 
eroding the public support for the Reformulated Gasoline 
Program, in general, a program that has been shown to actually 
work to reduce air pollution. We think there is a broad 
consensus throughout the country in support of getting rid of 
MTBE all together. In addition, many States have adopted these 
boutique fuel requirements specifically instead of adopting the 
Reformulated Gasoline Program because of their fear of MTBE 
contamination in their groundwater.
    During the energy bill conference last year, the House made 
an offer on reformulated gasoline even though there was not a 
reformulated gasoline title in the House bill. This bill 
essentially eliminated major provisions of the Senate-
compromised bill, which the Lung Association, NESCAUM and many 
others think is the heart of solving this problem and getting 
compromised legislation through the Congress. The House fuels 
offer eliminated the ban of MTBE in gasoline. It struck the 
language in the Senate bill that required that MTBE be 
eliminated from all fuels within 4 years. The House fuel 
offers----
    Mr. Barton. How much more do you have, Mr. Early? We have 
got a vote in 10 minutes, and I want to let Mr. Olson get his 
oral testimony. Could you take a minute more and wrap it up?
    Mr. Early. Yes. I am sorry, I am taking too long.
    Mr. Barton. No, no. Just if you can----
    Mr. Early. Well, let me say that the House offer, in our 
estimation, for areas suffering from MTBE contamination was the 
worst of both worlds, because it failed to--it removed the 
provisions of the Senate bill that eliminated MTBE from the 
fuel supply and assisted in cleaning up MTBE contamination 
while imposing a renewable fuel standard that rose to 5 billion 
gallons a year in 2012. It is the worst of both worlds, 
particularly for areas in the Northeast. We urge the House to 
return to the Senate compromise, which we think is the basis of 
a sound compromise, the Senate bill without the safe harbor for 
either renewable fuels or MTBE. Thank you, Mr. Chairman.
    [The prepared statement of A. Blakeman Early follows:]

Prepared Statement of A. Blakeman Early on Behalf of the American Lung 
                              Association

    Mr. Chairman, my name is A. Blakeman Early. I am pleased to appear 
today on behalf of the American Lung Association to discuss the use of 
MTBE in Reformulated Gasoline (RFG) and conventional gasoline. The 
American Lung Association has long been a supporter of the use of RFG 
as an important tool that many areas can and should use to reduce 
unhealthy levels of ozone. I am also here to share with you the views 
of the Northeast States for Coordinated Air Use Management (NESCAUM) 
with whom we have worked closely to craft essential changes to the RFG 
program.
Clean Fuels Help Reduce Smog
    As has been demonstrated in California, ``clean'' gasoline can be 
an effective tool in reducing car and truck emissions that contribute 
to smog. Based on separate cost effectiveness analyses conducted by 
both the U.S. EPA and the State of California, when compared to all 
available control options, reformulated gasoline (RFG) is a cost-
effective approach to reducing the pollutants that contribute to 
smog.1 Compared to conventional gasoline, RFG has also been 
show to reduce toxic air emissions from vehicles by approximately 30 
percent.2
---------------------------------------------------------------------------
    \1\ U.S. Environmental Protection Agency, Regulatory Impact 
Analysis, 59 FR 7716, Docket No. A-92-12, 1993
    \2\ Report of the Blue Ribbon Panel on Oxygenates in Gasoline, 
September 1999, pp. 28-29
---------------------------------------------------------------------------
Background of RFG Proposed Changes
    Both the American Lung Association and the Northeast States for 
Coordinated Air Use Management (NESCAUM) were members of the Blue 
Ribbon Panel on Oxygenates in Gasoline. Both organizations endorsed the 
recommendations of the Panel in a report issued in 1999. And both 
organizations engaged in extensive negotiations with the oil industry, 
ethanol industry, corn growers and many other stakeholders regarding 
needed legislative change to the RFG program. Throughout these 
discussions we maintained that three recommendations of the Blue Ribbon 
Panel were preeminent and must be included in legislation that modified 
the RFG provisions of the Clean Air Act. These were: 1) that MTBE must 
be eliminated from all gasoline, not just RFG 2) the mandatory oxygen 
requirement for RFG must be eliminated, and 3) ``anti-backsliding'' 
provisions must be added to the law to ensure that when refiners 
produced RFG without oxygen and without MTBE, the resulting fuel 
reduced toxic air emissions just as much as currently produced RFG. 
Both the American Lung Association and NESCAUM endorsed legislation in 
the 106th Congress that contained these critical elements plus a 
Renewable Fuel Standard (RFS) designed to compensate the ethanol 
industry for its loss of market associated with the elimination of the 
oxygen requirement in RFG.
    As negotiations continued, a large numbers of stakeholders(except 
the MTBE industry) supported the elimination of MTBE over four years, 
and anti-backsliding provisions for air toxics. Other elements of the 
Blue Ribbon Panel recommendations gained wide acceptance including: 
expanding EPA's authority to address MTBE in groundwater under the 
Leaking Underground Storage Tank (LUST) program, and augmenting EPA's 
authority to test and regulate gasoline constituents based on threats 
to public health or the environment from water contamination. But 
further progress on compromise legislation was thwarted over a 
disagreement between the ethanol industry which wanted an Renewable 
Fuel Standard that ``grew'' the industry by increasing over time and 
the API which opposed mandatory use of ethanol in volumes above those 
needed for octane in RFG and conventional gasoline.
    When the energy bill in the Senate gained momentum, the ethanol 
industry and the API announced an agreement that introduced a 
completely new element to the discussion. While agreeing on a level of 
mandatory ethanol use through an RFS that would grow the ethanol 
industry, the API and the ethanol industry announced that a necessary 
element of any compromise legislation must include a ``safe harbor'' 
that shielded both industries from defective product liability under 
federal or state law for the use of either MTBE or renewable fuels 
including ethanol. Both the American Lung Association and NESCAUM 
opposed this new concept. Ultimately, the Senate adopted many of the 
recommendations of the Blue Ribbon Panel as well as a ``safe harbor'' 
that applies only to renewable fuels.
    In the spirit of compromise NESCAUM endorsed the provisions of the 
Senate compromise bill, while the American Lung Association endorsed 
the bill language while calling for the removal of the ``safe harbor'' 
provisions. The attached NESCAUM letter explains well the important 
concerns that motivated its support for the compromise.(See Attachment 
A)

The American Lung Association Supports the Phase Out of MTBE in All 
        Gasoline
    As a member of the Blue Ribbon Panel on Oxygenates in Gasoline, the 
American Lung Association learned of the significant threat that MTBE 
poses to the nation's water supplies. Subsequent data collected by the 
USGS and presented in Mr. Olson's testimony heightens the concern over 
MTBE contamination. It is estimated that over 18 million people are 
served by drinking water contaminated by MTBE. (See Attachment B) We 
also came to understand that the continued use of MTBE in RFG would 
contribute to the undermining of public support for the RFG program. 
Based on these two factors, we have supported the Blue Ribbon Panel 
recommendation that MTBE be phased out of all gasoline, not just RFG. 
We believe there is a broad consensus in support of the MTBE phase out. 
Clearly, any discussion of federal fuel changes must start with the 
elimination of MTBE. Fourteen states have already banned MTBE and five 
more Northeast states may also do so. In addition, EPA found in its 
boutique fuels study that the antipathy toward MTBE has lead many 
states to adopt ``boutique fuels'' in lieu of federal RFG in order to 
avoid high amounts of MTBE dictated by the mandatory oxygen 
requirement.33 In short, removing MTBE from our nation's 
fuel supply is both a political and environmental imperative that must 
accompany any other fuel changes that Congress adopts. We believe the 
introduction of MTBE phase out authority in the Senate energy bill, 
along with ``anti-backsliding'' and other provisions that would 
implement recommendations of the Blue Ribbon Panel represents a unique 
opportunity to legislate constructive changes to RFG and conventional 
gasoline. These changes should not have unacceptable impacts on the 
price of gasoline especially if viewed in the context of maintaining 
the status quo.
---------------------------------------------------------------------------
    \3\ Study of Boutique Fuels & Issues Relating to Transition from 
Winter to Summer Gasoline, Office of Transportation and Air Quality, 
U.S. Environmental Protection Agency, October 24, 2001, p. 10.
---------------------------------------------------------------------------
    While it is unclear to members of the public and most members of 
Congress exactly what happened during the House-Senate conference on 
the energy bill, the House made an offer based on the attached text. 
(See Appendix A) This offer essentially eliminated major provisions of 
the Senate compromise and subsequent discussions were unable to resolve 
differences.
The House Fuels Offer Eliminates the Senate Ban of MTBE in Gasoline.
    Under the Senate bill, the use of MTBE is to be phased out in no 
more than four years. (See Attachment C, p. 22 and Attachment D, p.2) 
This language is absent from the House offer. Therefore, the only 
potential restrictions on MTBE use in RFG or conventional gasoline 
would be through the use of state enacted restriction. However, in many 
states these restrictions are being challenged by the MTBE industry and 
the courts may ultimately rule that states are preempted by the Clean 
Air Act Amendments of 1990 from restricting the use of MTBE.
    The continued legal use of MTBE in RFG and conventional fuel 
creates a nightmare of uncertainty regarding the future safety of water 
supplies and compliance responsibilities for refiners who have limited 
ability to prevent contamination of non-MTBE containing fuel by 
supplies that legally contain MTBE. This uncertainty will continue to 
discourage the use of RFG in areas that are newly designated non-
attainment for smog because of fears of MTBE contamination.
The House Fuels Offer Preempts State Prohibition of MTBE After 
        Enactment
    The House language leaves intact Senate language that preserved 
state restrictions on MTBE in effect prior to enactment of these 
provisions but preempted state mesure that go into effect subsequent to 
enactment. (See Attachment C, p. 25 and Attachment D, p. 4) The 
refiners sought this provision to provide a rational, nationwide phase 
out of MTBE in fuel in lieu of multiple different state bans. Since the 
House offer does not ban MTBE, but does address its use, subsequent 
state bans would be preempted.
The House Fuels Offer Eliminates EPA Authority to Regulate Fuel 
        Additives to Prevent Water Contamination.
    EPA does not appear to have the authority under the existing law to 
regulated gasoline additives because of their adverse impact on water. 
The EPA has been exploring whether it has such authority under the 
Toxic Substances Control Act since 2000. To my knowledge, EPA is still 
exploring. This lack of authority is at the heart of the current 
controversy over MTBE use in fuel. Having removed the ban on MTBE, one 
might expect that a minimum response to the current MTBE crisis in the 
House offer might be to give EPA the authority to regulate MTBE in 
order to prevent water contamination. The House offer contains no such 
language. The House language simply strikes subsection 833(c) of the 
Senate compromise which contained carefully crafted language endorsed 
by the API authorizing EPA regulate fuel additives based on their 
capacity to threaten health or the environment via water pollution.(See 
Attachment C, p. 22 and Attachment D, p. 2)
The House Offer Shields Refiners From Defective Product Liability 
        Lawsuits on MTBE Brought After Enactment.
    The House language requires equivalent treatment for MTBE as is 
provided in the ``safe harbor'' in the Senate bill for renewable fuels. 
(See Attachment C, pp. 18-19, p. 24 and Attachment E, pp.6-7) This 
language would bar any future lawsuits brought under federal or state 
law on the basis of a MTBE being a defective product and refiners 
failing to warn consumers of its water contamination hazards. This 
prohibition would apply regardless of whether the contamination 
occurred prior to the enactment of the RFG provision in the Clean Air 
Act Amendments of 1990. The prohibition also applies regardless of 
whether the contamination occurred from the presence of MTBE in 
conventional gasoline that is not subject to an oxygen requirement and 
contains MTBE solely because a refiner chose to add it to the fuel.
    To sum up, for many areas suffering from MTBE contamination the 
House offer was the worst of both worlds. It eliminated the most 
important tools in the Senate compromise bill to stem MTBE 
contamination and obtain cleanup assistance from refiners while still 
imposing the burden of a Renewable Fuel Standard nation-wide.
Without the Senate Compromise bill, Massive Amounts of Ethanol Must be 
        Used in California and the Northeast
    The Senate compromise bill represents a significant compromise that 
the American Lung Association believes provides the best basis for 
achieving modifications to RFG which meets the needs of the oil 
industry, the ethanol industry, state air regulators, and air quality. 
It is a compromise that should be able to be enacted and which clearly 
would avoid an impending ``train wreck'' if existing state bans of MTBE 
go into effect beginning with Connecticut in October of this year.
    In a world where 14 to 19 states individually ban MTBE but oxygen 
requirement is maintained in federal RFG, large amounts of ethanol will 
be needed. The difference between this scenario and implementing the 
Senate compromise is that the ethanol demand is inflexibly centered on 
California and the Northeast where ethanol is not currently produced or 
used in any significant volumes. According to the API, if MTBE bans in 
California and the Northeast take effect with no change to federal RFG 
requirements, California would need 843 million gallons of ethanol and 
the Northeast would need 713 million gallons.(See Tab 2 and 3) We 
believe the cost and price spike impact of such a scenario would be 
much more significant than under the Senate compromise. This is because 
ethanol must be transported and stored separately from the base 
gasoline it is mixed with until it reaches consumer distribution.
    Under the Senate compromise, the RFS credit and banking provisions 
allow some refiners to use ethanol in the most economically efficient 
manner, most likely where it is already made and used. These refiners 
can sell RFS credits to those who cannot use ethanol economically. We 
expect that octane for RFG used in the Northeast and California will be 
met substantially by the use of iso-octane and alkylates. Refiners 
supplying these regions would then be obligated to purchase RFS credits 
from refiners using ethanol in mid-west markets where it has been 
traditionally sold. Such an approach is far more practical than the 
``forced'' ethanol use under the status quo scenario.
American Lung Association Opposes A Liability ``Safe Harbor'' for MTBE
    Providing a defective product liability shield to MTBE, as provided 
in the House offer last year is truly unsupportable. As explained in 
detail in Mr. Olson's testimony, refiners and MTBE producers had 
extensive knowledge of MTBE's hazards as a contaminant in groundwater. 
They also knew that underground storage tanks of gasoline were leaking 
literally across the nation. This knowledge was extensive in the mid to 
late 80's. Nevertheless, the industry used MTBE extensively before the 
RFG program was enacted in 1990 and also failed to inform Congress of 
the dangers of adopting a clean fuels program that they knew would 
vastly increase MTBE use. Given the complicity of the industry in the 
creation of the MTBE contamination problem, we see absolutely no 
justification for the removal a legal tool that should be available to 
MTBE contamination victims to help address the clean up of widespread 
MTBE contamination.
The American Lung Association Opposes a Liability ``Safe Harbor'' for 
        Renewable Fuels
    One frustrating aspect of this debate is that, essentially, history 
is repeating itself. Refiners chose to use MTBE in gasoline in part to 
replace tetra-ethyl lead in gasoline after Congress banned it. You may 
recall that as a result of the lead refiners placed in gasoline and 
paint manufacturers placed in paint, 88 percent of children aged one to 
five had blood lead levels above the threshold believed to have the 
potential to impair cognitive development in the late 1970's. It took 
ten years to get lead out of gasoline. Hopefully Congress can get rid 
of MTBE in gasoline more quickly. The Congress must not adopt the 
``safe harbor'' provisions that were adopted in the Senate compromise 
that reduce the incentives to avoid renewable fuel additives to 
gasoline that replicate in any way the problems of lead or MTBE. 
Unfortunately, Section 819(e) of the Senate compromise bill provides 
that no renewable fuel can be deemed to be defective in design or 
manufacture ``by virtue of the fact that it is, or contains such a 
renewable fuel''. The liability shield in this provision reduces the 
incentive renewable fuel producers and purveyors have to be vigilant 
and provide a safe renewable fuel product. Therefore, the provision 
increases the likelihood of another MTBE situation developing rather 
than decreasing it. Indeed, we fear that the provision could be 
expanded to shield ETBE from defective product liability. ETBE is a 
cousin to MTBE containing ethanol instead of methanol. According to the 
Blue Ribbon Panel it exhibits many of the same water contamination 
characteristics.4 Clearly this product, and others in the 
same family of ``ethers'' as MTBE should not receive any sort of 
liability shield. More importantly, neither should other renewable 
fuels that may be used in the future, some of which may not have yet 
been invented.
---------------------------------------------------------------------------
    \4\ Report of the Blue Ribbon Panel on Oxygenates, September 1999, 
p. 86, 88.
---------------------------------------------------------------------------
    Since the oil refining industry is insisting on the ``safe harbor'' 
a question is clearly raised. What do they know about the dangers of 
renewable fuels that we do not? Are there dangers that they know about, 
as they did with MTBE in the 1980's that they are not telling Congress 
as it contemplates mandating the use of renewable fuels? Why does the 
ethanol industry support the ``safe harbor'' for renewable fuels? Are 
there adverse consequences from ethanol use that they know about that 
prompt their support for the ``safe harbor''?
Congress Must Adopt Needed Fuel Changes As soon As Possible
    The Congress has been deadlocked over legislation to eliminate MTBE 
and improve federal requirements for RFG and conventional gasoline for 
years. With the exception of the liability safe harbor, the provisions 
in the Senate compromise bill adopted last year represent a compromise 
that addresses widely varying concerns in a reasonable fashion. We urge 
you to grasp this opportunity and support this compromise.

    Mr. Barton. Thank you. We are going to hear now from Mr. 
Olson, and then we are going to recess. We have got two votes 
on the floor. When we come back, we will hear from Mr. Dinneen 
and Mr. Segal and then we will have questions. So, Mr. Olson, 
if you could try to summarize in approximately 5 minutes your 
testimony.

                   STATEMENT OF ERIK D. OLSON

    Mr. Olson. I will definitely do my best and try to beat 
that. Thank you for inviting me to testify this afternoon. I am 
here on behalf of NRDC as well as the Environmental Working 
Group. We would endorse what Mr. Early just suggested, that 
both NESCAUM and ALA urged, which is basically that the Blue 
Ribbon Panel's recommendations, the three foundation 
recommendations, that there be a phase-out of MTBE, an 
elimination of the 2 percent oxygen requirement and anti-
backsliding provision to maintain air quality benefits.
    Two other important components of any legislation are that 
there should be no waiver or preemption of liability or 
responsibility, no safe harbor provision, in other words, and 
also that there be authority to regulate fuel additives or 
fuels based on water quality impacts. The air quality benefits 
of the reformulated gas provisions have been clear, but there 
are also clear downside water quality problems that I go into 
in detail in the testimony, including some new U.S. Geological 
Survey data.
    The data are showing that in the neighborhood of 3 to 5 
percent of the source waters in the United States contain MTBE, 
which is a shocking number if you realize how short MTBE has 
been widely in our fuel supplies. It also shows that in high 
MTBE use areas as much as 14 to 15 percent of the water 
supplies are contaminated with MTBE. While much of that is 
below the EPA advisory level, which is based on foul taste and 
smell, there are also cancer and other possible concerns with 
MTBE. We have provided a map that is on page 9 of our testimony 
which shows the widespread nature of MTBE contamination across 
the country essentially in all States where intensive 
monitoring has been done.
    In addition, we highlight what the industry knew and when 
they knew it about MTBE. Interestingly, the industry--some 
members of the industry used to call MTBE, ``Most Things 
Biodegrade Easier,'' or, ``Major Threat to Better Earnings.'' 
What is going on is that the industry has known for some time, 
certainly before the 1990 Clean Air Act amendments, that MTBE 
was highly soluble, is highly persistent and hard to 
biodegrade, is coming out of leaking tanks it was widely being 
found outside of leaking tanks and spills prior to the 1990 
Clean Air Act amendments, and that the contamination was 
already spreading at that point. In jury in 2002, just last 
year in California, looked at this evidence and literally tens 
of thousands of pages of internal industry documents, some of 
which I have attached to my testimony, that show that industry, 
according to the jury, acted, ``with malice,'' in failing to 
warn and in failing to act on the MTBE problem before they did.
    We are concerned that other additives waiting in the wings, 
such as ETBE, TAME and DIPE, all ethers that are all highly 
soluble, as is discussed in the testimony, will be the next 
MTBE if they come into widespread use. Therefore, we urge 
strongly that there be no safe harbor preemption of State law 
or Federal law and no waiver of liability for MTBE or for other 
fuels or fuel additives. We believe that it is necessary to 
create the incentives to carefully handle and to use and 
manufacture these fuels and fuel additives in a way that is 
responsible, as between the companies that are manufacturing 
the fuel that fully know what the properties are and consumers 
or water utilities. It is clear that the industry ought to be 
responsible for the contamination problems.
    Finally, briefly in my testimony I highlight another issue 
that is likely to come up in this committee, in this 
legislation, which is the injection of MTBE and diesel and 
other contaminants through hydraulic fracturing in some areas. 
We strongly opposed any rollback in EPA's authority, which was 
recently decided by a Court of Appeals decision to be under the 
Safe Drinking Water Act and the National Drinking Water 
Advisory Council has actually urge that EPA can maintain its 
authority contrary to some of the legislation that was being 
considered last year. So I have beaten my 5-minute timeframe, 
and I will be happy to answer questions.
    [The prepared statement of Erik D. Olson follows:]

Prepared Statement of Erik D. Olson, Senior Attorney, Natural Resources 
 Defense Council on Behalf of NRDC and The Environmental Working Group

                              INTRODUCTION

    Good Morning Mr. Chairman and Members of the Subcommittee, I am 
Erik D. Olson, a Senior Attorney at the Natural Resources Defense 
Council (NRDC), a national non-profit organization with over 500,000 
members dedicated to the protection of public health and the 
environment. I also serve as chair of the Campaign for Safe and 
Affordable Drinking Water, an alliance of over 300 public health, 
medical, consumer, environmental, and other organizations seeking to 
assure safe drinking water at a reasonable price to all Americans, 
though today I do not appear on behalf of the Campaign. Part 1 of this 
testimony focuses primarily on MTBE. Part 2 briefly notes another 
important water issue likely to be addressed in the energy legislation, 
the use of hydraulic fracturing in oil and gas activities, which may 
harm water supplies. Part 3 highlights what the oil industry knew about 
MTBE problems, and when they knew about them, and was written by the 
Environmental Working Group, which authored the report summarized in 
that section, and joins in this testimony.
    We appreciate the opportunity to testify today. We have found it 
difficult, however, to testify on legislation whose full text we have 
not seen. In this testimony, with respect to certain issues we are 
essentially ``reading the tea leaves'' from last year's introduced and 
passed bills, the House offer to the Senate conferees, and frankly we 
are guessing as to what the House energy bill may say. We therefore 
respectfully request that we be provided an opportunity to testify 
again when the bill has been introduced.

