[Senate Hearing 108-1]
[From the U.S. Government Publishing Office]


                                                          S. Hrg. 108-1
 
                     JOSEPH T. KELLIHER NOMINATION
=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

TO CONSIDER THE NOMINATION OF JOSEPH T. KELLIHER TO BE A MEMBER OF THE 
                  FEDERAL ENERGY REGULATORY COMMISSION

                               __________

                           FEBRUARY 11, 2003


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
DON NICKLES, Oklahoma                JEFF BINGAMAN, New Mexico
LARRY E. CRAIG, Idaho                DANIEL K. AKAKA, Hawaii
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
CRAIG THOMAS, Wyoming                BOB GRAHAM, Florida
LAMAR ALEXANDER, Tennessee           RON WYDEN, Oregon
LISA MURKOWSKI, Alaska               TIM JOHNSON, South Dakota
JAMES M. TALENT, Missouri            MARY L. LANDRIEU, Louisiana
CONRAD BURNS, Montana                EVAN BAYH, Indiana
GORDON SMITH, Oregon                 DIANNE FEINSTEIN, California
JIM BUNNING, Kentucky                CHARLES E. SCHUMER, New York
JON KYL, Arizona                     MARIA CANTWELL, Washington

                       Alex Flint, Staff Director
                     James P. Beirne, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     8
Bunning, Hon. Jim, U.S. Senator from Kentucky....................     1
Cantwell, Hon. Maria, U.S. Senator from Washington...............    17
Craig, Hon. Larry E., U.S. Senator from Idaho....................     1
Feinstein, Hon. Dianne, U.S. Senator from California.............     2
Kelliher, Joseph T., Nominee to be a Member of the Federal Energy 
  Regulatory Commission..........................................     5
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............    27
Thomas, Hon. Craig, U.S. Senator from Wyoming....................    10

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    31

                              Appendix II

Additional material submitted for the record.....................    43


                     JOSEPH T. KELLIHER NOMINATION

                              ----------                              


                       TUESDAY, FEBRUARY 11, 2003

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:33 p.m., in 
room SH-216, Hart Senate Office Building, Hon. Larry E. Craig 
presiding.

           OPENING STATEMENT OF HON. LARRY E. CRAIG, 
                    U.S. SENATOR FROM IDAHO

    Senator Craig. The room will be in order, and the hearing 
by the Senate Energy and Natural Resources Committee will be 
convened. This hearing is to consider the nomination of Joseph 
T. Kelliher to be a Commissioner of the Federal Energy 
Regulatory Commission.
    Senator Domenici was called to The White House and 
apologizes for not being here. I am Senator Larry Craig of 
Idaho. I am pleased to sit here and chair in his stead. He did 
express his regrets.
    We have agreed to defer opening statements until after the 
nominee has presented his statement. With this, I will 
recognize Senator Bingaman and then swear in the witness and 
ask him to respond to the standard questions and introduce his 
family before recognizing members for opening statements and 
questions.
    [The prepared statements of Senators Bunning and Feinstein 
follow:]
   Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky
    Thank You, Mr. Chairman.
    Today, we have before us Mr. Joseph Kelliher, who has been 
nominated to be a member of the Federal Energy Regulatory Commission.
    The Federal Energy Regulatory Commission is an important agency 
within the Department of Energy. Its responsibilities include 
regulating electricity, natural gas pipelines, and oil pipelines and 
licensing hydroelectric projects.
    Kentucky residents enjoy the lowest electricity rates in the 
country. This low electricity rate has helped Kentucky's economy grow 
by attracting businesses and keeping money in the pockets of its 
consumers.
    Further, Kentucky's electricity market has worked. Our residents 
have continually enjoyed low cost uninterrupted service. Kentucky has 
not experienced rolling blackouts, price spikes, or market manipulation 
seen in other parts of the country, and Kentucky does not expect to 
under its current power grid.
    As a member of FERC, it will be Mr. Kelliher's job to examine the 
nation's current electricity policies and determine a structure that 
allows consumers to benefit from a competitive market. This is a big 
job and I expect Mr. Kelliher will stay receptive to suggestions and 
comments by members of Congress.
    I would like to see Kentucky's consumers keep their low rates and 
good service and would like for FERC to work to maintain this.
    I know that one job Mr. Kelliher will face as a member of FERC 
concerns FERC's Standard Market Design proposal to create a power grid 
operated under uniform national rules.
    I have some questions about this, and am looking forward to Mr. 
Kelliher's response.
    Thank you.
                                 ______
                                 
       Prepared Statement of Hon. Dianne Feinstein, U.S. Senator 
                            From California
    Mr. Chairman, I look forward to questioning Mr. Kelliher today 
because the regulatory body he has been nominated to join--the Federal 
Energy Regulatory Commission--must be a strong and aggressive enforcer 
to keep the energy markets from being abused.
    Over the past few years we have seen corporate scandal after 
corporate scandal in the news--and nowhere has there been more fraud 
and market abuse than in the energy sector.
    Last week, Jeffrey Richter, the former head of Enron's Short-Term 
California energy trading desk, pled guilty to conspiracy to commit 
fraud as part of Enron's well known schemes to manipulate Western 
energy markets. Richter's plea follows that of head Enron trader Tim 
Belden in the fall of 2002. Belden admitted that he schemed to defraud 
California during the Western energy crisis and also plead guilty to 
conspiracy to commit wire fraud.
    The Enron plea last week came on the heels of FERC's release of 
transcripts from Reliant Energy that reveal how their traders 
intentionally withheld power from the California market in an attempt 
to increase prices. This is one of the most egregious examples of fraud 
and manipulation that affected the Western Energy Market in 2000 and 
2001 and it is clear and convincing evidence of coordinated schemes to 
defraud consumers.
    The list of incidents of fraud and manipulation in the energy 
sector over the past six months is astounding, and the Reliant 
conversations are only the most recent example. Let me read just one 
part of the transcript to demonstrate the greed behind the market abuse 
by Reliant and its traders.
    On June 20, 2000 two Reliant employees had the following 
conversation that reveals the company withheld power from the 
California market to drive prices up:
    Reliant Operations Manager 1: ``I don't necessarily foresee those 
units being run the remainder of this week. In fact you will probably 
see, in fact I know, tomorrow we have all the units at Coolwater off.'' 
(The Coolwater plant is a 526 plant).
    Reliant Plant Operator 2: ``Really?''
    Reliant Operations Manager 1: ``Potentially. Even number four. More 
due to some market manipulation attempts on our part. And so, on number 
four it probably wouldn't last long. It would probably be back on the 
next day, if not the day after that. Trying to uh . . .''
    Reliant Plant Operator 2: ``Trying to shorten supply, uh? That way 
the price on demand goes up.''
    Reliant Operations Manager 1: ``Well, we'll see.''
    Reliant Plant Operator 2: ``I can understand. That's cool.''
    Reliant Operations Manager 1: ``We've got some term positions that, 
you know, that would benefit.''
    Mr. Chairman, only six months later, as this Committee was 
attempting to get to the bottom of why energy prices were soaring in 
the West, the President and CEO of Reliant testified before this 
Committee that the State of California ``has focused on an inaccurate 
perception of market manipulation.''
    Reliant's President and CEO went on to say, ``We are proud of our 
contributions to keep generation running to try to meet the demand for 
power in California. Reliant Energy's plant and technical staffs have 
worked hard to maximize the performance of our generation.''
    Reliant made similar statements before FERC, that high prices were 
``not an attempt by suppliers to withhold capacity from the market in 
order to drive up market clearing prices.''
    The conversations documented in these transcripts reveal the exact 
opposite--that Reliant employees intentionally held power off line at 
the direction of senior executives.
    Despite this clear and convincing evidence of fraud, on January 31 
of this year, the Federal Energy Regulatory Commission chose to give 
Reliant a slap on the wrist for this behavior. The company paid only 
$13.8 million to sweep this criminal behavior under the rug and settle 
with FERC.
    Over the past three years FERC has gone from an obscure government 
agency to a federal enforcement body people look to be a strong and 
aggressive cop on the beat.
    I strongly believe that in order to restore confidence in the 
economy, we must bolster the authority of the Securities and Exchange 
Commission, the Federal Energy Regulatory Commission, and the Commodity 
Futures Trading Commission and other regulatory agencies.
    The marketplace must be fair and transparent and FERC must show it 
will live up to its regulatory responsibility.
    Which brings me to my questions for Mr. Kelliher:
    1. Since FERC has an obligation to ensure rates are just and 
reasonable, and selling energy at market-based rates is a privilege, 
not a right, shouldn't the Federal Energy Regulatory Commission have 
rescinded Reliant's authority to sell power at market-based rates to 
send a message that fraud and manipulation like we see in these 
transcripts will not be tolerated?
    2. What type of fraud and manipulation would there have to be for 
you to vote to rescind a wholesale generator's authority to sell at 
market-based rates? If all Reliant has to do is pay back the money they 
made withholding the power, what is to stop them or another company 
from manipulating the market again?
    3. Do you believe Reliant's withholding of power from the Western 
Energy Market was confined to only two days--June 21 and 22 of 2000? Do 
you believe Reliant was the only company to withhold power during the 
Western Energy crisis?
    4. When Reliant held power offline and prices soared, other 
wholesale generators profited as much as Reliant, if not more, because 
the market clearing price was paid to all parties bidding into the 
California market. Is there a remedy for this? If not, what is to 
prevent Reliant from holding power off line one day and another firm 
doing it the next day and a different firm doing it the day after that?
    5. I strongly believe that FERC has an obligation to families and 
businesses in the West to use its subpoena authority to get all of the 
tapes from Reliant and review the conversations to see if the company 
intentionally withheld power other days besides June 21 and 22. Do you 
agree?
    Would you support releasing these tapes and other evidence of 
wrongdoing to the public?
    6. Last week, I sent a letter to FERC Chairman Pat Wood asking the 
Commission to lift its order that keeps all evidence of fraud and 
manipulation that is uncovered before February 28th secret. I sent the 
letter because I believe FERC must serve the public interest and people 
have a right to know the extent of fraud and manipulation that has 
occurred in the energy sector. Would you support lifting the protective 
order that keeps information found by the California parties seeking 
refunds confidential?
    7. What should be the punishment for companies and individual 
employees that deliberately withhold power to drive prices up and cause 
blackouts?
    8. As you know, I plan to introduce legislation with Senators 
Fitzgerald, Lugar, Harkin, Cantwell, Wyden, and Leahy to bring 
oversight to unregulated energy trading and increase penalties for 
misconduct. Will you support this bill?

    Senator Craig. With that, I am pleased to recognize the 
ranking member of this committee, Senator Bingaman.
    Senator Bingaman. Thank you very much, Mr. Chairman. And I 
am glad to abide by the order that you set out and look forward 
to hearing from the witness, and then look forward to a chance 
to make a short statement and ask a few questions
    Senator Craig. Thank you very much, Senator. The rules of 
the committee, which apply to all nominees, require that they 
be sworn in, in connection with their testimony.
    So, Joe, if you would rise with me and please raise your 
right hand.
    Do you solemnly swear that the testimony you are about to 
give to the Senate Energy and Natural Resources Committee shall 
be the truth, the whole truth, and nothing but the truth?
    Mr. Kelliher. I do.
    Senator Craig. Please be seated. And please feel free to 
introduce your family to the committee.
    Oh, I am following instructions here, Joe, so I am going to 
ask you to do this first: Before you begin your statement, I 
will ask you three questions addressed to each nominee before 
this committee.
    Will you be available to appear before this committee and 
other Congressional committees to represent departmental 
positions and respond to issue of concern to the Congress?
    Mr. Kelliher. I will.
    Senator Craig. Are you aware of any personal holdings, 
investments or interests that could constitute a conflict or 
create the appearance of such a conflict should you be 
confirmed and assume the office to which you are being 
nominated by the President?
    Mr. Kelliher. My investments, personal holdings, and other 
interests have been reviewed both by myself and appropriate 
ethics counselors within the Federal Government. I have taken 
appropriate action to avoid any conflicts of interest. There 
are no conflicts of interest or appearances thereof, to my 
knowledge.
    Senator Craig. Thank you. Are you involved or do you have 
any assets held in blind trust?
    Mr. Kelliher. No.
    Senator Craig. Thank you.
    I understand you do have family with you. And the committee 
would be pleased that you might introduce them to us.
    Mr. Kelliher. Thank you. Thank you for the privilege.
    First of all, I would like to introduce my wife Karen, who 
is formerly from New Mexico, which I have been pointing out to 
members of the committee as often as I can.
    [Laughter.]
    Mr. Kelliher. She is actually from Glenwood, which is up 
the road from Senator Bingaman's home town. And with Karen are 
our two children, Aidan and Nora. And Aidan has been practicing 
a special bow that he would like to do for members of the 
committee to thank you for holding this hearing.
    Senator Craig. Have at it, Aidan.
    Mr. Kelliher. Do you want to take a bow?
    [Laughter.]
    Senator Craig. Thank you.
    Mr. Kelliher. Thank you.
    Senator Craig. Well done.
    Mr. Kelliher. And also Nora, our daughter Nora. She is 3 
years old. She just had her third birthday. And she is wearing 
her special nomination hearing dress.
    [Laughter.]
    Mr. Kelliher. And I do not think she will do a bow. She is 
a little more shy.
    And my parents are also here, Joseph and Joan Kelliher, my 
sister Janet, my brother-in-law Eric Langborgh, and a close 
friend family Helen Mobley. And I have also seen a number of 
friends in the audience. But I just want to acknowledge their 
presence and thank them for being here.
    Senator Craig. Well, Joe, thank you.
    And to all of the family, I am sure you are proud of Joe. 
And we are pleased that you have been able to be with him and 
attend today.
    So, Joe, before I or Senator Bingaman make opening 
comments, we would now turn to you for your opening statement.

TESTIMONY OF JOSEPH T. KELLIHER, NOMINEE TO BE A MEMBER OF THE 
              FEDERAL ENERGY REGULATORY COMMISSION

    Mr. Kelliher. Thank you, sir.
    Senator Craig, Senator Bingaman, distinguished members of 
the committee, I am honored to be here today as a nominee for 
the Federal Energy Regulatory Commission. I would like to 
express my appreciation to President Bush for nominating me to 
this position. And I want to thank Chairman Domenici for 
scheduling this hearing and moving it so quickly.
    I have worked on energy policy matters from various 
perspectives for nearly 20 years. For much of this period, I 
was a congressional staffer, either on the personal staff of 
Chairman Barton on the House side or as majority counsel to the 
House Energy and Commerce Committee, your sister committee.
    As majority counsel, I was responsible for electricity, 
hydropower, conservation, and other issues. I was privileged to 
work closely with this committee on a range of legislation 
between 1995 and 2000. And I developed a great respect for the 
members and staff.
    Since January 2001, I have served as senior policy advisor 
to Secretary of Energy Spence Abraham. During this period, I 
advised the Secretary on energy policy issues and participated 
in the development of the National Energy Policy. I also worked 
closely with this committee during the development of energy 
legislation in the last Congress.
    Electricity markets today are facing tremendous challenges. 
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 confronting many of those 
producers. And we have also seen stagnant investment in the 
transition grid.
    Current Federal electricity policies promoting competition 
in wholesale power markets are the result of close 
collaboration between Congress and FERC that goes back 25 
years. Since 1978, Congress has twice passed laws to promote 
competition in electricity power markets. FERC has pursued the 
same goal through its open access policies. Increased 
competition has resulted in dramatic changes in electricity 
markets.
    In addition to electricity, there are three other 
substantive areas of FERC responsibility, hydropower licensing, 
natural gas pipelines, and oil pipelines. I plan to make 
hydropower issues a personal priority, if confirmed to this 
office, and look forward to working with members of this 
committee on those issues. Natural gas and oil pipeline 
regulation are the substantive areas of FERC responsibility in 
which I have the least direct personal experience.
    For much of my professional career, I have worked on 
Capitol Hill. If confirmed by the Senate, I believe my 
professional experience will be an asset at FERC. I have 
enormous respect for Congress and recognize the critical role 
that Congress plays on energy policy. It is essential that 
Congress and FERC continue to work closely together, just as 
they have on development of electricity policy over the past 25 
years. If confirmed by the Senate, I pledge to work closely 
with this committee to that end.
    I have enjoyed my years of public service on Capitol Hill 
and at the Department of Energy. It would be a privilege and 
honor to continue that public service at the Federal Energy 
Regulatory Commission. I appreciate the opportunity to testify 
before you today. And I am happy to answer any questions you 
might have.
    Thank you.
    [The prepared statement of Mr. Kelliher follows:]
Prepared Statement of Joseph T. Kelliher, Nominee To Be a Member of the 
                  Federal Energy Regulatory Commission
    Chairman Domenici, Senator Bingaman, and distinguished members of 
the Committee, I am honored to be here today as a nominee for the 
Federal Energy Regulatory Commission (FERC). I would like to express my 
appreciation to President Bush for nominating me to this position and I 
want to thank Chairman Domenici for moving so quickly to schedule this 
hearing.
    I have worked on energy policy matters from various perspectives 
for nearly twenty years. For much of this period, I was a Congressional 
staffer, either on the personal staff of Chairman Barton or as Majority 
Counsel to the House Energy and Commerce Committee. As Majority 
Counsel, I was responsible for electricity, hydropower, conservation, 
and other issues. I was privileged to work closely with this Committee 
on a range of legislation between 1995 and 2000, and I developed great 
respect for its members and staff.
    Since January 2001, I have served as Senior Policy Advisor to 
Secretary of Energy Spencer Abraham. During this period, I advised the 
Secretary on energy policy issues and participated in development of 
the National Energy Policy. I also worked closely with the Committee 
during development of energy legislation early in the last Congress.
    Electricity markets today are facing tremendous challenges. 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 confronting many of those producers, and stagnant investment 
in the transmission grid.
    Current Federal electricity policies promoting competition in 
wholesale power markets are the result of collaboration between 
Congress and FERC that goes back 25 years. Since 1978, Congress has 
twice passed laws to promote development of competitive power markets. 
FERC has pursued the same goal through its open access policies. 
Increased competition has resulted in dramatic changes in electricity 
markets.
    In addition to electricity, there are three other substantive areas 
of FERC responsibility: hydropower licensing, natural gas pipelines, 
and oil pipelines. I plan to make hydropower issues a personal priority 
and look forward to working with the members of this Committee on those 
issues. Natural gas and oil pipeline regulation are the substantive 
areas of FERC responsibility in which I have the least direct 
professional experience.
    For much of my professional career, I have worked on Capitol Hill. 
If confirmed by the Senate, I believe my Congressional experience will 
be an asset at FERC. I have enormous respect for Congress, and 
recognize the critical role that Congress plays on energy policy. It is 
essential that Congress and FERC continue to work closely together, 
just as they have on development of Federal electricity policy over the 
past 25 years. If confirmed by the Senate, I pledge to work closely 
with this Committee to that end.
    I have enjoyed my years of public service on Capitol Hill and at 
the Department of Energy. It would be a privilege and an honor to 
continue that public service at the Federal Energy Regulatory 
Commission.
    I appreciate the opportunity to testify before you today and am 
happy to answer any questions you may have.

