    [Senate Hearing 108-57]
    [From the U.S. Government Publishing Office]

                                                             S. Hrg. 108-57

        ELECTRICITY PROPOSALS AND ELECTRIC TRANSMISSION AND RELIABILITY
                            ENHANCEMENT ACT OF 2003

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

                                    HEARING

                                   before the

                                  COMMITTEE ON
                          ENERGY AND NATURAL RESOURCES
                              UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

             TO RECEIVE TESTIMONY ON VARIOUS ELECTRICITY PROPOSALS
     INCLUDING, BUT NOT LIMITED TO, S. 475, THE ELECTRIC TRANSMISSION AND
                      RELIABILITY ENHANCEMENT ACT OF 2003

                                   __________

                                 MARCH 27, 2003

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

                         U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2003
    87-936 PDF

    For Sale by the Superintendent of Documents, U.S. Government Printing Office
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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
                             Lisa Epifani, Counsel
               Leon Lowery, Democratic Professional Staff Member

                                C O N T E N T S

                                  ----------

                                   STATEMENTS

                                                                       Page

    Anderson, John, Executive Director, Electricity Consumers
      Resources Council..............................................    31
    Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     9
    Brownell, Nora Mead, Commissioner, Federal Energy Regulatory
      Commission.....................................................   135
    Burns, Hon. Conrad, U.S. Senator from Montana....................   162
    Campbell, Hon. Ben Nighthorse, U.S. Senator From Colorado........    11
    Cantwell, Hon. Maria, U.S. Senator from Washington...............   150
    Craig, Hon. Larry E., U.S. Senator From Idaho....................3, 142
    Domenici, Hon. Pete V., U.S. Senator From New Mexico.............     1
    Dorgan, Hon. Byron L., U.S. Senator From North Dakota............    10
    English, Glenn, CEO, National Rural Electric Cooperative
      Association....................................................    82
    Franklin, H. Allen, Chairman, President, and CEO, Southern
      Company, on behalf of Edison Electric Institute................    71
    Gifford, Raymond L., President, The Progress and Freedom
      Foundation.....................................................    18
    Glazer, Craig, Vice President of Government Policy, PJM
      Interconnection, L.L.C.........................................    47
    Kyl, Hon. Jon, U.S. Senator From Arizona.........................     5
    Landrieu, Hon. Mary L., U.S. Senator From Louisiana..............     5
    Massey, William L., Commissioner, Federal Energy Regulatory
      Commission.....................................................   131
    Moler, Elizabeth A., Executive Vice President, Government and
      Environmental Affairs and Public Policy, Exelon Corporation, on
      behalf of Electric Power Supply Corporation....................   109
    Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     8
    Norlander, Gerald, Chairman, Electricity Committee, National
      Association of State Utility Consumer Advocates, and Executive
      Director, Public Utility Law Project of New York, Inc..........    23
    Para, P.G. ``Bud'', Director, Legislative Affairs, Jacksonville
      Electric Authority, on behalf of the SeTrans RTO Sponsors......    54
    Richardson, Alan H., President and CEO, American Public Power
      Association....................................................    93
    Svanda, David A., President, National Association of Regulatory
      Utility Commissioners, and Commissioner, Michigan Public
      Service Commission.............................................    12
    Tollefson, Phil, CEO, Colorado Springs Utilities, on behalf of
      Large Public Power Council.....................................   102
    Torgerson, James P., President and CEO, Midwest Independent
      Transmission System Operator, Inc..............................    60
    Wood, Pat III, Chairman, Federal Energy Regulatory Commission....   126

                                   APPENDIXES

                                   Appendix I

    Responses to additional questions................................   175

                                  Appendix II

    Additional material submitted for the record.....................   207

      ELECTRICITY PROPOSALS AND THE ELECTRIC TRANSMISSION AND RELIABILITY
                            ENHANCEMENT ACT OF 2003

                                  ----------

                            THURSDAY, MARCH 27, 2003

                                           U.S. Senate,
                     Committee on Energy and Natural Resources,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 9:34 a.m., in
    room SD-366, Dirksen Senate Office Building, Hon. Pete V.
    Domenici, chairman, presiding.