    PART 1. MTBE: WATER QUALITY CONCERNS, AND THE NEED FOR FEDERAL 
                              LEGISLATION

Why MTBE?
    Because of serious air pollution triggering smog alerts in many 
``non-attainment'' areas around the nation, EPA began investigating 
changes in fuel supplies that could result in air quality improvements. 
For many years EPA was investigating the possible widespread use of 
methanol (a chemical cousin of ethanol) as a fuel. The petroleum 
industry, on the other hand, had another idea: reformulated gasoline 
that was produced from a byproduct fraction of petroleum cracking that 
for years had little market, called methyl tert-butyl ether (MTBE). 
MTBE could be used as an ``oxygenate,'' elements of the petroleum 
industry argued, and would reduce carbon monoxide emissions and ozone 
levels in the atmosphere, leading to air quality benefits.
1990 Clean Air Act Amendments
    In enacting the Clean Air Act Amendments (CAA) of 1990, Congress 
required the use of oxygenates in gas, in order to improve air quality. 
The use of oxygenates makes gas burn cleaner. The oxygenate requirement 
also was enacted in part because Congress hoped to give a big boost to 
the ethanol industry, which can use distilled ``biomass'' to make this 
alcohol. Instead of switching mostly to ethanol, the petroleum industry 
chose to use MTBE as the oxygenate of choice. MTBE use skyrocketed (see 
figure 1). By 1998, MTBE became ``the second most-produced organic 
chemical in the U.S.,'' with about 10 million gallons used per day. 
1
EPA Blue Ribbon Panel on MTBE
    EPA's Blue Ribbon Panel on MTBE concluded that the Reformulated 
Gasoline Program (RFG) established in the Clean Air Act Amendments of 
1990 ``has provided substantial reductions in the emissions of a number 
of air pollutants from motor vehicles . . .'' The reductions were 
greater, in fact, than legally required. The panel also noted that 
``there is disagreement about the precise role of oxygenates [such as 
MTBE] in attaining the RFG air quality benefits,'' though oxygenated 
fuels did, the panel concluded, probably reduce emissions. But in large 
because of the water quality problems caused by MTBE, the panel 
recommended:

 ``Action . . . to reduce the use of MTBE substantially (with 
        some members supporting its complete phase-out), and action by 
        Congress to clarify federal and state authority to regulate 
        and/or eliminate the use of gasoline additives that threaten 
        drinking water supplies;
 ``Action by Congress to remove the current 2 percent oxygen 
        requirement to ensure that adequate fuel supplies can be 
        blended in a cost-effective manner while quickly reducing usage 
        of MTBE; and
 ``Action by EPA to ensure that there is no loss of current air 
        quality benefits.''
Serious Concerns about Water Quality
    While MTBE may have contributed to improved air quality in some 
communities, the bad news is that MTBE is extremely soluble in water, 
far more soluble than hydrocarbon components such as benzene, toluene, 
and xylene (see Figure 2).
Industry Knew Long Before 1990 CAA Amendments MTBE Was a Problem
    As discussed at length in Part 3 in this testimony, internal oil 
industry documents that were only released in litigation show that the 
oil industry well aware of MTBE's water-contaminating properties before 
the 1990 Clean Air Act Amendments. These documents also show that the 
industry was aware that spills or leaks containing MTBE spread very 
fast, and were extremely difficult and expensive to clean up. Indeed, 
by 1981, a Shell scientist wrote an internal report on an MTBE 
contamination problem and the difficulties of cleanup. The joke inside 
Shell was that MTBE really stood for ``Most Things Biodegrade Easier;'' 
later, other versions of the joke circulated, including ``Menace 
Threatening Our Bountiful Environment,'' or ``Major Threat to Better 
Earnings.'' (Attachment 5)
    These and many other facts, documents, and testimony were 
considered by the jury that found that there was ``clear and convincing 
evidence'' in the South Tahoe case that Shell Oil and Lyondell Chemical 
Company (ARCO chemical Company) acted ``with malice'' in selling 
gasoline containing MTBE both because it was ``defective in design'' 
because the risks of harm outweighed its benefits, and because of their 
failure to disclose the threats posed by MTBE.2 Several 
other oil company defendants opted to settle the case before these 
findings were rendered.
Other MTBE Chemical Cousins May Also Present Problems
    Other ethers being considered as gasoline additives, such as ethyl-
tert-butyl ether (ETBE), tert-amyl methyl ether (TAME), and di-isoproyl 
ether (DIPE) also are extremely soluble, like MTBE. (Figure 2). The 
high solubility of MTBE has lead to widespread contamination of 
groundwater and surface waters across the nation.
Widespread MTBE Contamination of Water
    According to estimates from U.S. Geological Survey (USGS) experts, 
there may be 250,000 leaking underground storage tank (LUST) releases 
of MTBE.3 Pipeline releases, gas spills, and other sources 
also contaminate groundwater and surface water with MTBE. USGS 
estimates that about 35% of community water system wells are located 
within 1 km of a LUST (9000 wells).4 USGS data indicates 
that about 3% of groundwater wells in the U.S. contain MTBE, and about 
5% of surface waters contain MTBE (FIGURE 3).5 Testing also 
indicates that MTBE is often found in tap water--about 9% of water 
supplies tested.6 According to USGS testing, about 15% of 
drinking water in the Northeast contained MTBE.7 Most is 
found at relatively low levels; about 1% exceed the low end of EPA's 
advisory level (20 ppb), with1% over the low end of EPA's advisory 
level.8
Health Concerns With MTBE
    MTBE contamination of drinking water poses health concerns, but as 
is usually true with chemical contaminants, there remains some 
uncertainty as to how serious these risks are. EPA has found that MTBE 
may be a carcinogen, but has not reached a final verdict on the issue. 
There have been reports of acute human-health effects of MTBE such as 
nausea, dizziness, and headaches by people exposed to MTBE-containing 
fuel vapors in air, though some argue that these symptoms have not been 
clearly linked to MTBE exposure.9 The human-health effects 
of long-term inhalation or oral exposures to MTBE are 
unknown.10 However, there is some evidence of possible 
reproductive and developmental effects.11
    There are no published studies evaluating MTBE and cancer in 
humans, but MTBE has been shown to cause cancer in rats and mice 
exposed by inhalation or orally.12 Federal agency reports 
indicate that MTBE should be regarded as posing a potential cancer risk 
to people based on animal cancer data.13 Although EPA has 
concluded that ``MTBE poses a potential for human carcinogenicity at 
high doses'' based on animal data, EPA says that these animal data ``do 
not support confident, quantitative estimation of risk at low 
exposure'' 14 EPA has based its Drinking Water Advisory upon 
taste and odor thresholds (20 to 40 g/L) in humans, and has 
not yet established any enforceable health standard for 
MTBE.15 Consumer rejection due to taste and odor of MTBE 
often has been a factor in water utility decisions to stop using or to 
treat water sources contaminated with MTBE.
State Actions Banning or Restricting MTBE
    In response to widespread concerns about MTBE contamination, at 
least 17 States have adopted bans or serious restrictions on MTBE 
usage, and two have required intensive studies of MTBE contamination 
(Attachment 1).
Need for federal Legislation
    There is an urgent need for federal legislation that would:

 Ban MTBE, while maintaining air quality. Congress needs to 
        step in and enact a clear MTBE ban, but should accompany this 
        with a requirement that air quality benefits of reformulated 
        gas not be reduced. While there have been huge pollution 
        reductions in smog and cancer-causing air toxics from the 
        switch to reformulated gasoline, Congress can no longer ignore 
        the harm being done by gasoline and MTBE leaking into drinking 
        water supplies. Oil refiners have the ability to produce 
        gasoline that achieves just as much air pollution reduction 
        without oxygenates such as MTBE, but the law currently mandates 
        their use. Congress should act immediately to repeal the 
        mandate. It makes no sense to have a patchwork approach to this 
        problem with 15 to 20 states banning MTBE; if Congress doesn't 
        act and state bans go into effect, this could create needless 
        confusion and burdens for consumers.
 Prohibit oil companies from producing a fuel that is less 
        effective at reducing smog and toxic air pollutants than the 
        RFG sold today when they remove oxygenates. We do not need to 
        take a step backward in combating air pollution in order to 
        protect groundwater.
 Eliminate the 2% oxygen mandate. We agree with numerous state 
        officials, health groups, and API that Congress must lift the 
        oxygenate requirement (and ban MTBE) while maintaining air 
        quality benefits.
 Give EPA clear authority to regulate fuel additives based upon 
        air and water quality impacts (the Senate energy bill last 
        Congress would embody this authority; the House counter-offer 
        last year did not).
 No ethanol mandate. The legislation should set standards for 
        gasoline performance, rather than mandate a particular solution 
        to the problem.
 Encourage use of clean, renewable biofuels made from biomass, 
        which reduces global warming while improving air quality and 
        reducing water risks. This should not be styled to effectively 
        mandate ethanol use, however.
No Waiver or Preemption of State or Other Liability for Fuel 
        Contamination
    Our most overwhelming concern is that the legislation should not 
include any waiver or preemption of state or other liability for 
renewable fuels or MTBE. Introduced legislation (Rep. Peterson's H.R. 
837 and Sen. Daschle's S. 385) include a so-called ``safe harbor'' 
provision that would preempt state law and effectively remove tools 
available to states and municipalities to remedy tap water 
contamination problems from fuel containing ``renewable fuels.'' The 
provision would block lawsuits alleging that gasoline is a defective in 
design or manufacture because it contains such renewable fuels. A 
similar Senate measure last year was answered by a House conferees' 
offer that would have expanded this waiver of liability and preemption 
to MTBE.
    Such a waiver of liability and preemption of State law is an 
unacceptable overreach that will hurt the public, local governments, 
the environment, and will encourage irresponsible corporate behavior. 
As the South Tahoe jury found after an extensive trial and review of an 
enormous number of industry documents and witnesses, many in the oil 
industry knew of the risks of MTBE, and irresponsibly failed to act or 
to warn the public or their customers.
    Well before Congress enacted the 1990 CAA, the oil industry was 
aware of the risks posed by MTBE to water supplies, of the difficulty 
of cleaning up spills and leaks, of the persistence of MTBE, and of the 
fact that many oil storage tanks were leaking. Elements of the oil 
industry knew of problems a long time ago, and according to the 
California jury, acted ``with malice'' in failing to disclose these 
risks. (Attachment 4). As between this highly culpable oil industry 
that knew about the problem, failed to remedy it, and profited from the 
sale of their defective product, and the public water supplies that had 
nothing to do with creating the problem, and would have to bill their 
customers to remedy it, who should pay for the cleanup? Clearly, the 
oil industry should not be let off the hook for this liability. Why 
deny an important tool to local government and water utilities to 
address this important drinking water quality and potential health 
problem?
    A liability waiver and preemption also would create unacceptable 
incentives for manufacturers to introduce defective products. What will 
be the next MTBE? TAME? DIPE? ETBE? Why do the renewable fuels 
manufacturers need such liability protection? Do they know of problems 
with their products that they are not telling Congress or us about, 
much like the oil industry was not very forthcoming about the problems 
with MTBE before it came into such widespread use?
    The petroleum industry is clearly in best position to know about 
and to take action to avoid another MTBE. Industry must have the 
incentive to minimize the impacts of new fuel additives or new fuels.
    Last year, there was a strong alliance behind a sensible solution 
to the MTBE and oxygenate problem, which included API. The liability 
waiver and preemption was added after that deal was cut, and is a deal 
breaker. We oppose the safe harbor provision in the bill offered by 
Senator Daschle (S. 385) and others this year in the Senate, and we 
would oppose any legislation that contains the provision as part of the 
energy bill.

PART 2 THE NEED TO REGULATE HYDRAULIC FRACTURING TO PROTECT UNDERGROUND 
                       SOURCES OF DRINKING WATER

    There is another threat to drinking water and ground water by 
chemicals also used in gasoline and diesel fuel that is worthy of 
discussion and protective action by Congress. Hydraulic fracturing is a 
well development process that is designed to increase the yield of 
natural gas from underground rock formations, including coal. Fluid is 
injected down a well and into a rock formation at very high pressure in 
order to break up the rock formation and enable more gas to flow toward 
the well after all the groundwater has been removed.
    Hydraulic fracturing fluid commonly contains many toxic chemicals 
that pose a significant threat to underground sources of drinking 
water. The carcinogen benzene, and MTBE, diesel fuel, and many other 
chemicals are known to be used in hydraulic fracturing fluids. It is 
well known that very small volumes of potent chemicals like benzene and 
MTBE can contaminate millions of liters of ground water. In recent 
years, that has been painfully obvious as MTBE contaminated ground 
water and surface water across the country. Just 28 tablespoons of MTBE 
could contaminate millions of liters of ground water at concentrations 
that would render it unusable.16 It is important to note 
that the large number of coal bed methane wells planned in the US are 
of particular concern because their depths are relatively shallow and 
10 of the 11 coal basins in the US are likely to lie, at least in part 
within existing underground sources of drinking water.17
    A draft report by EPA reveals that many of the estimated 
concentrations of chemicals used in hydraulic fracturing fluids at the 
edge of the fracturing zone exceed the drinking water maximum 
contaminant levels (MCL)--even with an estimated dilution effect of 
30.18 The EPA report reveals that the estimated 
concentration of the carcinogen benzene is twice the drinking water 
MCL. The estimated concentrations of other chemicals exceed their MCLs 
by much greater factors--431 times the MCL in the case of 
methanol.19
    There are a very limited number of empirical scientific studies 
that have evaluated the behavior of these chemicals in the subsurface 
and their effects on groundwater quality. The toxic chemicals used in 
fracturing fluid can be continuous sources of ground water 
contamination since, as the EPA report reveals, as much as 39-75% of 
fracturing fluids remain in the ground.20
    After briefing some staff from this committee last September, it 
was discovered that EPA's calculations for estimated subsurface 
concentrations of chemicals of concern were based on values that were 
not consistent with data in their report that resulted in estimated 
concentrations 10 times lower.21 22 A January 
2003 article in Environmental Science & Technology includes the 
suggestion by a USGS hydrologist that EPA's dilution factor of 30 is 
not justified and that even if ``only 20-30% of the fracturing fluids 
remain in the formation and the fluids include diesel fuel, the aquifer 
would be destroyed because the diesel will remain as a contaminant for 
generations.'' 23
    The near-impossibility of cleaning up underground sources of 
drinking water once they have become contaminated is precisely why 
Congress acted with precaution to protect existing and future sources 
of drinking water in the Underground Injection Control provisions of 
the Safe Drinking Water Act. Preventing widespread contamination of 
drinking water is far less expensive than attempting to clean it up 
later.
    EPA's Congressionally-chartered National Drinking Water Advisory 
Council, comprised of representatives of the water industry, state and 
local governments, public health experts, consumers, environmental 
groups, and others, unanimously adopted a resolution December 12, 2002 
urging the Administrator ``to work through voluntary and/or regulatory 
means as appropriate in order to eliminate the use of diesel fuel and 
related additives in fracturing fluids that are emplaced in geologic 
formations containing sources of drinking water.'' (Attachment 2). 
Furthermore, the National Drinking Water Advisory Council urged the 
Administrator ``to defend as necessary the US EPA's existing authority 
and discretion to implement the Underground Injection Control Program 
in a manner that advances the protection of our ground water resources 
from contamination.'' Support for oversight of state Underground 
Injection Control programs by EPA is growing in many states as they 
face serious budget shortages.24
    We are very concerned about Section 2201 of the legislation filed 
by Congressman Barton that addresses hydraulic fracturing. EPA should 
not finalize its report entitled ``Evaluation of Impacts to Underground 
Sources of Drinking Water by Hydraulic Fracturing of Coalbed Methane 
Reservoirs'' until meaningful field investigation has been accomplished 
that includes collection and analysis of groundwater samples and 
installation of monitoring wells. In addition, EPA must retain its 
authority to oversee state regulation of hydraulic fracturing through 
the Underground Injection Control program to prevent contamination of 
underground sources of drinking water--consistent with Congress' 
intentional precautionary action via the Safe Drinking Water Act.