    Senator Craig. Joe, thank you very much. I had mentioned 
that I and Senator Bingaman and others would make their opening 
statements following your comment.
    Let me suggest that we will turn to each one of our members 
in the order in which they have come for their first 5 minutes. 
We will do 5-minute rounds, whether they be opening statement 
and/or questions. Acceptable?
    Senator Bingaman. Yes.
    Senator Craig. Okay. With that, Joe, again, welcome to this 
committee. We appreciate you being here. We appreciate you 
willingness to serve our country.
    The Commission is one of the oldest agencies within the 
Federal Government. It was created, as you know, in the 1920's 
to oversee the development of non-Federal hydropower projects 
throughout our Nation. Its role was particularly critical to 
the successful development of my part of the country in the 
Pacific Northwest.
    Over the years, the Commission's authority has been 
extended to regulate natural gas and the interstate 
transmission of wholesale electricity. It is a testament to the 
Commission's ingenuity that during a time of industry's 
deregulation in both the natural gas and the electricity 
sectors, FERC is more powerful today than it was when it was 
fully regulating the natural gas and the electric utility 
monopolies.
    The Commission's current quest is to restructure the 
electric utility industry and manage markets, which is an 
enormously complicated task fraught with dangers not only to 
consumers but to investors of the utility companies that were 
for so long guaranteed solid returns from very stable and well-
run companies.
    This is no longer the case. The financial stability of this 
industry is currently very questionable. And I fear that 
current Commission policy decisions are having an adverse 
effect on this extremely delicate situation. I have seen what 
happens when the Commission gets committed to policies that 
ignore economic realities in certain regions of the country 
that are perhaps not as densely populated as other regions.
    Such was the case in the late 1980's and the 1990's, when 
the Commission solely but methodically began to abrogate its 
responsibilities under Part One of the Federal Power Act and 
allow other government and non-governmental entities to shape 
hydroelectric licensing policies. That policy path effectively 
paralyzed the Commission's hydro program and frustrated any 
creative efforts to ensure the relicensing of many needed 
existing projects within a reasonable time frame.
    That Commission approach also had and continues to have 
devastating consequences for my region. And I commend you for 
your willingness, as you mentioned in your opening statement, 
to make hydropower a priority.
    I am certainly not pleased to observe that many of my 
colleagues here in the Senate from other regions of our country 
are now experiencing similar anxieties with the manner in which 
the Commission is proceeding in restructuring the electrical 
markets. Decisions affecting existing contracts for power and 
rules affecting State authority over transmission rates are 
deeply troubling.
    The need for commissioners with technical and practical 
expertise have never been more compelling. The very stability 
of this important industry depends on a high degree of 
competency for each member of this Commission.
    Your resume certainly shows that you have a great deal of 
technical and legal experience, although I believe that the 
depth of your knowledge is sufficient to handle the application 
of regulatory formulas necessary to ensure the adequate 
prosecution of the Commission's responsibilities. I can only 
hope that your level of practical business common sense will 
serve you well in this future.
    The most well-researched economic theory is useless in the 
hands of those with an inadequate understanding of business 
systems and poor business judgments. We must never forget that 
regulation is an extraordinary grant of government power that 
must be applied cautiously, responsibly, and respectfully. And 
I look forward to the response that you will give to the 
questions that many of us will ask.
    With that, I turn to my colleague from New Mexico, Senator 
Bingaman.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Thank you very much, Mr. Chairman.
    Let me begin by making a short statement. We have two 
vacancies on the Federal Energy Regulatory Commission. One is, 
by statute, reserved for a Republican nominee. Mr. Kelliher has 
been nominated for that position. One is also reserved, by 
statute, for a Democratic nominee. Last year I thought the 
administration had agreed to move ahead with nominations for 
both positions. That is what they had indicated to me, and that 
they would be sending us a nominee for the Democratic position, 
as well as the Republican position. And obviously they have not 
done that. They now urge that we proceed to pass on the 
Republican nominee.
    That being the case, I am not in a position to support 
moving ahead with just one of those positions. I have indicated 
this to various people in the administration. And I hope very 
much that they will correct the situation very quickly so that 
we can have both a Republican and a Democratic nominee and move 
ahead, as was originally committed.
    I think clearly everything I have seen indicates Mr. 
Kelliher is well qualified for the position he has been 
nominated for. And I do not say any of this by way of criticism 
of him. But unfortunately, the way the Congress functions 
sometimes in order to get the administration to honor its 
commitment in some of these areas, you have to be prepared to 
raise objections. So I will not be able to support going 
forward with the nomination at this time.
    But I do have some questions I would put to the nominee. Is 
it appropriate to do that right now, Mr. Chairman, or should--
--
    Senator Craig. Within your first five, absolutely.
    Senator Bingaman. Let me ask a question that has been 
raised by several, and that is relating to the work you did 
with the Vice President's energy task force.
    Mr. Kelliher. Yes, sir.
    Senator Bingaman. As you know, the work of that task force 
has become quite controversial and was subject to some 
litigation. Is there anything that you know of that should 
concern us about work you did for that task force or anything 
that you--any work you did for that task force that might 
compromise your ability to be an impartial member of the 
Federal Energy Regulatory Commission or serve appropriately on 
that Commission?
    Mr. Kelliher. No, sir. I do not believe so. I do not think 
so.
    Senator Bingaman. Okay.
    Mr. Kelliher. I can describe my role at length, if you 
would like, but----
    Senator Bingaman. Well, do not describe it at length, but 
maybe give us a short description.
    Mr. Kelliher. Okay. Just to be clear, I was not a member of 
the energy task force staff. I was an advisor to the Secretary 
of Energy. I was not a member of the Vice President's staff. I 
was an advisor to the Secretary of Energy.
    And my role in that capacity was to present options to the 
Secretary. I was not a decision-maker. The principal decisions 
on what was in the energy policy were made by the Vice 
President and the other members of the task force, the Cabinet 
level members of the task force.
    My function was to try to develop options. And we did that 
a number of ways. We had an internal process with about 90 
career employees. And we encouraged them to come forward with 
their ideas on what would make sense in an energy policy. And 
we encouraged them to be creative and not to edit themselves, 
not to worry that an idea might seem crazy. We wanted every 
idea they had.
    We also looked on the outside. We reviewed bills introduced 
by members of this committee, by Chairman Murkowski, by your 
bill, sir, S. 597 and S. 352. You had a LIHEAP bill and a 
comprehensive energy bill. Senator Murkowski had a 
comprehensive energy bill. So we went through bills introduced 
by Congress and also ideas from think tanks, public interest 
groups, environmental groups, and business groups.
    And we tried to--we looked far and wide for ideas. But once 
those ideas were collected, the decisions were made by the 
Secretary, the Vice President, and the other members of the 
task force.
    Senator Bingaman. Thank you. One issue that you are going 
to be faced with at the Federal Energy Regulatory Commission is 
the whole issue of how to ensure an adequate supply of natural 
gas. That is a concern that many of us on this committee have. 
We tried to include some provisions in the energy legislation 
we considered in the Senate last year to ensure that work on an 
Alaska gas pipeline would be expedited.
    Do you support going ahead with that? Do you have any views 
as to the importance of proceeding with a natural gas pipeline 
to bring gas from the north slope of Alaska to the lower 48?
    Mr. Kelliher. Well, it does seem clear that we need more 
natural gas supplies. I do not have a personal view as to 
whether it should come from Alaska or other sources. And I 
think FERC's role would be to be in a position to act promptly 
in the event people come forward and want to invest the 
substantial sums needed to build a natural gas pipeline. FERC's 
job would be to handle that application expeditiously and make 
a prompt decision one way or the other.
    FERC has another role, ensuring adequate natural gas 
supplies with respect to LNG. The United States right now, 
something like one-and-a-half percent of our gas supplies come 
from LNG. New England relies more heavily on LNG. But 
nationwide it is something like one-and-a-half percent. But 
that is expected to grow substantially, and FERC policies 
that--were recently changed to encourage investment in more LNG 
facilities, so that we could import more liquified natural gas.
    And one promising aspect of that is that that gas might 
arrive earlier and be available earlier than Alaska natural gas 
might be. So FERC's duties seem to fall into those two camps.
    Senator Bingaman. Thank you, Mr. Chairman.
    Senator Craig. Thank you, Senator.
    Now, let me turn to Senator Craig Thomas of Wyoming.

         STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR 
                          FROM WYOMING

    Senator Thomas. Thank you, Mr. Chairman.
    Welcome, Mr. Kelliher. Glad to have you here.
    Mr. Kelliher. Thank you, sir.
    Senator Thomas. We certainly need to fill those seats on 
FERC. And you seem totally qualified to do that. Obviously, we 
need some changes in our energy policy. We worked through some 
of that last year, did not complete our work, but intend to go 
back and do some more of it.
    Part of that responsibility belongs to the Congress. Part 
of it belongs, of course, to FERC and the administrative 
agencies. Certainly, the Federal rules that we either put in 
through administrative or legislative efforts--we need to 
delegate as much authority as we can to the States. And I think 
there is an appropriate role for the interstate issue to be 
addressed. And perhaps it has not been as addressed as it 
might.
    The electric generation transmission and distribution 
system in the Western United States is often referred to as the 
Western interconnect, as you know, highly interconnected and a 
complex system. It is characterized by widely diverse loads, 
equally diverse generation sources. More and more of them are 
becoming market generators and so on.
    Loads range in size from the large in the densely populated 
areas of California on the west coast, to small and sparsely 
populated areas in the inner mountain region. Generation 
research includes large coal-fired plants, base-load plants, 
nuclear, wind, and hydropower, of course.
    The Western interconnect is also characterized by a wide 
diversity of ownership, including investor owned, vertically 
integrated utility systems, public power systems, such as 
Bonneville and Western Area Power in the Rocky Mountains. Amid 
this diversity, the challenge has always been to operate an 
entire Western system in such a way as to optimize the 
productive capacity of generation and transmission.
    That is basically an opening statement. But I want to 
follow it with a question. And that is: Do you believe that we 
can put together an RTO in the western area in which we can get 
enough coming together among these different kind of users to 
have a system that will be most useful for the consumers?
    Mr. Kelliher. I agree with your--you describe a lot of the 
differences between the Western market and other markets. And 
that is one characteristic of the United States, is we do not 
have a national electricity market. We have a series of 
regional power markets. And there are important differences 
among those regions. As you have said, the West is different 
from other parts of the country. The transmission grid 
physically is different. The generation mix is very different, 
particularly in the Pacific Northwest.
    And also, the West legally is different. FERC has very 
little, virtually no authority over the Federal utilities like 
Bonneville and WAPA and very little authority, virtually no 
authority, over municipal utilities. And they account for a 
very large share of the Western market, much more so than in 
other parts of the country.
    So all that means--to me, that means that the West is 
significantly different. There is a great need to allow for 
regional flexibility and to take into account regional 
characteristics in developing any kind of market rules.
    Senator Thomas. Thank you, Mr. Chairman.
    Senator Craig. Thank you very much.
    Now let me turn to Senator Ron Wyden of Oregon.
    Senator Wyden. Thank you very much, Mr. Chairman.
    And welcome to you, Mr. Kelliher.
    Mr. Kelliher. Thank you, sir.
    Senator Wyden. On that specific point, you have just said 
that there are differences in power markets in various parts of 
the country. But that is not what the FERC is looking at right 
now. What the FERC is looking at with the standard market 
design proposal is sort of a one-size-fits-all approach, saying 
that the whole country has to set up a transmission system to 
look like what they are doing in New Jersey, despite the fact 
that the Pacific Northwest is so different.
    So tell me specifically, in terms of the concept, what do 
you think about the standard market design proposal, which is 
the principal issue on the plate at FERC? The people in my part 
of the country think that this is poison. They just think this 
is a disaster, the public utilities and others. I would like to 
know what you think conceptually about the single biggest issue 
on the FERC plate right now.
    Mr. Kelliher. Well, it is a big question. I am trying to be 
very careful, too, because I do not want to have to recuse 
myself from----
    Senator Wyden. Just tell me conceptually what you think 
about standard market design.
    Mr. Kelliher. I think conceptually FERC has identified 
certain goals they are pursuing in standard market design. They 
are trying to prevent market manipulation. They are trying to 
promote competition in the electricity power markets. They are 
trying to prevent market power abuse. They are trying to 
promote investment in generation and promote investment 
transmission.
    And I--conceptually looking at those goals, I think those 
are good goals for the agency to pursue. I think the big fact 
question is: do the means advanced by FERC and standard market 
design advance those goals? Are the means in the FERC standard 
market design the right ones?
    I mean, I think those general goals that I have laid out, I 
tend to think those are the right goals. But how to accomplish 
them is an open question. FERC right now, the standard market 
design rulemaking is underway. There have been something like 
500 comments received, totaling thousands of pages. And the 
comment period is still open. It will not close until the end 
of this month.
    I understand Chairman Wood has agreed, in discussion with 
Chairman Domenici, to put out a white paper later in the 
spring. And the committee may hold hearings. So a lot of these 
issues are--first of all, there is an open record. And if I am 
confirmed to this position, I would have to make a decision 
based solely on the record before FERC. So I am reluctant to 
make specific comments.
    Senator Wyden. I understand that. But I will tell you, if 
you gave that answer at a town hall meeting in central or 
eastern Oregon, people would be up in arms. And you said in 
response really to two of my colleagues from the West, Chairman 
Craig and my colleague from Wyoming, that you recognized that 
there were tremendous differences between different markets. 
Your answer seems to minimize those differences.
    And I want to ask about something else. But just note----
    Mr. Kelliher. Could I elaborate on that point, though, to 
try to reassure you?
    Senator Wyden. Please. Of course.
    Mr. Kelliher. That I think it is essential that there be 
regional flexibility, essential in the way FERC proceeds 
developing market rules. There is a separate proceeding, the 
RTO West proceeding. And to my understanding, FERC has allowed 
for regional flexibility in that proceeding.
    For example, the Bonneville contracts, which I know is a 
concern for some of the members from the region, Bonneville has 
long-term power transmission contracts. And that, in the RTO 
West order, FERC, to my understanding, approved a proposal from 
the region to allow voluntary conversion of those contracts, 
not to abrogate those contracts, to allow voluntary conversion, 
to allow the contract holder to decide whether they want the 
new service or to retain their existing service. I think it is 
essential to----
    Senator Wyden. But all that is, of course, part of the 
past. We are looking at the future. And I am going to do 
everything in my power as a Senator to block standard market 
design. I think it would be a disaster for our area. I think 
it, by the way, is inconsistent with what you said earlier. I 
recognize you do not want to lock in on a position. But just 
know how strongly we feel about this issue.
    Mr. Kelliher. Yes, sir.
    Senator Wyden. The other area I wanted to touch on very 
briefly, Mr. Chairman, is FERC's enforcement record. And I 
think it is a dismal one. The General Accounting Office has 
been very critical about FERC's enforcement record. In our part 
of the country, we have had two of Enron's energy traders plead 
guilty to criminal violations for their energy trading 
activities in the west coast market, including Enron's head 
west coast trader. And yet FERC has not taken any action to 
rectify the impacts of the illegal trading on west coast 
utilities and consumers.
    If you are confirmed as a member of FERC, what are you 
going to do to get the lead out of the agency's regulators and 
get us some real enforcement on these issues like the Enron 
violations?
    Mr. Kelliher. Sir, going back to 1998, I have believed that 
FERC's authority to impose criminal penalties has been 
inadequate. So going back 5 years, I have advocated--and in 
some cases, I am not aware that others have advocated; I think 
I have been on somewhat of a lonely crusade--to raise FERC's 
criminal penalties.
    Criminal penalties right now are capped at $500 a day. They 
are the same penalties that were set in 1935. I have thought 
that as markets become more competitive, it is clear that 
people have an incentive to violate the law if they are only 
subject to a $500-a-day penalty. So I have advocated that for 
years. So I am not a recent convert on that issue.
    But I do agree with your general thrust that FERC may need 
additional authority. Criminal penalty provisions, I think, are 
obviously inadequate.
    Senator Wyden. Well, it is a constructive answer again 
about having new penalties for the future. But we want to see 
action with respect to what is pending now. And that is my last 
question.
    Bonneville has contracts with Enron that they were induced 
to sign at the time Enron was manipulating the market. We have 
these smoking gun memos showing how the major traders, if not 
the largest trader, was manipulating the market. If Bonneville 
could get out from under those worthless Enron contracts, our 
region--including my State, which has the second highest 
unemployment rate in the country--could save more than $200 
million. Now that is a significant amount of money.
    Bonneville, at my request, has made a filing at FERC for 
relief from its Enron contracts. And my question is: I am sure 
you have seen these memos, because they have been out in wide 
circulation. Do you think that these memos provide Bonneville 
and the other Northwest utilities with a legal basis in which 
to get out from under these worthless contracts when Enron was 
manipulating the market?
    Mr. Kelliher. When you refer to memos, you mean the Enron 
marketing memos, the ones that----
    Senator Wyden. Yes, right, the smoking gun memos that 
describe how they were manipulating the market.
    Mr. Kelliher. As a legal matter, I do not know, sir. I 
thought that those memos were designed to manipulate spot 
markets. And I am just not familiar with the nature----
    Senator Wyden. We are talking about the Enron documents 
that were released last May.
    Mr. Kelliher. Yes, sir.
    Senator Wyden. That talk about manipulating the west coast 
market.
    Well, I will wrap this up, because I have taken plenty of 
my time. I hope that you will specifically look at FERC's 
actions with respect to the west coast market, because I do not 
think the agency has followed up with the speed and the force 
that is necessary. And I want to see that changed.
    But also with respect to this Bonneville filing, those are 
my priorities. And I felt that you were candid with me when you 
came to meet with me in my office. But I am troubled with 
respect to what I am hearing today. And I may be following this 
up with some additional questions for you.
    Thank you, Mr. Chairman.
    Mr. Kelliher. Thank you.
    Senator Craig. Thank you, Senator.
    Now let me turn to the Senator from Alaska, Lisa Murkowski.
    Senator Murkowski. Mr. Chairman.
    And welcome, Mr. Kelliher.
    Mr. Kelliher. Thank you.
    Senator Murkowski. I would like to follow up with your 
comments to Senator Bingaman with regards to the Alaska natural 
gas pipeline. You have indicated that you have not expressed a 
personal preference as to whether the gas comes from Alaska or 
somewhere else. And, of course, we in Alaska would like to be 
able to supply everybody back here in Washington, D.C., and all 
over the country with our abundance of natural gas. We just 
need to get that gas line.
    You have indicated that your role would be to ensure that 
the permitting is as expeditious as possible. And I just want 
to understand clearly that, in fact, should we work in the 
direction that we are going right now to get this gas line 
moving forward, that we will have the cooperation from the FERC 
in getting the permits in place, so that we can provide this 
domestic gas to the country at a time when it is seriously 
needed, and recognizing the incredible lag times that are 
involved here.
    We would like to think that it is going to be as 
expeditious as possible.
    Mr. Kelliher. I will do everything I can, Senator.
    Senator Murkowski. Thank you.
    I have no further questions, Mr. Chair.
    Senator Craig. Thank you very much, Senator.
    Now let me turn to Senator Byron Dorgan from North Dakota.
    Senator Dorgan. Mr. Chairman, thank you very much.
    Mr. Kelliher, you know that when we went through the 
hearings with respect to Enron and also other suppliers on the 
west coast, we had testimony on schemes to manipulate energy 
pricing, schemes that were called ``get shorty,'' ``fat boy,'' 
and ``death star.'' The energy companies, of course, were 
insisting that, gee, they really were not doing anything wrong 
at all.
    FERC was sitting on the sidelines dead from the neck up, 
doing nothing. And now, in the rearview mirror, it is quite 
clear that people on the west coast were literally fleeced out 
of perhaps hundreds of millions, and maybe even billions, of 
dollars.
    We had hearings during this period in the Energy Committee. 
I told FERC that they reminded me of a potted plant, just 
sitting there, perfectly interested, and willing to do nothing 
in the face of a fair amount of evidence that what was 
happening in these markets was just byzantine and clearly 
wrong.
    Give me your assessment of what you think happened during 
that period with the information we now know. And give me your 
assessment of how FERC behaved and acted during that period.
    Mr. Kelliher. With respect to Enron's behavior, the 
Commission, I understand, has an Enron investigation they are 
hoping to complete by the end of March. And that report would 
have to be voted on by the Commission. So I am in a difficult 
position because if I were to express some clear views, I would 
have to recuse myself from that, from any kind of deliberations 
on that report. So I am not sure how I can satisfy you on that 
first question.
    Senator Dorgan. Maybe I should not have asked the question 
specifically with respect to Enron. As you know, there were a 
number of market suppliers on the west coast.
    Mr. Kelliher. Yes, sir.
    Senator Dorgan. They were engaged in the type of 
deregulation whose construct was inherently unworkable, but 
whose construct also made it possible for some energy suppliers 
to manipulate markets. In fact, in recent weeks we have read a 
piece about one company--and I think there was a guilty plea by 
executives of one company, or workers of one company--which 
took the load off the system in order to manipulate prices in 
the short term.
    We know all of these things happen. I guess I am not going 
to ask you about Enron itself. You are an expert in the area of 
energy. You have a very impressive background. You clearly have 
some thoughts about what happened in California. Do you have 
any thoughts about FERC's role in the face of something like 
this, if it was to happen again?
    Mr. Kelliher. I can offer some general comments, if the 
question is how can we prevent this from recurring. I mean, I 
can offer some general thoughts on that.
    One is: I do think there may be a need to consider adding 
some provisions to expressly prohibit market manipulation, that 
right now, under Federal electricity law, there is--a certain 
end state is prohibited. Unjust and unreasonable rates are 
barred under the Federal Power Act. So that end state, 
regardless of how it is achieved, is barred in the Federal 
Power Act.
    But there is not an express prohibition on market 
manipulation that might lead to that end state. There is that 
kind of provision in securities law, for example. There is a 
prohibition of market manipulation. There is a prohibition of 
market manipulation in commodities law. And I think that is 
something that there may be a need to consider.
    If the goal, if the concern is, ``How do we prevent market 
manipulation,'' and there is a consensus that market 
manipulation should be prohibited in electricity markets, then 
there may be a need to consider some legislation on that point.
    Senator Dorgan. But is it not, on its face, obvious that 
FERC has the capability of now preventing market manipulation?
    Mr. Kelliher. Well----
    Senator Dorgan. Are you saying that capability does not 
exist?
    Mr. Kelliher. Well, what I would say--you pointed to the 
Enron, the guilty pleas of the two traders. I think you 
referred to that earlier.
    Senator Dorgan. That is correct.
    Mr. Kelliher. They pled guilty to wire fraud and conspiracy 
to commit wire fraud charges. There was no violation of the 
Federal Power Act, no violation of electricity law that they 
pled guilty to. They pled guilty to general wire fraud and 
conspiracy charges.
    Senator Dorgan. Okay. But we are talking about two 
different things then, because on the criminal side, if people 
are engaged in criminal behavior and criminal conduct, that is 
one set of issues. If companies, as what happened on the west 
coast, were manipulating price and supply in order to enrich 
themselves and disadvantage the consumers--in this case, in my 
judgment, they stole hundreds of millions of dollars and 
perhaps more. And they stole it right under the nose of FERC. 
And FERC had the capability to step in and did not.
    Would you agree with me that FERC had the capability along 
the way to set caps on wholesale prices in California and stop 
the manipulation?
    Mr. Kelliher. FERC has an absolute duty under the Federal 
Power Act to prevent unjust and unreasonable rates. And price 
caps are one means----
    Senator Dorgan. Right.
    Mr. Kelliher [continuing]. And not necessarily the only 
means. But price caps are a means that they can use to prevent 
unjust and unreasonable rates.
    Senator Dorgan. What I am trying to get at is: During that 
critical period in which there was a fleecing of consumers, 
FERC took no action. And that is why I was very critical of 
FERC. I was trying to get some sense of whether you were 
critical of FERC taking no action. Mr. Wood, to his credit, 
came in and said, ``We are taking action.''
    Mr. Kelliher. Yes, sir.
    Senator Dorgan. Good for Mr. Wood. I have told him that. Is 
your assessment of FERC prior to Mr. Wood the same as mine?
    Mr. Kelliher. Many believe that FERC should have acted 
earlier to adjust price caps.
    Senator Dorgan. How about you?
    Mr. Kelliher. I am a little hesitant because some of those 
matters, they are not just historical. They are pending before 
the Commission. There are proposals to amend the west-wide 
mitigation proposal. And that does involve price caps. So I do 
not want to have to recuse myself from considering those 
issues.
    But what I am trying to say is, prospectively, if the 
concern is market manipulation, I think there are ways to 
address that prospectively. And some of them may require 
legislation.
    Senator Dorgan. Mr. Chairman, would I have just another 
minute or two? I do not know what your time situation is.
    Senator Craig. We will give you one more minute. Please ask 
another question. Then we will turn to Ms. Cantwell.
    Senator Dorgan. I am sorry. I did not realize you were--
okay.
    I guess I am trying to understand your feeling about the 
role of FERC and your role as a commissioner. I really am not 
interested in sending a person to serve as they served during 
this period of manipulation with California, or, excuse me, the 
west coast, I should say--a person who is content to sit around 
and do nothing.
    Mr. Kelliher. Sir----
    Senator Dorgan. I want people who are tigers in support of 
the consumer interest to be there addressing that interest.
    Mr. Kelliher. I think protecting the consumer interest is 
FERC's principal responsibility. FERC has an absolute duty to 
prevent unjust and unreasonable rates. That is not 
discretionary. They have to do so. There is not--they have 
discretion on how to prevent unjust and unreasonable rates.
    So I would wake up in the morning knowing that is my number 
one duty, to protect the consumer interest. And I would have an 
absolute duty to prevent unjust and unreasonable rates. I would 
also have an absolute duty, if confirmed, to prevent undue 
discrimination and preference.
    There is--FERC has discretion on how to achieve those ends. 
But it is an absolute duty that they have to fulfill.
    Senator Dorgan. Well, Mr. Kelliher, you have a fine 
background. And I have no reason to believe you would not be a 
good addition to FERC. I feel that I would support your 
nomination and be voting for your nomination.
    Mr. Kelliher. Thank you, sir.
    Senator Dorgan. I also fear that you are going to be a 
victim of this problem that Senator Bingaman mentioned. There 
was an agreement with The White House that we would fill both 
seats. You are well aware of these issues. If The White House 
sends a Republican nominee for the Republican seats and says, 
``We agree we will send the Democratic nominee so that we can 
fill these two seats at FERC,'' but does not send the 
Democratic nominee, Senator Bingaman is quite right; that is a 
problem.
    My hope is that The White House will hear that, send us the 
Democratic nominee, who I hope will also be well-qualified. It 
will be my intention to support your nomination, because I 
think you will be a fine addition to FERC. And I hope to be 
able to support the Democratic nominee, as well.
    But I do think that Senator Bingaman is right. The 
nomination will not move until The White House sends us the 
other, at which point we should move both of them.
    I wish you well. We need good people on FERC. I thank you 
for offering yourself for public service.
    Mr. Kelliher. Thank you, sir.
    Senator Dorgan. Your son actually yawned once during my 
questioning, which I think was a signal to me.
    [Laughter.]
    Senator Dorgan. You have a fine-looking family, as well. 
Thank you very much.
    Mr. Kelliher. Thank you, sir.
    Senator Craig. Senator, thank you.
    Now, let me turn to Senator Cantwell from the State of 
Washington.
    Senator Cantwell. Thank you, Mr. Chairman.
    Senator Craig. Senator, we are doing 5-minute rounds. You 
can do your--if you have an opening statement, you can use the 
first round for that, if you wish, or go right into questions, 
of course.