              OPENING STATEMENT OF HON. PETE V. DOMENICI,
                      U.S. SENATOR FROM NEW MEXICO

        The Chairman. Good morning, everyone. It is obvious that we
    have a very difficult subject and one of great importance here
    today, and a number of Senators who will participate will also
    have to come in and out because of a hearing on Armed Services
    appropriations and an important Judiciary Committee. But I will
    try my best to maintain the schedule, and Senator Bingaman,
    from your side, you will have somebody here, more or less, for
    the witnesses during the day?
        Senator Bingaman. Probably, right.
        The Chairman. Good morning again.
        Next week the committee is going to begin, if I can
    possibly get it done, 2 weeks of markup on a comprehensive
    energy bill. I think that is possible because a great deal of
    the work was done last year, and much of it will be carried
    forward. While there will be changes proposed in the chairman's
    mark, a substantial portion of the work has been done. It is my
    intention that on April 9--that is the end of those markup
    days--we will consider the electricity title.
        Today's hearing will consider four legislative proposals
    and obviously anything constructive that witnesses care to
    share with us.
        S. 475, introduced by Senator Thomas on February 27. I
    compliment Senator Thomas. A lot of work went into this. I am
    sure he spent a great deal of time with varying views, and the
    bill is before us showing a great deal of effort, work, and
    obvious compromise.
        The second one is title VII from the House Energy and Power
    Subcommittee chaired by Congressman Barton.
        The third is a Senate October 16 offer from last year's
    energy bill conference, which Senator Bingaman participated in
    and he and his staff had a great deal to do with.
        And the fourth is the staff draft circulated from last
    week, which I have participated in, but is principally a work
    of the majority staff. I thank them for their effort. It
    obviously shows a great deal of ingenuity, innovation, and hard
    work.
        After reading most of the prepared testimony submitted for
    today's hearing, it is clear that the witnesses are essentially
    divided into two camps, those who support open access to
    transmission and generally support SMD and want the committee
    to approve Senator Thomas' proposal that would expand FERC's
    authority to ensure market access. On the other hand, those
    with serious concerns about SMD, in particular public power,
    prefer that the committee do nothing out of fear that including
    anything creates an unacceptable risk that we will include,
    either now or at some point down the legislative path,
    provisions that expand FERC's authority.
        Both sides make good cases, and from talking to individuals
    from the industry and from institutions, it is obvious that
    positions have been very well thought out.
        On the one hand, even though both sides make good cases,
    competition in the market is generally a good notion and the
    underpinning of our economy.
        On the other hand, I do believe that FERC's SMD proposal
    failed to sufficiently consider the fact that this country does
    not have a single market for the generation and transmission of
    electricity. In fact, it has a series of regional markets that,
    particularly in the West and South, are structured and operate
    differently than the markets in the Northeast and Mid-Atlantic
    regions.
        It is in this insensitivity to regional disparities and the
    fact that the current FERC has an expansive view of its
    authority that exceeds that vision by Congress, at least in my
    opinion, when we last amended the Federal Power Act in 1992
    that has caused many of my colleagues who understandably
    suggest that Congress should curtail FERC's SMD.
        While I share those concerns, SMD is a single rulemaking.
    If Congress were to simply curtail that rulemaking, it seems to
    me that the current FERC would remain free to implement the
    same policies through other rulemaking or proceedings.
        On the other hand, if we attempt a wholesale rewrite the
    Federal Power Act to remove the discretion of FERC to make
    permanent limitations on FERC's authority and to truly block
    SMD-like regulation, I believe that Congress would be deeply
    divided, as our witnesses are today, as their interests are
    represented.
        Finally, I do not see fundamental problems with the Federal
    Power act, at least as I have reviewed it. I believe the
    regulatory entities need discretion to address matters
    unforeseen to Congress.
        On the other hand, I believe that this FERC in particular
    sought to so expand its authorities so far beyond those that
    Congress anticipated, that those concerned about SMD have some
    very legitimate reasons to be skeptical about assurances made
    by the commission and its chairman.
        It was my view that the Federal Power Act itself is not
    fundamentally flawed, but that the current FERC has ignored
    real regional issues that must be considered in the regulation
    of generation of electricity and its transmission that has
    caused the committee staff to develop this regional energy
    services proposal, RESC.
        This proposal would authorize States to come together to
    implement part of the Federal Power Act themselves. The RESC's
    would permit regions to develop their own policies for market
    design and transmission, including rulemaking authority,
    reliability, efficiency, and infrastructure investment matters
    without FERC preemption.
        I know, from reading the prepared testimony that many of
    the witnesses have concerns about parts of this proposal.
    Clearly those who support FERC's SMD proposals object to the
    notion of regional markets, and they raise all sorts of
    concerns about adding another layer of regulation.
        But I do not believe that RESC has to be an additional
    layer, and I say that to my good friend, Senator Thomas, who
    has great concerns about that. I believe that RESC can assume
    as much power and authority under part II of the Federal Power
    Act as it desires and make its own determination as to whether
    there would be an appeals process from within the RESC to FERC.
    Ideally, I believe FERC's role would be limited to States that
    prefer not to enter a RESC and to issues among RESC's, much
    like Congress originally envisioned FERC's authority to be
    limited to interstate matters originally.
        After reading the proposals, some have approached me and
    recommended that instead of creating regional authorities,
    Congress should, instead, force FERC to give differences to
    regional matters in the form of regional transmission
    organizations, RTOs. I can imagine a system by which we give
    RTOs much greater authority than they currently possess would
    go a long way in addressing regional issues, but those would
    have to be real authorities over key issues or the RTOs would
    remain beholden to FERC where the matter starts in its sense of
    consternation today.
        Finally, the staff draft includes a provision for
    transportation development certificates to facilitate the
    construction of new transmission lines. I believe lack of
    transmission is one of the principal reasons for the mess we
    have today. I know that providing even limited authority to
    obtain right-of-way is strongly opposed by some of my
    colleagues on this committee. However, Congress has already
    provided authority for pipelines, and I think we just cannot
    ignore the fact that it is now virtually impossible to build a
    new transmission line.
        So with that, from somebody who used to read statements on
    budgets, I find it almost difficult to read this kind of
    statement.
        [Laughter.]
        The Chairman. But I am trying.
        I yield now to Senator Bingaman.
        [The prepared statements of Senators Craig, Kyl, Landrieu,
    and Murkowski follow:]
       Prepared Statement of Hon. Larry E. Craig, U.S. Senator From Idaho
        Over a decade ago, Congress passed legislation that cautiously
    moved the electric industry away from its historically regulated
    framework toward a new competitive market approach for the sale and
    resale of wholesale electricity.
        Some believe it is time for Congress to take bolder action. Most of
    these advocates represent a class in the industry known as merchant
    traders and merchant generators that I understand is suffering
    financial distress.
        It is instructive to me that most public power, coops, and investor
    owned utilities are not clamoring for bold change.
        It is also instructive that the pressure for bold action is coming
    primarily from electric system geographical corridors located in the
    Northeast and parts of the Midwest.
        Apparently, Middle Atlantic, Southeast, and Western electric system
    entities are content with the pace of the electric industry's
    evolution.
        They obviously don't rely on merchant traders and merchant
    generators the way the Northeast region did. And it appears that those
    regions did not fall prey to the over-regulation experienced in the
    Northeast.
        It certainly explains the outrage expressed by the South and West
    regions about the Commission's proposed Standard Market Design (SMD)
    rule.
        Chairman Domenici has aptly characterized the Commission's action
    on SMD as a serious overreaching of its authority. I and many others on
    this Committee agree.
        But what is equally troubling to me is the confusion created by
    Commission action since 2001. For example, the Commission's Order 2000
    set-out a voluntary incentive-based approach to restructuring that is
    clearly in conflict with the prescriptive approach set-out in its
    proposed SMD. The industry spent about $100 million to form Regional
    Transmission Organizations (RTOs) under Order 2000 that now appears to
    be money not well spent in light of SMD.
        Moreover, the Commission placed utility companies in settlement
    proceedings to form RTOs, only to disavow the results when the new
    Commission took over in 2001.
        This happened most dramatically in the Midwest, where parties
    negotiated and the Commission approved two RTOs, one for-profit and one
    not-for-profit in May 2001.
        In December, the Commission ignored its previous final action. In
    fact, the Commission questioned whether for-profit companies could
    become RTOs.
        In the Northeast and the Southeast, the Commission opened marathon
    mediation efforts, only to ignore the results.
        In the Northeast, the Commission originally required three RTOs to
    merge, then reduced the number to two and acquiesced when the parties
    to the merger that would have established the two RTOs canceled their
    plans.
        It seems to me that the Commission's policy lacks direction. Since
    2001, there has been too much lurching forward in provocative ways and
    then retraction once it becomes clear that the Commission went too far.
        It would be far better for the industry and consumers alike if the
    Commission would propose reasonable rules in the first place, rather
    than announce ambitious programs that require later modifications.
        I believe it far more prudent for this Committee to exercise much
    closer oversight of the Commission's administration of its current
    authority rather than contemplate the value of giving the Commission
    more authority, which in my opinion would only give the Commission more
    opportunity to create uncertainty in the marketplace.
        I have made no secret of my preference for Congress to go slow in
    determining whether electricity legislation is needed.
        During the last six years, Congress has struggled to find consensus
    on what to do on this issue. That consensus, to put it bluntly, has
    been illusive.
        We once again find ourselves on the eve of another effort to find
    consensus. The Chairman is working hard to make it happen. I want to
    express my appreciation to the Chairman for his efforts to accommodate
    the many Western concerns that have been expressed by me and other
    colleagues on this Committee. I am grateful for his willingness to
    think ``outside-the-box'' to ensure that the traditional role of the
    States in this area is not compromised.
        However, the draft legislation distributed by the Chairman
    introduces a rather novel idea for regional control of electricity
    regulation.
        Although it raises many attractive concepts for regional and local
    control, it demands more thought and careful analysis. Put simply--it
    needs more time to mature.
        Electricity regulation is, by nature, complex. In the short time I
    have had to review the proposal I have developed many questions about
    the concepts in the Chairman's proposal.
        I would be much more comfortable about proceeding with the analysis
    if I was not confronted with the very short time line that has been set
    to complete the energy bill.
        I continue to be confounded by the enormous pressure to include an
    electricity title in this bill. Such pressure contributed greatly to
    the demise of a similar energy bill in the last Congress. I hope our
    efforts in this Congress to pass such important legislation is not met
    with a similar fate.
                                     ______

         Prepared Statement of Hon. Jon Kyl, U.S. Senator From Arizona
        Mr. Chairman, as the Senior Senator from New Mexico, you understand
    the issues that are unique to the Western power markets and have
    endeavored to bring new perspective and new ideas to the table in order
    to promote workable competitive markets. I appreciate the leadership
    you have shown on this issue and look forward to working with you on
    these provisions in the bill. Obviously, we want to develop a bill that
    will do no harm to the electric utility industry and that will restore
    the faith of consumers and investors in our energy markets.
        The proposals on the table for an electricity title present a
    number of interesting concepts, with Regional Energy Services
    Commission the most recent. We must shift power from FERC to the
    States, so I appreciate this regional idea. A number of questions have
    been raised about details of the proposal, and I do think it needs
    further consideration and development before we mark-up the bill.
        But my principal concern is that we seem to be ignoring the
    elephant in the middle of the room--FERC's Standard Market Design
    proposal. FERC's SMD proposal represents a dramatic overreaching by
    FERC for jurisdiction and control over electricity issues traditionally
    dealt with by the States. Yet, much of the legislation on the table,
    including the Regional Energy Services Commission proposal, appears to
    accept, through silence, that the Standard Market Design proposal will
    move forward. This, despite the fact that the Northwestern,
    Southwestern, and Southeastern regulators, governors, and utilities are
    overwhelmingly against the proposal.
        It is beyond dispute that there is a lack of consensus across the
    Nation that SMD is the way to go. And, as I said, there is outright
    hostility to the idea by many. So, I think we should deal with SMD
    directly, and not just try to find a way to work with or around it.
        In the meantime, to maintain the confidence of retail consumers and
    investors, Congress should protect the retail service obligations of
    jurisdictional and non-jurisdictional utilities to provide needed
    regulatory certainty. I would have preferred to see this issue nailed
    down in the Chairman's draft. You have indicated, however, Mr. Chairman
    that you will work with me and other Senators who are interested in
    this to address this concern as the committee moves to markup.
        As a final matter, I must address federal siting. Nothing in these
    bills strikes more at the heart of federalism, nor seems to be more of
    a solution looking for a problem than the consistent attempts to
    preempt state authority over the siting of transmission lines. This
    Committee has heard from witnesses who testified unequivocally that
    States are denying permits for interstate transmission lines. However,
    these accusations have been devoid of factual evidence to back up the
    claims. It is clear that there are areas where transmission congestion
    is a problem, however I have not heard any evidence to suggest that
    State inaction on siting is the cause. The case has not been made,
    therefore, to justify centralizing these land-use decisions in
    Washington, D.C. And, we certainly do not want to speed up the process
    of siting transmission lines on private lands to the point that it
    provides an incentive to site an private rather than federal lands.
        Indeed, in the West, federal agencies control a large percentage of
    the land. In my home State of Arizona federal and tribal lands comprise
    74 percent of the total land base. If a siting problem in Arizona can
    be identified it is on federal lands because of the large number of
    environmental restrictions. Therefore, I support efforts in these
    proposals to streamline the federal process, but do not support efforts
    to preempt state authority.
        In sum, while I support the development of competitive markets to
    allocate resources efficiently, I believe that before we federally
    legislate any new market model (or allow FERC to force western
    utilities into a new market model) we should move with appropriate
    caution and deliberation. Only in this way can we ensure that we do not
    create another California-type scenario that provides an opportunity
    for unscrupulous market participants to game the system at the expense
    of consumers. We can, at this time, however, quell concerns about SMD
    by clarifying state jurisdiction and making sure that our local
    utilities are able to provide for their local customers first.
        I thank the Chairman for convening this hearing and look forward to
    hearing from our witnesses.
                                     ______

           Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator
                                 From Louisiana
        Mr. Chairman, today our country is at a critical juncture with
    respect to the need for affordable and reliable electricity. It is for
    these reasons that I have introduced the ``Federal Power Act Amendments
    of 2003.'' This bill is intended to ensure affordable and reliable
    electricity to all electricity customers in a fair and equitable
    manner.
        Electricity users, my constituents and your constituents, Mr.
    Chairman, wake up in the morning, flip a switch and expect their lights
    to turn on. They also expect that each month when their electricity
    bill arrives in the mail that they'll pay a reasonable price for that
    service. Customers don't care where the electrons come from or what new
    scheme the Federal Energy Regulatory Commission (FERC) has in mind for
    the electricity industry or really much of anything else. And frankly,
    as a representative of nearly four and a half million people in my home
    State of Louisiana, affordable and reliable electricity are my primary
    concerns when it comes to electricity policy, and that is the purpose
    for which I offered my legislation.
        Electricity prices in Louisiana, and throughout the Southeast for
    that matter, are some of the lowest in the nation. According to the
    North American Electric Reliability Council's most recent reliability
    assessment report, the Southeast region is expected to enjoy, at least
    for the near term, ``adequate delivery capacity to support forecast
    demand and energy requirements under normal and contingency
    conditions.'' In other words, electricity customers in the Southeast
    should expect to continue to enjoy reliable electric service over the
    short run. My concern, however, is about the future of retail
    electricity service in my State.
        There are several specific areas of concern that I have and that I
    attempt to address in my legislation being offered.
        First, the current balance between State and federal jurisdiction,
    which has worked exceedingly well in my home State to provide low-cost
    and reliable electric service, is in jeopardy. Retail transactions,
    regulated by State public utility commissions, have historically
    comprised 90 percent of most utilities' transactions and continue to do
    so in a majority of States that have not restructured their electricity
    markets. In fact, there is not a single State in the Southeast with the
    exception of Virginia that has authorized retail competition. Yet,
    customers in our region of the country enjoy some of the lowest priced
    electricity service.
        The FERC, however, has issued a proposed rule that would strip
    States of much of their current jurisdiction over retail electric
    service, including the transmission component of bundled retail sales.
    In so doing, FERC would dramatically impair the ability of States to
    use retail ratemaking to attain local policy goals and to continue to
    ensure low costs for retail customers. It would also prohibit States
    from ensuring that retail customers are given a priority for
    electricity service. As a result, in the event that supplies are tight,
    retail customers could lose the right to priority service.
        FERC's proposed plan is a one-size-fits-all scheme on the entire
    country based on a model that closely resembles the one in place in New
    Jersey, much of Pennsylvania and Maryland. This model may work well in
    the Northeast, but it has never been tested or proven viable in any
    other part of the country. In fact, in a study performed by the
    consulting firm, Charles River Associates, it was concluded that there
    is ``considerable uncertainty as to whether the FERC's proposed
    Standard Market Design would provide greater benefits to the southeast
    than the implementation costs.'' In Louisiana, and I'm sure in many
    other States throughout the Southeast and across the country, customers
    are happy with their electric service. So I ask Mr. Chairman, what's
    wrong with the current jurisdictional division between the State and
    federal government? If a State or region wants to adopt a new approach,
    they should be free to do so. But we should not allow a federal agency
    to make fundamental policy decisions that are best left to State
    officials who are accountable to local interests. We know what happened
    out West when California regulators attempted to institute a sweeping,
    new plan for its electricity markets. I hope to avoid importing those
    problems into Louisiana.
        To address this jurisdictional concern, Section 2 of my bill would
    clarify the federal-State arrangement under the Federal Power Act by
    explicitly stating that States shall have jurisdiction over the retail
    sale of electric energy, including all component parts of a bundled
    retail sale. In addition, Section 7 would enable States to continue to
    allow utilities to reserve transmission capacity for retail customers.
    This is current law and the current practice in a large number of
    States, including States with some of the lowest average retail rates
    and the best history of reliability. As contemplated by Congress when
    the Federal Power Act was enacted, FERC will retain jurisdiction over
    the wholesale sales of electric energy and States will retain
    jurisdiction over retail.
        My second concern for retail customers is the potential for
    increased rates caused by the costs of accommodating the ``merchant
    generation'' that, over the past several years, have been seeking to
    connect to the electric grid in the Southeast. Though new generation is
    important to wholesale competition, it is a strain on the transmission
    system. To accommodate the new generation, new transmission facilities
    and upgrades to existing facilities are needed. However, customers in
    Louisiana would be forced to pay for the facilities needed to
    accommodate the merchant generators, even though most of their
    customers are out-of-region customers. State regulatory commissioners,
    understandably, are reluctant to pass transmission construction and
    upgrade costs off to local customers who are not benefiting form the
    electricity. Meanwhile energy dependent regions of the country are
    denied cheap and reliable electricity.
        A reason they choose to site in Louisiana is because we are blessed
    with abundant reserves of natural gas--the currently favored fuel
    source for electric generation. Merchant generators are siting their
    facilities to gain access to these resources as cheaply as possible,
    and then are delivering electricity to regions where they can sell
    electricity at a higher cost. If enough transmission is built to export
    just a portion of the new generation that is planned to come on-line in
    Louisiana--10,000 megawatts--the estimated cost would impose a retail
    rate increase of 5 to 11 percent.
        Surely, there must be a more equitable way to allocate cost while
    simultaneously enhancing our transmission capacity. It is not fair to
    expect customers in energy generating States to keep paying for
    transmission expansion when this increased transmission is primarily
    being developed for out-of-region use. In Section 3 and 4 of this bill,
    I have attempted to provide a more equitable system. Section 3 would
    allow for ``voluntary participant-funding'' in which a regional
    transmission organization may choose to establish a system in which
    market participants pay for expansions to the transmission network in
    return for the transmission rights created by the expansion investment.
    This approach gives proper economic incentives for new generator
    location and transmission expansion decisions.
        Similarly, Section 4 of my bill would require the FERC to initiate
    a proceeding to establish rules for interconnecting new generation to
    transmission facilities. As in Section 3, any costs made necessary by
    the interconnecting generator would be funded by the generator, or
    cost-causer, in return for a right to use such facilities funded by the
    investment.
        The third problem that I see is the lack of new investment in
    transmission facilities. FERC noted in its Electric Transmission
    Constraint study that transmission congestion costs retail customers
    across the country millions of dollars every year. Over the past 10
    years, demand for electricity has increased by 17 percent while
    transmission investment during the same period has continuously
    declined about 45 percent.
        What is even more troubling is that current demand for electricity
    is projected to increase by 25 percent over the next 10 years with only
    a modest increase in transmission capacity. In the short term, this
    lack of transmission investment and the corresponding lack of
    transmission capacity, adversely affects the ability of retail
    customers to realize the benefits of wholesale competition. Over the
    long term, and if this trend continues, the reliability of the bulk
    power system could be compromised. In the summer of 2000, transmission
    constraints limited the ability to sell low-cost power from the Midwest
    to the South during a period of peak demand, causing higher costs for
    customers. In the summer of 2001 during the California electricity
    crisis, transmission constraints along the Path 15 transmission route
    were a significant cause of the blackouts experienced by customers in
    the northern parts of that State.
        To help spur this needed investment in the transmission sector,
    Section 5 of the legislation would provide further guidance to FERC in
    establishing transmission rates in two ways. First, Section 5 would
    amend Section 205 of the Federal Power Act to clarify that the cost
    causer is responsible for paying the costs of new transmission
    investment and that all users of the transmission facilities are
    required to pay an equitable share of the costs such facilities. These
    provisions will help ensure that users of the transmission system have
    proper economic price signals and encourage investment where it is
    needed most. Second, Section 5 would add a new section to the Federal
    Power Act, Section 215, that would require the FERC to initiate a
    rulemaking to establish transmission pricing policies and standards to
    promote investment in transmission facilities. Although the Commission
    may have sufficient authority under current law to initiate such
    policies, our nation's transmission system has been neglected too long
    and I believe that the FERC could benefit from more specific guidance
    from Congress.
        Finally, Mr. Chairman, customers are not realizing all of the
    potential benefits of wholesale electricity markets because of its
    balkanization. The likely result is higher electricity prices. In
    different parts of the country, electric utilities are in various
    stages of joining together to form large regional markets, or in the
    terms used by FERC--regional transmission organizations. In addition,
    public power entities, including municipal utilities, cooperatives, and
    federal and State power marketing associations have been willing or
    resisting, to varying degrees, to contribute to the efforts to
    establish regional markets. Exacerbating this problem is the underlying
    fact that FERC does not have the same jurisdiction over public power
    utilities as it does over electric utilities.
        Properly functioning regional markets for electricity can bring
    about significant benefits to customers in all parts of the country.
    More competitive wholesale generation, for example, will allow retail
    sellers greater opportunities to purchase generation from independent
    power producers. Improperly functioning markets, or one-size-fits all
    proposals that do not take into consideration regional differences, can
    be devastating. Current law and policy at FERC has been insufficient in
    achieving the proper balance between the need for robust regional
    markets, the reality of regional differences and the legitimate efforts
    of utilities.
        Therefore, in Section 6 of the bill, the FERC would be required to
    convene regional discussions with State regulatory commissions to
    consider the development and progress of regional transmission
    organizations. It would further provide for specific topics of
    discussion between FERC and the States including the need for regional
    organizations, the planning process for facilities, the protection of
    retail customers, and the establishment of proper price signals to
    ensure the efficient expansion of the transmission grid. Section 6
    would also help reduce the balkanization of the electric grid by
    authorizing the federal utilities such as the Tennessee Valley
    Authority and the Bonneville Power Administration to join regional
    transmission organizations. Also, in an attempt to help expand
    wholesale markets, Section 8 would provide for FERC to require that
    public power entities provide a limited form of access to their
    transmission facilities. This provision would give wholesale generators
    increased access to markets and ensure that competitors pay only the
    fair and reasonable price to use the transmission grid owned by public
    power.
        In conclusion, Mr. Chairman, I ask my colleagues to support this
    legislation and consider its affect on retail electricity customers in
    the States. Affordable and reliable electricity should be our objective
    for customers, in all parts of the country.
                                     ______