    PART 3: MTBE: WHAT THE OIL COMPANIES KNEW AND WHEN THEY KNEW IT

Internal Industry Documents Are Rewriting The MTBE Pollution Story
    In 2002, the Environmental Working Group released a report 
summarizing a series of internal oil industry documents that highlight 
the true story about MTBE. That report, available in full at 
www.ewg.org, is excerpted in this section of the testimony (web links 
to electronic versions of the industry documents cited in this 
testimony are included for readers of the electronic version of the 
testimony; copies of some of the key documents are attached to the hard 
copy version of the testimony).
    Congress is considering legislation to strictly limit oil company 
liability for contaminating groundwater in at least 35 states with 
MTBE. The industry says it's only fair to shield MTBE makers from 
lawsuits, since, they claim, it was the government that mandated oil 
companies to reformulate gas with MTBE in the first place, to clean the 
air.
    But a different story has emerged from internal industry documents 
and depositions, made public in recent successful lawsuits brought by 
cities and Communities for a Better Environment that want oil companies 
to pay to clean up water made undrinkable and unhealthy by MTBE. The 
documents, provided to EWG by CBE's lawyers Scott Summy and Celeste 
Evangelisti, show that the oil industry itself lobbied hard for the 
MTBE mandate because they made the additive and stood to profit. A top 
ARCO executive admitted under oath, ``The EPA did not initiate 
reformulated gasoline . . .'' He clarified that ``the oil industry . . 
. brought this [MTBE] forward as an alternative to what the EPA had 
initially proposed.'' (Attachment 3)
    By 1986, the oil industry was adding 54,000 barrels of MTBE to 
gasoline each day. By 1991, one year before the EPA requirements went 
into effect, the industry was using more than 100,000 barrels of MTBE 
per day in reformulated gasoline. Yet secret oil company studies, 
conducted at least as early as 1980, showed the industry knew that MTBE 
contaminated ground water in numerous locations where it was used.
    Oil companies are pressing Congress for liability protection 
because hundreds of communities have serious MTBE contamination 
problems, and company documents are coming back to haunt them in the 
courtroom. In April 2002, the documents convinced a California jury to 
find Shell, Texaco, Tosco, Lyondell Chemical (ARCO Chemical), and 
Equilon Enterprises liable for selling a defective product (gasoline 
with MTBE) while failing to warn of its pollution hazard, forcing a $60 
million settlement with the water district for South Tahoe. (Attachment 
4)
``The Government Made Us Do It''
    As noted earlier in this testimony, MTBE is an ``oxygenate'' that 
makes gasoline burn cleaner and more efficiently. Unfortunately, it is 
also a foul-tasting, nasty-smelling, potential carcinogen that spreads 
rapidly when gasoline escapes from leaky underground storage tanks, 
contaminating sources of groundwater and drinking water from New York 
to California. Once in soil or water, MTBE breaks down very slowly 
while it accelerates the spread of other contaminants in gasoline, such 
as benzene, a known carcinogen.
    Some communities, including Santa Monica and South Lake Tahoe, 
Calif., face tens or hundreds of millions of dollars in costs of 
cleaning up MTBE or replacing contaminated water supplies. At least 17 
states already have passed measures to ban or significantly limit the 
use of MTBE in gasoline; two more have required intensive studies. We 
believe that a federal ban is more a question of when than if.
    Pressure is building to follow the lead of many states and ban MTBE 
nationally by the year 2006. Members of Congress from corn-producing 
states support the phase out in part because ethanol made from corn is 
the primary MTBE substitute. Other members sympathetic to oil industry 
concerns, in turn, are demanding that any ban on MTBE shield its makers 
from product-defect liability. The proposal apparently would not 
preclude suits against parties responsible for allowing MTBE to leak 
from storage tanks, but would provide immunity from suits claiming that 
MTBE itself was a defective product--precisely the charge that won a 
$60 million settlement for the South Tahoe Water District this year. 
The jury in that case found five oil and chemical companies liable for 
selling a defective product--MTBE ``while failing to warn of its 
pollution risks. (Attachment 4)
The MTBE Papers
    The paper trail, dating at least to 1980, tells a different story: 
How the oil companies took a byproduct fraction of gasoline refining 
that had little profitable use and created a profitable market. 
Beginning in the mid-1980s, well in advance of the 1992 federal mandate 
to reformulate gasoline to meet the standards of the Clean Air Act, 
elements of the petrochemical industry promoted MTBE to U.S. and state 
regulators as the additive of choice.
    Thousands of pages of internal documents and sworn depositions from 
the producers at Shell, Exxon, Mobil, ARCO, Chevron, Unocal, Texaco and 
Tosco (now Valero) have come to light through a lawsuit by Communities 
for a Better Environment, a California public interest group. Many of 
the same documents were used in a suit by the South Lake Tahoe Water 
District against four oil companies and Lyondell Chemical Co. of 
Houston (ARCO Chemical Company), the nation's largest MTBE producer. In 
the CBE suit, several of the companies settled by agreeing to clean up 
MTBE spills at more than 1,300 California gas stations; the others 
continue to contest the case.
    In 2002, a jury in the Tahoe case found Lyondell, Shell, Texaco, 
Equilon, and Tosco guilty of irresponsibly manufacturing and 
distributing a product they knew would contaminate water. In addition, 
the jury found by ``clear and convincing evidence'' that both Shell Oil 
Company and Lyondell Chemical Company acted with ``malice'' by failing 
to warn customers of the almost certain environmental dangers of MTBE 
water contamination. (Attachment 4)
    In an interview with The Sacramento Bee, the jury foreman said he 
found the MTBE papers, which demonstrated the industry's early 
knowledge that MTBE would threaten water supplies ``among the most 
compelling evidence he recorded in 635 pages of handwritten notes.'' 
The foreman stated that ``[t]here were lessons to be learned, but 
(Shell) didn't (learn them) because it saw money to be made in selling 
the product.'' After the jury verdict establishing liability, but 
before the jury could assess monetary damages, the companies settled 
the case for $60 million.
Oil Companies Knew MTBE Was a Threat to Water Supplies
    Even though MTBE was not classified as a potential cause of cancer 
in humans until 1995, refiners knew much earlier that its powerfully 
foul taste and smell meant that small concentrations could render water 
undrinkable, and that once it got into water supplies it was all but 
impossible to clean up. A Shell hydrogeologist testified in the South 
Lake Tahoe case that he first dealt with an MTBE spill in 1980 in 
Rockaway, N.J., where seven MTBE plumes were leaking from underground 
storage tanks. By 1981, when the Shell scientist wrote an internal 
report on the Rockaway plumes, the joke inside Shell was that MTBE 
really stood for ``Most Things Biodegrade Easier.'' Later, other 
versions of the joke circulated, including ``Menace Threatening Our 
Bountiful Environment,'' or apropos to the present attempt to limit 
liability, ``Major Threat to Better Earnings.'' (Attachment 5)
    In 1983, Shell was one of at least nine companies surveyed by a 
task force of the American Petroleum Institute on ``the environmental 
fate and health effects'' of MTBE and other oxygenates. Shell's 
Environmental Affairs department replied to the trade association: ``In 
our spill situation the MTBE was detectable (by drinking) in 7 to 15 
parts per billion so even if it were not a factor to health, it still 
had to be removed to below the detectable amount in order to use the 
water.'' (emphasis added). The survey, the results of which were later 
distributed to all API members, asked for information about the number 
and extent of spills, chemical analysis of the spill and the 
contaminated water, and health effects to people in the community.
    Clearly, Shell was not the only company that knew about MTBE 
problems. An environmental engineer for ExxonMobil (the companies 
merged in 1999) testified that he learned of MTBE contamination from 
Exxon gasoline in 1980, when a tank leak in Jacksonville, Maryland, 
fouled wells for a planned subdivision. The ExxonMobil engineer said it 
was learned MTBE had also leaked into the subdivision's wells from a 
Gulf and an Amoco station.
Storage Tanks Were Known to be Leaking in the 1970s and 1980s
    Refiners also knew that underground gasoline storage tanks were 
susceptible to leaks, a fact that would amplify the problem with MTBE. 
In 1973, an Exxon report on the problem said: ``The subject of 
underground leaks at service stations is one of growing concern to 
gasoline marketers. Large sums of money, time, and effort are exhausted 
on a continuing basis in the location and detection of leaking tanks 
and lines.''
    In 1981, an ARCO memo said leaking tanks were ``a major problem . . 
. The issue is essentially a health/safety and environmental one. 
Escaping vapors can seep into basements, sewers and conduits, creating 
not only a nuisance but the danger of explosion and/or fire. Escaping 
gasoline also enters and pollutes the water table. (Groundwater is a 
major source of the U.S. water supply.) Certain chemicals in gasoline 
(namely the aromatics like benzene) may be carcinogenic or toxic in 
certain quantities.''
    By 1980, Exxon had an annual testing program for tanks and found 
that 27 percent were leaking; two years later the failure rate was up 
to 38 percent. In 1981, Shell and ARCO, the first refiners to add MTBE, 
estimated that 20 percent of all U.S. underground storage tanks were 
leaking. Five years later, in 1986, the EPA concurred. Prior knowledge 
of the extent of leaking gasoline storage tanks was a major part of 
South Lake Tahoe's case: Fully aware that tanks were leaking, the 
petrochemical industry nonetheless introduced an additive known to 
rapidly percolate down to groundwater from gasoline distribution 
systems with known leaks. Efforts were ongoing to upgrade storage tank 
systems, but when industry learned quickly that the new tanks were 
still leaking, it continued to expand the use of MTBE anyway.
The Industry, not the EPA, Promoted MTBE as an Oxygenate
    Recently disclosed court documents clearly show that the oil 
companies, not state or federal regulators, were the boosters of MTBE. 
The industry developed and promoted the concept of using reformulated 
gasoline to reduce air emissions, assuring the EPA that reformulated 
gasoline would be better than other options being considered. ARCO 
Chemical Co.'s Manager of Business Development from 1987 to 1998 
testified: ``What I recall is the EPA actually promoting using methanol 
blends . . . and the refining industry said here's another option . . . 
we can reformulate gasoline to reduce the emissions . . . that would be 
equal to or better than you would get by substituting or mandating the 
use of methanol vehicles . . . [T]he oil industry . . . brought this 
forward as an alternative to what the EPA had initially proposed.'' He 
continued, ``The EPA did not initiate reformulated gasoline.'' 
(Attachment 3)
    Well before EPA mandated reformulated gasoline in 1992, the oil 
industry was aggressively promoting MTBE. According to the American 
Petroleum Institute, refiners were adding an average of 74,000 barrels 
of MTBE to gasoline per day from 1986 through 1991, roughly one third 
of the peak amount added to gasoline in 1998.
    In 1987, a representative of ARCO Chemical (later absorbed by 
Lyondell), which was rapidly expanding its MTBE production, testified 
before the Colorado Air Quality Control Commission that the additive 
would reduce emissions and improve gas mileage, that supply and price 
were no barrier, and that consumers didn't need to be warned about the 
presence of MTBE in gasoline. Nothing was said about the leak and 
contamination problems that ARCO and the rest of the industry had known 
about for at least seven years. ARCO's representative testified that in 
the 1980s he played a similar role in ``assisting'' the states of 
Arizona and Nevada in the development of oxygenate programs--programs 
that resulted in those states adopting MTBE.
The Industry Attacked Safety Studies and Withheld Information From 
        Regulators
    In 1986, the Maine Department of Environmental Protection published 
a report documenting extensive MTBE groundwater contamination in the 
state. The authors identified MTBE as a ``rapidly spreading groundwater 
contaminant'' and discussed the option that ``MTBE could be abandoned 
as an additive in gasoline stored underground'' or that gas with MTBE 
``be stored only in double-contained facilities.'' The Maine Paper was 
perhaps the earliest warning from government health officials about the 
dangers of MTBE. To the oil companies, it was a call to arms. Documents 
show that even as they were internally disseminating this study and 
treating its findings seriously, the oil companies joined forces to 
attack the study's authors and the article's ``damage'' in an effort to 
discredit their findings and downplay the risks of MTBE.
    The industry disinformation effort began even before publication of 
the paper. A 1987 ARCO memo details the continued attack on the authors 
and their research:
        ``We initially became involved with the Maine DEP prior to the 
        presentation of their first version of this paper at the 
        National Well Water Conference on November 13, 1986 . . . Since 
        the paper was presented last November, we have been working 
        with API, the newly formed MTBE Committee [of the Oxygenated 
        Fuels Association], and on our view to assess the potential 
        impact of this paper on state policymakers [and] to contain the 
        potential `damage' from this paper . . .''
    The memo goes on to explain how the Maine Petroleum Council, the 
state affiliate of the API, was preparing a paper claiming that MTBE 
didn't speed up the spread of benzene in water, that MTBE ``only 
spreads slightly further'' than benzene and other contaminants, and 
that MTBE could be easily removed from water with existing technology--
none of which is true. Internally, however, the industry admitted the 
Maine paper was a scientifically credible threat. A 1987 letter from an 
ARCO refining executive to his Unocal counterpart admits the MTBE task 
force didn't ``have any data to refute comments made in the paper that 
MTBE may spread further in a plume or may be more difficult to remove/
clean up than other gasoline constituents.''
    In 1987, at the same time that ARCO and API were leading the attack 
on the Maine Paper, EPA issued a request to the industry for ``more 
information on the presence and persistence of MTBE in groundwater.'' 
As reported in 2001 by the San Francisco Chronicle and The Sacramento 
Bee, ARCO responded: ``Where gasoline containing MTBE is stored at 
refineries, terminals or service stations, there is little information 
on MTBE in groundwater. We feel that there are no unique handling 
problems when gasoline containing MTBE is compared to hydrocarbon-only 
gasoline.''
Internal Memos Warning Against MTBE Were Ignored
    There were voices within the industry that warned against the use 
of MTBE, on grounds both of public health and cleanup costs from the 
inevitable leaks. A document dated April 3, 1984 from an Exxon employee 
said:
        ``[W]e have ethical and environmental concerns that are not too 
        well defined at this point; e.g., (1) possible leakage of 
        [storage] tanks into underground water systems of a gasoline 
        component that is soluble in water to a much greater extent 
        [than other chemicals], (2) potential necessity of treating 
        water bottoms as a ``hazardous waste,'' [and] (3) delivery of a 
        fuel to our customers that potentially provides poorer fuel 
        economy . . . (Emphasis added.)
    That same year, an Exxon engineer wrote the first in a series of 
memos outlining ``reasons MTBE could add to ground water incident costs 
and adverse public exposure:''
        ``Based on higher mobility and taste/odor characteristics of 
        MTBE, Exxon's experiences with contaminations in Maryland and 
        our knowledge of Shell's experience with MTBE contamination 
        incidents, the number of well contamination incidents is 
        estimated to increase three times following the widespread 
        introduction of MTBE into Exxon gasoline . . .'' Later, the 
        document notes: ``Any increase in potential groundwater 
        contamination will also increase risk exposure to major 
        incidents.''
    An Exxon memo from 1985 discusses MTBE's ``much higher aqueous 
solubility'' than benzene and other gasoline components:
        ``This can be a factor in instances where underground storage 
        tanks develop a leak which ultimately may find its way to the 
        underground aquifer. When these compounds dissolve in ground 
        water and migrate through the soil matrix they separate into 
        distinct plumes. MTBE creates the most mobile of the common 
        gasoline plumes. MTBE is not a known carcinogen like Benzene 
        however we can be required by public health agencies to remove 
        it based on its taste and odor characteristics.''
    Thus, it is clear that the oil industry was not only well aware of 
the fact the MTBE is extremely soluble, mobile, and persistent, but 
that leaks could and had seriously contaminated water sources, well 
before the Clean Air Act Amendments of 1990.
    [Additional material submitted is retained in subcommittee files.]

                                ENDNOTES

    1 Personal Communication with John Zogorski, USGS, March 
11, 2003; Johnson, Pankow, Bender, Price, and Zogorski, USGS, ``MTBE: 
To What Extent Will Past Releases Contaminate Community Water Supply 
Wells?'' Environmental Science & Technology at 2A (May 1, 2000).
    2 South Tahoe Public Utility District v. ARCO, No. 
999128 (Superior Court, S.F., March 4, 2002), SPECIAL VERDICT PHASE 1 
(Attachment 4).
    3 Johnson, Pankow, Bender, Price, and Zogorski, USGS, 
``MTBE: To What Extent Will Past Releases Contaminate Community Water 
Supply Wells?'' Environmental Science & Technology at 2A (May 1, 2000).
    4 Ibid.
    5 Personal Communication with John Zogorski, USGS, March 
11, 2003
    6 Ibid.
    7 Ibid.
    8 Ibid.
    9 Toccalino, P., ``Human Health Effects of MTBE: A 
Literature Summary,'' USGS, available on the web at http://
sd.water.usgs.gov/nawqa/vocns/mtbe--hh--summary.html; citing inter alia 
Agency for Toxic Substances and Disease Registry, 1996, Toxicological 
profile for methyl t-butyl ether (MTBE): Atlanta, GA, U.S. Department 
of Health and Human Services, Public Health Service, August 1996, 268 
p., http://atsdr1.atsdr.cdc.gov/toxprofiles/tp91.html; Health Effects 
Institute, 1996, The potential health effects of oxygenates added to 
gasoline. A review of the current literature. A special report of the 
Institute's oxygenates evaluation committee: Cambridge, MA, Health 
Effects Institute, April 1996, http://www.healtheffects.org/Pubs/
oxysum.htm; National Institute of Environmental Health Sciences, 2002, 
MTBE (in gasoline): National Institute of Environmental Health 
Sciences, March 13, 2002, http://www.niehs.nih.gov/external/faq/
gas.htm; National Research Council, 1996, Toxicological and performance 
aspects of oxygenated motor vehicle fuels: Washington, D.C., National 
Academy Press, 160 p.; National Science and Technology Council, 1996, 
Interagency assessment of potential health risks associated with 
oxygenated gasoline: Washington, DC, National Science and Technology 
Council, Committee on Environment and Natural Resources, February 1996, 
http://www.ostp.gov/NSTC/html/MTBE/mtbe-top.html; Office of Science and 
Technology Policy, 1997, Interagency assessment of oxygenated fuels: 
Washington, DC, Office of Science and Technology Policy, National 
Science and Technology Council, Executive Office of the President of 
the United States, June 1997, 264 p., www.epa.gov/oms/regs/fuels/
ostpfin.pdf .
    10 Toccalino, supra; citing inter alia National 
Institute of Environmental Health Sciences, 2002, MTBE (in gasoline): 
National Institute of Environmental Health Sciences, March 13, 2002, 
http://www.niehs.nih.gov/external/faq/gas.htm; U. S. Environmental 
Protection Agency, 1995, Proceedings of the conference on MTBE and 
other oxygenates: a research update. Conference summary session seven: 
Research Triangle Park, NC, U.S. Environmental Protection Agency, 
National Center for Environmental Assessment, EPA/600/R-95/134, August 
1995, 274 p., www.epa.gov/ncea/pdfs/mtbe/0850-A.pdf; National Research 
Council, 1996, Toxicological and performance aspects of oxygenated 
motor vehicle fuels: Washington, D.C., National Academy Press, 160 p.; 
National Science and Technology Council, 1996, Interagency assessment 
of potential health risks associated with oxygenated gasoline: 
Washington, DC, National Science and Technology Council, Committee on 
Environment and Natural Resources, February 1996, http://www.ostp.gov/
NSTC/html/MTBE/mtbe-top.html' Office of Science and Technology Policy, 
1997, Interagency assessment of oxygenated fuels: Washington, DC, 
Office of Science and Technology Policy, National Science and 
Technology Council, Executive Office of the President of the United 
States, June 1997, 264 p., http://www.epa.gov/oms/regs/fuels/
ostpfin.pdf.
    11 Hartley, W.R., A.J. Englande, Jr., and D.J. 
Harrington. 1999. ``Health risk assessment of groundwater contaminated 
with methyl tertiary butyl ether.'' Water Science & Technology 39, no. 
11: 305-310.
    12 Toccalino, supra; Health Effects Institute, 1996, The 
potential health effects of oxygenates added to gasoline. A review of 
the current literature. A special report of the Institute's oxygenates 
evaluation committee: Cambridge, MA, Health Effects Institute, April 
1996, http://www.healtheffects.org/Pubs/oxysum.htm; National Institute 
of Environmental Health Sciences, 2002, MTBE (in gasoline): National 
Institute of Environmental Health Sciences, March 13, 2002, http://
www.niehs.nih.gov/external/faq/gas.htm;
    13 Toccalino, supra citing inter alia; National Science 
and Technology Council, 1996, Interagency assessment of potential 
health risks associated with oxygenated gasoline: Washington, DC, 
National Science and Technology Council, Committee on Environment and 
Natural Resources, February 1996, http://www.ostp.gov/NSTC/html/MTBE/
mtbe-top.html; Office of Science and Technology Policy, 1997, 
Interagency assessment of oxygenated fuels: Washington, DC, Office of 
Science and Technology Policy, National Science and Technology Council, 
Executive Office of the President of the United States, June 1997, 264 
p., http://www.epa.gov/oms/regs/fuels/ostpfin.pdf; U. S. Environmental 
Protection Agency, 1997, Drinking water advisory: Consumer 
acceptability advice and health effects analysis on methyl tertiary-
butyl ether (MTBE): Washington, DC, U. S. Environmental Protection 
Agency, Office of Water, EPA-822-F-97-009, December 1997, 48 p., http:/
/www.epa.gov/waterscience/drinking/mtbe.pdf.; California Department of 
Health Services, 2001, Proposed Regulations, California Code of 
Regulations, Title 22, Chapter 15, Section 64468.2. health effects 
language--volatile organic chemicals: Sacramento, CA, California 
Department of Health Services, R-16-01, April 12, 2001, 26 p., http://
www.dhs.
cahwnet.gov/ps/ddwem/publications/Regulations/R-16-01-RegTxt.pdf.
    14 U.S. Environmental Protection Agency, 1997, Drinking 
water advisory: Consumer acceptability advice and health effects 
analysis on methyl tertiary-butyl ether (MTBE): Washington, DC, U. S. 
Environmental Protection Agency, Office of Water, EPA-822-F-97-009, 
December 1997, 48 p., http://www.epa.gov/waterscience/drinking/mtbe.pdf
    15 Ibid.
    16 Johnson, R., et al., ``MTBE: To What Extent Will Past 
Releases Contaminate Community Water Supply Wells?'', Environ. Sci. 
Technol. 2000, 34 (9), 210 A-217.
    17 US EPA, 2002, Evaluation of Impacts to Underground 
Sources of Drinking Water by Hydraulic Fracturing of Coalbed Methane 
Reservoirs, p. ES-11, 5-14, and 7-2.
    18 Ibid., p. 4-4.
    19 Ibid., p. 4-4.
    20 Ibid., p. 3-10.
    21 Gurney, S., 2002, Comments submitted by the Natural 
Resources Defense Council about US EPA draft report Evaluation of 
Impacts to Underground Sources of Drinking Water by Hydraulic 
Fracturing of Coalbed Methane Reservoirs., US EPA Water Docket ID No. 
W-01-09-11
    22 First letter to EPA Administrator Christine Todd 
Whitman from Congressman Henry Waxman, October 1, 2002. Available at 
http://www.house.gov/waxman/news--letters.htm.
    23 ``Does Hydraulic Fracturing Harm Groundwater?,'' 
Environ. Sci. Technol. 2003, 37 (1), 11A-12A.
    24 News from the Ground Water Protection Council found 
at http://www.gwpc.org/News-2003/states-weigh.htm .