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

    Senator Cantwell. Thank you, Mr. Chairman.
    And welcome, Mr. Kelliher.
    And thank you, Mr. Chairman, for clarifying that. I am sure 
I could spend an easy 5 minutes explaining, hopefully not news 
to you, the crisis that has happened in Washington State. So my 
questions are going to be similar to my colleague from North 
Dakota. Although I have to say, for Washington residents, and 
those in my home county particularly, who are stuck with a 50-
percent rate increase because of the long-term Enron contracts 
that they have signed probably for 5 and 6 years, the fact that 
FERC has failed to act on this when people have owned up to 
being crooks, and the only policeman on the watch is FERC, is a 
tragedy.
    And the fact is now, some of these people have even gone to 
court to find standing to challenge those contracts, only to 
have the courts dismiss them, saying it is FERC's 
responsibility to act. So ratepayers in my State are stuck, 
even after the guilt admitted by these manipulators of pricing, 
stuck with these high rates because FERC is failing to act.
    Now, I would just like to clarify some of the issues, 
just--and I know that there is action before FERC. But some of 
this, some of the members of FERC have come before the 
committee and made statements. So I just want to see if you 
will answer those same questions.
    But first of all, do you believe that price manipulation 
went on in the western markets? And I am sorry I did not hear 
all the questions before this. So if you have already answered 
this----
    Mr. Kelliher. I am trying to be very careful, because I do 
not want to have to recuse myself from matters that are 
pending. But there have been guilty pleas. People have pled 
guilty to committing fraud in power markets. There have been 
settlements and guilty pleas where people have admitted making 
false statements. They have admitted to criminal violations, 
making false statements with an intent to manipulate gas 
prices.
    So I think, yes, I would have to agree there is evidence 
that there was manipulation in both power and gas markets.
    Senator Cantwell. And do you think in a broad sense now, in 
a broad sense, if there has been manipulation of contracts, 
that those prices could ever be just and reasonable?
    Mr. Kelliher. If there is manipulation of contracts or 
manipulation of markets?
    Senator Cantwell. Of markets and, therefore, in the 
contracts.
    Mr. Kelliher. That really does go to the heart of some of 
the contract cases before FERC. One of the fact issues in those 
cases is the relationship between spot markets and long-term 
markets. And so I have to be----
    Senator Cantwell. I am trying to get a sense of whether you 
think price manipulation, if somebody had openly admitted that 
they had manipulated the markets, whether those rates then 
could be considered just and reasonable.
    Mr. Kelliher. Under--FERC only has the tools that Congress 
has given it. And under the Federal Power Act, what is 
prohibited is an end state of unjust and unreasonable rates. 
Congress has never put into the Federal Power Act a prohibition 
of market manipulation. That is not in the Federal Power Act. 
What is in the Federal Power Act is a prohibition of unjust and 
unreasonable rates by whatever manner that is achieved, whether 
it be poor market rules, whether it be manipulation. So I 
think----
    Senator Cantwell. Are you saying that you think we need 
further clarification of FERC responsibility?
    Mr. Kelliher. I think if Congress wants to prohibit market 
manipulation, there are other laws that you could look to as a 
model. But there is no express prohibition of market 
manipulation in the Federal Power Act.
    Senator Cantwell. So the answer to the question of whether 
you think that market manipulation, that prices arising from 
agreed-to, market manipulation by various companies could be 
just and reasonable, you seem to be arguing that yes, that 
could be possible.
    Mr. Kelliher. I am sorry. I did not follow the question. 
You are saying that I----
    Senator Cantwell. I am asking you whether you think 
companies who admitted that they manipulated contracts and 
markets, whether those contractor rates could be just and 
reasonable. Would you say that they could be, even if the 
parties have admitted that they purposely try to scheme to 
increase the prices in the West?
    Mr. Kelliher. One complication is the first step you have 
to take in that kind of a question is, ``Which markets?'' There 
are different electricity markets. There is not just one 
electricity market. There is a spot market. There is a day 
ahead market. There is a real-time market. There is an 
ancillary services market. There is a long-term market.
    And, you know, just conceptually, manipulation in one 
market does not necessarily affect prices in every other 
market. That is one of the major fact questions in the FERC 
contract reform cases.
    This is a matter that, if I am confirmed, I would have to--
I may have--if I am confirmed, I would have to make--I may have 
to vote on this. And I have a duty not to prejudge these 
matters.
    Senator Cantwell. Mr. Kelliher, the Commission, in a 2001 
order, wrote that there is and was, during this critical 
crisis, a ``critical interdependence'' among the prices of 
California's ISO in the spot markets, in the bilateral markets, 
and the rest of the West. I mean, they made that statement. Do 
you agree with that?
    Mr. Kelliher. I believe their decision said that spot 
markets are dysfunctional and that prices in spot markets are 
unjust and reasonable. That is one of the issues in the 
contract cases, is that FERC finding, with respect to spot 
markets, to what extent does it carry over into disputes over 
long-term power sales contracts. What is the relationship? 
There is a factual question. What is the relationship between 
spot markets and long-term markets? And that is at the very 
heart of the contract cases.
    There is also the other issue you are very familiar with 
and you have spent a lot of time on, which is: Which standard, 
which legal standard, governs? Is it the just and reasonable 
standard or the public interest standard in the contract cases?
    But the major fact question is: What is the relationship 
between spot markets and long-term markets? The Commission did 
make that finding, as you said, insofar as it applies to spot 
markets. It certainly begs the question, ``Well, does that mean 
there is--that necessarily in long-term markets prices were 
unjust and unreasonable?''
    Senator Cantwell. Mr. Kelliher, unfortunately I think my 
constituents believe that FERC is playing a shell game. They 
are playing a shell game using different standards of review 
when they have never used different standards before. They are 
leaving my constituents without the ability to go to court and 
get relief or get relief from FERC.
    And the Chairman and other members of the commission have 
been before this committee saying there was a relationship 
between the Northwest and spot markets. And now the Commission 
wants to. We will see what happens with FERC.
    But I am telling you, the Congress set up FERC with this 
authority to give relief to consumers. And we have not even 
gotten into standard market design and all the other actions 
that FERC wants to take.
    I see my time is up, Mr. Chairman. And I probably have not 
gotten to the degree of specificity I'd like. May we submit 
more questions?
    Mr. Kelliher. May I say one thing?
    Senator Cantwell. But I just want to finish that we could 
not be more displeased in the Northwest with the fact that we 
are going to be stuck with these prices even though companies 
have admitted guilt. FERC is the only policeman on the street, 
the only policeman on the street.
    And you are asked to come here and answer questions for 
your nomination to this commission. And yet I see some of the 
same issues that FERC is now dealing with, the same kind of 
roundabout answers here today that have frustrated citizens and 
businesses in my region. Mr. Chairman, I will submit for the 
record an article about businesses, Weyerhauser, other paper 
companies that have said, ``We are paying the highest rates in 
the entire country in the Northwest.''
    A company in Everett, Washington, with several hundred 
employees probably will go out of business or have to shut down 
because of these rates. And they are looking to FERC as the 
only answer.
    Thank you, Mr. Chairman.
    Mr. Kelliher. Thank you.
    Senator Craig. Thank you, Senator.
    Let me remind all of our members that we will have until 6 
p.m. today to submit further questions for the record. And a 
copy of the questions should be provided to the chief counsel's 
office, if you have additional questions.
    Mr. Kelliher, as you know, one thing we must all insist on 
is that the lights stay on. In other words, that reliability 
not be jeopardized. Would you agree that maintaining 
reliability is of paramount concern of a member of FERC?
    Mr. Kelliher. Yes, I do.
    Senator Craig. Will you commit to this committee and to the 
Congress that you will place reliability of service at the top 
of your list of priorities as a commissioner, and that you will 
not support any measure that threatens it?
    Mr. Kelliher. Yes, sir. I make that commitment.
    Senator Craig. Would you agree that some fundamental 
decisions on restructuring are for the Congress and not for 
FERC to make?
    Mr. Kelliher. Yes, sir. As I pointed out in my testimony, 
at one level I consider myself a creature of Congress. I have 
spent a lot of my career working for Congress, and I have a 
tremendous respect for Congress's role in energy policy.
    Senator Craig. We are in the midst of trying to structure 
an energy policy for this country. We were talking a moment ago 
about penalties. And you mentioned or referenced penalties that 
were put in place in the 1930's. The bill we attempted to move 
last year had substantial increases in penalties.
    Do you have any suggestions for how FERC can work more 
closely with the Congress?
    Mr. Kelliher. Well, just as a general observation, our 
current policy is a result of collaboration. Really, for the 
past 25 years, Congress and FERC have worked very closely to 
develop electricity policy, open access policy, in particular. 
But with respect to how to maintain that--so I think it is 
essential that that collaboration continue.
    But with respect to how to assure it continues, I can only 
say that I think hearings are helpful, because hearings are a 
way to make sure that Congress is familiar with what FERC's 
policies are and what policies they are considering, and also 
informal communications. And that is an area where I plan to 
spend a lot of my time. I hope my Congressional background will 
be an asset and help result in strong collaboration between 
Congress and FERC.
    Senator Craig. Thank you. I am concerned that with FERC's 
focus on market design they are losing sight of the plain fact 
that without adequate transmission capacity, no competitive 
markets can truly work. Would you agree with that?
    Mr. Kelliher. I agree that a robust transmission grid is 
essential for a competitive market.
    Senator Craig. Would you also agree that FERC ought to pay 
a little more attention to incenting the expansion of needed 
transmission capacity?
    Mr. Kelliher. I think FERC has to take steps to encourage 
investment in transmission in order to remove those 
constraints.
    Senator Craig. Would you agree that this is key to 
expanding the scope of the market or markets?
    Mr. Kelliher. Yes, sir. Yes, I do.
    Senator Craig. The proposed standard market design rule 
contains no evidence of systematic discrimination in access to 
the transmission system. The minimal anecdotal evidence is the 
proposed rule--in the proposed rule, is from experiences in the 
eastern interconnection. The Commission has been unwilling or 
unable to provide systematic evidence of transmission 
discrimination in the western interconnection despite the fact 
that the Commission's order 888, which prohibits such 
discrimination, has been in effect since 1996.
    Before jettisoning the Commission's original remedy for 
discrimination order 888 in favor of imposing standard market 
design in the West, the Commission should be obliged to present 
systematic evidence for transmission discrimination in the 
Western interconnection.
    My question, Joe, is: Prior to making decisions on the 
Commission, will you require that systematic evidence be 
presented on this issue?
    Mr. Kelliher. Sir, you have raised one of the fundamental 
issues in standard market design, under the status quo today, 
is there undue discrimination and preference in the electricity 
markets that are subject to FERC jurisdiction. And that is a 
fundamental aspect of standard market design.
    And if I am confirmed to this position, that is--I have not 
prejudged that question, whether or not there is 
discrimination. And if I am confirmed to this position, I would 
make a decision on that issue based solely on the record before 
the Commission.
    Senator Craig. So I am trusting that the answer to that 
question is yes, in relation to requiring that systematic 
evidence be presented on the issue.
    Mr. Kelliher. I think there would be a need for a record on 
that point.
    Senator Craig. In the case of the proposed standard market 
design rule, the Commission has not presented systematic or 
even anecdotal evidence on discrimination in access to 
transmission in the western interconnection. Remedying 
discrimination is the fundamental objective of the standard 
market rule. Will you commit to developing such information 
prior to remedying a design on the proposed SMD rule?
    Mr. Kelliher. Yes, sir. I would have to be persuaded that 
there is evidence of discrimination.
    Senator Craig. Okay. My colleague from Wyoming.
    Senator Thomas. Thank you, sir.
    Let me scoot back over. You have jurisdiction also over 
pipelines, gas pipelines particularly.
    Mr. Kelliher. Yes, sir.
    Senator Thomas. The envelopment of methane gas production 
in Wyoming has run up against some problems that results in a 
very extreme price differential between the producer, the well 
price, and the market. Some say it is the lack of pipeline. 
Some say it is marketers buying space on the pipeline that will 
not let the independents on unless they sell at the lower 
price.
    Would you be interested in helping to expedite to find the 
problem and expedite the development of new pipelines, in terms 
of FERC's role?
    Mr. Kelliher. Yes, sir. With respect to the second issue of 
whether or not there is a kind of gaming going on, I think that 
is something FERC should investigate. And with respect to the 
first question, whether pipeline capacity is inadequate and it 
may need to expand, I understood that there were--there are 
four--there are a few pipeline projects that are under 
discussion to try to remove those bottlenecks.
    I do not think there are any applications before FERC right 
now. But hopefully one or more of those will bear fruit, and 
there will be an application. And if so, FERC should move 
expeditiously on it.
    Senator Thomas. That is good. And I think there is some 
responsibility of FERC to look into, when there are problems of 
that kind, to at least help find a solution. I think El Paso 
and Colorado Interstate are trying to do something.
    With respect to--back to the electricity thing: It seems 
like if you are going to be able to resolve the movement of 
wholesale electricity, you are going to--and let the States 
have a good voice in interstate movement, you are going to have 
to have regional transmission organizations. We seem to be slow 
in getting one there.
    The States involved and the Western Governors have outlined 
five areas. One of them is that FERC should specifically set 
aside the western interconnect from SMD rule and concentrate on 
working with the States to develop RTOs. Does that make sense 
to you?
    Mr. Kelliher. Well, right now FERC is proceeding on a two-
track basis. There is SMD, and then they also are looking at 
individual RTO proposals in the West. The big question--and 
some of those orders, like in the RTO West order, FERC included 
a provision saying that to the extent there were differences 
between SMD and RTO West, RTO West would trump standard market 
design.
    So I think there is an effort to try to show regional 
flexibility. And I think that is essential. The Western grid is 
different. And there is need to accommodate those differences.
    Senator Thomas. One of the real conflicts in terms of 
transmission is the heavy involvement of Bonneville and WAPA 
who apparently resist being part of an RTO and sharing their 
transmission in order to get on other people's transmission. So 
a little bit of a problem there.
    We have heard a lot about the Northwest and California, of 
course. And they did have some very difficult things. Now there 
has been some ordered refunds to the States. My concern is: Are 
the utilities in other States, like Wyoming, Colorado, Utah, 
going to be disadvantaged as these companies have to raise 
their rates to pay off what they are owed in the west coast? It 
does not seem like that is quite fair.
    Mr. Kelliher. Yes. I thought that there was discussion of 
license plate rates where--instead of taking off different 
transmission rates for a certain RTO, adding up the cost and 
averaging all the different transmission rates, I thought 
initially the goal was to have license plate rates, so that 
there would be one rate, that the rate--there would be one 
transmission rate. It would not be pancaked. But the rate would 
be the rate that governed where the buyer, wherever the 
wholesale purchaser, was.
    I know that is a confusing answer. But I think there was an 
attempt to avoid that problem of averaging and cost shifts and 
shifting into raising transmission rates in low cost areas.
    Senator Thomas. Well, there are those who feel like the 
companies, who are now going to be penalized perhaps in the 
west coast, will be raising their rates in Wyoming to help 
offset those costs.
    Mr. Kelliher. I think there is a way to guard against that. 
And I look forward to working with you on it.
    Senator Thomas. Yes. Well, thank you. I look forward to 
working with you. And I hope we can get this confirmation done 
quickly.
    Mr. Kelliher. Thank you, sir.
    Senator Thomas. Thank you very much.
    Senator Craig. Joe, a couple more questions on my part 
before we conclude the hearing: One of the most controversial 
issues in the electricity debate in Congress has been to define 
the line between State and Federal jurisdiction, both as a 
matter of law and as a matter of sound policy. In your view, 
what should be the State and Federal roles in electricity 
regulation?
    Mr. Kelliher. I think Congress laid that line down in 1935 
in the Federal Power Act. In that law, Congress defined clearly 
what the State and Federal roles were. The State role, Congress 
did not grant the States' role, because States had a role 
before the Federal Power Act. But Congress preserved the State 
role over retail markets. States have exclusive jurisdiction in 
that area.
    Congress preserved State role over generation, over 
transmission siting, generation siting, local distribution 
lines, and transmission of electric energy in intrastate 
commerce. FERC was given jurisdiction over transmission of 
energy in interstate commerce and wholesale power markets. And 
I think that the lines that were drawn in 1935 still work. And 
there is no reason to change them.
    Senator Craig. Thank you. There are a number of critics who 
feel that the last time Congress tried to streamline the hydro 
relicensing process under part one of the Federal Power Act in 
1986, all we did was double the cost and add 50 percent to the 
time involved. Whether that is accurate or not, the process is 
not going quickly. And it is increasingly more expensive and 
usually results in a reduction in generating capacity.
    I have been concerned about that for some time and have 
attempted to move legislation. And we attempted to deal with 
that last year, as we were trying to shape energy policy. What 
is your opinion of the current process? And do you believe that 
the problems are administrative at FERC and other agencies, or 
are they legislative, or a mix of both?
    Mr. Kelliher. Well, I certainly agree with you that the 
process is expensive and very lengthy. In at least one case, I 
think the Tacoma case, it took 22 years to relicense the 
project.
    Senator Craig. That is a bit long, is it not?
    Mr. Kelliher. It seemed a bit long.
    Senator Craig. Yes.
    Mr. Kelliher. And so there is some room for administrative 
reforms at FERC. And I think some of those reforms should focus 
on trying to move up decision making; instead of having 
decision making occur at the end of the process, try to have it 
occur as early as possible. And that might involve, or that 
might require to involve FERC staff earlier in the process.
    FERC has encouraged settlements to try to get the parties 
to agree to the terms of a new license, of a relicense. And I 
think FERC does have a proposal right now, a hydro licensing 
reform proposal, that is intended to improve the 
administrative--make administrative improvements at FERC. But 
when it comes to the broader question of what kind of 
legislative reforms should be made, a lot of that falls outside 
the FERC domain. I mean, as you know, the hydro licensing 
process is an extremely complicated one. And it involves the 
interplay of something like 20 or 22 different laws.
    I think FERC can do some things to improve the 
administrative side. But I think with respect to legislative 
changes, I would have to defer to Congress and--on what changes 
might be appropriate.
    Senator Craig. I mentioned our efforts in the past several 
years. There is a perception that Federal agencies use their 
mandatory conditioning to require actions unrelated to the 
protection of the reservation or to avoid FERC's balancing test 
under section 10(j). Concerns were also expressed over the 
timing of other Federal agencies' actions. Do you have any 
comments on this?
    Mr. Kelliher. I guess my only comment is--my perception is 
that the 10(j) process has worked pretty well. The last time I 
saw information in this area in 10(j)--you certainly know 
10(j). But 10(j) is an area where agencies submit conditions to 
FERC, and FERC does not have to accept the conditions. FERC can 
accept or reject the conditions.
    And the last time I saw any kind of numbers on that, which 
I admit was awhile ago, FERC accepted well over 90 percent of 
the, for lack of a better term, voluntary conditions submitted 
to it under 10(j). So I thought 10(j) worked well.
    But with respect to mandatory conditioning, again, that is 
an area where only Congress can make decisions on whether or 
not to address mandatory conditioning of other agencies.
    Senator Craig. In numerous orders, the Commission has 
stated that electricity markets are regional in nature and 
specifically that the boundary of the Western electricity 
market is defined by the electrically separate Western 
connection, which covers all or parts of 14 States, 2 Canadian 
provinces, and northwest Mexico.
    Do you agree that electricity markets are fundamentally 
regional in character and that FERC's policies need to reflect 
the needs of such regional markets?
    Mr. Kelliher. Yes, I do. And I said earlier that the United 
States does not have a national electricity market. We have 
regional power markets. And there are differences among those 
regions, and it is essential that FERC consider those 
differences when developing market rules.
    Senator Craig. In devising policies to meet the needs of 
regional markets, do you believe that States within those 
regions that are affected by such policies should have a role 
in deciding each policy, those such policies?
    Mr. Kelliher. Yes, sir. I think FERC has to work very 
closely with the States. If you look at the electricity 
regulatory scheme--I hate to use that word. It sounds 
pejorative. But our electricity regulatory scheme is a very 
Federalist approach. States have extremely important 
responsibilities. And FERC has important responsibilities. And 
I think that has to be borne in mind. And the two have to work 
together to develop rules.
    Senator Craig. Specifically, do you support FERC's granting 
deference to the collective advice it receives from the States 
in the Western interconnection?
    Mr. Kelliher. Yes, I think FERC should give deference to 
the States in the Western interconnection.
    Senator Craig. Senator from Wyoming, do you have any 
further questions?
    Senator Thomas. No, sir. I do not believe so. I am pleased 
with what we have heard today. And it is very indicative of the 
fact that those of us in the West are concerned about the 
differences there, which you agreed to. And of course, one of 
the real difficult decisions at some point is going to be 
whether the Federal power agencies are going to have to 
participate, like others, if there is any sort of an interstate 
transmission grid and some of those kinds of things. And those 
will be tough issues.
    Mr. Kelliher. Yes, sir.
    Senator Thomas. But, you know, as people generate more than 
their native load, why, they will be wanting to go into a sales 
system. And I think we are going to have to really take a look 
at the changes that have taken place in the electric energy 
business. And, of course, generation being deregulated is a 
good thing.
    Thank you.
    Senator Craig. Well, Joe, I have one more question. And I 
will move with some haste. Both of your children are asleep. 
That ought to be indicative of the fact that we should be 
wrapping this hearing up.
    Senator Thomas. I hope it is only the children so far.
    [Laughter.]
    Senator Craig. We are not going to debate who has put them 
to sleep.
    [Laughter.]
    Mr. Kelliher. They usually nap at this time. I should point 
that out for the record.
    Senator Craig. I see.
    [Laughter.]
    Senator Craig. All right. Well, then we will blame it on 
you and your wife.
    Mr. Kelliher. They are on a good schedule.
    Senator Craig. All right.
    For many years, no Commissioner on the FERC has brought to 
the Commission firsthand experience in working in the Western 
interconnection. This serious lack of experience with Western 
electricity, with the Western electricity system, has hampered 
the Commission in taking appropriate action in response to 
challenges to the West.
    You share this lack of experience in Western 
interconnection. To overcome this commission handicap, would 
you advocate that the Commission hold decision meetings in the 
West when addressing Western issues?
    Mr. Kelliher. I think it is appropriate to have meetings in 
the West on the issues that are of fundamental importance to 
the West.
    Senator Craig. Existing FERC Commissioners have undertaken 
some effort to make FERC less of a Beltway insular agency 
through devices such as regional panels. However, this attempt 
has been halfhearted and typically amounts to little more than 
an opportunity for State PUC commissioners to get on a 
conference call with FERC Commissioners.
    For FERC Commissioners to understand the realities of 
Western electricity systems and hear directly from the people 
impacted by the Commission's policies, the Commission, in my 
opinion, needs to better engage those affected by FERC 
policies.
    Would you advocate that the Commission experiment in the 
Western interconnection with new approaches, such as joint 
boards under section 209-1 of the Federal Power Act to provide 
for joint decision making by the Commission and the States on 
electricity issues before FERC that affect citizens of the 
West?
    Mr. Kelliher. I agree with you that any collaboration 
between FERC and the States has to be meaningful to be of any 
value. And I think the proposal to form a joint board is an 
interesting one. That authority in FERC is rarely used. And to 
be honest, I do not know why. I think it has been in the act 
since 1935, but it is rarely used. And that is--I am open to 
that idea. I think it is an interesting one. I will look into 
that.
    Senator Craig. Well, as you know, the dysfunctional 
character of the West during the last energy crisis, you have 
heard from many of the Western Senators, very frustrated and 
concerned about what it did to regional power costs and the 
action and/or inaction that has resulted and the impact of that 
pricing still existing. So I think to move the FERC West for a 
while to begin to understand it would be an appropriate effort. 
And I would hope you would encourage that.
    We have just been graced with the presence of the Senator 
from Louisiana.
    Senator Landrieu, I was making this my last question under 
the due caution that both of Joe Kelliher's children are now 
asleep. I know you have small children.
    Senator Landrieu. Sometimes that happens to us.
    [Laughter.]
    Senator Craig. But I will turn the hearing to you for any 
opening comment and/or question you would like to ask of the 
nominee.
    Senator Landrieu. Thank you, Mr. Chairman. I appreciate the 
opportunity just to ask a few brief questions. I know the 
hearing has been going on for some time, and I wanted to submit 
a statement for the record and ask unanimous consent at this 
time for my statement to be entered in the record.
    Senator Craig. Without objection.
    [The prepared statement of Senator Landrieu follows:]
       Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator 
                             From Louisiana
    Mr. Chairman, this hearing takes place at a difficult time in the 
energy industry, especially the electric industry. There have been many 
times in the past when the nomination of a new Commissioner attracted 
little attention. This is clearly not one of those times. While many 
companies in the energy industry are in financial distress, we are 
treated to the sight of some of their employees being led off in 
handcuffs. We see many states slowing, stopping, and even reversing the 
move toward retail competition in the electricity industry that just a 
year or so ago seemed to be in such favor. Most would say that this 
sense of caution with regard to changes in retail electricity markets 
is well-placed, considering the events of the past several years.
    However, despite the well-publicized difficulties with retail 
competition, competitive wholesale electricity markets have been 
benefiting consumers across the country. The competitive wholesale 
market is not going to go away, nor should it. There are actions that 
can, and should, be taken to make it work even better. I understand 
that this was the goal of the FERC proposed rulemaking on Standardized 
Market Design. Generally, I have no problem with this goal. I do have 
serious concerns about part of the SMD proposal and whether these 
controversial provisions are necessary to improving wholesale 
competition.
    The traditional division of authority between state regulators, who 
oversee retail markets, and Federal regulators, who oversee wholesale 
markets has served us well for almost seventy years. And, as we have 
seen, a well-placed sense of caution about sudden changes can be a good 
thing. This is particularly true of regulators in states with 
relatively low electricity costs, who don't see where their current 
system is broken.
    With the SMD proposed rulemaking, FERC has gone beyond 
``designing'' the wholesale market, and intruded into areas of historic 
state authority. This has transformed what could have been polite 
skepticism from state regulators into outright hostility. By attempting 
to assume authority over transmission used to serve retail customers, 
system planning and other areas of state jurisdiction, FERC has taken 
steps that are NOT necessary to improve wholesale electricity markets. 
If these Federal/state conflicts are not resolved, a long stalemate and 
endless litigation could be the result. I believe that FERC can achieve 
the quickest and most significant improvement in the wholesale market, 
and avoid this impasse, by taking only those actions necessary to 
improve wholesale electricity markets.
    In addition to resolving the jurisdictional issues, a key to 
obtaining the support of many state regulators is ensuring that costs 
for transmission upgrades and interconnections are paid for by those 
who cause those costs. Because we are blessed with abundant natural 
resources, the State of Louisiana has experienced a huge construction 
boom in power plants that are built in large part to participate in 
competitive wholesale markets. These plants will require several 
billion dollars worth of new facilities to hook up to the grid and move 
their power to markets in and out of Louisiana. If all these costs are 
``rolled into'' the rates of Louisiana's retail ratepayers, they could 
face a major rate increase. These are already some of the poorest 
people in the nation. The answer to this problem is ``participant 
funding,'' which will assign these costs to the cost-causers.
    The proposed rulemaking on Standardized Market Design states that 
it has a preference for participant funding. Chairman Wood also has 
endorsed participant funding in his public statements. However, I am 
quite dismayed that in recent orders, the FERC has chosen to force the 
ratepayers of Louisiana to subsidize participants in the wholesale 
electricity market by abrogating existing interconnection contracts and 
placing the burden of interconnection costs for wholesale generators 
onto the Louisiana retail consumer. These are costs that these 
generators had previously agreed to pay. While I appreciate the 
financial condition many generators are in, there is absolutely no 
justification for making the citizens of Louisiana bear the burden of 
these poor investments.
    With all due respect, these orders call into serious question 
whether FERC is truly committed to participant funding. As indicated in 
a cost-benefit study conducted by the Southeastern Association of 
Regulatory Utility Commissioners, participant funding is the key to 
making SMD a net benefit for the Southeast. For SMD to work, 
participant funding must be a reality, not just a promise.
    In conclusion, I look for Mr. Kelliher's responses to the following 
questions that are of great importance to Louisiana and the southeast.