      Prepared Statement of Hon. Lisa Murkowski, U.S. Senator From Alaska
        Mr. Chairman, thank you for calling this hearing today to review a
    variety of legislative proposals regarding electricity. As I have
    stated earlier, this nation needs a comprehensive national energy
    policy. I commend the Chairman for taking the lead on this important
    issue, and setting an aggressive schedule for reporting out a
    comprehensive energy bill.
        I understand that the Majority Leader would like to have energy
    legislation on the Senate floor following the April recess.
        The Electricity Title will undoubtedly be a controversial part of
    energy bill. I hope the many interested parties will be able to reach
    consensus on this issue.
        Many problems exist in the electricity market in the United States.
    These problems, for the most part, have been felt most notably in the
    Western Lower 48 States.
        As we are all aware, Alaska is unique. My State is not adjacent to
    any other state. It borders only Canada. The electric grid of my state
    is not interconnected to the electric grid Lower 48 States. Thus,
    careful review of the applicability of a number of the provisions of
    the Electricity title to Alaska is necessary.
        In this regard, I am pleased to note that the Energy Committee
    Staff Draft exempts the State of Alaska, as well as Hawaii, from the
    Regional Energy Services Commissions (RESC) and the Reliability
    Subtitle of the Electricity title.
        As we consider these proposals, I would like to point out some of
    my goals. We need to seek to lower energy prices for consumers in my
    State and the rest of the United States.
        We also need to restore confidence and stability to the energy
    marketplace. Without this, the investment capital needed to assure an
    adequate supply of reasonably priced energy and the infrastructure
    investment we need will not occur.
        We must also keep in mind the many far reaching effects the
    Electricity Title will have on the demand for fossil fuels,
    particularly natural gas. It will be important to construct the Alaska
    Natural Gas Pipeline, as the demand for natural gas rises, and no doubt
    will continue to rise. In addition to providing well paying jobs,
    construction of the Alaska Natural Gas Pipeline will provide a secure,
    domestic source of energy for our nation.
        The Staff Draft also has several provisions aimed at updating our
    nation's electricity policy to reflect current realities in the energy
    marketplace. These include the repeal of the 1935 Public Utility
    Holding Company Act (PUHCA) and reform of the Public Utility Regulatory
    Policies Act (PURPA). Careful consideration should be given to these
    proposals. Any repeal of the PUHCA should include appropriate consumer
    safeguards. Reform of PURPA may also be appropriate if properly
    conditioned. Together, these can be important steps toward the
    modernization of our nation's electricity policy.
        I look forward to working with Chairman, Senator Bingaman, and the
    other members of this committee as we push forward on this legislation.
        I am also eager to hear the testimony of today's witnesses.
        Thank you Mr. Chairman.

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

        Senator Bingaman. Thank you very much, Mr. Chairman, for
    having the hearing.
        I have supported, as you know, moving legislation to deal
    with electricity issues for several years now. Last year we
    came close to enacting a comprehensive energy bill with an
    electricity title in it. Senator Thomas worked very hard on
    that. I worked very hard on that. Other members of the
    committee did as well.
        And it was not easy to get as far as we were able to get in
    the last Congress. I do not think it has gotten any easier. The
    path forward on electricity legislation is not clear to me at
    this point.
        Some issues that were fairly settled or seemed to be
    settled last year, FERC-lite for example, do not seem to be
    enjoying the same kind of consensus now that they did then.
    There also seems to be more uncertainty about the wisdom of
    repealing the Holding Company Act than before. In general, I
    think that many who supported an electricity title in the bill
    last year have great reservations about doing so this year.
        I continue to believe that PUHCA can be repealed, but only
    if the loss of essential consumer protections is offset by
    increasing FERC's merger review authority, as we did in the
    bill last year. I have long believed that many issues should be
    dealt with on a regional basis rather than at the State or
    Federal level. Such issues might be the siting of transmission
    lines, planning for both transmission and generation.
        The proposal that is contained in the Republican staff
    draft before us today goes, in my view, far beyond that and
    gives essentially all Federal electricity authority to regional
    bodies to be appointed by the Governors. This would raise
    serious constitutional questions, as well as questions about
    the practicality of how it would work and I think, as I
    presently read the proposal, it might well add to the
    regulatory uncertainty in the market.
        I look forward to hearing from the witnesses on their views
    on the proposal. I look forward to learning more about it.
        I also believe it is important to encourage renewable
    generation. That is an issue that we discussed and debated
    extensively in the last Congress. I think it is important to
    diversify our resource mix to get a head start on actions that
    are going to be necessary to address the issue of climate
    change. A portfolio standard is the best way to do that in a
    market-friendly way, and such a provision in my view is
    essential in an electricity title.
        I have a couple of items of testimony, one from the Utility
    Coalition advocating renewable energy. I would ask that that be
    included in the record, although they are not testifying.
        The Chairman. It will be admitted in the record.
        Senator Bingaman. Thank you.
        And let me just say in closing that clearly we have very
    few days before the markup that you have scheduled. I hope that
    we can resolve differences that exist on the committee about
    this issue of electricity in that period. I hope the witnesses
    today can help us do that. But clearly there are many
    differences and I think we need to recognize the complexity of
    this issue as we move forward.
        The Chairman. Senator, I am very grateful for at least the
    implication of your last statement. We will work together and
    hopefully we will try. This is, from what I can tell, as I have
    reviewed the entire agenda, the most difficult provision to
    reach consensus. Obviously, the House is having the same
    difficulty. That is why I said at last I was hoping that we
    would get some momentum and learning how to work together and
    get some things done.
        On the other hand, I do believe that we could also delay
    incessantly over an issue such as this, and I do not intend to
    do that because we have three more episodes before we arrive at
    a conclusion. We have the floor and we have a conference
    besides this markup. So that will all be a great learning
    exercise from what I have experienced in the legislative
    process. Some who think one way today will probably think
    differently when we finish a conference. So we will continue
    with that.
        I have one observation regarding renewables and then we
    will call the witnesses.
        Senator, there are many of us who look with favor upon
    pursuing renewables, and I think you will find in the proposals
    from this Senator that I intend to offer as many and more
    incentives than ever before for renewables. I believe major
    incentives is the best way to bring renewables into the
    marketplace rather than forcing them. But that issue will be
    taken up another time, and we will discuss it at length.
        Senator Dorgan. Mr. Chairman?
        The Chairman. Yes, Senator.
        Senator Dorgan. Because the Appropriations Committee and
    the Defense Approps Subcommittee is holding a hearing at 10
    o'clock, I will not be able to stay for the entire hearing this
    morning. That is on the supplemental which is moving on a very
    fast track and I think will require a lot of effort.
        But might I make one comment?
        The Chairman. Yes, sir. Can you make it brief?
        Senator Dorgan. Yes, of course.
        The Chairman. Everybody will want to, and we have four
    Senators who want to go to that committee.