    Mr. Barton. We thank you. We are going to recess. We will 
reconvene at approximately between 3:20 and 3:25 to hear our 
last two witnesses and then take questions. So we are in recess 
for approximately 20 minutes.
    [Brief recess.]

                   STATEMENT OF SCOTT H. SEGAL

    Mr. Segal. continuing] of the MCL for MTBE. This committee 
itself has recently considered material improvements in the 
Underground Storage Tank Program, and OFA looks forward to 
working with you on such legislation. Frankly, UST 
implementation, enforcement and recently introduced legislation 
are the most direct and appropriate ways to deal with instances 
of gasoline components and water.
    Further, we urge the subcommittee to support appropriate 
liability protection for clean fuel additives. First, it is 
important to recognize that MTBE usage in RFG derives from 
compliance in a Federal mandate. Tom Daschle, the author of the 
floor amendment that established the 2 percent oxygen standard, 
stated during debate, ``MTBE and ETBE are expected to be major 
components of any clean octane program.'' Under certain forms 
of the then debated oxygenate mandate, Senator Daschle went as 
far as to note that EPA predicts that the amendment will be met 
almost exclusively by MTBE, a methanol derivative.
    I want to take a word for a little bit of what we have seen 
in the NRDC comments, in particular. Siting documents from a 
lawsuit supported in part by MTBE competitors, Mr. Olson 
implies that the Federal Government had no knowledge of 
potential MTBE characteristics in water prior to the regulatory 
developments associated with the 2 percent standard. In 1986, 
the EPA stated in the Federal Register that MTBE may indeed 
persist for long periods, that it was not likely to be readily 
biodegraded or otherwise transformed in groundwater. This is 
the precise observation that Mr. Olson thinks was new and 
different in 1998, but EPA was well aware of it 13 years 
earlier. In addition, we would be willing to submit, and in 
fact we intend to submit, a memorandum on this issue for the 
record.
    Mr. Olson does not give the full context of the documents 
he sites. For example, he leaves out the actual methodological 
assessment of the main Department of Environmental Protection. 
The next line from the document cited states, ``The authors, 
Garrett, et. al., don't represent the views of the Department 
of Environmental Protection Policymakers. Given MTBE's low 
toxicity, DEP doesn't consider MTBE to be especially 
hazardous.'' The main report that is cited also publicly thanks 
the ARCO Chemical Company for its assistance in providing 
documents related to the characteristics of MTBE, voluntarily 
given to Garrett and his co-authors.
    In addition, the contention is made that MTBE producers 
have the temerity to lobby on behalf of their product, but most 
participants opposed bans on MTBE. In fact, the record will 
show that in 1997 the California Air Resources Board, a State 
agency, convened a meeting with oil industry interests and NRDC 
to pool resources to defeat a ban on MTBE. Mr. Chairman, I have 
a copy of a Los Angeles Times article to this effect, which 
makes very interesting reading, and I would be happy to submit 
it for the record. After that meeting, an NRDC senior attorney 
that attended was interviewed. She said, ``This is a unique 
situation. It is the first time the oil industry saw their 
interests as coinciding with the NRDC's.'' The LA Times even 
referred to NRDC as, ``part of the oil industry's coalition.'' 
Last, we are highly suspect of the conclusions that have been 
reached here. Because of allegations that have been discussed, 
somehow this has been transformed into an argument that we 
ought to maintain full products liability. First, no one has 
suggested relief for negligent theories of liability. If a 
defendant has negligently mishandled gasoline containing MTBE, 
tort relief would still be available even under your 
construction of last year. In fact, the California attorney 
general, along with other local counsels, has obtained millions 
of dollars in relief by simply undertaking underground storage 
tank enforcement actions well outside of the tort system all 
together. And as the Council of Economic Advisors found only 
last year, only 20 cents on the dollar is returned in actual 
damages in the tort system. Surely we can come up with 
something better than 20 cents on the dollar.
    I see my time has expired, so I just want to say that on a 
going-forward basis we have big problems. We will continue to 
have problems with fuel price and supply and with clean air. 
One thing we can do is to adopt responsible liability 
protections. The other thing we can do is to make sure that any 
difficulties associated with splash-blended ethanol are 
addressed by allowing us to incorporate ethanol into other 
ethers, for example, ETBE. And, in fact, the Lyondell Chemical 
Company, I understand, has a statement they have prepared for 
the record that I would like to submit.
    Mr. Barton. Without objection.
    Mr. Segal. Thank you very much for the time and we look 
forward to working with you on the legislation.
    [The prepared statement of Scott H. Segal follows:]

    Prepared Statement of Scott H. Segal, Counsel, Oxygenated Fuels 
                              Association

    Chairman Barton, Congressman Boucher and Members of the 
Subcommittee, thank you for this opportunity to testify regarding 
comprehensive national energy policy as it relates to national motor 
fuels policy and the Clean Air Act. My name is Scott Segal, and I am a 
partner at the law firm of Bracewell & Patterson. In that capacity, I 
have represented clients here in Washington on environmental policy 
matters for thirteen years. Today, I am here in my capacity as counsel 
to the Oxygenated Fuels Association. In addition, I serve on the 
adjunct faculty of the University of Maryland (University College) in 
the area of Science and Technology Management.
    Founded in 1983, the Oxygenated Fuels Association (OFA) is an 
international trade association established to advance the use of 
oxygenated fuel additives to improve the combustion performance of 
gasoline, thereby significantly reducing automotive tailpipe pollution.
    As the leading voice of the industry, OFA gathers, develops and 
analyzes technical information on the blending, performance, handling, 
health benefits and environmental properties of oxygenates used in 
gasoline. OFA works with federal, state and local governments, national 
health organizations, environmental groups and major allied industries, 
such as automotive manufacturers, oil companies, and gasoline marketers 
and other interested parties. OFA sponsors numerous technical analyses 
and health science studies showing the automotive performance and 
health benefits of oxygenated fuels.

         1. GENERAL CONSIDERATIONS FOR U.S. MOTOR FUELS POLICY
    Mr. Chairman, the decision to examine the impact of energy policy 
on U.S. motor fuels issues could not be more timely. As today's hearing 
is underway, disturbing trends are emerging regarding the security, 
supply and price of motor fuels. Despite the fact that the spring 
driving season is not yet upon us, gasoline prices at the pump are 
already elevated. While much of the blame for gas prices rests squarely 
on crude oil prices stimulated by current international uncertainties 
in the Middle East and Venezuela, other self-imposed policy decisions 
are also playing a role.
    Last week, one analyst at the Oil Price Information Service 
described current prices this way, ``It's Ash Wednesday, and we're 
going to be asked to give up disposable income for Lent.'' The analyst 
noted that ``high fuel prices rob consumers of money to pay for 
computers, cars, home improvements and other economy-boosting goods and 
services.'' (``No Stopping Gas Prices,'' USA Today, March 5, 2003, 
citing Tom Kloza). The article in which he was cited went on to assess 
complicating factors. And one of these was:
        Conversion to ethanol instead of potential pollutant MTBE as an 
        ingredient in summer-season gas. The change is cumbersome, and 
        states such as California rely on distant states for corn-based 
        ethanol. ``Not a lot of folks can help them out if they get 
        into trouble'' with ethanol supplies, says Joanne Shore, senior 
        analyst at DOE's Energy Information Administration. (Id.)
    In particular, problems in California are complicated by conversion 
from MTBE to ethanol fuels. The noted oil analyst Trilby Lundberg put 
the California situation in a national context, stating in part that, 
``The increase of just over a nickel in the U.S. average is nearly 
entirely due to California refineries switching over to corn-based 
additives . . . Some refineries are changing over to a more expensive 
blend of gasoline and ethanol, which temporarily cut the state's 
gasoline supply by 10 percent.'' (Gas Prices Up to Near-Record Level, 
Associated Press, March 10, 2003). Californians familiar with the 
State's energy situation question whether moving away from MTBE makes 
sense right now, particularly in light of the international situation. 
The Daily Bulletin of California's Inland Valley reported:
        Rising prices now are not due to a true shortage . . . but 
        simply to uncertainty. ``We've been living the good life for 22 
        years. We've had some of the cheapest gas in the world,'' said 
        Bob van der Valk, bulk fuels manager for Cosby Oil in Santa Fe 
        Springs. Market factors like the major oil companies' decision 
        to start blending their summer gas a different way are playing 
        a role as well, van der Valk said. Gas blended for summer usage 
        has always required more refining than the winter variety, he 
        said. But starting Monday, the major companies will mix their 
        summer gas with ethanol additives instead of MTBE (methyl 
        tertiary butyl-ether) for the first time--an added cost, and 
        complication, at a time when a potential war in Iraq throws the 
        reliability of Middle Eastern crude oil into question. ``The 
        last Persian Gulf War when hostilities broke out, we had an 
        interruption in crude oil supply, and there was an instant 
        spike in the price of gas on the street 25 to 30 cents. That 
        hasn't even happened,'' van der Valk said. ``That time we 
        didn't have the MTBE-to-ethanol switch. Last time it was just 
        strictly crude oil.'' (``Gas prices keep pumping up: No end in 
        sight as a gallon climbs to $1.97,'' March 3, 2003).
    A consensus of studies confirms the price-supply impact of 
switching from MTBE to ethanol. Noted petroleum economist Phil Verleger 
puts it this way: removal of MTBE from the California market could push 
the retail price of gasoline to levels previously unseen across the 
United States. Research on price elasticity of gasoline--confirmed in 
over 300 studies--means that high prices in California will pull 
gasoline from the rest of the country, leaving everyone short of 
supply. Verleger is a principal at PKVerleger LLC and BP Senior Fellow 
at the Council on Foreign Relations.
    As OFA has noted many times, the impact of MTBE on the national 
motor fuels pool is extraordinarily significant. Today, many of 
America's drivers use cleaner-burning gasoline designed to cost-
effectively reduce harmful motor fuel emissions and improve the air we 
breathe. Introduced in 1995, Reformulated Gasoline (RFG) is used today 
in the most polluted urban areas in 17 states and the District of 
Columbia. RFG usage accounts for about 34 percent of the total U.S. 
gasoline market (i.e., 2.5 million barrels/day or 100 million gallons/
day).
    While the undeniable environmental benefits of RFG will be 
discussed later in this statement, I want to keep our eyes on the 
impact of MTBE volumes on fuel supply. DOE Under Secretary Bob Card 
testified before the U.S. Senate in 2001 that,
        MTBE's contribution to gasoline supplies nationally is 
        equivalent to about 400,000 barrels a day of gasoline 
        production capacity or the gasoline output of four to five 
        large refineries. Additionally, a loss of ability to use MTBE 
        may also affect the ability of the US gasoline market to draw 
        gasoline supplies from Europe, the major source of our price-
        sensitive gasoline imports, since those refiners widely use 
        MTBE, albeit typically at lower concentrations than in the U.S. 
        (Statement before the Senate Energy and Natural Resources 
        Committee, June 21, 2001).
    Not only do policies designed to hasten MTBE's exit from the 
marketplace, therefore, complicate the existing picture for gasoline 
price and supply; they also undermine our clear and present needs for 
national security. It is no secret that as these hearings are 
occurring, hundreds of thousands of U.S. men and women are being 
mobilized in the Middle East. What few recognize is that a robust 
supply of motor fuels is an essential prerequisite for a safe and 
effective mobilization. The National Defense Council Foundation (NDCF) 
noted that five different Presidents--Eisenhower, Kennedy, Nixon, Ford 
and Carter--recognized that maintaining a healthy refining sector was 
essential to national security. (National Defense Council Foundation, 
The Growing Refining Gap, A Threat to National Security vi--Apr. 29, 
1994).
    As mobilization continues, one would be hard pressed to think of a 
worse time to remove ten percent of the capacity of motors fuels 
capacity in the nation's most populous cities. The amount of refined 
products required to supply a modern military far exceeds the amount 
required in the past. For example, during the peak of Operation Desert 
Storm, the half million U.S. military personnel involved consumed more 
than 450,000 barrels of light refined products per day, nearly four 
times the amount used in World War II by the two million strong Allied 
Expeditionary Force that liberated Europe.
    While ethanol currently has a significant and growing share of the 
fuel pool, some have suggested that mandating its further use could 
answer price and supply questions. We believe that an ethanol mandate 
does not provide an acceptable answer to U.S. energy security needs, 
given ethanol's heavy dependence on fossil fuel inputs and its net 
negative energy yield. Data from the Argonne National Laboratory, for 
example, proves the point that an ethanol mandate ``is more likely to 
increasenot reduceforeign oil imports, fossil energy use, and global 
greenhouse gas emissions.'' (as cited in Sierra Club Statement Before 
the Senate Committee on Environment and Public Works, at Cong. Rec., 
Aug. 3, 1994, at S10472). David Pimental of Cornell University further 
noted that, ``Numerous studies have concluded that ethanol production 
does not enhance energy security, is not a renewable energy source, is 
not an economical fuel, and does not insure clean air. Further its 
production uses land suitable for crop production and causes 
environmental degradation.'' (The Limits of Biomass Utilization, August 
16, 2001 at 9).

             2. THE ROLE OF RFG IN ENVIRONMENTAL PROTECTION
    By every measure, clean-burning RFG blended with MTBE has exceeded 
all pollution reduction goals and substantially and cost-effectively 
improved the nation's air quality. RFG has cut smog-forming pollutant 
emissions by over 17 percent, the equivalent of removing 64,000 tons of 
harmful pollution from the air we breathe or taking 10 million vehicles 
off our roads. RFG has reduced emissions of benzene, a known human 
carcinogen, by some 43 percent, while reducing total toxic air 
emissions by about 22 percent. Cleaner-burning MTBE accounts for a 
large part of the overall emission reductions from RFG. In 1998, the 
Northeast States for Coordinated Air Use Management found that RFG with 
MTBE substantially reduced ``the relative cancer risk associated with 
gasoline vapors and automobile exhaust compared to conventional 
gasoline,'' concluding that today's RFG reduces cancer risk by 20 
percent over conventional gasoline. More recently, the California Bay 
Area Air Quality Management District (BAAQMD) concluded that a 
substantial reduction in cancer risk in the region is directly 
attributable to MTBE.
    OFA has consistently taken the position that an essential 
prerequisite for substantive revision of the Clean Air Act is that the 
actual reductions in air emissions that result from use of oxygenated 
RFG be preserved in any subsequent formulation of fuel.

                   3. ISSUES RELATED TO WATER QUALITY
    Opponents of the continued use of MTBE point to allegations 
regarding MTBE in certain water sources. Is this fair commentary? The 
answer is--no--providing gasoline is properly contained and accidental 
spills and leaks promptly cleaned up. In 1996, MTBE was discovered at 
low levels in groundwater sources in California. MTBE has also been 
detected at low concentrations in other parts of the country. MTBE has 
since received an inordinate amount of attention from US public 
officials who have attempted to ban MTBE in their jurisdictions.
    Initially, the US problem resulted almost entirely from a serious 
lapse in the regulation of underground gasoline storage tanks (UGSTs), 
which resulted in thousands of leaking UGSTs by the late 1980's. So 
widespread was the problem that the EPA established a program in 1988, 
the Leaking Underground Storage Tank (LUST) Trust Fund, to provide 
financial assistance to close down or bring these tanks up to 
standards. Yet by 1999, over ten years later, only 80% of leaking tanks 
had been closed down or repaired. By 1999, EPA also estimated that 
almost 400,000 releases from regulated USTs had been identified. In 
spite of these sobering statistics, however, US public debate has 
focused only on MTBE detected at some of these leak sites, and not on 
larger problems associated with gasoline.
    Claims have been made that MTBE is more water-soluble than other 
gasoline components. What has been completely overlooked, or ignored is 
that MTBE can only be introduced into the environment mixed with much 
larger quantities of the gasoline in which it is blended, usually 
through gasoline leaks or spills. The much larger problem in fact, is 
that where you find MTBE, which is not toxic or hazardous to health and 
the environment, you also find gasoline, containing compounds that are. 
More information on toxicity is attached as an addendum to this 
statement.
    This Committee itself has recently considered material improvements 
in the UST program, and OFA looks forward to working with you on such 
legislation. Frankly, UST implementation, enforcement and recently-
introduced legislation are the most direct and appropriate ways to deal 
with instances of gasoline components appearing in water.
    Objective analysis points to MTBE having become a convenient 
scapegoat as the one entity to which blame for a collective failure to 
protect US groundwater resources can be conveniently transferred. An 
Australian fuels expert recently characterized this phenomenon as 
``shooting the messenger'', a reference to the fact that some 
countries, such as Canada, actually use MTBE detections in water as an 
``early warning'' of potentially significant gasoline leaks into the 
ground that need to be cleaned up as quickly as possible.
    Citizens in the Americas are well aware that gasoline and water do 
not mix. Many countries around the world have safely and securely used 
MTBE extensively as an octane enhancer since the early 1970's, and 
ethanol enriched gasoline--another water soluble, but toxic oxygenate--
since the 1980's. Where strict compliance with and strong enforcement 
of gasoline storage and handling regulations is observed, MTBE and 
other water-soluble additives have a statistically insignificant 
likelihood of ever contaminating water supplies.