    Senator Landrieu. Mr. Kelliher, I have enjoyed working with 
you and Secretary Abraham on so many issues. And there would 
have been a time when an appointment to a board such as this 
would not have attracted too much attention. But that, of 
course, is not the case today, because it is a very critical 
issue for our Nation and one that has really not been decided. 
And there have been, of course, many, many situations that have 
been very tough on consumers, as well as providers from one 
part of the country to another.
    So you are coming at this job in a very critical time. But 
representing the Southeast part of the country--and, of course, 
Louisiana does generate a tremendous amount of energy, not just 
for ourselves but for the country--I have been particularly 
focused on the issue of cost causation for participant funding, 
trying to think if we are going to move in the direction of 
expanding the grid and the reliability of the grid and trying 
to keep affordable prices, that expanding the transmission 
lines in this Nation are very important.
    So I wanted to ask you just if you could comment just 
briefly on your general philosophy about how that should be 
accomplished in terms of charging customers in one region of 
the country for the construction of transmission lines. Because 
this is a very contentious issue in Louisiana, as you may be 
aware. And I need to be clear about your views, so that I can 
communicate that to the people of my State and to the Public 
Service Commission, particularly.
    Mr. Kelliher. Senator, I am aware of your interest in this 
area. And you had legislation in the last Congress on 
participant funding. And I agree with the general concern that 
there are serious issues of cost shifting. If the transmission 
grid in one region of the country has to be expanded in order 
to accommodate exports from that region to a neighboring 
region, the region that is receiving the power should not--they 
should not receive some kind of subsidy in the process.
    I think cost causation is generally a good approach that 
FERC should bear in mind when it makes decisions on 
transmission pricing. And participant funding is one of the 
issues that has come up in the context of standard market 
design.
    Senator Landrieu. Well, I appreciate those comments and 
just want to say to you and to my colleagues how important I 
think this issue is, because we are never going to build the 
kind of transmission or capacity that we need, if we are going 
to ask the States that do not need the extra capacity to bear 
the cost of its construction. There has to be a fair way that 
the people who need the energy are paying for the cost of 
receiving the energy or the electricity.
    And I am not saying that our plan is perfect. And I think 
that there are some weak points of it. But it is a very 
important issue, and I am not sure how we are ever going to 
resolve the situation that we are in at this time.
    One other question, just for now, and I will submit the 
rest for the record. And I appreciate your answers, and I thank 
you for that.
    What about the role of State regulators in terms of siting 
transmission planning decisions between the State regulators 
and the Federal? Could you just give a comment about your 
general philosophy about where the lines should be drawn, or 
just a general comment?
    Mr. Kelliher. Who should site transmission?
    Senator Landrieu. Yes, site transmission and how much 
authority should be given at the local level or at the State, 
the Federal level.
    Mr. Kelliher. Okay. I mean, under current law, States site 
transmission. And that is the way it has been since 1935. And I 
think Congress should only change that if a compelling case can 
be made that State siting is not working and there is a need to 
shift it to the Federal level.
    This issue has come up before in the natural gas pipeline 
context. When the Natural Gas Act was first enacted in 1938, 
States had siting over natural gas pipelines. FERC, or its 
predecessor agency, the Federal Power Commission, was not given 
authority to site pipelines.
    Ten years later, in 1948, Congress stepped in, preempted 
the States, and transferred it to FERC, again, its predecessor. 
Something happened in that 10 years to convince Congress that 
State siting was not going to work on interstate natural gas 
pipelines. We have nearly 70 years of history in the area of 
siting electricity transmission lines. And Congress has not 
come to the same conclusion.
    Senator Landrieu. Okay. Thank you.
    Mr. Chairman, I appreciate it. That ends my questions.
    Senator Craig. Senator, thank you for your participation.
    Mr. Kelliher, thank you very much for being with us, for 
your candidness. I cannot prejudge timetables here. You have 
heard some concern expressed by some of my colleagues today 
about another commissioner slot and how that gets filled, and I 
know that is being addressed at this time. So I am sure that 
you have waited some time already and will anticipate a bit 
longer in that wait.
    But at the same time, I think this committee, and certainly 
this Senator, recognizes the importance of filling these 
positions on the Commission so that it can be at full force in 
its decision making. And so I will--I trust that we will act 
expeditiously and encourage the administration to move quickly, 
also.
    With that, I had mentioned that the record will stay open 
until 6 p.m. this evening for any additional questions to be 
offered for your response, to Senators who might offer.
    With that, this hearing will stand adjourned. And again, I 
thank you.
    Mr. Kelliher. Thank you, sir.
    [Whereupon, at 3:50 p.m., the hearing was adjourned.]
                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