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

        Senator Dorgan. I understand.
        I think it is very important we move forward and move
    forward aggressively, but I am concerned, especially having
    chaired hearings last year about what happened in California
    which we now understand was in part grand theft. I am very
    concerned that we not only move forward with some dispatch, but
    we get this done and done right.
        The electricity title I think is very complicated. As I
    listened to your statement, I was thinking about it is almost a
    foreign language that we speak here with RESC, MISO, SMD, RPS,
    PURPA, PUHCA, RTOs. I mean, it is almost a foreign language, it
    is so god-awful complicated. I just hope that as we set dates
    here for markups and so on that we have enough flexibility to
    be able to make sure that as we sort through all of this, we
    are going to get it done right. That is my only concern.
        The Chairman. You can be assured of that. I have come to
    the conclusion, having been here a long time, that if we have
    good will and hard work, we will make as good a judgment in 3
    or 4 weeks as we will in 3 or 4 months because 3 or 4 months--
    we will do all that work the last week anyway.
        [Laughter.]
        The Chairman. So we are going to move with some degree of
    dispatch with your concerns fully in mind.
        Now, the other Senators who are here, I know some are going
    to stay, some must leave. Senator Campbell, you are going to
    leave for appropriations. Would you care to make a comment?
        Senator Campbell. Mr. Chairman, with your permission, I
    would like to just include something in the record, because I
    had hoped we would be able to listen to the testimony of at
    least a couple of witnesses before we had to run to the next
    hearing. So thank you.
        [The prepared statement of Senator Campbell follows:]
              Prepared Statement of Hon. Ben Nighthorse Campbell,
                           U.S. Senator From Colorado
        Mr. Chairman, thank you for holding this hearing on electricity
    issues in moving forward on crafting a comprehensive energy bill. I
    would also like to applaud you for your proposed draft establishing
    Regional Energy Service Commissions (RESC). I'd also like to welcome
    Mr. Phil Tollefson from Colorado Springs Utilities and Ray Gifford, who
    recently head Colorado's PUC and who is now going to testify on behalf
    of the Progress & Freedom Foundation.
        Many members of this Committee, myself included, have been highly
    critical of FERC's proposed Standard Market Design Rule because it
    fails to consider regional differences and instead applies a one-size-
    fits-all approach to our nation. Your proposal, on the other hand,
    picks up where FERC left off and is designed specifically to address
    regional distinctions.
        I am troubled that the Regional proposal is a direct answer to
    FERC's SIVID. In fact, as worded, the RESC draft requires states to
    choose between regulated by a Regional Commission or the Federal
    Commission--a choice some states may find objectionable.
        The strength of the RESC's novel and innovative approach is also
    its principle drawback. Your regional vision allows FERC and the state
    to retain certain levels of jurisdiction, but where do those lines of
    jurisdiction begin and end? Is this not just a third layer of
    regulatory bureaucracy that will cost states? How are the regions
    established, and can one state comprise a region?
        Regarding that last question, my state of Colorado is in a unique
    circumstance. Colorado borders the eastern interconnect at Kansas.
    Therefore, there is no west to east transmission. Colorado's demand for
    electricity is localized to the front range, and we have coal-fired
    plants to meet that demand, and any excess is imported from Wyoming.
    14,000 ft. peaks divide Colorado in half, making transmission across
    the state prohibitive, and people living on the west slope are
    principally served by public power.
        Therefore, although Colorado is in the middle of the nation, it is
    more akin to an island like Hawaii than an eastern state like Virginia.
        That said, the state of Colorado's electricity costs are in the
    lowest quarter of the nation. Denver is one of the five cheapest cities
    for ratepayers. As we proceed, we must ensure that states like Colorado
    retain their efficient, reliable, and inexpensive electricity while
    crafting national policy. We must make sure that ``flexibility'' does
    not result in price shifting that may benefit some states, while
    detrimentally affecting others.
        I look forward to working with you, Mr. Chairman, and the other
    members of the Committee, on a reasonable and balanced approach.

        The Chairman. Senator Craig.
        Senator Craig. Mr. Chairman, I do have an opening
    statement. I will make it in my first questioning period. I am
    interested in hearing the witnesses. I think I am more
    interested in listening today than I am in questioning, unless
    somebody comes up with something uniquely novel, but I have sat
    through a good number of--well, maybe 100 hours of testimony on
    this issue before. My guess is nothing novel, but all of you
    hold strong and very important opinions. Thank you.
        The Chairman. I hope you are wrong.
        [Laughter.]
        The Chairman. We will start with the witnesses. The
    witnesses are listed here. David Svanda, Ray Gifford, Gerald
    Norlander, and John Anderson, would you please come up?
        Senator Thomas, would you like to make some opening
    remarks?
        Senator Thomas. Mr. Chairman, I had a very insightful
    comment to make, but I will withhold because I would like to
    hear from the witnesses. Thank you.
        The Chairman. Thank you very much.
        Okay. We are going to start on this slide, please.

     STATEMENT OF DAVID A. SVANDA, PRESIDENT, NATIONAL ASSOCIATION
    OF REGULATORY UTILITY COMMISSIONERS, AND COMMISSIONER, MICHIGAN
                       PUBLIC SERVICE COMMISSION