                4. PRODUCT BANS SET DANGEROUS PRECEDENTS
    Mr. Chairman, it is our understanding that you do not support 
product bans, as a general rule, and that the case for a ban of MTBE is 
unacceptably weak. Yet there are some who would urge the adoption of a 
ban as a matter of political expediency. We urge the Subcommittee in 
the strongest terms not to ban MTBE.
    While Congress has acted to ban certain toxic chemicals, it has 
never done so without an extensive scientific record of confirmed risks 
and, in some cases, with an opportunity for the appropriate 
administrative agency to revisit the prohibition based on additional 
factual information. Congress has enacted only one statutory 
prohibition on a toxic chemical, a ban on PCBs in the Toxic Substances 
Control Act, enacted in 1976. Even this prohibition allowed EPA to 
permit the use of PCBs where it could be shown that there was no 
unreasonable risk. Furthermore, while EPA has taken regulatory action 
before to take chemicals out of commerce or limit their use, such as 
asbestos, lead, and a few major pesticides, EPA only exercised its 
authority after substantial scientific analysis and an opportunity for 
public review and comment. None of the product bans thus far proposed 
allows EPA to make additional findings concerning the actual risk to 
human health nor allows EPA to exercise its regulatory expertise to 
provide for exceptions or changes based on changed circumstances. In 
fact, the data cited in the addendum below disproves toxicity claims. 
In this respect, a ban of MTBE is both arbitrary and unprecedented.
    A ban of MTBE is also objectionable because of the typically short 
phase-in periods for such actions (some to be implemented in four years 
or less). In o1ther parts of the Clean Air Act, Congress has taken 
action to prohibit the sale of certain chemicals or change the design 
of certain products, but never according to such an abrupt schedule. In 
Title VI of the 1990 Clean Air Act Amendments, for example, Congress 
mandated a phase out of Class I chlorofluorocarbons (CFCs) over a ten-
year period, and a phase out of Class II CFCs over a 30-year period. 
Likewise, in Title IV of the 1990 Clean Air Act Amendments, Congress 
ordered a reduction in emissions of sulfur dioxide over a ten-year 
period. Title II of the 1990 Clean Air Act Amendments provides for a 
tightening of standards for automobile emissions that extends in a two-
step process over eleven years. Indeed, the investments required to 
make the Clean Air Act RFG work were substantial enough to warrant a 
five-year planning and implementation period alone.
    Restrictions on MTBE not only harm MTBE manufacturers, but they 
also set a dangerous precedent that could inhibit the success of 
federally mandated environmental programs in the future. To encourage 
the development of environmentally protective products and processes in 
the future, Congress must ensure that the rules for participating in 
markets are clear and fair, and that the participant has a reasonable 
expectation to earn a return on an investment. Proposed bans on MTBE in 
four years or less send a disquieting message that Congress can 
arbitrarily change the rules at any time, with potentially ruinous 
consequences for those who have taken risks and made good faith 
investments.

                          5. LIABILITY ISSUES
    Mr. Chairman, as you know, instances of alleged contamination of 
water sources by gasoline containing MTBE have recently been the source 
of a number of lawsuits. These suits are now ongoing, and I am not in a 
position to comment on any particular lawsuit or settlement 
discussions. However, I would like to address some of the underlying 
issues relevant to public policy on litigation.
    By way of review, I would note that last year's Senate energy 
proposal contained a safe-harbor provision applicable only to ethanol 
fuels. That provision stood for the proposition that because the 
government would be mandating renewable fuels, no plaintiff's attorney 
should be able to sustain the legal argument that merely complying with 
the law--that is, making gasoline that satisfies the requirement--could 
be the basis for strict products liability. If the government tells you 
to make a particular fuel, it makes little sense to regard such a 
product as ``unreasonably dangerous.'' If the purpose of products 
liability is to deter unwanted behavior, such liability cannot do so 
when the government mandates the product.
    When the House entered into conference discussions with the Senate 
last year, House negotiators correctly realized that the same argument, 
as a matter of law, fairness and policy, was clearly applicable to MTBE 
and other ethers.
    First, it is important to recognize that MTBE usage in RFG derives 
from compliance with a federal mandate--the requirement that RFG 
contain two percent (by weight) oxygen in order to achieve the goals of 
the Act to clean the air. An honest assessment of the conditions 
surrounding the adoption of the two-percent oxygen standard leaves 
little doubt but that Congress intended substantial use of MTBE. For 
example, Senator Tom Daschle, the author of the floor amendment that 
established the two-percent standard, stated during debate, ``The 
ethers, especially MTBE and ETBE, are expected to be major components 
of meeting a clean octane program.'' (Clean Air Act Amendments of 1989, 
Cong. Rec., March 29, 1990 at S3511). Under certain forms of an 
oxygenate mandate, Senator Daschle went as far as to note that, ``EPA 
predicts that the amendment will be met almost exclusively by MTBE , a 
methanol derivative.'' (RFG: Whose Recipe Is It Anyway, and Will It 
Work?, Cong. Rec., May 16, 1990 at S6383).
    Senator Daschle recognized what we all know: there are substantial 
benefits to using MTBE as far as environmental protection is concerned. 
In the floor debate on the two percent standard, Senator Daschle cited 
evidence that, ``NOx, hydrocarbons, and carbon monoxide are 
dramatically reduced by adding the oxygenate MTBE to gasoline.'' (Id.).
    Even opponents of MTBE concede that the federal mandate lies at the 
heart of MTBE use. California Governor Gray Davis wrote to EPA, ``The 
only reason such MTBE-free gasoline is not being made available today 
is U.S. EPA's enforcement of the 2.0 percent oxygen requirements.'' 
(Letter from Hon. Gray Davis, Governor of the State of California, to 
Hon. Carol M. Browner, Administrator of U.S. EPA, April 12, 1999).
    Some argue that because the text of Clean Air Act is silent as to 
which oxygenate should be used, that somehow there was no intention to 
use MTBE. However, the overwhelming consensus of those supporting the 
two-percent standard was that the provision was intended to be 
satisfied in a cost-effective manner that would not cause unacceptable 
price and supply disruptions. Given the dynamics of ethanol price and 
supply, it is inconceivable that the two-percent standard was intended 
to be a de facto ethanol mandate. In fact, farm-state proponents of the 
two-percent standard vigorously denied such an intention throughout the 
debates on the standard.
    Given that the action of the Congress clearly underscored the 
requirement for MTBE use, it makes little sense to allow for the 
propagation of a legal theory that complying with Congress' wishes is 
sufficient for products liability. Of course, if gasoline containing 
MTBE is negligently spilled, liability may still be an issue. Last 
year's debate on liability did not extend to negligence theories, and 
every MTBE case thus filed contains in whole or in part such negligence 
theories. The safe harbor provision in question here is narrowly 
tailored and does not interfere with the ability of plaintiffs to 
obtain relief for truly negligent behavior that results in diminished 
value of resources.
    There are many examples of the Congress adopting such narrowly-
tailored provisions dealing with liability in specific contexts. We 
have included a short list of such examples as an addendum to this 
statement. Perhaps the closest fact-pattern deals with a flame 
retardant, TRIS. The Federal Government required its use in children's 
sleepwear, only to learn that the retardant was carcinogenic, whereupon 
it was banned. The Federal Government not only limited liability, but 
it set up a settlement fund to deal with claims made by companies that 
manufactured TRIS.
    Some have argued that imposition of strict product liability is a 
prerequisite for appropriate remedial actions. We respectfully 
disagree. First, negligence theories more than suffice to address 
remedial questions. Second, the use and improvement of the UST program, 
as discussed above, provides a far fairer and efficient mechanism to 
address the problems of alleged contamination. Third, one can hardly 
think of a less efficient mechanism for addressing water quality 
concerns than imposition of inflexible strict liability theories. A 
recent report from the Council of Economic Advisors found that using 
the tort system in this way ``is extremely inefficient, returning only 
20 cents of the tort cost dollar for that purpose.'' (Council of 
Economic Advisors, Who Pays for Tort Liability Claims? An Economic 
Analysis of the U.S. Tort Liability System, April 2002, at 9). Surely 
we can construct a policy that addresses UST leaks such that greater 
than 20 cents out of every dollar spent goes to actual clean up!

                        6. A LOOK TO THE FUTURE
    The problems of tightness in supply and refining capacity are 
likely to be with us for the time being. The need to maximize energy 
security will continue as well. As new fuel choices present themselves, 
we should adopt public policies that do their best to minimize external 
costs associated with new fuels and fuel additives. We must maintain a 
robust and competitive market in fuel additives, and not allow one 
particular approach to dominate.
    One thing we can do is adopt responsible liability protections when 
fuel choices are or have been mandated. Failure to do so undermines the 
introduction of new fuel additives that will be essential for a 
competitive marketplace. The Council of Economic Advisors is clear on 
this point: ``At higher levels of expected liability costs, however, 
firms will choose to forgo innovation or to withhold a product from 
market, resulting in a net negative effect of expected liability costs 
on innovation.'' (Id. at 6). Given the current dynamics of the fuel 
market, we can ill afford less alternatives.
    Another approach to consider is support for transition assistance 
for additive manufacturers. In the event that policies are adopted that 
make continued use of MTBE less likely, Congress should make clear that 
it will make adequate resources available on a timely basis to 
transition current additive manufacturers to new and different products 
capable of meeting America's energy needs.
    If Congress should choose to adopt some form of ethanol mandate, 
then policies must be put in place that facilitate such mandates on the 
most acceptable terms. For example, mere splash blending of ethanol is 
likely to prove to be unacceptable on a number of fronts. The 
volatility of splash-blended ethanol will cause unacceptable 
environmental and performance complications, particularly in certain 
regions of the country not currently using the product. In addition, 
ethanol's requirement for segregated pipeline transportation poses high 
hurdles to efficient movement and allocation of product to distant 
markets. As both coasts are enforced to embrace ethanol, this problem 
will only get worse.
    One way to address the problems with splash-blended ethanol is to 
incorporate ethanol into an ether, ETBE. An ether with less affinity 
for water than MTBE, ETBE addresses both the volatility and pipeline 
transportation issues. However, in order to facilitate greater ETBE 
use, ETBE must be placed on equal-footing with splash-blended ethanol. 
This means that ETBE must be treated fairly in tax and regulatory 
contexts. For more information, please see a separate statement 
submitted for the record in this hearing by the Lyondell Chemical 
Company.
    Mr. Chairman, Congressman Boucher, and other Members of the 
Subcommittee, thank you for your careful attention to these matters. 
OFA and its members look forward to working with you on a fair and 
effective national fuels policy--one that protects consumers, human 
health and the environment.