                                                 February 21, 2003.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Chairman Domenici: Enclosed are my responses to questions for 
the record of the Senate Energy and Natural Resources Committee's 
February 11, 2003 hearing to consider my nomination to be a member of 
the Federal Energy Regulatory Commission.
    If you have further questions or need additional information, 
please let me know.
            Sincerely,
                                                Joseph T. Kelliher.
              Responses to Questions From Senator Campbell
    Question 1a. As a FERC Commissioner, one of your first duties would 
be to implement the proposed Standard Market Design Rule. As I am sure 
you are aware, the SMD is extremely controversial with large regions of 
the country.
    In fact, Colorado's Public Utilities Commission stated that the 
``SMD embodies the dictionary definition of impudence: the quality of 
being offensively bold. While boldness may be required where problems 
are manifest and immediate, it becomes offensive when it upsets settled 
jurisdictional understanding and offers expensive Procrustean solutions 
for yet-to-be documented problems.''
    In large measure, Colorado is concerned that the SMD fails to 
recognize regional differences, and that FERC's broad approach could 
injure ratepayers.
    Do you agree that electricity markets are regional in nature?
    Answer. I agree the United States does not have a national 
electricity market, and electricity markets in this country are 
regional in nature.
    Question 1b. In devising policies to meet the needs of regional 
markets, do you believe that the states within those regions should 
have a role in deciding such policies? Specifically, would you support 
FERC granting deference to the collective advice it receives from 
states in the Western Interconnection?
    Answer. I agree States should have a role in devising regional 
market rules. I also agree FERC should work closely with the States in 
the development of market rules and regulatory policies, and grant 
States deference. Collaboration between FERC and the States is 
essential. To have any value, collaboration must be meaningful. Our 
electricity laws reflect a Federalist approach. States have very 
important responsibilities; FERC also has important responsibilities. I 
respect the role of the States in electricity regulation and assure you 
if confirmed I will work closely with the States.
    Question 2a. Colorado and other western states are concerned with 
the SMD's jurisdictional application. Much of the West's transmission 
and generation infrastructure is owned by non-FERC jurisdictional 
entities. For example cooperative and municipally owned utilities, as 
well as the Western Area Power Administration are not FERC 
jurisdictional, yet provide a large share of Colorado's electricity.
    How do you imagine the SMD would work considering these entities 
are not covered by the SMD?
    Answer. Congress made a very deliberate decision in 1935 when it 
consciously refrained from granting FERC authority over State and 
municipal utilities, rural electric cooperatives, and Federal utilities 
such as the Bonneville Power Administration and Western Area Power 
Administration. I respect the judgment of Congress. I understand these 
nonjurisdictional utilities represent roughly half the Western power 
market. It is necessary that FERC work closely with the region to 
develop regional market rules. Under current law, FERC cannot command 
nonjurisdictional utilities to adhere to any market rules, and 
nonjurisdictional utilities are free to decide whether to voluntary 
bind themselves. They will only do so if these rules make sense in the 
West.
    Question 2b. If confirmed as a FERC commissioner, how would you 
balance the detrimental effect on consumers against broad policy 
objectives?
    Answer. If confirmed by the Senate, I would place the interests of 
consumers first and foremost.
               Responses to Questions From Senator Smith
    Question 1. In response to a question at the hearing, you stated 
that the Federal Power Act provided clear guidance on the jurisdiction 
of federal and state regulators with respect to electricity, and that 
those lines of authority still work. Can you tell me where ``bundled'' 
retail sales fall in the guidance provided by the Federal Power Act?
    Answer. There is no question retail sales are under the 
jurisdiction of the States. Under the Federal Power Act, States have 
exclusive jurisdiction over retail sales and ``facilities used for the 
generation of electric energy or over facilities used in local 
distribution or only for the transmission of electric energy in 
intrastate commerce, or over facilities for the transmission of 
electric energy consumed wholly by the transmitter.'' The Act also 
provides that FERC jurisdiction ``extend[s] only to those matters which 
are not subject to regulation by the States.''
    Question 2. If FERC's Order 888 prevents undue discrimination on 
the transmission system, why is the proposed rulemaking on standard 
market design necessary? Doesn't the FERC have the tools through Order 
888 or through any orders on regional transmission organizations to 
remedy undue discrimination in those limited geographic areas where it 
may actually be shown to exist?
    Answer. In the Standard Market Design proposed rule, FERC found 
that Order 888 has not eliminated undue discrimination and preference 
and ``unduly discriminatory transmission practices have continued to 
occur . . . . That finding is the legal basis for the proposed rule. 
Under section 206(a) of the Federal Power Act, if FERC determines that 
``any rate, charge[], or classification . . . for any transmission or 
sale subject to the jurisdiction of the Commission . . . is unjust, 
unreasonable, unduly discriminatory or preferential, the Commission 
shall determine the just and reasonable rate, charge, classification, 
rule, regulation, practice, or contract to be thereafter observed and 
in force, and shall fix the same by order.'' So, if FERC finds undue 
discrimination and preference exists in transmission subject to its 
jurisdiction, it has a statutory duty to act. The Standard Market 
Design proposed rule is the specific action FERC has proposed to remedy 
undue discrimination and preference. I have not prejudged whether I 
agree with this finding. If confirmed by the Senate, I would make a 
decision based solely on the record. If I were to make an independent 
judgment that the record supports such a finding, in my view FERC would 
have a legal duty to take some action. That action need not take the 
form of the Standard Market Design proposed rule. I agree FERC has a 
number of tools at its disposal, and has discretion on what specific 
action it can take.
    Question 3. FERC's standard market design rule is based on the 
theory that essential electricity services like transmission should be 
``allocated to those who value them most.'' As I've stated before 
publicly, those who value them the most and those who can pay the most 
for them are not always the same thing. How does such an allocation 
scheme benefit rural and residential customers?
    Answer. I am not convinced that allocation of transmission rights 
based on an auction is appropriate. If confirmed by the Senate, I would 
have to be persuaded by the record before I would support an allocation 
based on auction.
    Question 4. How does a financial tool to handle transmission 
congestion, or locational marginal pricing, benefit the retail 
customer?
    Answer. I am not convinced that locational marginal pricing and 
congestion revenue rights benefit consumers. If confirmed by the 
Senate, I would have to be persuaded by the record before I would 
support locational marginal pricing and congestion revenue rights in 
Standard Market Design or regional transmission organization 
proceedings.
             Responses to Questions From Senator Feinstein
    Question 1. Since FERC has an obligation to ensure rates are just 
and reasonable, and selling energy at market-based rates is a 
privilege, not a right, shouldn't the Federal Energy Regulatory 
Commission have rescinded Reliant's authority to sell power at market-
based rates to send a message that fraud and manipulation like we see 
in these transcripts will not be tolerated?
    Answer. I have reviewed the transcript of the conversations of the 
Reliant employees and on a personal level find the statements 
reprehensible. I agree authorization to sell power at market-based 
rates is a privilege, not a right, and FERC can revoke market-based 
rate authorization. Under the right circumstances, FERC should do just 
that. I am not familiar with the record in the Reliant case. All I have 
seen is the transcript. If confirmed by the Senate, I may have to make 
a decision on this matter, and I would have a legal responsibility to 
make a decision based solely on the record. I assure you if I am 
confirmed I will review the record and make an independent judgment on 
whether revocation of Reliant's market-based rate authorization is 
appropriate.
    Question 2. What type of fraud and manipulation would there have to 
be for you to vote to rescind a wholesale generator's authority to sell 
at market-based rates? If all Reliant has to do is pay back the money 
they made withholding the power, what is to stop them or another 
company from manipulating the market again?
    Answer. Under certain circumstances, it is appropriate to hold a 
corporation liable for the acts of directors, officers, employees, and 
agents. It all depends on the facts of the case. As I indicated, I am 
not familiar with the record in the Reliant case. I agree authorization 
to sell power at market-based rates is a privilege, not a right, and 
FERC can revoke market-based rate authorization. I agree penalties must 
be sufficient to discourage market manipulation. As I noted at the 
hearing, for years I have believed the criminal penalties in the 
Federal Power Act are woefully inadequate. Well before the Enron 
marketing strategies were revealed, I advocated tougher criminal 
penalties, both higher monetary penalties and longer prison terms. In 
my view, the penalties authorized by Congress in the Federal Power Act 
are unlikely to discourage criminal behavior. I discuss my views on 
appropriate penalties in my response to question 7.
    Question 3. Do you believe Reliant's withholding of power from the 
Western Energy Market was confined to only two days--June 21 and 22 of 
2000? Do you believe Reliant was the only company to withhold power 
during the Western Energy crisis?
    Answer. I have no basis to believe Reliant's withholding of power 
was confined to the two days in question, and have no reason to believe 
Reliant was the only company to engage in withholding during the 
Western power crisis. However, any determination would have to be based 
on the record.
    Question 4. When Reliant held power offline and prices soared, 
other wholesale generators profited as much as Reliant, if not more, 
because the market clearing price was paid to all parties bidding into 
the California market. Is there a remedy for this? If not, what is to 
prevent Reliant from holding power offline one day and another firm 
doing it the next day and a different firm doing it the day after that?
    Answer. I agree there is a need to take firm steps to prevent 
market manipulation. One approach would be for FERC to use its existing 
legal authority to prohibit manipulative practices such as withholding. 
FERC has a legal duty under section 206 of the Federal Power Act to 
prevent unjust, unreasonable, unduly discriminatory or preferential 
rates, charges, classifications, rules, regulations, practices and 
contracts. An argument could be made that FERC has legal authority to 
prohibit manipulative practices as inherently unjust, unreasonable, 
unduly discriminatory or preferential. I would support that approach. 
There would likely be legal challenges to any Commission effort in this 
area. Regardless of the means, conspiracy to manipulate markets should 
be prohibited.
    Question 5a. I strongly believe that FERC has an obligation to 
families and businesses in the West to use its subpoena authority to 
get all of the tapes from Reliant and review the conversations to see 
if the company intentionally withheld power other days besides June 21 
and 22. Do you agree?
    Answer. There is a need to investigate whether there were other 
instances of withholding during the Western power crisis. If it were 
necessary to use FERC's subpoena authority to get additional 
information and conduct such an investigation, I would support doing 
so.
    Question 5b. Would you support releasing these tapes and other 
evidence of wrongdoing to the public?
    Answer. As a general matter, I support disclosure consistent with 
other legal constraints. I would support releasing evidence of market 
manipulation to the public.
    Question 6. Last week I sent a letter to FERC Chairman Pat Wood 
asking the Commission to lift its order that keeps all evidence of 
fraud and manipulation that is uncovered before February 28th secret. I 
sent the letter because I believe FERC must serve the public interest 
and people have a right to know the extent of fraud and manipulation 
that has occurred in the energy sector. Would you support lifting the 
protective order that keeps information found by the California parties 
seeking refunds confidential?
    Answer. As a general matter, I support releasing evidence of market 
manipulation to the public. I am not familiar with the legal issues 
associated with the use of protective orders, however. If confirmed by 
the Senate, I would have a responsibility to make decisions based 
solely on the law and the facts.
    Question 7. What should be the punishment for companies and 
individual employees that deliberately withhold power to drive prices 
up and cause blackouts?
    Answer. There is a need for a range of penalties for both companies 
and individuals that engage in market manipulation. Penalties for 
corporations could include significant civil and criminal penalties and 
revocation of market-based rate authorization. Penalties for 
individuals could include significant civil and criminal penalties, 
longer prison terms, and a lifetime ban on employment in the 
electricity industry.
    Question 8. As you know, I plan to introduce legislation with 
Senators Fitzgerald, Lugar, Harkin, Cantwell, Wyden, and Leahy to bring 
oversight to unregulated energy trading and increase penalties for 
misconduct. Will you support this bill?
    Answer. I agree there is a need to prevent market manipulation, 
agree there is a need for legislation, and support the goals of your 
legislation.
              Responses to Questions From Senator Landrieu
    Question 1. Do you believe it is proper to charge customers in one 
region of the country extra costs for constructing transmission 
facilities, in order solely to benefit customers in another region of 
the country with higher wholesale electric costs?
    Answer. No.
    Question 2. Do you believe that it is appropriate for the states to 
retain the authority to veto any transmission planning decision based 
on legitimate and reasonable concerns?
    Answer. Under current law, States retain the authority to site 
transmission facilities. In my view, Congress should only consider 
changing the law if a compelling case can be made that State siting is 
not working.
    Question 3. Do you believe state regulators should retain a role in 
market[] monitoring after the implementation of SMD? What role?
    Answer. I agree States should retain a role in controlling market 
power. Under current law, States retain exclusive authority over retail 
markets. So, States have responsibility to control market power in 
retail markets. Market monitoring in Standard Market Design is one of 
the areas addressed by public comments. I believe a State role in 
market monitoring is appropriate, and will review public comments that 
discuss the State role.
    Question 4. Do you believe that it would be appropriate to do 
economic studies to determine the costs and benefits of SMD 
implementation, prior to requiring such implementation?
    Answer. I agree there should be some rationale basis to believe 
Standard Market Design will result in consumer benefits before 
implementation of a final rule. Economic studies could provide such a 
basis.
              Responses to Questions From Senator Cantwell
    Question 1a. The western electricity crisis continues to devastate 
the economy of my home state. And yet, consumers in Washington continue 
to await any action by FERC to help remedy the situation. I know that 
you cannot comment on the specifics of any particular case. However, 
these questions resemble those I have previously asked FERC Chairman 
Wood in hearings before the Energy Committee.
    Specifically, I know that you are acquainted with the smoking-gun 
Enron memos, in which the company laid out strategies such as Fat Boy, 
Get Shorty, Death Star and the like, to drive up prices in the west. 
Similarly, I assume you are acquainted with FERC's recent order 
involving Reliant, in which that company agreed to a settlement after 
transcripts were revealed in which traders admitted the marketer was 
withholding power.
    Do you believe that these strategies in general--using various 
means to create phantom congestion, shipping power out of California to 
evade price caps and deliberately withholding power, to name a 
fewindicate market manipulation?
    Answer. The Enron marketing strategies certainly indicate an intent 
to manipulate markets; many of these strategies were rooted in outright 
fraud and deception.
    Question 1b. Do you agree with Chairman Wood's statement before 
this Committee, that there is no circumstance in which a transaction 
resulting from manipulative market practices can be ``in the public 
interest,'' or ``just and reasonable?''
    Answer. Under the Federal Power Act, FERC has an absolute duty to 
prevent unjust and unreasonable rates, regardless of causation. Market 
manipulation is one possible cause of unjust and unreasonable rates. 
Securities and commodities law draw a distinction between market 
manipulation and attempts to manipulate markets, because the 
possibility exists an attempt to manipulate markets may be 
unsuccessful. Manipulative practices in electricity markets should also 
be prohibited regardless of whether they are successful.
    Question 1c. Do you agree with the Commission when, in its June 19, 
2001 order, it wrote that there is and was during the crisis ``a 
critical interdependence among prices in the [California] ISO's 
organized spot markets, the prices in the bilateral spot markets in 
California and the rest of the West, and the prices in forward 
markets''?
    Answer. As a general matter, I believe there is a relationship 
among prices in the spot markets in the West and forward markets. The 
exact nature of that relationship is a question of fact that is central 
to the refund and contract cases before the Commission. If confirmed by 
the Senate, I would have a legal responsibility not to prejudge, the 
issues in those cases, and make decisions based solely on the record.
    Question 1d. Because prices in the Northwest are directly impacted 
by prices in California and FERC has determined prices in California 
were unjust and unreasonable, don't you agree that the Commission would 
be discriminating against Northwest consumers if FERC granted refunds 
for overcharges to California consumers, but not refunds for 
overcharges to other consumers, including my constituents?
    Answer. It is my understanding the Commission has ongoing 
proceedings to address the relationship between spot market prices in 
California and those in the Pacific Northwest. I generally believe 
there is a relationship between spot markets in California and spot 
markets in the Pacific Northwest. The exact nature of that relationship 
is a question of fact that is central to the refund cases before the 
Commission. I believe decisions involving refunds should reflect a 
consistent approach. However, I must state I am not familiar with the 
record of these cases, and if confirmed by the Senate I would have a 
legal duty to make decisions solely on the law and the facts.
    Question 2a. When you joined the Bush Administration, the 
President, the Vice President and Secretary of Energy were all 
outspoken opponents of implementing price caps in California and 
throughout the west. Fortunately, Chairman Wood and others brought 
sanity to the situation and imposed caps to reign in the skyrocketing 
electricity prices that have had such a devastating impact on the 
economy of the Northwest.
    Were you aware of then-Enron Chairman Ken Lay's memo to Vice 
President Cheney, urging the Administration to ``reject any attempt to 
re-regulate wholesale power markets by adopting price caps . . .''?
    Answer. I learned of the memo from an article that appeared in The 
San Francisco Chronicle on January 30, 2002, seven months after FERC 
adopted price mitigation.
    Question 2b. Did you, in your capacity as a senior advisor to 
Secretary Abraham, advocate Enron's position, in opposition to the 
price caps that proved so necessary to rein in western energy markets?
    Answer. No.
    Question 2c. If, hypothetically, you had been a commissioner during 
June 2001, would you have voted for the Commission's price mitigation 
order?
    Answer. I may have advocated a different form of price mitigation, 
but if I had been a Commissioner I would have supported price 
mitigation.
    Question 2d. If your nomination is confirmed by the Senate, and a 
situation similar to the western energy crisis were to transpire, would 
you support FERC action to limit the market price for power?
    Answer. If confirmed by the Senate, I would have an absolute legal 
duty to prevent unjust and unreasonable rates. If a situation similar 
to the Western power crisis were to arise, I would support FERC action.
    Question 3a. It seems to me we have learned a number of lessons 
about market manipulation from the western energy crisis. In response 
to the findings of FERC's investigation thus far, would you:
    Support the Commission's adoption of a general tariff provision 
that would explicitly bar companies from withholding available 
generation if it's necessary to meet demand, similar to the tactics 
Reliant employed? If not, why?
    Answer. There is a need to take firm steps to prevent market 
manipulation. The question is how best to accomplish that goal. One 
approach would be for FERC to use its existing legal authority to 
prohibit withholding and other manipulative practices. FERC has a legal 
duty under section 206 of the Federal Power Act to prevent unjust, 
unreasonable, unduly discriminatory or preferential rates, charges, 
classifications, rules, regulations, practices and contracts. An 
argument could be made FERC has legal authority to prohibit 
manipulative practices as inherently unjust, unreasonable, unduly 
discriminatory or preferential. I would support that approach. There 
would likely be legal challenges to any Commission effort in this area.
    Question 3b. Support the Commission's adoption of a general tariff 
provision that makes automatic the disgorgement of profits once FERC 
has found that a company has charged unjust and unreasonable rates? If 
not, why?
    Answer. I agree penalties must be sufficient to discourage market 
manipulation. As I noted at the hearing, I have believed for years the 
criminal penalties in the Federal Power Act are woefully inadequate. 
Well before the Enron marketing strategies were revealed, I advocated 
tougher criminal penalties, both higher monetary penalties and longer 
prison terms. In my view, the penalties authorized by Congress in the 
Federal Power Act are unlikely to discourage criminal behavior. I would 
support a general tariff provision that provides for disgorgement of 
profits in the event a market participant violates clear rules 
governing market manipulation. The legal authority of FERC to impose 
higher penalties through a general tariff provision than provided in 
statute would likely be challenged. For that reason, it may be 
appropriate to consider legislation.
    Question 4a. As you likely know, the Commission's standard market 
design proposal has sparked quite a bit of controversy from the western 
region of the country--including my home state of Washington. To put it 
succinctly, many folks in the Northwest believe that SMD was conceived 
to address problems that don't exist in our region; that FERC's 
proposed pricing scheme might not work on an integrated, hydro-based 
system on the scale of the Federal Columbia River Power System; and 
that the proposal (as written) could void existing transmission 
contract rights and leave consumers holding the bag for higher costs.
    Do you agree that FERC should not and cannot proceed to impose 
uniform national policies such as Standard Market Design--which would 
create new market structures and expose consumers to new risks--without 
clear and accepted evidence that benefits from those policies will 
outweigh the costs, on a region by region basis?
    Answer. I agree FERC should not proceed with Standard Market Design 
unless the record shows that doing so is in the public interest.
    Question 4b. Do you believe FERC has met that burden of proof? 
What, in your opinion, must FERC do to make an affirmative showing that 
the benefits outweigh the risks on a region by region basis?
    Answer. The record of the Standard Market Design proceeding is 
extensive. Public comments total thousands of pages, and reply comments 
were only recently filed. I have not had an opportunity to review the 
complete record, and have reached no final judgment about the proposed 
rule. I agree FERC should not proceed with Standard Market Design 
unless the record shows that doing so is in the public interest.
    Question 4c. Will you commit that you will not support any version 
of Standard Market Design in the absence of concrete evidence that it 
would either lower costs for, or hold harmless, consumers and 
businesses in my home state of Washington?
    Answer. Protecting consumers is FERC's primary responsibility. If 
confirmed by the Senate, I would not support market rules for the 
Pacific Northwest unless I were convinced, based on the record, that 
such rules were in the public interest.