        Mr. Svanda. Mr. Chairman and members of the committee,
    thank you so much for this opportunity to share my thinking
    with you on the Senate draft energy legislation. I am
    presenting the views of NARUC, and when I so indicate, I will
    also be injecting some of my own thinking. My comments will
    follow the suggested template and will highlight the content of
    my written testimony.
        With respect to regional energy services commissions, NARUC
    supports legislation allowing States to form voluntary regional
    bodies to address multistate issues, including transmission
    siting. However, the RESC proposal in this draft legislation is
    significantly different than the models that NARUC and others
    have been working with, such as joint boards, compacts, and
    informal coordination. The proposal to create RESCs is a new
    attempt to build on the momentum I think already developing
    toward cooperative and voluntary regional regulatory bodies to
    oversee those regional markets that many of you have spoken
    about. It needs to be carefully considered.
        A great deal of work has already been done by the affected
    parties to develop logical and efficient regulatory constructs
    that allow the electric industry to move forward in a reliable
    and cost effective way. The work has been public and it has
    been painful, but critical knowledge and shared insights have
    been gained. Many parties have helped move us to the important
    juncture at which we now collectively find ourselves.
        Under the Energy Policy Act of 1992, the States, through
    the NGA, various regional governors associations and entities,
    and NARUC, have been working to develop wholesale power markets
    and regional mechanisms for the coordination of State efforts
    including siting responsibilities. Progress continues to be
    made in these areas driven by the NGA, its regional affiliates,
    NARUC, FERC, the Department of Energy, currently approved RTOs,
    and numerous other industry stakeholder groups.
        All parties are now preparing to hear how FERC synthesizes
    the ideas that have surfaced to this point when its white paper
    is issued later this spring. The conclusions of the white paper
    can inform the discussion on this RESC proposal. NARUC has
    taken no position on the issuance of the white paper, nor on
    the underlying SMD proposal.
        As you know, all regions of the country are not on the same
    page with regard to the standard market design. The standard
    market design proposal has, however, acted as a catalyst to
    focus our attention on achieving the objectives of the National
    Energy Policy Act.
        That is why we offer our hard-won experience to you as you
    consider, review, and analyze the RESC proposal in this draft
    legislation. The RESC proposal would be a significant step
    beyond current proposals and therefore does warrant additional
    considerable work.
        There are provisions such as section 402 requirements that
    narrowly define the options open to States considering the RESC
    and also section 1222 which usurp State siting authority, and
    that is something that we would certainly want to work with you
    on.
        Any proposal contemplating a multistate approach should
    explicitly include representation by State regulatory bodies.
    The requirement that States cannot be in more than one RESC
    does not work, as we know that some States are bisected and
    even trisected by RTOs, and that simply creates problems.
        The provision also creates great uncertainty in States like
    mine where transmission is owned by third party independent
    providers of transmission services.
        Authorizing swift release of funding to help the States
    with the logistics of regional coordination would certainly
    help the States and regions move forward.
        We know that you recognize how long and hard we have worked
    on these issues and would love the opportunity to continue to
    work with you and your staff in helping to create systems that
    we can all live with.
        Reliability standards. NARUC has staked out positions, and
    you know them and we will continue on those, as well as on
    transmission siting. We at NARUC need to respectfully oppose
    section 1222 based on the FERC backstop provision that is
    included.
        With regard to incentives--and I will go quickly to the
    point here with the remaining time that I have--energy markets
    need clear rules and certainty. Right now the investment
    community, as you have heard in previous hearings, views the
    energy industry as being in constant flux, including even the
    implementation of existing rules. The parties can work together
    to create a stable environment where investment can happen.
    However, new institution-building, while it may be necessary in
    other venues, would tend to retard the supply of investment
    capital in this sector by pushing off horizons.
        In my testimony, I have provided a number of suggestions
    for incenting investment, and those include focusing on
    customer needs, focusing on technological advancement, focusing
    on balancing this country's fuel portfolio and demand response
    mechanisms, focusing on maintaining America's competitive
    advantages and fostering wise North American energy
    utilization, and finally, focusing on enhancing homeland
    security. I think that those options can be accommodated in a
    balanced investment incentive program that this committee could
    craft that would give equal weight and value to all of those
    categories.
        I have commented on a number of other areas within the
    draft, and would be happy to respond to any questions about
    those comments that you may have. Thank you very much.
        [The prepared statement of Mr. Svanda follows:]
    Prepared Statement of David S. Svanda, President, National Association
    of Regulatory Utility Commissioners, Commissioner, and Michigan Public
                               Service Commission
        Mr. Chairman and members of the Committee, thank you so much for
    this opportunity to share my thinking with you on the Senate Staff
    draft energy legislation. I am David A. Svanda, President of the
    National Association of Regulatory Utility Commissioners (NARUC) and a
    commissioner on the Michigan Public Service Commission. I am presenting
    the views of NARUC, and when I so indicate, my own views on the draft
    legislation at issue.
        NARUC is a quasi-governmental, nonprofit organization founded in
    1889. Its membership includes the state public utility commissions for
    all states and territories. NARUC's mission is to serve the public
    interest by improving the quality and effectiveness of public utility
    regulation. NARUC's members regulate the retail rates and services of
    electric, gas, water and telephone utilities. We have the obligation
    under state law to ensure the establishment and maintenance of such
    energy utility services as may be required by the public convenience
    and necessity, and to ensure that such services are provided at rates
    and conditions that are just, reasonable and nondiscriminatory for all
    consumers.
        I especially appreciate the fact that it is your collective concern
    with the energy needs of this country that is providing this
    opportunity. Your sensitivity to the regulatory concerns we have, your
    desire to help the regions of the U.S. achieve efficient wholesale
    energy markets, and your willingness to hear what we, the affected
    parties, have to say about the draft legislation, has brought us here
    today. My comments will follow the prescribed outline.
                      regional energy services commissions
        NARUC supports legislation allowing states to form voluntary
    regional bodies to address multistate issues, including transmission
    siting. However, the Regional Energy Services Commissions (RESC)
    proposal in this draft legislation is significantly different than the
    models NARUC has examined in the past, such as joint boards, compacts,
    and informal coordination. The proposal to create RESCs is a new
    attempt to build on the momentum already developing toward cooperative
    and voluntary regional regulatory bodies to oversee regional electric
    markets. It needs to be carefully considered.
        A great deal of work has been done in recent years by affected
    parties to develop a logical and efficient regulatory construct that
    allows the electric industry to move forward in a reliable and cost-
    effective way. The work has been public and painful, but critical
    knowledge and shared insights have been gained. Many parties have
    helped move us to the important juncture at which we now collectively
    find ourselves.
        The NGA's Task Force on Electricity Infrastructure issued a report
    in July 2002, entitled, ``Interstate Strategies for Transmission
    Planning and Expansion''. This report recommends the creation of Multi-
    State Entities (MSEs) ``to facilitate state coordination on
    transmission planning, certification, and siting at the regional
    level.'' In July of last year, both NARUC through its resolution on
    interstate transmission planning and expansion, and the FERC in its
    market design proposal, acknowledged the MSE concept as worth
    developing.
        Under the Energy Policy Act of 1992, the states, through the NGA,
    various regional governors associations and entities, and NARUC, have
    been working to develop wholesale power markets and regional mechanisms
    for the coordination of state efforts, including siting
    responsibilities. Progress continues to be made in these areas, driven
    by the NGA and its regional affiliates, NARUC, FERC, U.S. DOE,
    currently approved RTOs, and numerous industry stakeholder groups.
        All parties are now preparing to hear how the FERC synthesizes the
    ideas that have surfaced to this point when its white paper is issued
    later this spring. The conclusions of the white paper can inform the
    discussion on this RESC proposal. NARUC has taken no position on the
    issuance of the white paper, nor has it taken a position on the
    underlying SMD proposal. As you know, not all regions of the country
    support FERC's direction to this point. The SMD proposal has, however,
    acted as a catalyst to focus our attention on achieving the objectives
    of the Energy Policy Act.
        That is why we offer our hard-won experience to you as you
    consider, review, and analyze the RESC proposal in this draft
    legislation. The RESC proposal would be a significant step beyond
    current proposals and warrants very careful examination before the
    Committee commits to this concept.
        Specifically, preliminary analyses suggest that the intent of the
    provision is to allow contiguous states in a region to come together
    and reclaim from the FERC much jurisdiction over the form, function and
    operation of regional wholesale electric markets. In cases where states
    set up an RESC, FERC jurisdiction would be largely limited to resolving
    conflicts among states in that region or addressing inter-regional
    complaints. This idea may have some appeal to some states on its
    surface. However, other provisions of the bill such as the Sec. 402
    requirements that narrowly define the options open to states
    considering an RESC combined with the Sec. 1222 provisions which usurp
    state siting authority unless states form an RESC that meets certain
    criteria, are likely to yield unintended results.
        Similarly, it is NARUC's position that any proposal contemplating a
    multi-state approach, must explicitly include representatives from each
    of the regions state's public utility regulatory bodies. Additionally,
    we do not support provisions that permit the RESC or FERC to preempt
    individual state commission decisions. Further, the requirement that
    states cannot be in more than one RESC would be logical if the electric
    grid and the regional transmission organization (RTO) borders conformed
    to state boundaries. However, several states are in the unenviable
    position of being bisected (or trisected) by more than one RTO. It is
    not reasonable to limit those states to membership in one RESC. This
    would force such an unlucky state to choose favorites among its
    jurisdictional utilities and consumers. If a state declined to favor
    one group of its jurisdictional constituents over another, under the
    proposal currently before the Committee, it would be required to
    sacrifice its siting jurisdiction. This provision also creates great
    uncertainty where transmission is owned by third-party independent
    providers of transmission service.
        Also, a statement of support encouraging states to proceed
    expeditiously with regional initiatives to coordinate reviews of multi-
    state transmission siting proposals might be welcome. Authorizing and
    directing swift release of funding to assist with the logistics of
    regional coordination would be helpful in enabling states to move ahead
    quickly. Given the momentum that has been developing on this issue, any
    attempt to introduce a federal backstop or federal pre-emption of the
    state transmission siting jurisdiction could be counterproductive.
        We know this Committee recognizes how long and hard the parties
    have been laboring on creating workable wholesale energy markets. We
    have consolidated and defined issues that have elevated the status of
    this debate. These foundations can be built upon and incorporated into
    this draft legislation. Please let NARUC work with you and the
    Committee as you debate, vet, and develop the RESC concept. We would
    like to give you the benefit of the lessons we have learned.
                             reliability standards
        NARUC has consistently held that reliability should be addressed in
    any federal energy legislation. NARUC has been a strong and consistent
    supporter of legislation that establishes a more robust, mandatory
    model for the enforcement of compliance with mandatory technical
    reliability standards. This is provided that states are not preempted
    on resource, adequacy, and planning issues and can form voluntary
    regional bodies to advise FERC on implementation of the standards
    within their regions. Accordingly, NARUC supports the electric
    reliability provision in S. 475 introduced by Senator Thomas.
        NARUC believes that Congress should mandate compliance with
    industry-developed reliability standards on the transmission system
    that include adequate reserve margins and preserve the authority of the
    states to set more rigorous standards when in the public interest. The
    reliability section of the staff draft is complicated by the RESC
    proposal, which puts standards development and enforcement
    responsibility with the RESC, rather than the NERC collaborative
    effort. There is also some confusion as to whether the Electric
    Reliability Organization needs to file with both the FERC and the RESC.
                              transmission siting
        We appreciate the efforts that have been made in an attempt to
    alleviate the concerns raised by NARUC and other state and local
    government organizations with regard to the siting proposals floated
    during the last Congress. However, NARUC must respectfully oppose Sec.
    1222 based on the FERC backstop provision that is included. Although
    efforts have been made to produce a more moderate backstop proposal,
    the result is the same: the FERC will have authority to override state
    decision processes on transmission siting, if that state is not in an
    RESC.
        NARUC finds this provision to be unacceptable. States should retain
    authority to site electric facilities. Congress should support the
    states' authority to negotiate and enter into cooperative agreements or
    compacts with federal agencies and other states to facilitate the
    siting and construction of electric transmission facilities as well as
    to consider alternative solutions to such facilities, such as
    distributed generation and energy efficiency. NARUC has strongly
    opposed any role (direct or backstop) for FERC in authorizing or siting
    transmission lines.
        Looking to the future, this committee also needs to be aware of the
    growing debate concerning central station power plants versus
    distributed resources. At one extreme are those who believe that the
    U.S. needs huge new investments in transmission, to allow competitive
    markets to gain access to central station generation assets. At the
    other extreme are those, including a utility in Michigan, who believe
    that distributed resources may make both central generation stations
    and transmission redundant and obsolete.
                       transmission investment incentives
        Helping to stabilize and reinvigorate interest in investing in
    America's infrastructure is one of the goals I have set for my term as
    President of NARUC.
        Energy markets need clear rules and certainty. Both are needed
    sooner rather than later. Right now, the investment community views the
    energy industry as being in constant flux, including even the
    implementation of existing rules. Together, the FERC, the regions, and
    the states need to set market rules that have staying power and can be
    relied upon when making investments. New institution building may be
    necessary in other venues, but in this sector of the economy it will
    retard the supply of infrastructure investment capital because it
    creates confusion rather than clarity, and pushes out the decision
    horizon.
        The energy industry does not operate in a vacuum. Contributing to
    sector uncertainty are a laundry list of issues: the general health of
    the American and global economy, adjustments of an industry that had
    been unchanged for over half a century, attempts to encourage
    alternative fuel sources, California's restructuring problems, serious
    (even criminal) lapses in corporate ethics and business practices, wash
    trades and market manipulation, the September 11 tragedy, homeland
    security and war concerns, lack of liquidity in markets, and the
    current regulatory debate about electricity market restructuring.
        Even though there are current uncertainties, there are ways to open
    closed investment wallets and we must get those wallets opened again.
    Electric transmission systems in this country have been on a starvation
    diet for nearly two decades, with actual transfer capacity having
    peaked in the 1980's. We need to upgrade the dumb system of the last
    century with an internet-speed and internet-smart grid for this
    century. The policies pursued should entice investment that helps
    accomplish other major national objectives.
        In my opinion, this Committee could help to bring considerable
    stability to the energy related investment climate by:

              1. Focusing on customer needs by incenting;

                      a. Investment to enhance reliability to support the
                    information, manufacturing and lifestyle expectations
                    of today
                      b. Investment for removing bottlenecks wherever they
                    exist in the transmission system. Investment incentives
                    could be given for the removal of bottlenecks, while
                    penalties could be applied for maintaining bottlenecks,

              2. Focusing on technological advancement by incenting;

                      Investment in new smart-grid technology
                      The export of this new technology for our economic
                    benefit and for global fuel efficiency and
                    environmental purposes,

              3. Focusing on balancing this country's fuel portfolio and
            demand/response mechanisms;
              4. Focusing on maintaining America's competitive advantages
            and fostering wise North American energy utilization;
              5. Focusing on enhancing Homeland Security.

        Future investment options will generally fall into four categories.
    They are 1) traditional public and investor-owned utilities; 2)
    unbundled-asset utilities; 3) independent power producers; and 4)
    independent transmission owners. These all have their place, and are
    all right for particular circumstances. A balanced investment incentive
    program crafted by this Committee would give equal weight and value to
    each of these categories.
               transmission cost allocation (participant funding)
        NARUC is supportive of transmission cost allocation proposals
    however, the provision found in Subtitle E falls short of our policy on
    this issue. NARUC supports a pricing policy which allocates
    transmission costs in two ways. One, the cost of investments that have
    been demonstrated; through an even-handed assessment of transmission,
    generation and efficiency alternatives; to be needed to maintain the
    reliability of the existing transmission system, is recoverable through
    rates paid by all transmission customers. Two, the cost of upgrades and
    expansions that are necessary to support incremental new loads or
    demands on the transmission system is borne by those causing the
    upgrade or expansion to be undertaken. Additionally, any cost
    allocation proposal should not preclude the assignment of
    interconnection cost to the general body of ratepayers within a state
    when that state's regulatory body determines that such allocation is in
    the public interest.
                                     puhca
        Congress should reform PUHCA, but in doing so, should allow the
    states to protect the public through effective oversight of holding
    company practices and increased state access to holding company books
    and records. This should be independent of any similar authorities
    granted to federal regulatory bodies.
        The draft legislation requires a state to begin a proceeding to get
    access to books and records. NARUC believes a written request from a
    state should be sufficient, and that no proceeding is required.
                                     purpa
        NARUC supports legislation to repeal the PURPA ``must purchase''
    requirement if a state determines that the generating markets are
    competitive or that the public interest in resource acquisition is
    protected. However, NARUC opposes the language found in the Senate
    draft that preempts state jurisdiction by granting FERC authority over
    the recovery of costs in retail rates or to otherwise limit state
    authority to require mitigation of PURPA contract costs. States that
    have already approved these contracts are better able to address this
    issue than FERC.
        I think it is important for the federal government to remove
    barriers to the adoption of new and improved energy technology
    infrastructure. It is also appropriate to open up opportunities for
    cogenerators and small power producers to interconnect and gain access
    to competitive wholesale and/or retail markets, with the details of
    those policies clearly reserved for the appropriate regulatory agency.
                       net metering and real-time pricing
        NARUC believes that net metering, real-time pricing, and
    distributed generation are retail in nature and subject to state, not
    federal legislation. The draft legislation provides that each state has
    the ability to determine if such services are appropriate for state
    implementation. NARUC's interpretation of this language is that no
    state would be required to implement these provisions without the state
    determining that they are appropriate for that state. However, we
    prefer the language currently found in PURPA that allows states to
    consider but may adopt or reject, rather than mandatory federal
    standards.
        NARUC is supportive of these provisions, but the draft language
    needs to be clarified consistent with our understanding. Such revision
    may also help the distributed generation and distribution
    interconnection provisions because they are retail in nature, and
    therefore within the jurisdiction of the states.
              market transparency, anti-manipulation, enforcement
        There is an increased need for oversight of the energy markets in
    order to protect against market abuse. Electricity price volatility has
    raised concerns about the integrity of wholesale markets, suggesting a
    much greater need for monitoring of these markets by regulatory bodies.
    The draft legislation does not address a critical concern, the state
    regulatory role in market monitoring. States can provide a ``first
    responders'' view of energy markets.
        However, in order to be an effective market monitor, the state
    regulators must have access to all necessary data. These data include
    generating plant production, fuel sources, heat rates, and both
    scheduled and actual transmission path flows. State regulators must
    have the ability to review this type of data to be able to detect
    market gaming as well as attempts to obtain and exercise unlawful
    market power.
        There is a real concern that the energy markets are vulnerable to
    manipulation and there needs to be an improvement in the reliability of
    the indices used. A minimum set of standards should be established for
    how price reporting occurs. Regulatory oversight of price reporting and
    the ability to impose penalties on traders that don't comply with the
    rules should help ensure that energy companies follow the rules.
        The energy industry must adopt a set of practices and benchmarks to
    increase market transparency and to help restore public confidence in
    the US energy markets. If the goal of legislation is to ensure that the
    market participants do not manipulate the market, the policies ought to
    provide for more transparency, not less. Claims that data reporting to
    state regulators will result in competitive disadvantages to those
    reporting are spurious. To the extent the necessary data are
    commercially sensitive, state regulators can provide appropriate
    protections. States routinely and frequently handle such information
    without compromising parties' interests.
                              consumer protections
        NARUC's members have a long-standing commitment to consumer
    protection. Indeed, state utility commissions were established to
    ensure that consumers received essential services without fear of
    predatory practices and pricing. However, while we favor strong
    consumer protection measures, NARUC does not believe that preempting
    the states by federally legislating retail consumer protections is the
    way to go.
        The states are more capable in dealing with abuses that occur at
    the retail level, and in fact many, if not most, of the states that
    have moved to restructure and unbundled their retail electric markets
    have in place regulations or laws that address the consumer issues
    found in the staff draft. In short, Congress should not limit state
    authority to prescribe and enforce laws, regulations or procedures
    regarding consumer protection. We believe legislation should include a
    state authority section, such as that found in the Senate energy
    legislation from the last Congress so that states are not precluded
    from imposing their own consumer protection requirements.
        Thank you for your attention. NARUC would welcome the opportunity
    to work with the committee to address the concerns raised here today. I
    would be happy to answer any questions you may have.

        The Chairman. Mr. Svanda, thank you so much for your
    testimony and your observations.
        All of your testimony will be made a part of the record. We
    will have some questions.
        Ray Gifford, president of The Progress and Freedom
    Foundation.