    Mr. Barton. Appreciate your testimony. We are going to now 
begin our questions. We are going to recognize Mr. Boucher of 
Virginia for 5 minutes.
    Mr. Boucher. Well, thank you, Mr. Chairman, and thanks to 
all the witnesses for informing us about the matter of ethanol 
use today. We are the wiser by virtue of your presentations. I 
just have two basic questions, and I am going to be brief about 
both of these.
    Here is the first question, here is the thesis, that it 
actually takes more energy to produce ethanol than the energy 
value of the petroleum that is saved when ethanol is consumed, 
and that most of the energy that is used in ethanol production 
actually comes from petroleum in growing and processing corn. 
And so by using ethanol we actually have a net petroleum loss. 
That is the thesis. I would like to hear from those who would 
either support it or would like to rebut it. And who wants to 
go first?
    Mr. Dinneen. Congressman, if you don't mind, I think I will 
jump into this first, and I would ask maybe to submit for the 
record the most recent comprehensive study conducted by the 
Department of Energy's Argonne National Lab, which looked at 
all of the energy balance studies that have been done over the 
past 10 and 15 years and concluded that without question 
ethanol has a positive energy balance.
    Mr. Barton. Without objection.
    Mr. Dinneen. The ethanol industry is growing significantly, 
as I indicated in my statement. Every new ethanol plant is 
using the most efficient technologies today, so we are just 
growing more and more energy efficient. There are a few studies 
that have been out there for quite some time that my good 
friend to my left likes to cite all the time from one professor 
at Cornell University who uses a number of outdated inputs. The 
United States Department of Agriculture has looked at his 
data----
    Mr. Boucher. Now, these are the studies that can conclude 
that there is some sort of net deficit.
    Mr. Dinneen. That is correct.
    Mr. Boucher. Yes. Okay.
    Mr. Dinneen. But USDA has looked at his studies as well and 
found them to be extremely lacking, and I would like to submit 
USDA's analysis of the Cornell papers as well.
    Mr. Boucher. Okay. We will be happy to look at that.
    Anybody else want to comment on this subject? Yes, Mr. 
Slaughter?
    Mr. Slaughter. Mr. Boucher, I think there is a law of 
physics that says for every ethanol study there is an equal and 
opposite study. It has been true now for about 20 years 
whatever study comes out there is a counter study with exactly 
the opposite finding that hits the streets quite shortly. I 
have watched that go back and forth for a number of years. I 
think the only answer you can take away from it is that there 
is negligible impact either way. It is either negligibly minus 
or it is negligibly plus, but I think the operative word is, 
``negligibly.''
    Mr. Boucher. All right. Other comment on that question?
    Mr. Murphy. Mr. Boucher?
    Mr. Boucher. Mr. Murphy.
    Mr. Murphy. Yes, Mr. Boucher. We think that the renewable 
fuels standard, a renewable fuels standard, would serve to 
reduce imports. We don't make the case that it would 
dramatically reduce imports. And, of course, one thing to keep 
in mind is this is not an ethanol mandate, this is a renewable 
fuels mandate. And some of what is going to into that are 
things like biodiesel and things that we don't even understand 
and appreciate at this time. And that is why it is so important 
that we have the EPA approve any additive that is used under 
this before it is added to gasoline. So I think we perhaps put 
too much focus, as you pointed out, on ethanol, because ethanol 
may be today's answer, but I don't know if it is the answer 5 
years from now.
    Mr. Boucher. Okay. Other comments on this very briefly? Mr. 
Early?
    Mr. Early. We have looked at this issue, Mr. Boucher, and 
there isn't any question that the efficiencies that have 
occurred in the ethanol industry have resulted in the 
production of, I think, a net benefit from an energy 
perspective, although I caution that it is a modest benefit. 
Because when you are using ethanol and gasoline at only 10 
percent, and the studies show you get somewhere around a 20 or 
30 percent net benefit, 10 percent of 20 percent is only 2 
percent, so it is a very modest benefit. But I believe it is 
positive.
    Mr. Boucher. Okay. Let me move to my----
    Mr. Segal. Mr. Boucher? Mr. Boucher?
    Mr. Boucher. All right. Very quickly, Mr. Segal.
    Mr. Segal. Very quick comment.
    Mr. Boucher. My time is almost up.
    Mr. Segal. I am not even going to enter the fray on the 
efficiency argument except to say this: There is one problem in 
the whole discussion you have heard so far. If ethanol has 
indeed made major efficiency gains, and I have copied down what 
Bob said, ``most efficient technologies all being in place and 
therefore now has a positive energy yield,'' one does have to 
question why ethanol--that is not the argument ethanol makes in 
advancing the tax incentive where they say that, ``We just need 
a little bit more tax incentive until we make certain 
efficiency breakthroughs and then we won't need it anymore.'' 
But in answering this question, they have always come up with 
the most efficient technologies. A little bit of an 
inconsistency is all I am saying.
    Mr. Boucher. Okay. Thank you. The second question I have is 
this, and, again, this is for anyone who wants to respond. Tell 
me about the general condition of the ethanol industry in the 
United States today. Is there adequate capacity to meet the 
potential that the provision we all think is coming in the 
energy legislation would create? Is it a competitive industry 
or is it so concentrated that just a few producers could 
effectively control the price to the detriment of consumers? 
Who wants to comment?
    Mr. Dinneen. Congressman, again, I am sorry you missed my 
opening statement in which I talked about the growing ethanol 
industry today. We opened 12 plants last year, there are 11 
more under construction. We will open 70 ethanol plants in 
operation as of this Saturday. It is a very competitive 
industry today. We are producing 2.8 billion gallons on an 
annualized basis at the current time. We will process more than 
a billion bushels of grain this year producing that ethanol. We 
will have more than 3 billion gallons of ethanol production 
capacity. Our industry is growing quickly in order to satisfy 
the increased demand that is occurring as a result of State and 
Federal laws, and we are going to be there for our customers.
    Mr. Boucher. Anyone want to comment beyond--Mr. Slaughter?
    Mr. Slaughter. I will just say, Congressman Boucher, that 
last year's--one of last year's rationales for the renewable 
fuels mandate was that we needed the mandate to pull demand. I 
am glad to hear that evidently it is no longer necessary to 
increase demand in the ethanol industry. And I just would go 
along with what Mr. Segal has said about two different stories 
being told at two different times.
    Mr. Boucher. Well, I think it is interesting that we are 
having this dramatic growth in the industry without the 
mandate, and I wonder, Mr. Dinneen, why the mandate might be 
necessary.
    Mr. Dinneen. Well, our customers are suggesting that 
current law is too restrictive. They want a more flexible 
program, and indeed we are building because States are phasing 
out the use of MTBE, which under current law with the Clean Air 
Act oxygen requirements would require a tremendous amount of 
ethanol being used in the Northeast and other areas where 
refiners want to have additional flexibility. At the end of the 
day, the refiners, the marketers, they are our customers. We 
want to make sure that the use of our product makes sense for 
them. And so more than a year ago we began negotiations with 
the American Petroleum Institute and others to come up with a 
new program that would give the refiners the flexibility that 
they have sought in order to meet demand in those clean air 
areas while still meeting clean air standards, while still 
giving us the assurance that if we are going to repeal the 
oxygen standard that is driving ethanol growth today, that we 
would replace it with something that would provide an 
equivalent amount of demand. And that is what this is about, it 
is trying to give refiners the flexibility that they have 
sought.
    Mr. Boucher. Okay. Let me say thank you. We appreciate very 
much your contribution to this debate. Thank you, Mr. Chairman.
    Mr. Barton. Thank you. The Chair recognize himself for 5 
minutes. I am reminded of the late Mr. Rogers' Neighborhood. We 
started every show with, ``It is a nice day in the 
neighborhood,'' you know, ``and all of you are special to me.''
    I wish Mr. Markey were here to hear that. Somebody last 
night asked me to say some poetry, so--but I think it is a 
little tacky for my MTBE friends and my new ethanol friends to 
get into these little tacky, tacky, nitpicky arguments, because 
we are all friends here and we are going to be friends.
    Mr. Boucher. Doesn't matter what the other people say.
    Mr. Barton. It has been a long day.
    I want to go to Mr. Segal on this issue of liability 
protection for MTBE. In the bill that was in conference with 
the Senate last year and in our draft--I don't think it is in 
the draft, but at some point in time we will put out an 
amendment, probably at full committee, that addresses 
liability. What we were talking about in the last Congress and 
what we are actively considering in this Congress is not 
liability protection for negligence or something that gets into 
the water table and is defective. We are simply saying that 
there should be liability protection for a legal product that 
was authorized by Federal law and at least, if not directly, 
indirectly mandated by the oxygenate fuel requirement under the 
Clean Air Act. So could you be a little more specific on what 
liability protection MTBE would like to see in any type of 
Federal bill that goes forward?
    Mr. Segal. Yes, Mr. Barton. First, it is important to make 
a distinction between products liability and negligence 
theories for liability. What we are talking about here is it 
makes little sense to have a liability theory which essentially 
says if you make a product that is in compliance with Federal 
law, that is certified by a Federal agency, that it is exactly 
to specifications that are mandated by the Clean Air Act, that 
the mere fact that you have produced either such an additive or 
such a product could be used ipso facto to prove that it is an 
unreasonably dangerous product. That doesn't make any sense. 
The reason we have products liability theories, quite honestly, 
is to deter folks. Now, wait a minute. If the Federal Clean Air 
Act says thou shall make this product, it is a little difficult 
to believe that we are sending a clear message of deterrence by 
applying products liability.
    Now, by contrast, negligence theories, which say if I have 
MTBE-containing gasoline or ethanol-containing gasoline, for 
that matter, and I spill that material through my own 
negligence and if a plaintiff's attorney can prove up a 
negligence case, then relief can be had that will be targeted 
directly toward cleanup. I will also say there are legal 
actions that are independent of the tort system. The State of 
California has successfully prosecuted violations of the 
Underground Storage Tank Program and recovered millions of 
dollars that have gone, again, to cleanup. But these settlement 
agreements that some of these discussions that Mr. Olson 
referred to, you know, there is not even a statement in those 
settlement agreements that the money has to be spent on 
cleanup. So it really is not an efficient way to target 
remedial assets to the actual problem, and that is what we are 
about.
    Mr. Barton. But what was under consideration in the last 
Congress, and will be under consideration at some point in this 
Congress, is a very limited protection to simply indemnify a 
legal product against being considered to be liable in a 
lawsuit because it is that product.
    Mr. Segal. That is exactly right, sir. The protection, it 
just extends to the defective product theory under products 
liability, not to negligence theories, not to recoveries under 
the underground storage laws.
    Mr. Barton. All right. Now, Mr. Dinneen, I thought you gave 
a fairly incoherent answer to Mr. Boucher's question about the 
need for a continued mandate for ethanol.
    Mr. Dinneen. I apologize.
    Mr. Barton. That is all right.
    Mr. Dinneen. Mr. Segal accused me of that too.
    Mr. Barton. You are not the first witness to give an 
incoherent answer, and it is probably my hearing, not your 
answer. But my assumption is that your trade group continues to 
support a Federal--an increase in the Federal mandate for 
ethanol use to 5 billion gallons per year at some date in the 
future; is that correct?
    Mr. Dinneen. That is correct.
    Mr. Barton. Okay. I just wanted to get that on the record. 
Now, Mr. Murphy, my good friends at API, I am a little bit 
confused by your position on this issue. My understanding is 
that API does support an MTBE ban; is that----
    Mr. Murphy. We do support a phasedown of MTBE consistent 
with----
    Mr. Barton. A phasedown, so you have changed the 
terminology.
    Mr. Murphy. Well, at some point----
    Mr. Barton. You would argue that is not a ban.
    Mr. Murphy. Well, we do support a phasedown which would 
give us adequate time to make the necessary refinery 
investments.
    Mr. Barton. Is it API's positions that the States under 
current law don't have the right to ban MTBE themselves?
    Mr. Murphy. We are concerned if the States do ban MTBE, 
that they are likely to do that in an uncoordinated, 
inconsistent fashion.
    Mr. Barton. So you do----
    Mr. Murphy. So we end up with boutique fuels and we end up 
with----
    Mr. Barton. All right. But you are not answering my 
question.
    Mr. Murphy. Excuse me.
    Mr. Barton. That is all right. It has been a long day. Does 
API believe that a State that wishes to ban MTBE can or cannot 
under the existing Clean Air Act, specifically Section 
211(c)(4)?
    Mr. Murphy. Well, I am not an attorney, but I do believe 
that there has been no adverse court finding that they cannot 
do that.
    Mr. Barton. So you would think that--API's official 
position would be that a State that wishes to ban MTBE could; 
is that correct?
    Mr. Murphy. That is correct, sir.
    Mr. Barton. Okay. My time has expired, and let us see, 
recognize Mr. Allen for 5 minutes.
    Mr. Allen. Thank you, Mr. Chairman. I want to continue this 
discussion about liability waivers, and I guess I will begin 
with you, Mr. Segal, and I think I would like Mr. Douglass to 
comment on this. If a liability waiver, products liability 
waiver, granted exclusively for the manufacturers of MTBE and/
or ethanol, who is left to pick up the cost of contamination? I 
heard your comment about a negligence case, but in the kinds of 
underground contamination cases we have had in Maine, you can 
forget negligence for all practical purposes. And I am 
wondering whether there is going to be an expectation that 
somehow gasoline stations and owners are supposed to pay for 
the cleanup? I just don't quite understand how this is likely 
to operate. And if I could just add--well, let us start there, 
begin with you.
    Mr. Segal. Okay. Please. First of all, what I think we all 
can agree on, in terms of a common goal, is to make sure that 
resources get to the place where they can actually impact on 
remediation. Whether that comes through the tort system or 
whether it comes through another system the most efficient 
mechanism to do it ought to be the one that I think we would 
all agree we should put first.
    Our point of view is this: If you use the tort system as 
that mechanism, first of all, only 20 cents on the dollar is 
delivered out of the tort system. Surely we can do better than 
that. Our argument is the Underground Storage Tank System, that 
is the Leaking Underground Storage Tank funds and remember we 
are considering legislation to expand and make easier the use 
of those funds for remedial activities, that is a much more 
efficient way, a much more efficient approach. It also avoids 
the downside consequence of discouraging new additive, new and 
innovative additive manufactures from getting into the 
business.
    I think Dr. Murphy made a good point, which is that it is 
not a renewable fuel standard, it is a renewable fuel standard, 
not an ethanol mandate, which to my mind means that you want 
other new additives that might be available as time goes on. 
The problem with using the tort system is if you say, hey, you 
met the requirements of the Clean Air Act but you are still 
going to get liability, that is going to weigh on companies in 
introducing new additives, which I think are going to be 
essential for the energy security and environmental protection 
of the country on a going-forward basis.
    So Underground Storage Tank Fund is one place the money 
comes from, negligence theories applicable to those who 
actually mishandled or spilled the gasoline is indeed another 
place, and successful enforcements under State underground 
storage tank laws. And there a good record of victories on 
those.
    Mr. Allen. I understand the argument, but what I hear you 
saying, the other side of that coin is that the injury falls 
where the injury falls in most cases; that is, the person with 
the contaminate well has the contaminated well and barring 
proof of negligence of something else, they are the one who 
suffers the loss. The current system at least spreads that----
    Mr. Segal. The LUST System, the Leaking Underground Storage 
Tank System spreads the risk even better than the tort system.
    Mr. Allen. I hear you.
    Mr. Segal. Okay.
    Mr. Allen. If I could have a quick comment from Mr. 
Douglass, and then I would be interested in Mr. Olson's 
comments as well, particularly if I could, with respect to Mr. 
Olson, I would like you to address again the question of what 
manufacturers may know or not know before the product enters 
the market and whether that bears on the liability waiver as 
written. Mr. Douglass?
    Mr. Douglass. Yes. Thank you, Congressman Allen. My 
personal net worth is wrapped up, for the most part, in 
properties that sell gasoline, and therefore we are very 
attuned to this whole MTBE issue. And we have concluded that 
the gradual phaseout would be in our best interest for MTBE, 
because the liability doesn't--just doesn't go away apparently 
under the existing conditions. So we are concerned that if we 
don't get a gradual phaseout and/or an upgrade in the 
underground tank inspection and enforcement system, our 
properties are going to be liabilities and not assets.
    Mr. Allen. Thank you. Mr. Olson?
    Mr. Olson. I would just point out three points. One is that 
the approach of exempting basically the MTBE folks in the oil 
industry from liability here would be to stick it to the gas 
station owners, and I think that is really sort of part of what 
is going on here. I wanted to read just one sentence out of 
the--there has only been one decision that I am aware of that 
has addressed this MTBE issue. It is the Lake Tahoe case, and 
after an extensive jury investigations, thousands of pages of 
documents, the jury was asked, ``Do you find by clear and 
convincing evidence that the Defendant Shell Oil and the 
Defendant Lyondell Chemical Company, ARCO, acted with malice in 
selling gasoline containing MTBE that is defective in design 
because of a failure to warn?'' They failed to warn, according 
to this jury, their customers, they failed to warn the public, 
et cetera, among other problems that were found by the jury.
    I think what is going on is clearly there was--this ought 
to be left up to the juries and to the courts to determine 
whether these kinds of defective and design type problems 
existed, and it is the companies that had all this information. 
We want to create the incentives for companies that are 
developing new additives or the ones that introduced old 
additives to try to make those products in a way that aren't 
going to contaminate water supplies. We have got widespread 
contamination in Maine, as you mentioned, widespread 
contamination in many other places. We need to create the 
incentives to avoid that. That is what the tort works for.
    Mr. Allen. Thank you. Thank you, Mr. Chairman.
    Mr. Barton. Mr. Olson, before we recognize Mr. Shimkus, 
what was defective, according to that jury?
    Mr. Olson. Well, there were two things that were defective, 
according to the jury. One was that the companies failed to 
warn. That was----
    Mr. Barton. No, what was defective about the product?
    Mr. Olson. It was that it was so persistent that it was 
known to contaminate water supplies, that it----
    Mr. Barton. What did it contaminate? What was the harm in 
the contamination?
    Mr. Olson. The harm in the contamination was it was 
contaminating the water supplies to the point they couldn't be 
used.
    Mr. Barton. Did people drink the water and they died?
    Mr. Olson. You couldn't use the water because, basically--
--
    Mr. Barton. Because why?
    Mr. Olson. Well, if I took----
    Mr. Barton. Because it smelled bad.
    Mr. Olson. If I took this glass of water and gave it to 
you----
    Mr. Barton. Isn't that the harm, it smells bad?
    Mr. Olson. It is undrinkable.
    Mr. Barton. It smells bad.
    Mr. Olson. It is undrinkable.
    Mr. Barton. Is there any case anywhere where it has been 
proven to be harm to public health because of MTBE? I don't 
doubt there are cases where MTBE has gotten into the water 
supply. There haven't been many of them lately, because we are 
doing a better job of stopping the leaks from the underground 
storage tanks. But isn't it true that the contamination and the 
harm is that it smells bad?
    Mr. Olson. Well, Mr. Chairman, there are a couple of 
problems. One is that it smells so bad and it tastes so bad 
that consumers simply won't drink the water. If you had a glass 
of water in front of you, sir, that had serious MTBE 
contamination, you wouldn't drink it.
    Mr. Barton. But that is not a health problem. That may be 
aesthetic problems.
    Mr. Olson. No, I am saying that. So that is one problem. 
The second problem is that there are health issues. There are 
several studies that suggest that it may be a carcinogen.
    Mr. Barton. No, not suggest, that prove.
    Mr. Olson. Well----
    Mr. Barton. If I drink enough diet Dr. Pepper, there is a 
suggestion that it is a carcinogen, okay, but there is no proof 
that if I am a normal imbiber of diet Dr. Pepper that that is a 
carcinogenic. I can go out in the hall and pass gas and that 
odor is harmful, in a sense, to the people that are around me 
at the time, but I have not been identified as EPA yet because 
of that as a mobile source polluter.
    Mr. Green. Mr. Chairman, I won't touch that with a 10-foot 
pole.
    Mr. Barton. I apologize for being a little exercised. I am 
not personally offended by you, Mr. Olson. I know you represent 
a large group, and you have got an issue that you want to 
present before us, and we are going to try to reach a 
compromise that satisfies everybody.
    Mr. Olson. May I finish responding. I guess I do think it 
is important to note, first of all, that water supplies are 
rendered unusable and millions and millions of dollars are 
spent on many of these water supplies because consumers simply 
won't drink the water. So that is a real injury. The second 
point is that there really are significant public health 
questions and this stuff is contaminating people's water. If 
you talk to consumers that are drinking water from one of these 
supplies about whether they think it is a good idea that they 
have----
    Mr. Barton. I am all for stopping any leaks from the 
source, I am with you in that regard. Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. Let me go to Mr. 
Segal real quick first. You say that the whole reason that fuel 
prices are higher in California are higher because of ethanol. 
Yet right now ethanol is cheaper than gasoline. And the CARB 
and the refiners are telling us that ethanol-blended gasoline 
is selling for less than MTBE-blended gasoline. Can you explain 
why that is the case currently?
    Mr. Segal. Sure.
    Mr. Shimkus. So it is the case. So it is the case. You 
said, ``Sure.''
    Mr. Segal. I just said, ``sure, I can explain.''
    Mr. Shimkus. Okay.
    Mr. Segal. All right.
    Mr. Shimkus. Well, come on. I don't have a lot of time.
    Mr. Segal. Okay. I hear you, I hear you. I will keep it 
quick. It is more expensive to utilize ethanol. In other words, 
the cost of blend stocks increases even if the market price of 
the ethanol itself isn't as relevant as the cost of what it 
takes to----
    Mr. Shimkus. True or false, the gasoline price at the pump 
currently between ethanol-blended gasoline versus MTBE-blended 
gasoline currently is cheaper with the ethanol in California?
    Mr. Segal. I guess I would have to say false, and we do 
cite in our testimony----
    Mr. Shimkus. So you disagree with CARB. Okay.
    Mr. Segal. I agree----
    Mr. Shimkus. That is fine. Let me go to Mr. Slaughter. Mr. 
Slaughter, how many refineries were there 20 years ago?
    Mr. Slaughter. Twenty years ago, there would have been 
maybe 200.
    Mr. Shimkus. Ten years ago?
    Mr. Slaughter. Two hundred or more.
    Mr. Shimkus. Ten years ago?
    Mr. Slaughter. Something between 200 and the current 149.
    Mr. Shimkus. And so currently we have 149.
    Mr. Slaughter. One hundred forty-nine.
    Mr. Shimkus. And so you have increased efficiency quite a 
bit to meet the demand; is that correct?
    Mr. Slaughter. Well, we aren't quite meeting demand, 
Congressman Shimkus. Demand is for 20 million barrels a day, 
and we have about 16.8 million barrels a day of refining 
capacity.
    Mr. Shimkus. So where does the additional refined product 
come from?
    Mr. Slaughter. It is imported.
    Mr. Shimkus. Okay. So we are importing refined product. 
Okay. Now, 20 years ago, how many--what was our percentage of 
imported petroleum products to this country that you were 
refining?
    Mr. Slaughter. Well, I am most familiar with the gasoline 
statistics. We are currently refining about 95 percent, as I 
remember, and it would have been more than that.
    Mr. Shimkus. Is it safe to say that we have increased our 
reliance on foreign oil in the past 20 years?
    Mr. Slaughter. Definitely.
    Mr. Shimkus. We have increased it.
    Mr. Slaughter. Yes.
    Mr. Shimkus. Even after the 1991 Gulf War. All right. So my 
friends and colleagues on the panel who have been asking about 
this issue, let me--so nothing that you have done has decreased 
the reliance on foreign oil.
    Mr. Slaughter. Well, I would say the industry does a lot to 
try to reduce the reliance on it----
    Mr. Shimkus. But you haven't. Really, we have increased our 
demand.
    Mr. Slaughter. Well, you can certainly say that we could 
increase access to some producing areas in the U.S.----
    Mr. Shimkus. Okay. Let me just jump this so I don't run out 
of my time.
    Mr. Slaughter. Go ahead.
    Mr. Shimkus. Mr. Dinneen, what is one of the--what has been 
the only way that I know of that we have deceased our reliance 
on foreign oil domestically in the past 10 years?
    Mr. Douglass. Well, clearly, the 70 ethanol facilities that 
have been built over the last 20 years are adding absolutely to 
domestic gasoline supplies.
    Mr. Shimkus. And I would also add, and I know my colleague 
in the chair, the ability for natural gas vehicles has probably 
helped decrease some of the reliance on gasoline products. But 
we have done nothing in this country to decrease our reliance 
on foreign oil. In fact, we actually have increased our need 
for imported gasoline products over the past 10 years. That is 
safe to say, correct? So what we have done over the past 7 
years, since I have been here, we have kind of changed the 
debate on the whole oxygen issue.
    Now, there are many provisions of this bill that many of 
you guys want, and there is one provision that you don't, and i 
would suggest that you get on board to keep the ones you want 
or you may end up losing everything. The reality is this: We 
have changed the debate from the oxygen issues because of 
arguments by California that they have new technology, and we 
have addressed the true fact that we have a demand for fuel in 
this country, and it is being met by imported oil and imported 
refined products. So now this 5 billion gallon renewable 
requirement is there for one issue. Why the mandate? The 
mandate is here for national security. The mandate is here to 
make sure that we have an ability to have refined products that 
we can use to keep this Nation going.
    Now, it is not going to meet all our demands. We are going 
to be relying on foreign oil even after we get through with 
whatever occurs in the Middle East. But we have to start doing 
something to decrease our reliance on foreign oil, and one of 
the ways we are doing it is through ethanol. And thanks for 
answering my questions, my 5 minutes went quickly, but to 
answer the question, why the mandate, national security. I 
yield back the balance of my time.
    Mr. Barton. Mr. Hall is recognized for 5 minutes.
    Mr. Hall. Thank you, Mr. Chairman.
    Mr. Barton. Knowing that he and I are on the same plane 
that leaves at 5:09.
    Mr. Hall. He says Mr. Hall is recognized for 5 minutes. 
Four minutes are already gone, right? I would ask Mr. Douglass 
a question that we have talked about before. I am not sure I 
totally understand, but you have indicated that Congress ought 
to adopt a legislative provision to permit the commingling of 
the divergent and compliant fuels. And as you know and as you 
have pointed out, the EPA regulations specifically prohibit 
that blending----
    Mr. Douglass. Correct.
    Mr. Hall. [continuing] of ethanol atotized RFT with MTBE--
atotized RFG. The two can't mix of any two compliance fuels if 
the resultant mixture would have a certain RVP probably higher 
than allowed in some specific markets. How does that affect 
you?
    Mr. Douglass. Well, the serious problem for us is that, as 
you know, we are not in a corn growing area, and so we 
currently do not have the supplies of ethanol that would be 
available, say, in the Midwest. But if we got the ethanol into 
our market and we were supplied by ethanol, we would have to 
clean our tanks and prepare for that because, as you know, 
ethanol is water-sensitive and you can't commingle, if you 
will, with gasoline unless the gasoline is completely dry and 
the tanks are completely dry. So we have to empty our tanks 
technically whenever we switch from gasoline RFG or non-RFG to 
ethanol-blended fuel. If we lost the supply of ethanol because 
of a supply interruption, we would have to empty our tanks 
again to put the RFG or the non-reformulated fuel back in. It 
is a very difficult thing to do.
    Mr. Hall. As Douglass Distributing Company, you can sell 
each to anyone and they can mix it, can't they?
    Mr. Douglass. Correct. Any customer can mix it any day. We 
are just not permitted under the law to commingle it.
    Mr. Hall. Why aren't you?
    Mr. Douglass. That is the current EPA regulation.
    Mr. Hall. And what is the effect of the person you pass it 
on to making such a mixture?
    Mr. Douglass. Well, when they add it to their tank it is 
negligible. All the studies that we have read and read from 
California that it has an negligible effect on the 
environmental air.
    Mr. Hall. I think that is about the easiest one I can lob 
to you right now. Let me see if I can find another one. There 
is something else I wanted to ask you about.
    Mr. Barton. Who is the best congressman from Rockwell, 
Texas?
    Mr. Douglass. Congressman Hall.
    Mr. Barton. There you go. That is pretty easy, isn't it.
    Mr. Hall. Don't fool with him. He is one of those 25,000 or 
30,000 Republicans that look for my name there and they have to 
look for it, believe me, the way you Republicans hide it on 
those ballots down there.
    Mr. Barton. Well, they find it pretty regularly.
    Mr. Hall. Well, I will yield back the balance of my time, 
because I want to be on that airplane.
    Mr. Barton. We recognize the gentleman from California, Mr. 
Radanovich, for 5 minutes.
    Mr. Radanovich. Thanks, Mr. Chairman. I won't take the full 
five but do want to ask a couple of questions. Thank you, 
panel, for being here. Mr. Murphy, I do have a question. You 
had mentioned that in Connecticut and my State of California 
and New York, once these bans on--all these bans MTBEs take 
effect, that they would result in an ethanol demand in those 
States of about 1.1 billion gallons. Mr. Dinneen testifies that 
there is plenty of capacity. Do you agree with that, and if 
not, can you give me an idea of why that might not be the case 
for these States?
    Mr. Murphy. I do agree that there should be more than 
adequate ethanol capacity. I think in fact the Department of 
Energy has recently come out with some studies that confirm 
that. Our concern is not with the adequacy of the ethanol 
supplies, our concern is with the logistical and gasoline 
production problems that result when the application of an 
inflexible mandate to use ethanol in each and every gallon of 
gasoline regardless of whether or not that makes economic sense 
to use it. We are wiling to use ethanol, willing to use 
renewable fuels where they make economical and environmental 
sense. That is likely to be primarily in the Midwest but 
perhaps not entirely, but it should be market driven not driven 
by mandates.
    Mr. Radanovich. Very good. Thank you for clarifying that 
for me. Mr. Douglass, welcome to the committee. I want to ask 
something to clarify in your statement, which addresses a 
provision in the Senate bill that requires the use of ethanol 
throughout the year. You have advocate deleting this provision, 
and I am wondering if you can be more specific as to the 
benefits and detriments requiring year-round ethanol usage?
    Mr. Douglass. Well, under the current regulation, they 
control the revapor pressure, if you will, the volatility of 
the fuel. And the problem in the summer if we have to put 
ethanol in in the summertime, it pushes it above the current 
controlled revapor pressure. So the refiners would have to go 
back and reformulate and make an even lower grade, a costly 
process, and we are just very concerned that it is another 
boutique fuel that will end up with shortages and price spikes.
    Mr. Radanovich. Very good. Thank you for clarifying that 
for me. And those are the extent of my questions. I yield back.
    Mr. Boucher [presiding]. The gentleman yields back, and the 
Chair now recognizes the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I would like to 
thank both you and the chairman for allowing me to waive on the 
committee because this is so important, obviously to our 
country, but also to Texas. Mr. Early, didn't the Blue Ribbon 
Panel call for a reduction in MTBE and not the elimination of 
it?
    Mr. Early. All members of the Panel supported getting rid 
of MTBE except for, of course, the MTBE panelist itself. So----
    Mr. Green. But what did the report say?
    Mr. Early. The report said a phasedown or a possible phase-
out, I believe is the----
    Mr. Green. Okay. Not a reduction then.
    Mr. Early. I think the--as Mr. Murphy has been using the 
term, ``phasedown,'' that was clearly in the report, but the 
report also acknowledged that phaseout was supported by most of 
the members of the panel.
    Mr. Green. Okay. Maybe we are just into semantics. Because 
I had the impression that it was only--it called for a 
reduction in the use but not complete elimination of it. Is 
that correct, the mic wasn't on?
    Mr. Segal. Mr. Congressman, my recollection is that the--
what was called for was phasedown to historical use levels 
which was----
    Mr. Green. Okay. Well, we will get a copy of it. Mr. 
Dinneen, let me ask you a little bit, because obviously you can 
tell where I come from from my accent. The----
    Mr. Dinneen. There is a 5:09 plane, Congressman.
    Mr. Green. Oh, I am going to Houston, not Dallas at 7:12, 
so we have a lot of time here.
    Mr. Douglass. All right. I just didn't want you to miss 
your plane, that is all.
    Mr. Green. It wouldn't be the first time if I did. I 
understand there is a substantial amount of Federal tax and 
tariff and quota subsidies under ethanol. Are you aware of any 
other agriculture or consumer products that receive similar 
treatment?
    Mr. Douglass. I wouldn't be an expert in anything other 
than ethanol. I can tell you that indeed your premise is 
correct, the U.S. Congress has seen fit to provide significant 
incentives to the increased production and use of fuel ethanol, 
and they have proven to be successful.
    Mr. Green. I know that a few years ago it was at least 
about 50 cents a gallon? Is that generally correct?
    Mr. Douglass. The tax incentive that goes to refiners and 
gasoline marketers is 5.2 cents less than 18.4 cent tax on 
gasoline for a 10 percent ethanol blend. So that has the 
equivalent value of 52 cents per gallon of ethanol, yes.
    Mr. Green. Okay. Mr. Murphy, one of the concerns I have 
had, and I have a lot of questions, I guess, because of the 
concern about MTBE, and I have said it many times, whatever 
makes my car run I don't want to drink. And just because I can 
taste MTBE there be something else that may be in there that I 
can't taste that are known carcinogens. What is the refining 
industry doing to continue efforts to improve the Underground 
Gasoline Storage Tank Program? And it seems to me no reason why 
gasoline containing either ethanol or MTBE should ever leak 
from storage facilities.
    Mr. Murphy. Well, we certainly are doing all we can to 
ensure that the tanks do not leak. I think the latest data, 
though, is even under the standards that were first passed in 
1988, I believe only about 86 percent of the tanks have been 
inspected, and there is a lot of suspicion that the tanks that 
have not been inspected could in fact be leaking. And, of 
course, leaking tanks is not the only way that MTBE enters the 
groundwater.
    Mr. Green. That is true. There can be spills, there can 
be----
    Mr. Murphy. Two-cycle gasoline--two-cycle engines.
    Mr. Green. In fact, I think testimony last year was that 
that was the situation in Lake Tahoe, the two-cycle engines. 
Mr. Dinneen, does ethanol evaporate faster than other gasoline 
components?
    Mr. Douglass. When blended with gasoline it does. ethanol's 
volatility itself is actually much lower than that of gasoline, 
but when blended with gasoline, ethanol does have higher 
evaporation, yes.
    Mr. Green. Mr. Olson, how does that relate to the National 
Resource Defense Council? Seems like that would be higher 
overall harmful emissions if you have ethanol evaporating. 
Granted, I don't want to drink MTBE but I don't also want to 
smell whatever is evaporating. Has the council looked at that 
issue?
    Mr. Olson. Yes, we have. Basically, what we have said we 
are in favor of is a performance-based renewable standard that 
would take a look at the whole cycle energy savings as well as 
look at the air impacts.
    Mr. Green. Okay. I understood and I read your testimony 
about the failure to warn in your conversation with the 
chairman. Other than MTBE, should we also hold manufacturers 
responsible for whatever else may be in gasoline, whether it is 
ethanol that may be evaporating or whatever other elements of 
gasoline if they are not warned what may be in the water or in 
the air?
    Mr. Olson. Well, I guess I would respond, first of all, 
that I don't see why it is important for Congress to step in. 
There has been a single case. Why should Congress be stepping 
in and preempting States from adopting their own laws, which is 
what is suggested here?
    Second, if a company acts, ``with malice,'' in failing to 
warn their consumers, including the gas stations and others, 
about a product and that results in harm, sure, that is what 
the tort system is for. And, obviously, if you don't have them 
responsible, the refiners and so on and the MTBE manufactures, 
who ends up paying for that cleanup? In many of these case, it 
is going to be the little----
    Mr. Green. I am almost through with my time, but let me ask 
one final question. I have a district in Houston and we have 
used RFG, and it has been successful in our air quality 
problems, but I have been told because of the nature of our 
humidity and that during the summer, which in Houston starts in 
early May and lasts until early October, that ethanol is not 
appropriate. Can any panelists talk about that during the 
summer in some of the parts of southern United States?
    Mr. Dinneen. Not appropriate. I guess I would say how? I 
mean, certainly, technically, the fuel could certainly be used 
and would perform quite well in your vehicle. If you are 
suggesting that not appropriate because of increased 
evaporative emissions, the Clean Air Act currently does not 
allow ethanol-blended fuels to have an increased volatility 
when sold in the marketplace. Refiners have to accommodate for 
ethanol's additional volatility in the manufacture of the fuel. 
So from an air quality standpoint, there would be no emissions 
impact, and from a performance standpoint, there would be no 
negatives either.
    Mr. Murphy. Mr. Congressman, I can just add to that. I 
think the problem is that of course--and Bob is certainly 
correct in the case of--Mr. Dinneen is correct in the case of 
the RFG. You have to meet the evaporative emission standards 
regardless of whether or not you had ethanol. So you have to 
produce a different and slightly more expensive blend stock if 
you intend to use ethanol with that. We have done extensive 
studies and there was mention made of the seasonal component of 
an RFS. Those studies indicate that renewables are likely to be 
used throughout the year, because renewables and ethanol do 
have other advantages that in many cases make them worthwhile 
to use because of the volume effect, the octane effect, 
reduction in toxics and so on. So we do believe that we are 
going to use ethanol and renewables throughout the year in an 
environmentally acceptable way, meeting and in fact exceeding 
existing environmental standards.
    Mr. Green. Okay. And one last thing: I understand for a 
number of years that ethanol is difficult to transport. Is it 
only available in tanker trucks or is it available--can you 
pipeline it? Has all the research been done that we can 
actually pipeline it?
    Mr. Murphy. Well, again, it is not presently pipelined. Is 
has an affinity for water, and so it cannot be shipped through 
common pipelines. Ethanol is shipped in tanks trucks and on 
railroads. Again, there was a recent Department of Energy study 
which suggested that the--concluded that the infrastructure was 
adequate to supply it. The problem with the existing service is 
that the only way in which, for instance, we could supply 
ethanol-blended gasoline to Long Island is to bring ethanol 
through New York City--ethanol tank trucks through New York 
City out to Long Island. We are willing to use the ethanol, we 
are willing to use the renewable fuels, but we would like to 
use those where it makes good economic and environment sense to 
do it.
    Mr. Green. And, obviously, with the tax credits that you 
already have for that, it is still not to the level that it is 
economically viable.
    Mr. Murphy. Well, of course, the problem at the moment is 
unless the law is changed we are going to be looking at an 
effective ethanol mandate the next several years that is in 
fact much larger than the volumes that we have been considering 
heretofore.
    Mr. Green. I guess that is subject to Congress. Thank you, 
Mr. Chairman.
    Mr. Boucher. Yes. The gentleman's time has expired. 
Chairman Barton has asked me to make two announcements. First 
of all, that a bill will be made available by the committee on 
Monday, and this will be comprehensive energy legislation. And 
so members should look for the legislation on Monday. They can 
then begin considering amendments they would like to draft to 
this measure. And the markup of the legislation will commence 
in this subcommittee on Wednesday and probably go for about a 
month.
    And we will all be looking forward to that event. I would 
like to say thank you to this panel for a very interesting 
presentation today. I want to say thank you to all of the 
witnesses, all 19 of them, who have graced us with their 
appearance during the course of the day. It has been a long but 
informative day for us. And there being no further business to 
come before this subcommittee, we stand adjourned.
    [Whereupon, at 4:12 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