    Question 4d. Do you agree with my opinion that, given the 
devastating impact the FERC-approved California restructuring debacle 
had on the entire economy of the Northwest, that the burden of proof 
should lie with FERC, to demonstrate why its SMD proposal will work, 
rather than with market participants and consumers, who are otherwise 
forced to disprove the Commission's theoretical model of market design?
    Answer. The burden lies with FERC to support the legal foundation 
for Standard Market Design, namely its finding that ``unduly 
discriminatory transmission practices have continued to occur . . . .'' 
The burden would also be on FERC to demonstrate Standard Market Design 
remedies any undue discrimination and is in the public interest. I 
agree Standard Market Design must be based on a record and on facts.
    Question 5a. Obviously, the Federal Power Act unequivocally states 
that wholesale electric rates under FERC's jurisdiction must be ``just 
and reasonable.'' But yet another issue that has recently surfaced--
which bears on the Commission's willingness to act on behalf of 
consumers--pertains to the Mobile-Sierra doctrine. Again, while I know 
you cannot tell me how you would vote on various cases now pending 
before the Commission, I would like to understand a little about your 
thinking related to the Mobile-Sierra doctrine.
    In response to a question I asked at a hearing of this Committee 
last summer, Chairman Wood told me that, in his view, the Mobile-Sierra 
``public interest'' standard can't apply to market-based rate contracts 
unless the parties agree to explicitly bind themselves to the ``public 
interest'' standard of review. Do you agree with Chairman Wood on this 
point--that the Mobile-Sierra doctrine doesn't apply in a market-based 
rate context unless the parties affirmatively agree to waive the just 
and reasonable standard?
    Answer. I understand the importance of this issue to your State and 
am aware of your strong interest in this matter. Your question goes 
directly to the heart of contract reform cases pending before FERC. The 
principal legal issue in those cases is which legal standard governs, 
the just and reasonable standard or the public interest standard. If 
confirmed by the Senate, I would have an affirmative duty not to 
prejudge the issues and to rely solely on the record. I assure you if I 
am confirmed I will personally review the legal precedents and make an 
independent judgment based on the law and the facts.
    Question 5b. The marketers that made outrageous amounts of money 
from forward contracts signed during the western energy crisis argue 
that FERC implicitly approves contracts as ``just and reasonable'' when 
the Commission grants the general authority to charge market-based 
rates. Thus, they argue, any further review of these contracts should 
be conducted under the ``public interest'' standard. If the Commission 
were to adopt this view, why shouldn't Congress explicitly prohibit 
marketers from charging market-based rates in order to ensure that the 
plain meaning of the Federal Power Act--the just and reasonable 
standard--is not ignored?
    Answer. FERC has an absolute legal duty under the Federal Power Act 
to prevent unjust and unreasonable rates. The Act grants FERC 
discretion on how to discharge this duty. Authorization to sell power 
at market-based rates is a privilege, not a right, and FERC can revoke 
authorization. Under the right circumstances, FERC should do just that.
    Question 5c. I am also concerned about this issue because, as you 
know, the Commission has already declared spot market transactions in 
California ``unjust and unreasonable'' and is in the process of 
assessing refunds for those consumers. Due to the interconnected nature 
of the western markets, it's clear that a number of utilities in my 
state sold into these markets--sometimes under federal order to do so. 
Given this debate over the Mobile-Sierra doctrine, I am concerned that 
with regard to both spot transactions in the Northwest and forward 
contracts throughout the West, the Commission might chose to apply the 
more stringent public interest standard to the claims of utilities in 
my state. Do you see any reason that consumers in Washington and other 
states in the West should be treated more harshly than California 
ratepayers, which are being protected by the just and reasonable 
standard?
    Answer. As I stated earlier, I generally believe there is a 
relationship between spot markets in California and spot markets in the 
Pacific Northwest. The exact nature of that relationship is a question 
of fact central to cases before the Commission. I also believe 
decisions involving refunds should reflect a consistent approach. 
However, I must state that I am not familiar with the record of the 
pending cases, and if confirmed by the Senate I would have a legal duty 
to make decisions solely on the law and the facts.
    Question 6. During oral testimony before the Energy Committee, you 
failed to answer numerous questions on the grounds you may have to 
recuse yourself in matters on which the Commission may vote at some 
time in the future.
    In your view, do recent statements by Commissioner Brownell, widely 
reported by the energy trade press, in which she suggested at a 
conference that ``I did not [come to FERC] to undo contracts'' and that 
``I'm not sure that manipulation in the market in fact affected prices 
as significantly as people may have thought and therefore may have 
affected contract prices,'' constitute grounds for her recusal from 
pending cases at FERC that involve the reformation of contracts?
    Answer. FERC has authority to reform contracts, and in certain 
circumstances contract reform is appropriate. If confirmed by the 
Senate, I would have no predilection against reforming contracts if the 
circumstances so demand.
    Question 7. As you may be aware, the Performance and Management 
Assessment included in the President's Fiscal Year 2004 budget included 
statements challenging the structure of all the federal Power Marketing 
Administrations, including the Bonneville Power Administration--which 
is of obvious concern to me and my constituents. I was a bit puzzled, 
however, because these statements directly conflict with assurances 
Energy Secretary Abraham gave me at his confirmation hearing.
    If you are confirmed by the Senate, would you--like Secretary 
Abraham--support the continuation of the statutorily-mandated system of 
cost-based electricity rates and regional preference that have long 
been the engine of the Northwest economy?
    Answer. Since enactment of the Bonneville Project Act of 1937, 
Bonneville has operated under a regime of cost-based rates, public 
preference, and regional preference. I respect the judgment of 
Congress.
    Question 8. As you may be aware, the Senate energy bill passed 
during the 107th Congress included an additional 81.3 billion in 
borrowing authority for the Bonneville Power Administration, primarily 
to make much needed improvements to the Northwest transmission system, 
but also for the purpose of assisting the agency in meeting its 
multiple public purpose obligations. The Omnibus Appropriations bill 
now the subject of conference deliberations includes 5700 million in 
this borrowing authority.
    Chairman Wood has previously stated before this Committee that he 
supports the $1.3 billion in borrowing authority included in the energy 
bill, and would support even more if it were available. Do you agree 
with Chairman Wood on this point?
    Answer. There is a need for more transmission in the Pacific 
Northwest. Bonneville owns roughly 80 percent of the grid in the 
region, and to my knowledge the other transmission owners have no plans 
to significantly expand their transmission systems. So, an expansion of 
the Bonneville transmission grid seems warranted. I understand 
Bonneville needs an increase in borrowing authority to fund such an 
expansion. I am not familiar enough with the details to have a view on 
the appropriate size of any increase.
               Response to Question From Senator Schumer
    Question 1. Mr. Kelliher, you once represented Public Service 
Electric and Gas. PSEG is currently involved in a dispute before FERC 
regarding contracts from 1975 and 1978 in which PSEG contracted to 
transmit power from upstate New York to New York City until 2012. The 
New York utility that entered into the contract claims that PSEG has 
failed to meet its full obligations to transmit power under the 
contract. Given your previous relationship with PSEG, would you be 
willing to recuse yourself from this or any other PSEG related decision 
laid before FERC?
    Answer. If confirmed by the Senate, I commit to consult with the 
FERC Designated Agency Ethics Official and follow his or her advice to 
avoid any real or perceived conflicts of interest with respect to 
matters in which Public Service Electric and Gas is a party.
              Responses to Questions From Senator Bingaman
                              electricity
    Question 1. Do you believe that the movement toward competitive 
markets that we have been seeing the last few years is positive, or 
negative? Can it be sustained successfully?
    Answer. Congress set us on the path to competitive wholesale power 
markets 25 years ago with enactment of the Public Utility Regulatory 
Policies Act of 1978. Congress further promoted competitive markets 
with enactment of the Energy Policy Act of 1992. FERC has pursued 
policies consistent with the direction set by Congress. Competitive 
wholesale markets have great potential to benefit consumers, but the 
record of competitive markets has been mixed. Between 1989 and 1999, 
wholesale power prices fell 27 percent. Much of this decline was 
reversed by the Western power crisis, although prices have fallen 
significantly since then. I believe the potential of competitive 
markets can be realized and competition in wholesale markets can be 
sustained.
    Question 2. If you believe that this movement is positive, but is 
not as successful as it should be, what needs to be done to get it on 
the right track? At the FERC? Legislatively?
    Answer. We have been going through a long transition to competitive 
power that began 25 years ago. The record of competitive markets has 
been mixed, and we are at an important crossroads in that transition. 
There is a need to take steps to realize the potential of competitive 
wholesale power markets for consumers. In my view, it is important to 
first reach agreement on broad policy goals. Once agreement is reached 
on broad policy goals, it should be easier to come to terms with the 
specific policy proposals that advance those goals, and to what extent 
action is required by FERC or by Congress. There are a number of broad 
policy goals that could make markets more competitive, such as 
preventing market manipulation and market power abuse, providing 
regulatory certainty, assuring adequate electricity supplies, 
encouraging investment in new generation and transmission, lowering 
barriers to entry, providing greater transparency, and promoting energy 
efficiency. It is difficult to draw the line between which steps FERC 
should take and which steps Congress should take. Current Federal 
electricity policy is the result of a long collaboration between FERC 
and the Congress. It is vital this collaboration continue.
    Question 3. Does the threat of consolidation in the industry 
endanger the development of competitive markets? If so what should be 
done to prevent such consolidation?
    Answer. The potential for abuse of market power does endanger the 
development of competitive electricity markets. Consolidation may 
increase concentration of market power. In order to prevent such 
concentration, FERC must properly weigh both horizontal and vertical 
market power. There also is a need to lower barriers to entry into the 
electricity industry. In addition, it is important to promote 
investment in electricity generation and transmission. It is more 
difficult to abuse market power if electricity supplies are adequate 
and transmission constraints are removed. Price transparency also 
promotes competitive markets.
    Question 4. Is the movement to competitive markets at the retail 
level, which seems to have reversed itself recently, inevitable? If so, 
how long do [you] think it will take before retail competition plays an 
important role in electricity markets?
    Answer. I do not believe that movement to competitive markets at 
the retail level is inevitable, and defer to the judgment of the States 
on whether to open their retail markets to competition, and, if so, 
under what terms. FERC is responsible for regulating wholesale power 
markets. In my view, making sure wholesale power markets operate 
effectively is important regardless of whether States open their retail 
markets.
    Question 5. Do captive ratepayers of vertically-integrated 
utilities still need the protections contained in Federal statutes?
    Answer. You answered this question best in the nomination hearing 
for Chairman Wood and Commissioner Brownell on May 16, 2001, when you 
recalled what the U.S. Court of Appeals for the District of Columbia 
Circuit stated in National Association for the Advancement of Colored 
People v. Federal Power Commission: ``Of the Commission's primary task 
there is no doubt, however, and that is to guard the consumer from 
exploitation by non-competitive electric power companies.'' Unless 
Congress amends the Federal Power Act otherwise, that task remains 
paramount.
    Question 6. Some concern has been expressed in a number of quarters 
about the Vice-[P]resident's Energy Task Force. What role, if any, did 
you play in that Task Force? Is there any reason that you know of that 
we should be concerned about your role in the Task Force and that would 
make you an inappropriate candidate for the Commission?
    Answer. Since January 2001, I have served as Senior Policy Advisor 
to Secretary of Energy Spence Abraham. I was not a member of the staff 
of the National Energy Policy Development Group. I advised the 
Secretary during development of the National Energy Policy. In that 
capacity, I helped develop policy options for possible inclusion in the 
National Energy Policy. The Department of Energy developed its policy 
recommendations for inclusion in the National Energy Policy in the 
following manner. First, we had an internal process where about 90 
career civil servants from various program offices were charged with 
developing policy proposals.
    Second, we had an external process where we reviewed ideas from 
Congress, think tanks, public interest groups, environmental groups, 
and trade associations. Policy proposals from both tracks were 
combined, and I presented them to the Secretary for his consideration. 
We worked through each policy proposal, and the Secretary decided which 
proposals would be forwarded to the National Energy Policy Development 
Group for its consideration. I did not decide which proposals were 
presented to the task force, the Secretary did. Once each agency had 
presented its policy recommendations, the National Energy Policy 
Development Group members, which included the Vice President, various 
Cabinet members, and senior White House staff, made decisions on all 
major policy proposals. A staff-level working group made preliminary 
recommendations on noncontroversial policy proposals. I was a member of 
that working group.
    Those preliminary recommendations were made by consensus and were 
subject to appeal by any agency to the National Energy Policy 
Development Group principals. At no time did I have authority to 
unilaterally adopt policy proposals for inclusion into the National 
Energy Policy, and at no time did I do so. There is no reason I know of 
why you should be concerned about my role in development of the 
National Energy Policy.
                               hydropower
    Question 1. Do you believe that the section 4(e) conditioning 
authority of the resource agencies should be modified legislatively in 
order to facilitate the hydroelectric relicensing process?
    Answer. I believe Congress should only modify the section 4(e) 
conditioning authority of Federal resource agencies if it determines 
such conditioning authority is being abused, and that alternative 
approaches provide for adequate protection of fish and wildlife and 
other beneficial public uses.
    Question 2. What policies would you like to see the Commission 
pursue in order to improve the hydroelectric relicensing process?
    Answer. Generally, I believe the hydroelectric relicensing process 
could be improved by moving decisionmaking up to earlier stages in the 
process. That should shorten the length of relicensing proceedings, 
lower the costs to parties and stakeholders, and provide greater 
regulatory certainty. That may require involving FERC staff earlier in 
the process. I also believe FERC should continue to encourage 
settlements.
              Responses to Questions From Senator Johnson
    Question 1. Municipal utilities, cooperatives and federal power 
marketing agencies are considered non-jurisdictional and do not fall 
under FERC jurisdiction currently. Do you feel it will be necessary to 
give FERC jurisdiction over the agencies in order for SMD to work? If 
so, why? If not, why not?
    Answer. Congress made a very deliberate decision in 1935 when it 
consciously refrained from granting FERC authority over State and 
municipal utilities, rural electric cooperatives, and Federal 
utilities. I respect the judgment of Congress. Under current law, FERC 
cannot command nonjurisdictional utilities to adhere to any market 
rules, and nonjurisdictional utilities are free to decide whether to 
voluntary bind themselves. They will only do so if these market rules 
make sense.
    Question 2. FERC has proposed ``license plate'' transmission 
pricing with a transition to ``postage stamp'' pricing as well as some 
discussion about ``participant funding'' pricing for new transmission. 
Which of these are appropriate? What would the affects of the different 
methods be in South Dakota where we have great distances and miles of 
transmission with little new load growth?
    Answer. There are concerns rate pancaking impedes competition in 
wholesale power markets. Elimination of rate pancaking is an 
appropriate goal. However, I am concerned about cost shifting that may 
occur as a result, and believe it is important to take steps to avoid 
substantial cost shifts. There is no question there is a need to expand 
the transmission grid. Which transmission pricing approach best serves 
that need may vary depending on regional characteristics. If confirmed 
by the Senate, I will carefully weigh those considerations in any 
decisions I may make on transmission pricing.
              Responses to Questions From Senator Bunning
    Question 1. Kentucky has the lowest residential electricity rates 
in the country. The FERC's proposed Standard Market Design rule, or 
SMD, appears to penalize states with low costs to benefit those with 
high costs. Do you believe that FERC's SMD rule will negatively affect 
Kentucky's rates?
    Answer. The record of the Standard Market Design proceeding is 
extensive. Public comments total thousands of pages, and reply comments 
were only recently filed. I have not had an opportunity to review the 
complete record, and have reached no final judgment about the proposed 
rule. In my view, FERC should not proceed with Standard Market Design 
unless the record shows that doing so is in the public interest.
    Question 2. One size does not fit all. The nation's electricity 
market is not uniform, and instead, each region of the country has 
different needs. Do you believe the SMD takes into account regional 
differences and individual state interests?
    Answer. I agree the United States does not have a national 
electricity market, and electricity markets in this country are 
regional in nature. There are significant differences among these 
regional power markets. In my view, it is essential that market rules 
reflect these regional differences.
    Question 3. A portion of Kentucky is served by TVA. It is my 
understanding that public power companies within TVA will not be 
subject to SMD. How do you propose that the SMD rule will benefit the 
country if public power companies and TVA, which make up a large 
portion of the nation's electricity market, do not even have to follow 
it? How will this affect the rest of Kentucky companies that will be 
forced to follow SMD?
    Answer. Congress made a very deliberate decision in 1935 when it 
consciously refrained from granting FERC authority over State and 
municipal utilities, rural electric cooperatives, and Federal utilities 
such as the Tennessee Valley Authority. I respect the judgment of 
Congress. Under current law, FERC cannot command nonjurisdictional 
utilities to adhere to market rules, and nonjurisdictional utilities 
are free to decide whether to voluntary bind themselves. They will only 
do so if these rules make sense.
    Question 4a. TVA recently announced a rate increase for its 
customers. Currently, TVA is not subject to FERC jurisdiction for its 
rates, charges, and terms, and therefore, is not subject to any 
oversight other than by themselves and Congress. Placing TVA under FERC 
would require it to be subject to the same regulatory requirements as 
other utility companies. What do you think of FERC overseeing TVA for 
how it operates its transmission grid and how it charges its customers 
for wholesale electricity?
    Answer. As you say, for all practical purposes FERC has no 
regulatory authority over the Tennessee Valley Authority (TVA). TVA is 
largely exempt from FERC regulation under section 201(f) of the Federal 
Power Act, since TVA is an ``agency, authority, or instrumentality'' of 
the United States. That exemption also applies to other Federal 
utilities, namely the four power marketing administrations. Other 
Federal laws--the Flood Control Act of 1944 and the Pacific Northwest 
Electric Power Planning and Conservation Act--provide for limited FERC 
review of wholesale power rates charged by power marketing 
administrations. Under current law, Congress is TVA's regulator. For 
that reason, and since only Congress can change the law, I defer to 
Congress.
    Question 4b. Do you think FERC oversight will bring more 
competition into TVA's region that right now operates under its 
monopoly?
    Answer. Under current law, there is no wholesale competition in the 
region. There have been a number of legislative proposals in the past 
to amend the Tennessee Valley Authority Act of 1933. Proposed reforms 
include lowering the so-called ``TVA fence,'' reforming TVA's power 
sales contracts, providing open access to the TVA transmission grid, 
and assuring stranded cost recovery. Legislation would be required to 
introduce competition into the region. I defer to Congress on the 
threshold issue of whether to change the law to introduce wholesale 
competition into the Tennessee Valley.
                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                                            Public Citizen,
                                 Washington, DC, February 11, 2003.
Senate Committee on Energy and Natural Resources, Dirksen Building, 
        Washington, DC.
    Dear Chairman Domenici: Today your Committee will discuss the 
President's appointment of Joseph Kelliher to one of two open seats at 
the Federal Energy Regulatory Commission (FERC). While the Energy 
Committee traditionally gives wide latitude to the President's FERC 
nominees, Public Citizen believes that Mr. Kelliher's controversial 
role as liaison to Vice President Cheney's National Energy Policy 
Development Group make the nominee uniquely unfit for a FERC 
commissioner. We therefore ask the Committee to oppose or delay Mr. 
Kelliher's appointment to FERC until the questions raised in this 
letter are answered in a satisfactory manner.
    Public Citizen challenges the selection of Mr. Kelliher because he 
abused his responsibilities to the public while at the Department of 
Energy. As one of the primary coordinators of the Administration's 
National Energy Policy Development Group, Kelliher actively solicited 
the advice of large energy industry corporations and associations while 
ignoring similar requests from organizations representing the public 
interest. Although these meetings and conversations were carried out in 
private, the Administration has so far successfully fought to limit the 
release to only a small percentage of these communications. From this 
sliver of information, it is clear that whole email passages and other 
correspondence were simply lifted from language supplied by lobbyists 
and placed not only into the National Energy Policy, but also carry the 
force of law through Executive Order and regulatory rulemakings.
    Although the U.S. Government Accounting Office has recently 
declined to pursue its landmark legal action against the Executive 
Branch to force the Administration to turn key documents over to the 
public, they only did so because continued pursuit of the case would 
consume resources the agency does not have.\1\ So the legal merits of 
the case remain, as evidenced by the lawsuit brought by the 
conservative watchdog organization Judicial Watch remains active and 
continues to proceed through the courts.\2\
---------------------------------------------------------------------------
    \1\ Dana Milbank, ``GAO ends fight with Cheney over files,'' 
Washington Post, February 8, 2003.
    \2\ D.C. District Court, Judicial Watch, Inc. v. National Energy 
Policy Development Group.
---------------------------------------------------------------------------
    Kelliher's inappropriate relationship and communications with 
corporate lobbyists not only tainted the Administration's National 
Energy Policy, but raise questions about the ability of Mr. Kelliher to 
be an impartial voice at FERC. FERC is weathering a storm of criticism 
for its deficient handling of the west coast energy crisis, the 
Commission's failure to maintain any effective enforcement of dozens of 
corrupt energy corporations, the deteriorating relations between FERC 
and nearly half of the state utility regulators who continue to be 
mistrustful of the Commission's jurisdictional intentions, and the 
Commission's poor track record protecting consumers.\3\ With FERC at 
its most crucial juncture in its history, now is not the time to 
nominate an individual with a tarnished record like Mr. Kelliher. For 
these reasons, Public Citizen asks the Committee to oppose or delay Mr. 
Kelliher's appointment to FERC until the questions raised below are 
answered in a satisfactory manner.
---------------------------------------------------------------------------
    \3\ Government Accounting Office, Concerted Actions Needed by FERC 
to Confront Challenges That Impede Effective Oversight, GAO-02-656, 
June 2002, .
---------------------------------------------------------------------------
    Following are summaries of a few of the private email 
correspondences between Kelliher and various lobbyists representing 
energy corporations that saw much of their demands incorporated not 
only into the President's National Energy Policy, but also adopted into 
law through executive fiat.
                kelliher delivers enron's ``dream list''
    Stephen Craig Sayle, former Counsel to the House Commerce 
Committee, worked for Texas Rep. Joe Barton. Sayle and Kelliher shared 
the same boss, although Sayle left the Committee in 1993, whereas 
Kelliher joined in 1995. Sayle now serves as a Vice President of the 
Dutko Group, accepting money from mostly energy and telecom 
corporations to lobby the federal government.
    During the time Kelliher was compiling information for Vice 
President Cheney's National Energy Policy Development Group, Sayle was 
lobbying on behalf of Calpine, El Paso Corp, Enron, NiSource and Trigen 
Energy (a subsidiary of France-based Suez). Together, these 
corporations paid Sayle's firm $550,000 in the first six months of 2001 
alone.\4\ These five companies formed the Clean Power Group, and 
collectively gave 80 percent of their $5.6 million in campaign 
contributions since 1999 to Republican candidates.\5\
---------------------------------------------------------------------------
    \4\ Mid-year lobbying disclosure report filed by the Dutko Group on 
behalf of their client, the Clean Power Group, on August 14, 2001 with 
the U.S. Senate Office of Public Records,  The 
five corporations listed were members of the Clean Power Group at the 
time of Sayle's communications with Kelliher.
    \5\ Center for Responsive Politics, http:/www.opensecrets.org/
industries>.
---------------------------------------------------------------------------
    Two of the five companies now face serious legal problems. Since 
Enron declared bankruptcy in December 2001, it has been revealed that 
top executives and the company's board of directors were aware of 
widespread accounting fraud and of the role the corporation played in 
causing the west coast energy crisis of 2000-01. El Paso Corp. is under 
numerous federal and state criminal investigations for intentionally 
withholding delivery of natural gas in the major pipeline serving all 
of southern California during the energy crisis in order to jack up 
prices and for feeding false data to natural gas publications.
    On behalf of these clients, Sayle corresponded with Kelliher 
through a series of emails beginning on March 23, 2001. Sayle began 
with a long, somewhat rambling email describing his clients' goals 
regarding New Source Review (NSR) and a ``multipollutant strategy,'' 
ending the email with the comment, ``Obviously, this is a dream list. 
Not all will be done. But perhaps some of these ideas could be floated 
and adopted.'' \6\
---------------------------------------------------------------------------
    \6\ All email communications referenced in this letter involving 
Mr. Kelliher can be accessed here: .
---------------------------------------------------------------------------
    With the political capital of companies like Enron behind Sayle's 
proposals, most of the ``dream list'' was in fact incorporated into the 
Bush-Cheney energy plan. Hours after penning the long email, Kelliher 
asked Sayle to summarize the email's main points. Sayle responded the 
same day by writing, ``A multipollutant regulatory strategy should be 
estimated for the power generation sector including: Gradually phased 
in [mercury, nitrogen oxides and sulfur dioxide emissions] reductions; 
Reform/replacement of NSR; Use of market-based/emission trading 
programs; Inclusion of both existing and new plants and equal treatment 
for both. The last bullet is the critical one to ensure that: a) we 
encourage the new generation that is required b) we ensure that the new 
technologies developed through DOE programs can come into the market.''
    This email, along with a follow-up Powerpoint presentation Sayle 
sent to Kelliher (A Comprehensive Multipollutant Emission Control 
Strategy for Power Generation), outlined the Clean Power Group's 
support of the ``cap and trade'' approach to address emissions of 
mercury, nitrogen oxides and sulfur dioxide from power plants, but 
proposed a voluntary cap on carbon dioxide. The proposal also sought 
reforms to New Source Review (discussion of this issue to follow in the 
next section). The Clean Power Group would benefit from such a proposal 
because they could release more emissions under such a ``flexible'' 
plan than under the more stringent rule-making process the Clinton 
Administration had initiated.
    After receiving Sayle's email, Kelliher incorporated much of the 
lobbyist's text into Vice-President Cheney's National Energy Policy 
Development Group: ``The NEPD Group recommends that the President 
direct the Administrator of the Environmental Protection Agency (EPA) 
to propose multi-pollutant legislation . . . that would establish a 
flexible, market-based program to significantly reduce and cap 
emissions . . . provide regulatory certainty to allow utilities to make 
modifications to their plants without fear of new litigation, provide 
market-based incentives, such as emissions-trading credits to help 
achieve the required reductions.'' \7\ And indeed, President Bush's 
``Clear Skies'' initiative, which is directly built upon the 
recommendations in the National Energy Policy, embraces the strategy 
laid out months earlier in Sayle's email.
---------------------------------------------------------------------------
    \7\ Page 3-3. .
---------------------------------------------------------------------------
        kelliher sets stage for federal favor to french company
    The Powerpoint presentation Sayle sent to Kelliher also advocates 
an ``output-based allocation system to reward efficiency (include 
CHP).'' Combined Heat & Power (CHP) is a technology which can improve 
the efficiency of fossil fuel power plants.
    Sayle's request resulted in the National Energy Policy recommending 
``that the President direct the EPA Administrator to promote CHP 
through flexibility in environmental permitting.'' \8\ President Bush 
has proposed spending $52 million in fiscal year 2004 for corporate 
partnerships on distributed generation technologies and CHP.\9\
---------------------------------------------------------------------------
    \8\ Page 4-9. .
    \9\ Page 378, .
---------------------------------------------------------------------------
    Five months after the National Energy Policy Development Group 
released its report, Bush's EPA selected Trigen Energy as a ``founding 
partner'' for the Administration's Combined Heat & Power Partnership, 
which was ``established as a direct result of President Bush's National 
Energy Policy report.'' \10\
---------------------------------------------------------------------------
    \10\ Trigen press release, October 15, 2001. .
---------------------------------------------------------------------------
     southern co., clean power group's successful push to redefine 
                           new source review
    The Clean Air Act imposes sensible public health standards to 
protect people from coal power plant and oil refinery emissions. To be 
fair to industry, the Act exempts, or grandfathers, plants that were 
already built at the time the law was passed in the 1970s. New Source 
Review (NSR) was authorized in the 1977 amendments to the Act to apply 
the tougher environmental standards should grandfathered plants choose 
to make significant modifications or upgrades to their facilities, 
thereby increasing emissions. NSR, therefore, levels the playing field 
by not granting older plants a competitive advantage.
    But lobbyists contacting Kelliher loudly complained that their 
clients needed to do away with NSR because the law inhibited the 
ability of these dirty facilities to continue operating after 
undergoing an upgrade. Sayle, in his communications with Kelliher on 
behalf of the Clean Power Group, argued for ``Reform/replacement of 
NSR.'' But the most extensive email traffic on the issue was between a 
lobbyist for Southern Co. and Kelliher.
    Southern Co. is the second largest operator of coal-fired power 
plants in America, and the largest campaign contributor from the entire 
energy industry since 1999. The company showered 71 percent of its $3.2 
million in campaign contributions over that time period on 
Republicans.\11\
---------------------------------------------------------------------------
    \11\ Center for Responsive Politics, .
---------------------------------------------------------------------------
    On March 23, 2001, Michael J. Riith, a lobbyist for Southern Co, 
wrote this email to Kelliher: ``Good morning. This is the document I 
told you was in `the works' on NSR in relation to the national energy 
strategy. As promised, it is attached. I hope this is helpful. After 
talking with you yesterday, the last thing you need is another issue to 
deal with. Thanks for your consideration. Again. I look forward to 
lunch on Tuesday. Best regards, Mike.''
    The document referenced in this email to Kelliher is titled A 
National Energy Strategy Should Include Reform of EPA 's New Source 
Review Program. The document recommends that ``a National Energy 
Strategy that is focused on increasing supply should find ways to 
resolve the inconsistency between the Strategy's goals and EPA's 
current NSR interpretation . . . which would exclude from NSR review 
projects that are routine repair and replacement and allow utilities 
and other industries to move forward with needed projects.'' Southern 
Co. had a lot to gain from redefining NSR, since the Justice Department 
and the EPA named Southern as one of several utilities in a November 
1999 lawsuit for violation of NSR.
    After Kelliher accepted this language from the Southern lobbyist, 
the Bush National Energy Policy adopted passages quite similar: The 
National Energy Policy Development Group ``recommends that the 
President direct the Administrator of the Environmental Protection 
Agency, in consultation with the Secretary of Energy and other relevant 
agencies, to review New Source Review regulations, including 
administrative interpretation and implementation . . . [and] recommends 
that the President direct the Attorney General to review existing 
enforcement actions regarding New Source Review to ensure that the 
enforcement actions are consistent with the Clean Air Act and its 
regulations.'' \12\
---------------------------------------------------------------------------
    \12\ Page 7-14. .
---------------------------------------------------------------------------
    President Bush took this recommendation and ran with it: the 
Administration announced in November 2002 that factories, oil 
refineries and coal power plants would win exemptions from NSR, 
fulfilling the requests asked of Kelliher.\13\ Granted, opposition to 
NSR within the energy industry was widespread: but the FOIA records 
released thus far reveal zero communication between Kelliher and public 
interest organizations who could argue the merits of retaining the 
status quo interpretation of NSR.
---------------------------------------------------------------------------
    \13\ Nick Anderson, ``Bush Prevails in Clean Air Duel,'' Los 
Angeles Times, January 23, 2003.
---------------------------------------------------------------------------
       big oil presents kelliher, an offer bush doesn't refuse: 
                      ready-made executive orders
    A series of emails in March 2001 between Kelliher and Jim Ford, a 
registered lobbyist with the American Petroleum Institute, documents 
Kelliher's reliance on the industry's proposals to preempt state 
regulation, and includes two proposed Executive Orders, both of which 
Bush eventually adopted and signed into law.
    The American Petroleum Institute represents over 200 oil and gas 
companies. Oil and gas corporations lavished 79 percent of their $57 
million in campaign contributions to Republicans since 1999.\14\
---------------------------------------------------------------------------
    \14\ Center for Responsive Politics, .
---------------------------------------------------------------------------
    On March 20, 2001, the oil industry lobbyist emailed Kelliher a 
document titled, Overview: U.S. Oil and Natural Gas Supply Situation. 
The third page of this document suggests that Bush ``require Executive 
Branch agencies to avoid significant adverse energy consequences in 
proposing regulatory other administrative actions.'' On May 18, 2001, 
Bush signed an Executive Order mirroring the lobbyist's request to 
Kelliher: ``I [President Bush] am requiring that agencies shall prepare 
a Statement of Energy Effects when undertaking certain agency actions . 
. . such Statements of Energy Effects shall describe the effect of 
certain regulatory actions on energy supply, distribution, or use.'' 
\15\
---------------------------------------------------------------------------
    \15\ http://www.whitehouse.gov/news/releases/2001/05/20010518-
6.html
---------------------------------------------------------------------------
    The oil lobbyist's email also asked Kelliher to recommend 
``Executive Branch agencies to review existing rules and policies and 
revise them as necessary to eliminate significant adverse energy 
consequences . . . [and] provide a `strike force' to complement 
existing staff of public land management agencies to immediately reduce 
the tremendous backlog of pending applications for permits to develop 
federal oil and gas leases.'' A similar memo addressed to Kelliher was 
penned by Darrell Henry, director of public affairs for the American 
Gas Association, which sought a strike force ``to streamline regulation 
of exploration and production on federal lands.'' The American Gas 
Association had originally been turned down by the Clinton 
Administration for such an Executive Order when the Association first 
requested it in January 2000.\16\
---------------------------------------------------------------------------
    \16\ Don Van Natta, Jr, ``Executive Order Followed Energy Industry 
Recommendation,'' The New York Times, April 4. 2002.
---------------------------------------------------------------------------
    President Bush again complied, signing a second Executive Order on 
May 18 which read: ``it is the policy of this Administration that 
executive departments and agencies shall take appropriate actions . . . 
to expedite projects that will increase the production, transmission, 
or conservation of energy . . . For energy-related projects, agencies 
shall expedite their review of permits or take other actions as 
necessary to accelerate the completion of such projects . . . There is 
established an interagency task force to monitor and assist the 
agencies in their efforts to expedite their review of permits or 
similar actions, as necessary, to accelerate the completion of energy-
related projects, increase energy production and conservation, and 
improve transmission of energy. The Task Force also shall monitor and 
assist agencies in setting up appropriate mechanisms to coordinate 
Federal, State, tribal, and local permitting in geographic areas where 
increased permitting activity is expected.'' \17\
---------------------------------------------------------------------------
    \17\ http://www.whitehouse.gov/news/releases/2001/05/20010518-
5.html
---------------------------------------------------------------------------
          kelliher and oil fight the states, and the fed wins
    The American Petroleum Institute lobbyist emailed Kelliher a second 
document titled Recommendations for a National Energy Policy on March 
20, 2001. The first regulation about which the oil lobbyist complained 
in this document was the Coastal Zone Management Act of 1972. The law 
guarantees coastal states input in the development of offshore oil 
exploration, especially off the coast of California and in the Gulf of 
Mexico. The oil industry grumbles that some states, like California, 
have used the law to prioritize environmental protection and coastal 
preservation over increased oil drilling. As a result, the oil lobbyist 
urged Kelliher to ``amend the Coastal Zone Management Act to ensure 
that valid offshore natural gas and oil lease rights are protected in 
the CZMA process.'' Such an amendment would limit the ability of states 
to have adequate input over oil development projects off their shores.
    While the Bush Administration declined to copy the exact text used 
by the oil lobbyist, Kelliher and the Administration parroted the 
lobbyist's complaints and recommendations. For example, the oil 
lobbyist email complained that the Coastal Zone Management Act became 
``a tool for unnecessary delay and duplicative regulation of offshore 
exploration and production.'' Bush's National Energy Policy echoes the 
lobbyist's request: ``These delays and uncertainties can hinder proper 
energy exploration and production projects.'' \18\ The oil lobbyist's 
email asks Kelliher to ``direct the Department of Commerce to 
administer state consistency programs to ensure priority consideration 
is given to responsible oil and natural gas development [with regards 
to the Coastal Zone Management Act].'' The Bush Administration produced 
this recommendation on CZMA: ``The NEPD Group recommends that the 
President direct the Secretaries of Commerce and Interior to re-examine 
the current federal legal and policy regime (statutes, regulations, and 
Executive Orders) to determine if changes are needed regarding energy-
related activities and the siting of energy facilities in the coastal 
zone and on the Outer Continental Shelf (OCS).'' \19\
---------------------------------------------------------------------------
    \18\ Page 5-7, .
    \19\ Page 5-8,.
---------------------------------------------------------------------------
    That Bush Administration recommendation came after Kelliher 
returned this email on March 21, 2001 to the oil lobbyist: ``Do you 
have more detail on the CZMA issue? Your description suggests that 
legislation is not needed, and that changing the regulations would 
suffice. Is that true? Also, please explain in more detail how the 
current regulations relating to consistency impede offshore 
development, it is not clear what the problem is. Thanks.'' The oil 
lobbyist responded on March 22. ``We do have more. I'll get back to you 
with supplementary material as soon as possible. Curious as to whether 
any of the other suggestions we've made--particularly the short-term 
administrative measures recommended in the first e-mail I sent you--
have any traction. By the way, I heard some word yesterday that the NEP 
development group may have produced a draft. Can you shed any light on 
this? ``Bush Administration lawyers unsuccessfully argued that the 
state of California, through the Coastal Zone Management Act, had no 
right to review the Clinton Administration's decision to allow 
increased drilling off the state's coast by renewing existing 
leases.\20\ The Bush Administration's willingness to take California to 
court contrasts with the President's approach to his brother, governor 
of Florida. President Bush announced plans to protect Governor Bush's 
coast by spending $120 million to buy oil and gas rights in the 
Everglades and another $115 million to pay oil companies to stop 
drilling plans in the Gulf of Mexico. President Bush rejected a similar 
offer proffered by Governor Davis of California.
---------------------------------------------------------------------------
    \20\ Unanimous decision by a three-judge panel of the 9th U.S. 
Circuit Court of Appeals, State of California vs. Norton, December 
2002.
---------------------------------------------------------------------------
                 kelliher, treats oil companies royally
    The oil lobbyist's memo also recommends promoting and expanding the 
federal government's royalty in kind pilot program. The program allows 
corporations drilling for oil on public land to forgo paying cash 
royalties to taxpayers. Instead, companies provide an amount of the oil 
as an in-kind contribution to the federal government. Since federal 
land supplies one-third of the oil and gas produced in the United 
States, expansion of this program could have a significant impact on 
the federal treasury.
    The Bush Administration accepted the lobbyist's recommendation, as 
the National Energy Policy requests that the Secretary of the Interior 
``explore opportunities for royalty reductions.'' \21\ A recent 
Government Accounting Office report, however, criticizes the current 
royalty in kind program, concluding that the government is unable to 
determine whether taxpayers receive a fair shake from the program. For 
example, the GAO concluded that since the pilot program currently 
``relies upon royalty payers to self-report the amount of oil and gas 
they produce, the value of this oil and gas, and the cost of 
transportation and processing that they deduct from royalty payments, 
there are concerns about the accuracy and reliability of these data.'' 
\22\ Indeed, the industry's cheerleading for the royalty in-kind 
program stems from recent court decisions that found U.S. oil 
companies, equipped with an ``honor system'' self-reporting system, 
routinely underreported the volume of oil and natural gas removed from 
taxpayer land, therefore allowing the companies to cheat the public. By 
seeking to end cash payments for the privilege of drilling on public 
land altogether, it appears as though the oil companies are attempting 
to hedge their losses from the embarrassing court decisions.
---------------------------------------------------------------------------
    \21\ Page 5-7. .
    \22\ Government Accounting Office, A more Systematic Evaluation of 
the Royalty-in-Kind Pilots is Needed, GAO-03-296, January 2003, Pgs 3-
4, .
---------------------------------------------------------------------------
          what would mussolini do? ask a natural gas lobbyist
    On March 18, 2001, Kelliher initiated an email correspondence with 
Dana Contralto, chairman of the energy group at the IBC law firm/lobby 
shop Crowell & Moring. Kelliher asked: ``If you were King, or Il Duce, 
what would you include in a national energy policy, especially with 
respect to natural gas issues . . . I am working up the policy 
elements, and am less confident of my judgment on gas pipeline issues 
than other areas, and thought I would pick your brain.'' Mr. Contralto 
replied, ``Of course, if I were King we would already have a national 
energy policy that would have kept California out of the mess in which 
it now finds itself . . . so, having said that, what can be done . . . 
more resources at FERC . . . could expedite pipeline certificates 
substantially.'' The Cheney energy task force parroted Contratto's 
advice: ``The NEPD Group recommends that the President direct agencies 
to . . . expedite pipeline permitting.'' \23\
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    \23\ Page 7-18, 
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         while corporations get attention, the public interest 
                          gets a cold shoulder
    Public Citizen's search of released communications involving 
Kelliher turned up zero contacts with public interest organizations. 
But correspondence by Kelliher's co-workers indicate that public 
interest groups were given 48 hours to provide input--compared to 
private meetings, breakfasts and lunches available to energy company 
representatives. A March 2, 2001, email sent from Kelliher's co-worker 
Margot Anderson asked that fellow staffer Peter Karpoff contact public 
interest groups ``and get them to send you any energy policy options 
they are advocating . . . can you then review the proposals and 
recommend some we might like to support that are consistent with the 
Administration's energy statements to date?'' The message, which was 
sent on Wednesday afternoon, concluded ``need by Friday noon.''
    It should come as no surprise that as a result of his advocacy, 
Kelliher enjoys broad industry support for his nomination to FERC. The 
Electric Power Supply Association praised Kelliher's as ``an excellent 
choice to round out and complement a newly re-energized FERC.'' The 
Edison Electric Institute's Pat McMurray noted Kelliher's ``broad and 
deep'' background in energy policy in giving him their support.\24\ The 
American Gas Association described Kelliher in an August 16, 2001 
letter to President Bush as having the ``breadth of experience, 
judgment and expertise to fulfill the responsibilities'' of a FERC 
commissioner,\25\ even though he admitted he was ``less confident of my 
judgment on gas pipeline issues.''
---------------------------------------------------------------------------
    \24\ The Energy Report, October 22, 2001, Volume 29, Issue 43.
    \25\ Katharine Fraser and Chris Newkumet, Inside FERC, September 3, 
2001.
---------------------------------------------------------------------------
    In addition to asking questions about Kelliher's role in writing 
the Administration's National Energy Policy, the Committee should ask 
Mr. Kelliher his views on important market issues currently before 
FERC. A quick analysis of legislation of which Kelliher has had a hand 
drafting shows an interest in repealing the Public Utility Holding 
Company Act and providing an increased regulatory role for FERC at the 
expense of state sovereignty.
    The White House first announced its intent to nominate Kelliher in 
October 2001 and in May 2002 sent his nomination to the Senate, which 
did not act on it. Kelliher, a Republican, was nominated for a term 
expiring June 30, 2007, to replace former Commissioner Linda Breathitt, 
whose term ran out late last year. When Bush first nominated Kelliher 
in October 2001, he was set to fill former FERC Chairman Curtis 
Hebert's seat, which is set to expire in June 2004 (Hebert resigned in 
August 2001).