 Prepared Statement of Bob Dinneen, President and CEO, Renewable Fuels 
                              Association

    Mr. Chairman and Members of the Committee, I would like to thank 
you for the opportunity to provide comments on national energy policy. 
Today's hearing is very timely. Crude oil prices are rising, driven by 
concerns over possible conflict in Iraq and continued political unrest 
in Venezuela. At the same time, gasoline output is down, in part, 
because refiners have responded to increased demand for heating oil. 
Consequently, the need for an energy policy that reduces our nation's 
dependence on foreign sources of energy by increasing the production 
and use of domestic fuels such as ethanol and biodiesel has never been 
greater. I commend the Chairman and the Committee for convening today's 
hearing.
    The Renewable Fuels Association is the national trade association 
for the domestic ethanol industry. Our membership includes ethanol 
producers and suppliers, gasoline marketers, agricultural organizations 
and state agencies dedicated to the expanded production and use of fuel 
ethanol. The U.S. ethanol industry consists of 69 production facilities 
located in 20 states with an annual production capacity of 2.75 billion 
gallons. Production capacity continues to expand, particularly among 
farmer owned cooperatives, the fastest growing segment of our industry. 
Thus, the U.S. ethanol industry and farmers across the country stand 
ready to contribute more meaningfully to our growing energy needs.

               THE NEED FOR A COMPREHENSIVE ENERGY POLICY

    Continued unrest and the threat of war in Iraq coupled with 
political upheaval in Venezuela have focused renewed attention on the 
need for a comprehensive national energy policy that ensures a reliable 
fuel supply. As you know, the U.S. currently imports more than 57% of 
our oil, and our imports are predicted to grow to 68% by 2025. At the 
same time, we rely increasingly on our energy supplies from unstable 
regions of the world, including Iraq. In fact, last year we imported 
450,000 barrels of oil per day from Iraq! In addition, the war on 
terrorism has renewed interest in reducing energy imports and 
diversifying the energy sector.
    In testimony before Congress, R. James Woolsey, former Director, 
Central Intelligence, said, ``We have to realize that our fuel 
distribution . . . systems are almost certainly going to come under 
attack in some way. Their high degree of centralization and their 
fragility to terrorist attack is a serious matter. One thing we have to 
be looking at is how to decentralize and how to make more flexible and 
less fragile our energy distribution networks. It means local 
production of renewable fuels . . . rather than relying on imports and 
central fuel stations.''
    President George Bush has recognized the contribution American 
agriculture can make to provide a more reliable fuel supply through the 
production of domestic liquid fuels such as ethanol and biodiesel. In 
calling for the Congress to pass an energy bill last fall, President 
Bush said, ``We need an energy bill in America. An energy bill that 
enhances renewables like ethanol. An energy bill that makes us less 
dependent on foreign sources of crude oil.''
    Deputy Secretary of Energy Kyle McSlarrow echoed the 
Administration's support for expanded use of ethanol in the U.S. fuel 
supply last week in testimony before this Committee. Among the eight 
goals the Administration feels should guide the energy debate, 
McSlarrow stated, ``the Administration strongly supports a renewable 
fuels standard that will increase the use of clean, domestically 
produced renewable fuels, especially ethanol, which will improve the 
Nation's energy security, farm economy, and environment.''
    The increased use of renewable fuels will expand U.S. fuel 
supplies. Ethanol and biodiesel are blended with gasoline and diesel 
after the refining process. Thus, the increased use of these fuels adds 
directly to domestic fuel supplies. Blending ten percent ethanol in a 
gallon of gasoline provides an additional ten percent volume to the 
transportation fuel market.

               2002 RECORD YEAR FOR U.S. ETHANOL INDUSTRY

    The U.S. ethanol industry has been a responsible partner in the 
fuels marketplace, increasing production capacity to meet the growing 
demand for ethanol created by state and federal law. In 2002, the U.S. 
ethanol industry set records in production, production capacity, and 
number of new facilities. Twelve new state-of-the-art production 
facilities were completed in 2002; and with expansions at existing 
plants completed, the industry produced more ethanol in 2002 than at 
any time in its history--2.13 billion gallons.
    Last year's record production represents a 20-percent increase over 
2001 and a 45-percent increase since 1999. This record-breaking 
production is continuing this year. In January, the industry set an 
all-time monthly production record of 177,000 barrels per day, 
representing a 31-percent increase over last January's production.
    But the industry is not done yet. There are another eleven ethanol 
production facilities totaling more than 500 million gallons of 
capacity currently under construction, which will increase ethanol 
production capacity to more than 3 billion gallons by the end of this 
year. At current production rates, the industry will produce a record 
2.8 billion gallons of ethanol in 2003.
    Ethanol is the third largest and fastest growing market for U.S. 
corn. In 2002, over 800 million bushels of corn were processed into 
ethanol and valuable feed co-products, boosting corn prices by 30-40 
cents per bushel nationally. The U.S. Department of Agriculture 
estimates that the ethanol industry will process as much as one billion 
bushels of corn this year, approximately 10 percent of the national 
crop. Additionally, ethanol is the second-largest user of grain 
sorghum. More than 45 million bushels of grain sorghum were used in 
ethanol production in 2002.
    The recent growth in ethanol plant construction has been led by 
farmers seeking to capture new value-added markets for the commodities 
they grow. Since 1999, farmer-owned ethanol facilities have increased 
their percentage of total production capacity to more than 30%. Today, 
farmers own 29 of the 69 plants in operation. Eight of the 11 plants 
under construction are farmer-owned. With this new production, taken 
together farmer-owned ethanol plants will be the single largest ethanol 
producer in the country.
    Ethanol production facilities represent local economic engines 
throughout rural America, creating jobs, investment opportunities, 
value-added markets for farmers, and increased local tax revenue. A 
recent study 1 found that an average 40 million gallon 
facility would have the following positive economic impact on the local 
community in which it is located:

    \1\ ``Ethanol and the Local Community,'' John Urbanchuk, AUS 
Consultants and Jeff Kapell, SJH & Company, June 2002.
---------------------------------------------------------------------------
 Provide a one-time boost of $142 million to the local economy 
        during construction;
 Expand the local economic base of the community by $110.2 
        million each year through the direct spending of $56 million;
 Create 41 full-time jobs at the plant and a total of 694 jobs 
        throughout the entire economy;
 Increase the local price of corn by an average of 5-10 cents 
        per bushel, adding significantly to farm income in the general 
        area surrounding the plant;
 Increase household income for the community by $19.6 million 
        annually; and,
 Boost state and local sales tax receipts by an average of $1.2 
        million (varies depending on local rates).

                         RISING ETHANOL DEMAND

    The tremendous growth in ethanol demand over the last several years 
is a direct response to state efforts to reduce the use of MTBE. To 
date, sixteen states have acted to phase out the use of MTBE, and the 
ethanol industry has acted responsibly to build additional capacity so 
that refiners could continue to supply consumers with competitive fuels 
that meet federal Clean Air Act requirements. Without commenting on 
whether such state actions are justified, between 3.5 and 4.5 billion 
gallons of ethanol would be needed to replace MTBE, depending on how 
new EPA regulations implementing the 8-hour ozone standard impact state 
decisions to opt into the RFG program.
    The U.S. ethanol industry has proven it can supply such demand, if 
necessary.
    In California, most major refiners have voluntarily switched to 
ethanol one year ahead of schedule. With the transition two-thirds 
complete, the results can only be described as seamless. There have 
been no ethanol shortages, transportation delays or logistical problems 
associated with the increased use of ethanol in the state. Today, 
approximately 65% of all California gasoline is blended with ethanol, 
and it is estimated that 80% of the fuel will contain ethanol by this 
summer. As a result, while there was only about 100 million gallons of 
ethanol being used in the state last year, California refiners will use 
between 600-700 million gallons of ethanol in 2003.
    Concerns about ethanol supply, transportation and logistics have 
been successfully answered. Pat Perez, manager of the California Energy 
Commission's (CEC) Transportation Fuel Supply and Demand Office, said 
recently the transition to ethanol is ``progressing without significant 
problems.'' Furthermore, CEC spokesman Rob Schlichting told the San 
Jose Mercury News in a February 27 article that the substitution of 
ethanol for MTBE in California has not added to recent retail price 
increases ``because ethanol is more plentiful than previously expected 
and cheaper than gas.''
    With the transition to ethanol in California nearly complete, the 
focus turns to the Northeast. Connecticut is currently scheduled to 
phase out MTBE use by October 1, 2003, followed by the state of New 
York beginning January 1, 2004. As in California, the U.S. ethanol 
industry is committed to supplying customers there, if necessary, also.
    The use of ethanol is not new to Connecticut or New York and 
ethanol is indeed currently being blended in both states. At our 
National Ethanol Conference in Scottsdale, Arizona, February 19, Paul 
Stendardi of Getty Petroleum Marketing spoke of the ethanol blending 
that is currently occurring in the Northeast. Specifically, Stendardi 
said, ``We've been blending with ethanol longer than 12 years. Right 
now we blend in Providence, Rhode Island, New Haven, Connecticut, 
Albany, New York, Newark, New Jersey and Paulsboro, New Jersey. We take 
the ethanol into Providence by rail. We truck it down to New Haven. And 
we take the ethanol into Paulsboro and Newark by water. And it's railed 
into Albany, New York.'' Blending ethanol is common practice throughout 
the country and logistics for converting terminals is very 
straightforward.
    In addition to the ethanol blending currently occurring in the 
Northeast, California's successful transition to ethanol should give 
East Coast policymakers confidence that ethanol can be used to satisfy 
the Clean Air Act oxygenate requirement in a smooth and orderly 
fashion. In fact, the Northeast is even better equipped for the 
transition to ethanol than California as the Northeast draws from a 
wider variety of fuel supply sources including the Gulf, Mid Atlantic 
and off-shore refineries. This diversity of fuel supply options will 
help keep a competitive and steady supply of fuel components coming 
into the region.

                       FUELS SECURITY ACT OF 2003

    The U.S. ethanol industry has clearly demonstrated it can continue 
to provide refiners with adequate supplies to meet current Clean Air 
Act requirements, even as states take action limiting the use of MTBE. 
But we have heard the requests of our customers for greater flexibility 
in meeting those standards, i.e., eliminating the federal RFG oxygen 
content requirement. Consequently, we have worked for more than a year 
to develop a consensus proposal that addresses the concerns of a number 
of stakeholders, including environmental and water quality officials 
apprehensive about MTBE, petroleum companies appealing for greater 
flexibility, and ethanol producers expanding to meet the increased 
demand created by current federal and state laws.
    The result of this collaborative effort was legislation 
overwhelmingly approved by the United States Senate during 
consideration of the energy bill last year, and recently reintroduced 
as the Fuels Security Act of 2003 in the Senate, S. 385, and introduced 
in the House of Representatives by Congressmen Collin Peterson (D-MN) 
and Tom Osborne (R-NE), H.R. 837. The Renewable Fuels Association 
continues to support this legislation.
    The Fuels Security Act of 2003 provides a federal resolution to 
persistent concerns related to MTBE, avoiding a patchwork of state 
actions that complicate the fuel distribution system. It maintains the 
existing clean air benefits of federal RFG with strong anti-backsliding 
provisions. It provides refiners with the flexibility they have sought 
in meeting Clean Air Act requirements by eliminating the federal RFG 
oxygen standard. And it provides some marketplace certainty to farmers 
and ethanol producers that have acted responsibly to meet the demand 
created by current law.
    Renewable, domestically produced fuels can and should play a larger 
role in meeting our nation's energy needs. Creating a Renewable Fuels 
Standard (RFS) in which a small percentage of our nation's fuel supply 
is provided by renewable, domestic fuels such as ethanol and biodiesel 
provides a positive roadmap for reducing consumer fuel prices, 
increasing energy security, and stimulating rural economies by 
harnessing America's renewable energy potential.
    The RFS included in the Fuels Security Act of 2003 boosts the 
demand for renewable fuels such as ethanol and biodiesel to 5 billion 
gallons by 2012. A recent analysis by the U.S. Department of Energy, 
``Infrastructure Requirements for an Expanded Fuel Ethanol Industry,'' 
concludes, ``no major infrastructure barriers exist'' to expanding the 
U.S. ethanol industry to 5 billion gallons per year. This is because 
credit banking and trading provisions included in the bill maximize 
refiner flexibility. The bill does not require that any renewable fuels 
be used in any particular area, allowing refiners to use these fuels in 
those areas where it is most cost-effective. Moreover, there are 
several provisions allowing the requirement to be adjusted or 
eliminated if price or supply problems occur. Small refiners are 
exempted from the RFS for several years, allowing those companies an 
easier transition to the program. Finally, recognizing that MTBE 
producers made investments in reliance upon a federal mandate, the bill 
provides significant transition assistance to MTBE producers.
    The Fuels Security Act of 2003 is a comprehensive approach to a 
myriad of fuels issues that has generated broad support from several 
previously competing interests. It protects the environment, provides 
refiner flexibility and marketplace certainty to farmers. I encourage 
you to give it careful consideration as you craft comprehensive energy 
legislation over the next several months.

                               CONCLUSION

    Mr. Chairman and members of the Subcommittee, the issues before you 
are extremely complex and finding a fair resolution will be difficult. 
But the need for a comprehensive energy policy that ensures a reliable 
fuel supply for our nation has never been greater. America's economic 
prosperity and national security depend on the availability of 
reliable, affordable energy. Therefore, increasing the production of 
domestic fuels and diversifying our energy infrastructure are critical 
components of energy policy legislation. Providing for an expanded role 
for domestic, renewable fuels such as ethanol in the U.S. fuels 
marketplace is vital if we are to reduce our dangerous dependence on 
imported energy.
    Media reports of your discussion draft suggest it will include a 
renewable fuels standard, and we commend you for your support of the 
expanded use of biofuels to meet our nation's energy needs. The U.S. 
ethanol industry stands ready to work with you and the Committee to 
develop comprehensive energy legislation that addresses the concerns of 
all stakeholders.
    Thank you.
                                 ______
                                 
Supplemental Comments of The Electricity Consumers Resource Council and 
                 the Electric Power Supply Association

    The Barton discussion draft contains in Section 7031 what is 
commonly referred to as the ``consensus reliability'' language. Though 
we recognize that many disparate stakeholders have endorsed this 
section, we do not believe that it is a true consensus document and we 
do not believe that it will, in fact, enhance reliability.
    By way of background, the Electricity Consumers Resource Council 
(ELCON) and the Electric Power Supply Association (EPSA) were part of 
the process that developed, and endorsed, the original ``consensus 
reliability'' language roughly seven years ago. That language was 
unfortunately the result of a Christmas tree effort, as every 
stakeholder representative (including us) tried to add language to 
advantage their own particular group. Since then, when we have looked 
at that end product and subsequent revisions, we see that they all have 
similar flaws.
    We recognize that this is an issue in which few Members have an 
interest. All Members--and all industry stakeholders--support increased 
reliability. Certainly we do. But we do not believe that this language 
will serve that purpose.
What Does It Actually Do and How Does It Do It?
    Section 7031 does not enhance reliability--rather it establishes a 
regulatory process which is designed to authorize on organization to 
set standards that are supposed to increase reliability. Although 
promoters of this language purport to model it on the securities 
industry, that model fails under scrutiny. For example, violators of 
rules promulgated by the National Association of Securities Dealers can 
be denied the ability to trade. It is unclear how violations and 
violators would be sanctioned or punished in the electricity industry. 
Clearly, removal from market activities would be difficult if not 
impossible when dealing with owners of interstate transmission lines. 
And, since electricity functions in ``real time,'' violations of 
reliability rules would cause real, possible irremediable, damage 
before any action could be taken in response.
It Could Lead to Balkanization of the Grid
    The language in Section 7031 grants deference to regional groups 
founded on an interconnection-wide basis. This is in response to 
demands from western officials that ``the West is different.'' This may 
be, and in fact reliability rules recognizing these regional 
differences can be developed without granting deference in the 
standard-setting process to any regional group. If the facts support a 
regional standard, that regional standard should be adopted. But by 
granting deference to one group, this language opens the door for 
deference to be granted to other groups (perhaps to one organized on an 
RTO-wide basis, perhaps to consumers who actually pay the bills). This 
will encourage the development of regional, rather than national, 
standards, and make it more difficult for power to move from one region 
to another.
It Does Not Account for Commercial Impact
    For those truly interested in making wholesale markets more 
competitive, reliability should not be considered in a vacuum. The 
issues of reliability and commercial impact are inextricably 
intertwined. Reliability standards should not be developed without an 
examination of their impact on commercial practices. Ideally this would 
be done by the same organization. The current bifurcation of duties 
between the North American Electric Reliability Council (NERC) and the 
North American Energy Standards Board (NAESB) has a number of problems. 
For consumers and new entrants to the market, participation in NERC and 
NAESB standard-setting processes entails a considerable outlay of often 
unavailable staff resources. Moreover, the fact that reliability and 
commercial decisions will be made by two different organizations will 
lead to all sorts of complications. We continue to believe that one 
organization, tasked with both standard-setting responsibilities, 
should consider both reliability and commercial impacts.
    In conclusion, we hope that the reliability language (Section 7031) 
is not approved simply because no one has taken the time to examine it 
and its potential impact. Everyone wants reliability, and it is worth 
time to develop the legislative language that will truly achieve it.

                                 ______
                                 
            Prepared Statement of Lyondell Chemical Company

    Lyondell Chemical Company appreciates the opportunity to comment on 
the development of energy policy as it pertains to the use of 
oxygenates in ``clean'' transportation fuels. Lyondell, along with its 
predecessor companies, has been commercially producing fuel oxygenates 
since 1969 and fuel ethers since 1979. Currently, as the world's 
largest producer of fuel oxygenates, Lyondell is well positioned to 
comment on the oxygenate issues. We support the Oxygenated Fuels 
Association statement on methyl tertiary butyl ether (MTBE) and will 
focus this statement on ethyl tertiary butyl ether (ETBE).
    We believe that if Congress is going to enact a Renewable Fuels 
Standard, ETBE, ethanol's ether, should be allowed to play a 
significant role. France and other European countries have used ETBE 
successfully for several years. Lyondell has participated in that 
market since 1992.
    In summary, ETBE will expand the gasoline pool, protect air quality 
and water resources, allow ethanol distribution through existing 
infrastructure, and minimize ethanol's impact on the Highway Trust 
Fund. However, in order for these benefits to be realized, some 
adjustments must be made to the current law. First of all, the ethanol 
used in ETBE must be treated equally to direct blended ethanol in the 
tax structure. In addition, it must receive comparable product 
liability protection to ethanol and ethanol blends in fuels.

                             ETBE BENEFITS

    ETBE is made by chemically combining fuel ethanol with butanes, 
which are derived from U.S. natural gas production. This combination 
forms an ethanol ether that can be easily blended in the refinery with 
many advantages as compared to the direct blending of ethanol into 
gasoline at the terminal. The advantages of ETBE can be summarized as 
follows:
ETBE Expands Gasoline Supplies and Reduces our Dependence on Foreign 
        Imports
    On an energy basis, ETBE delivers three times more non-petroleum 
alternative energy for expanding gasoline supplies than direct ethanol 
blending. On a volume basis, every gallon of ethanol generates 2.3 
gallons of ETBE with the addition of the butanes. If all the U.S. MTBE 
capacity switches to ETBE, it will consume 1.7 billion gallons per year 
(BGY) of ethanol and make 3.9 BGY of ETBE. This volume of ETBE would 
provide more than 5 BGY of gasoline using ETBE's premium gasoline 
quality characteristics in the refinery to blend in more subquality 
gasoline components that normally could not be utilized in gasoline. 
This additional gasoline possible with ETBE is equivalent in volume to 
the gasoline refined from imported Iraqi crude oil, to the development 
of ANWR, or to the Venezuelan gasoline imports. Accelerating ETBE 
production can immediately replace the gasoline shortfall from any MTBE 
reductions within the next two to four years while direct ethanol 
blending under RFS still comes up very short on expanding gasoline 
supply even at 5 B Gal/yr after 2012.
Unlike Ethanol, ETBE Expands Summertime Gasoline Supplies
    Without its pollutionincreasing RVP waiver, blending 10% ethanol 
into the ``low RVP'' summer gasoline used in the high pollution market 
areas will actually shrink gasoline supplies by 0.2 to 2.8% (energy 
basis) according to the Energy Information Administration (September 
2002). The ``low RVP'' gasoline is the key smogfighting control program 
that is widely used in 50% of the gasoline markets today. The use of 
this pollution control program by the states is expected to greatly 
spread to other markets in order to meet the EPA's new, more 
restrictive ozone standard.
    On the other hand, blending 10% ETBE, with its favorable low RVP 
property, will actually expand the supply of ``low RVP'' gasoline by 
more than 10%. An example of supply reductions with ethanol is 
currently being experienced with California's switch from MTBE to 
ethanol. The supply reductions are now resulting in severe price 
increases.
ETBE Substantially Increases the Economic Efficiency of Ethanol
    Unlike ethanol, the very low water solubility of ETBE permits it to 
be blended into gasoline at the refinery where the ETBE blend can then 
be costeffectively distributed via pipeline and barge to all gasoline 
terminals. Since it can be freely mixed with all other gasolines, it 
also eliminates the gasoline segregation barriers that contribute to 
``boutique fuel'' shortages and other higher cost associated with 
ethanol blending. Since ETBE can be efficiently blended at the 
refinery, it eliminates the need for any new infrastructure investment 
for the refiner blending ethanol in the gasoline marketplace.
ETBE Protects Water Resources
    ETBE is 75% less water soluble than MTBE and 99% less than ethanol 
which is 100% soluble. This means substantially reduced risks to 
groundwater resources from leaking underground gasoline storage tanks. 
Not only is ETBE much less soluble in water, it has other physical 
properties which shortens its migration distances and makes it much 
easier to remove from water with existing lowcost cleanup technologies. 
In addition, ETBE's high octane replaces more toxic aromatics during 
the refinery blending process which, therefore, reduces the risk of 
aromatics leaking into the groundwater.
ETBE Provides the Greatest Air Pollutant Reductions
    ETBE reduces exhaust emissions of VOC's, NOx, Toxics, 
and CO by nearly three times more than that of ethanol blended by 
itself. ETBE also eliminates all of the large evaporative VOC increases 
associated with ethanol. In addition, because of its high displacement 
of aromatics in gasoline, ETBE provides 20% more CO2 
reduction than using straight ethanol. The net result is that ETBE is 
one of the most effective motor fuel compounds for reducing overall 
emissions from the vehicles.
ETBE Lessens the Burden on the Highway Trust Funds
    Maximizing the use of ETBE could free-up nearly $800 million 
dollars per year from the Highway Trust Fund for incremental road and 
highway projects (that would otherwise be lost under conventional 
ethanol blending).
    Since ETBE blenders will be able to use the Alcohol Tax Income 
Credit rather than the Gasohol Excise Tax Exemption (used for 
conventional ethanol blending at the terminal), the amount of ethanol 
subsidy diverted from the Highway Trust Fund will be greatly minimized. 
Of the 3 billion gallons per year of new ethanol demand created under a 
RFS, 1.5 billion gallons are expected to be subsidized from General 
Revenues instead of the Highway Trust Fund if ETBE use were maximized.

                        REALIZING ETBE BENEFITS

    Though ETBE is an excellent and proven product and delivers the 
above benefits to ``clean'' gasoline, it cannot carry the higher burden 
of unequal risk or tax treatment under the law as compared to the 
direct blending of ethanol in gasoline. In that regard, the following 
additions or changes in the Energy Bill are necessary to correct these 
regulatory inequalities.
Requires Equal Access to Ethanol's Tax Subsidy
    Without full and encumbered access to the tax subsidy used for 
ethanol blends, ETBE economics will be uncertain for the refiner 
particularly when the refiner will need the certainty of ethanol 
blending to meet a possible (RFS) requirement. Since ethanol in ETBE 
utilizes the Alcohol Blenders Income Tax Credit instead of the Gasoline 
Excise Tax Exemption (used by terminal blenders of ethanol), access to 
the ethanol tax subsidy by the refiner is highly dependent on his 
income tax status and not on the value of the ETBE product. Since 
future AMT constraints and taxable profitability are unpredictable and 
can eliminate the value of the income tax credit used for ETBE 
blending, the refiner cannot depend on ETBE's future economics being 
competitive with those of direct ethanol blending. As a result of this 
economic uncertainty under the current tax code, the refiner will have 
no choice but to commit to direct ethanol blending to meet a possible 
RFS.
    To provide equal footing with the tax treatment for ethanol 
utilizing the Gasoline Excise Tax Exemption, the uncertainty of the 
income tax credit needs to be corrected by modifying the tax codes to 
give the refiner access to alternative tax liabilities.
    The Senate energy bill from the last Congress included provisions 
that would make the necessary correction. The Joint Committee on 
Taxation, in a letter dated February 7, 2002, determined that the score 
for this adjustment would be negligible. We encourage the 108th 
Congress to make the same correction.
Comparable Product Liability Protection to Ethanol and Ethanol Blends
    The Senate energy bill from last Congress provided product 
liability protection for ethanol and ethanol blending in gasoline. ETBE 
viability will depend on equal liability protection as that afforded to 
ethanol. We urge Congress to assure the equal treatment by removing the 
ether exemptions included in last year's Senate bill.
Independent Health and Environmental Fate Review
    Though industry has provided the required health and environmental 
fate studies required to safely commercialize ETBE both in the US and 
Europe, further studies may be required to improve the acceptance of 
ETBE as a fuel additive. An independent third party health and 
environmental fate study of ETBE, similar to that done for ethanol 
blends, may be necessary.
Transition Cost Assistance for MTBE producers switching to ETBE 
        production
    Though much of the MTBE capacity (approximately 30%) in the US 
already has the flexibility to produce ETBE, the economic hurdles and 
risk for the remaining MTBE capacity may still be too great a risk to 
obtain the necessary capital from the finance community. Therefore, any 
transition cost assistance program for the MTBE industry should be 
extended to include those willing to convert their MTBE process units 
over to ETBE.
    Without these changes or additions, the uncertainty and added risk 
for potential ETBE users will be too great. As a result, it would be 
very unlikely that the market for this beneficial product would be 
realized.
    Mr. Chairman, Lyondell believes that ETBE can make an important 
contribution to increased gasoline supplies and cleaner air without 
negatively impacting groundwater. We ask your support for the necessary 
legislative provisions that would allow the benefits of ETBE to become 
a reality.
                                 ______
                                 
                                        Calpine Corporation
                                                      25 March 2003
The Honorable Joe Barton
Chairman, Subcommittee on Energy & Air Quality
House Energy and Commerce Committee
Washington, DC 20515-6115
    Dear Chairman Barton: I very much appreciated the opportunity to 
testify before the Subcommittee on March 13th, and I thank you for your 
keen interest in our industry.
    Attached, please find my reply to your subsequent question of March 
14th. Please do not hesitate to contact me for any further information 
or clarification.
            Sincerely,
                                                 Ron Walter
                                           Executive Vice President

    Question: ``Mr. Walter, I understand that Calpine is an independent 
generator, thus you build power plants in a variety of states and try 
to sell power on the electrical grid. How does your ability to sell 
power differ from states that are open to competition to those that are 
closed?''
    Answer: Calpine builds and operates power plants throughout the 
United States and sells electric energy at wholesale. Some of Calpine's 
plants are located in regions where transmission and reliability 
functions are managed by an Independent System Operator (ISO), which 
also administers markets for energy and capacity. Calpine also operates 
in regions where the transmission grid remains under the direct control 
of vertically integrated monopoly utilities. Calpine sells power under 
long term contracts wherever and whenever possible and also bids into 
spot and day-ahead markets where these exist.
    In regions where ISOs/RTOs are fully operational and markets are 
independently administered, Calpine, like all market participants, can 
be assured of fair and objective treatment in terms of interconnection 
to the grid, access to the grid and scheduling of transmission service. 
In these regions, we also find an order of dispatch that adheres 
strictly to economic merit (with due regard to security constraints), 
energy prices that are the result of competitive behavior, 
independently verifiable prices for congestion, and predictable market 
rules. In these regions, wholesale customers have the ability to access 
the most efficient generator at the most competitive price. Also in 
these regions, price discovery and operational behavior is made 
transparent by real time posting of results on publicly accessible 
Oasis or other internet-based platforms.
    In regions where the transmission grid remains under the control of 
monopolies and markets are neither independently administered nor 
organized, Calpine, like all market participants, typically experiences 
costly transmission interconnection, one-party, non verifiable 
calculation of available transmission capacity (ATC), and access to the 
grid under terms and conditions that are not equally imposed by the 
transmission owner on itself and its affiliates and on all other market 
participants. We also experience unpredictable scheduling of 
transmission service and no market-based value for congestion. In these 
regions, there is no publicly posted daily order of dispatch and 
therefore no independently verifiable economic merit for the dispatch. 
There is also an absence of spot and day ahead and forward markets for 
generation capacity and energy, absence of market signals for 
construction of new generation and transmission, an unequal playing 
field in regard to rate and non-rate treatment of investment and fuel 
costs, and indefinitely postponed retirement of older, inefficient, 
high emission generating plants.
    Procurement of wholesale power differs widely from state to state. 
In Calpine's experience, States that have restructured to allow for 
competition have concurrently leveled the playing field, thereby 
assuring equal access to the market for both native utilities and 
independent power producers. In pro-competition states, it is typical 
for state regulatory commissions to affirmatively oversee the 
procurement process in order to ensure that it is conducted openly and 
fairly and that the results are independently verifiable. By contrast, 
in states with protected markets, procurement of supplies at the 
wholesale level by the native utility is generally carried out under 
somewhat opaque rules that frequently result in the award of contracts 
to the utility itself or to its affiliates. Recent examples of such 
procurement practices can be found in Missouri, Wisconsin and 
Louisiana, among others.
    Question: Mr. Walter: How would the Federal Energy Regulatory 
Commission's (FERC) commitment to open access help or hurt your company 
and what would the impact be on consumers?
    Answer: Open access, and related independently managed dispatch and 
market functions, are conditions precedent to a competitive 
marketplace. Without non-discriminatory open access to the grid, 
Calpine is unable to reach potential customers and remains therefore 
entirely captive of the native utility to which its plants are 
connected. In the South and West, where competitive markets are either 
limited or nonexistent, and where transmission access is not 
independently administered by ISOs/RTOs, Calpine faces continuing 
difficulties in obtaining transmission service from the local, 
vertically integrated utilities. In sum, only an independent third 
party such as an ISO/RTO can guarantee access to the grid, for all 
market participants, on equal, non-discriminatory terms and conditions.
    Consumers and ratepayers benefit from open access and related 
competitive markets in several important ways:

1. The evidence is incontrovertible that competitive power markets 
        exert downward pressure on prices. As stated in my testimony, 
        this has directly contributed to the more than 30% reduction in 
        residential rates in the last fifteen years. This is true, 
        notwithstanding the short but aberrant experience with the 
        flawed California ``market.''
2. In Texas, over 6,000 MW of outdated generation capacity is scheduled 
        for retirement because it is no longer economically 
        competitive. Ratepayers will consequently no longer carry the 
        burden of the cost of this inefficient capacity.
3. In Louisiana, a competitive market based on true economic dispatch 
        would likely result in the retirement of up to 15,000 MW of 
        outdated gas/oil fired generation. The difference between the 
        existing, outdated capacity and the state-of-the-art capacity 
        that is available to replace it would be:
     A near 40% decrease in fuel use (whose costs are currently 
            directly assigned to ratepayers),
     Elimination from the rate base of the un-amortized plant 
            investment
     A 93% reduction in NOX emissions
     A 47% reduction in CO2 emissions.
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