            Sincerely,
                                   Joan Claybrook,
                                           President, Public Citizen.

                                   Wenonah Hauter,
                                           Director, Publc Citizen's 
                                               Critical Mass Energy
                                             and Environment Program.
    [The following article was submitted for the record by 
Senator Cantwell:]

          Published on HeraldNet on Tuesday, February 11, 2003

                       RATE HIKES WORRY BUSINESS

        If PUD raises power rates again, Kimberly-Clark might shut its 
        Everett mill, and other large power users fret about paying 
        their bills.

                     By Lukas Velush, Herald Writer

EVERETT--If Kimberly-Clark Corp.'s electricity rates go up again, the 
longtime company will scale back operations and possibly start 
discussions that could lead to shutting down its 900-employee pulp and 
tissue mills.
    Kimberly-Clark and several other large power users in Snohomish 
County say they can't afford another PUD rate increase. All said recent 
spikes in power bills tied to the 2000-01 energy crisis are 
unacceptable.
    If the PUD passes on a Bonneville Power Administration rate 
increase to its customers, Kimberly-Clark will look at building its own 
power plant. ``If that's not cost-effective, we'll have to take a look 
at whether it makes sense to continue to do business in this county,'' 
said Dave Faddis, general manager of Kimberly-Clark's Everett 
operations. ``We cannot tolerate these kinds of price swings.''
    The PUD has not announced that it will raise rates, but BPA--the 
federal energy wholesaler that provides 80 percent of the PUD's power--
last week proposed a 15 percent rate increase to cover a massive budget 
shortfall. If adopted, it would go into effect Oct. 1.
    The PUD, which charges residential customers the highest 
electricity rates in the state, also has some of the highest rates for 
industrial customers. A 2002 survey of major U.S. public utilities by 
Weyerhaeuser Co. shows Snohomish County PUD rates for large industrial 
customers ranks 29th out of 32 surveyed.
    Kimberly-Clark's rates are up 85 percent since late 2001, when the 
PUD raised costs because of a 46 percent Bonneville increase and a 
similar spike in rates linked to high-priced power contracts signed by 
the PUD. For residential customers, the two rate increases and one 
small reduction translated to bills that are 50 percent more than they 
were two years ago.
    ``We cannot afford another rate increase,'' Faddis said. ``The cost 
of power has gotten to the point where it's not supportable.''
    The Boeing Co. and the Everett School District are among the 
county's big power users that have complained to Bonneville and the 
PUD. But Kimberly-Clark's worries are urgent. The company has cut its 
local workforce by 10 percent over the last two years and projects that 
the trend will continue if electricity rates go up.
    The Everett paper mill is one of Kimberly-Clark's most expensive 
plants in the country, where two years ago its was in the ``middle of 
the pack.'' The rising cost of power and the higher cost of fiber, the 
wood material the company uses to make its paper products, are listed 
as reasons. Kimberly-Clark uses about 300 million kilowatt-hours of 
power a year. To compare, the average home uses only about 13,000 
kilowatt-hours.
    The company has been in Everett since 1927. The Dallas-based 
corporation is known for making Scott paper towels, Huggies diapers and 
Kleenex tissues, most of which are made here. Meanwhile, Boeing's 
Everett assembly plant, which employs about 20,000 people, uses about 
360 million kilowatt-hours a year, spokesman Dean Tougas said.
    Alan Mulally, president and CEO of Boeing's Commercial Airplanes 
division, asked Bonneville to avoid another rate hike in a letter sent 
in October.
    ``Boeing urges BPA to forgo these rate increases and explore 
alternative strategies for addressing its potential budget shortfalls 
that do not impose greater financial burdens on its customers,'' 
Mulally said. ``As you are aware, the Pacific Northwest is suffering 
from a significant recession with some of the highest unemployment 
rates in the nation. Boeing simply cannot absorb more rate increases.'' 
School districts that expect the state to slash next year's budgets 
also want to avoid higher electricity rates.
    ``There is no extra money,'' said Sue McCann, a spokeswoman for the 
Everett School District, which used about 25 million kilowatt-hours to 
keep the lights on at its 25 schools last year. ``When you have an 
increase, it has to come from somewhere,'' she said, adding that the 
district will try to make up for the hike by increasing conservation 
efforts. ``Hopefully it doesn't touch the classroom, but if it keeps 
going everything will be hurting.''
    The school district has adopted conservation measures that save it 
about $200,000 per year. The district spent about $2 million on power 
last school year.
    Bonneville has started a rate-case proposal to make up for a budget 
shortfall of about $500 million. It will take about six months for an 
increase to be approved. The agency hopes to reduce its budget 
shortfall, which would lower the proposed rate increase. But a poor 
year for snow actually looks like it could increase its costs to 
generate power even more--causing the shortfall to grow even more.

                                    

      
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