              STATEMENT OF RAYMOND L. GIFFORD, PRESIDENT,
                  THE PROGRESS AND FREEDOM FOUNDATION

        Mr. Gifford. Thank you, Mr. Chairman.
        The Chairman. Thank you.
        Mr. Gifford. Mr. Chairman, members of the committee, thank
    you for the opportunity to testify. My name is Ray Gifford. I
    am president of The Progress and Freedom Foundation and
    immediate past chairman of the Colorado Public Utilities
    Commission.
        Each of us here today shares the same goal: to benefit
    consumers through a reliable, efficient, affordable system that
    accommodates technological change and meets consumers' needs.
        But to get there, we need to confront the twin pillars of
    human behavior: mistakes and opportunism. Everyone knows what a
    mistake is. It means that we do not know everything about the
    electric industry, how it works, how it will evolve, and what
    it will look like in the future. Even if we did, we might make
    the wrong policy choices. Opportunism is the reality that
    people will often act to elevate a narrow interest above one
    that is broader.
        We should strive to minimize mistakes and make sure they do
    not become permanent. Similarly opportunism, be it the
    opportunism of companies, regulators, or, I even dare say,
    legislators must be channeled to work for consumers.
        With that in mind, I turn to a few topics on the table
    today.
        The RESC is a sound theoretical idea that, if executed
    properly, could help solve some problems that are larger than
    just State problems but smaller than a Federal problem.
    However, in execution, I fear that it will simply introduce a
    new layer of regulation that will be even less accountable than
    our current regulatory scheme.
        As I read it in the draft, the RESC is a new regulatory
    body raising a few concerns.
        First, its accountability is highly questionable. Flying
    below the Federal radar but above State accountability, the
    RESC will become a prime target for regulatory opportunism. Our
    current State-Federal jurisdiction ultimately makes the
    regulators accountable to some political body. The RESC, in
    contrast, will operate in a murky middle ground. This presents
    great risk for regulatory capture, the perversion of the
    regulatory process toward parochial ends.
        Second, the RESC does not appear to displace old regulatory
    structures, but rather adds a new layer of regulation. This
    will add to the regulatory costs and burden with no clear
    identifiable benefit to consumers. If you are at all inclined
    to create this new regulatory body, the jurisdiction of both
    FERC and the State commissions must be pared back to make the
    RESC the sole preeminent regulatory body for electricity, and
    that body must bring within its scope all players public and
    private. That is the only way to have a coherent and fair
    regulatory scheme.
        The elephant in the room that no one is talking about is
    FERC's proposal to alter national utility regulation through
    standard market design. Congress should block it or at least
    mandate a dramatic change of course in its regulatory
    direction. We should minimize the effects of a potential grand
    national regulatory mistake and shrink the space for
    opportunism that will pervert outcomes.
        The major premise of SMD is to further split operation and
    control over the transmission system and to reside control over
    the system in a barely accountable entity, the independent
    transmission provider. This new entity I fear will have
    accountability problems similar to the RESC.
        Next, SMD does not solve the most pressing problems of
    adequate transmission investment. While the pricing mechanisms
    of SMD solve short-term allocation issues, FERC admits that it
    does not give the right long-term price signal to spur
    efficient investment. Accordingly, the long-term investment
    decisions are thrown into what will become a hyper-political
    planning process.
        Finally, SMD imposes a regulatory vision on the national
    grid that will lock in the current paradigm for electricity
    generation, transmission, and distribution for years to come.
    There are exciting technological developments that may change
    the way electricity is generated, transmitted, and metered. I
    would hate to see the regulatory regime stifle that innovation.
    I would urge FERC and this committee to be modest in how far
    and how fast we want to change the regulatory paradigm for
    electricity.
        Finally, I will add briefly I think one omission in the
    current markups is that section 203 and FERC merger review
    authority remains. I think this merger review authority is
    duplicative and unnecessary. The Department of Justice
    Antitrust Division does a most capable and efficient job of
    that, and you may want to look seriously at eliminating that
    FERC jurisdiction.
        I thank you again for the opportunity to appear here today.
    I hope my presentation will help you in your deliberations.
    Thank you.
        [The prepared statement of Mr. Gifford follows:]
             Prepared Statement of Raymond L. Gifford, President,
                       The Progress & Freedom Foundation
        Mr. Chairman, members of the Committee, thank you for the
    opportunity to testify. My name is Ray Gifford. I am president of the
    Progress and Freedom Foundation, a think-tank devoted to studying the
    law and regulation of network industries, including this most
    fundamental network industry, electricity. Also relevant to my
    testimony here today is that I am the immediate past-Chairman of the
    Colorado Public Utilities Commission, so immediate, in fact, that I
    only left less than two months ago. I hope therefore my comments offer
    you some insight of a dispassionate, academic observer, tempered with
    the experience of having been an actual state regulator.
        Debates over regulation of the electric industry too often play
    according to the following script: proponents of markets and
    restructuring describe the abstract, theoretical benefits of
    competition, therefore claiming to illustrate the superiority of
    markets over close regulation. In rebuttal, defenders of a more
    regulatory approach, describe the theoretical benefits of properly
    focused, all-knowing administrative regulation, which when done right
    mimics the outcomes of a market. You thus get an impasse over which
    abstract, theoretical way of ordering an industry will produce the most
    abstract, theoretical benefits. This is perhaps interesting in a
    classroom, but sterile and fruitless to you as policymakers.
        Any debate over the right policy for electricity must start by
    setting a goal. I think that we can all agree that the goal is to
    benefit consumers through a reliable, efficient, affordable system that
    accommodates technological change and meets individual consumers'
    needs.
        However, getting back to that false debate over competition versus
    regulation, we must forge our views over which regulatory system most
    benefits consumers by acknowledging the twin pillars of human behavior:
    mistakes and opportunism. The theoretical superiority of markets or
    regulation is swamped by these practical concerns of how people
    actually behave. Now, mistakes are something we all know well my wife
    is particularly good at pointing mine out to me but they simply reflect
    that we cannot know all there is possible to know about electric
    industry and, even if we did, we might make the wrong policy choices.
    Opportunism, meanwhile, is the reality that people will often act to
    elevate their own, narrow interest above that of some broader interest.
        Our goal therefore in making policy must be to minimize the
    possibility of mistakes and make sure that our system does not make
    those mistakes a permanent, irreversible feature of the landscape.
    Similarly, opportunism be it the opportunism of companies, regulators,
    legislators, whom have you must be channeled to work for consumers, not
    against them. Focusing, then, on minimizing mistake and opportunism, I
    turn to a few topics on the table for today: Regional Energy Services
    Commissions
        The Regional Energy Service Commission (RESC) notion strikes me as
    a perfectly sound theoretical idea that, if executed properly, could
    have some merit in solving some of the problems that we confront that
    are larger than just state problems, but smaller than a federal
    problem. However, in execution I fear that the RESC will simply become
    engrafted on the current system of federal and state electricity
    jurisdiction. As such, the RESC will introduce a new layer of
    regulation and be even less accountable if that's possible than our
    current dual-layered regulatory scheme.
        As I read it in the draft, the RESC is a new regulatory body to be
    authorized, I presume, under the commerce and interstate compact
    clauses of the Constitution. The RESC will not affect traditional state
    jurisdiction, but will be shunted in below FERC's current national
    jurisdiction. Again, in the abstract this idea has some merit, but I
    fear it will go wrong rather quickly.
        First, the RESC's accountability is highly questionable. Flying
    below the federal radar, but above state accountability, the RESC will
    become a prime target for regulatory opportunism. Our current state-
    federal dual jurisdiction while highly imperfect, to be sure ultimately
    makes the regulators' accountable to some political body. In the
    states, that is the voters, the governor or the legislature. With FERC,
    the Commission is ultimately accountable to both the executive branch
    and you here in Congress.
        The RESC, in contrast, will operate in the murky middle ground
    between state and federal regulation, beyond state accountability and
    below federal scrutiny. To me, this presents great risk for regulatory
    capture; that is, perversion of the regulatory process toward parochial
    ends. I am not sure who will be able to capture the RESC it could be a
    company, it could be a regulatory staff with a particular agenda,
    indeed, I daresay, it could even be a powerful senator in the given
    region whose interests may reflect an agenda to benefit his state or
    his preferred vision of the electric industry. None of this potential
    for opportunism will be good for consumers.
        Second, the RESC does not appear to displace old regulatory
    structures but rather adds a new layer of regulation. While in the
    draft the FERC's role recedes somewhat, FERC is still there, the state
    commissions are still there and the RESC is added to the mix. This
    addition of a regulatory body threatens to be a mistake, I think,
    because it will inevitably add to the regulatory cost and burden, with
    no clear, identifiable benefit to consumers. One thing we know about
    regulation is that it is nearly impossible to get rid of once
    established. Therefore, before creating a new regulatory body, you need
    to be sure, based on clear and convincing evidence, that a real benefit
    will come from it. Right now, the RESC has a ``this might be a good
    idea'' brainstorming quality to it, but the case has not been made that
    it will actually be beneficial to consumers.
        I would therefore be very cautious before you legislate the
    creation of a new entity hovering in the frontier between state and
    federal jurisdiction. If you are at all inclined to create this new
    regulatory body, you must, I submit, categorically, unambiguously,
    clearly, definitively I am out of adverbs pare back the jurisdiction of
    both FERC and the state commissions to make the RESC the sole,
    preeminent regulatory body for electricity, and that body must bring
    within its scope all players, public and private. That is the only way
    to have a coherent and fair regulatory scheme.
                             standard market design
        The elephant in the room that no one is talking about in this
    electricity title is FERC's bold proposal to alter national utility
    regulation through Standard Market Design, or SMD. I submit that you in
    Congress must go on record about your desire to authorize this dramatic
    experiment with our national electric system, or to block it. I would
    urge you to block it, or at least mandate a dramatic change of course
    to its regulatory direction.
        On SMD, the sides quickly retreat into the sterile debate between
    theoretical competition and theoretical regulation. These are not the
    questions you should ask. The questions should again be motivated from
    a desire to minimize the effects of a potential grand, national
    regulatory mistake, and shrink the space for opportunism to pervert
    outcomes.
        One thing we know in an economy is that the last thing you want to
    ever do, unless you absolutely have to, is split ownership and control
    of a firm or asset. This is because when you divide ownership from
    control, your risk of mistake and opportunism skyrocket. Mistakes are
    easier to make and more enduring because the effects of errors are not
    internalized when ownership and control are split. Meanwhile, the
    potential for opportunism runs rampant because entities managers,
    regulators, and politicians have the incentive to run the firm in their
    own interests.
        Now we tolerate separating ownership from control with traditional
    public utility regulation, to an extent, by giving partial control over
    the utility to political bodies the FERC and state commissions. We do
    this because of the natural monopoly character of the electric system,
    but recognize the imperfections and trade-offs inherent in such a
    regulatory solution.
        The major premise of SMD is to further split operation and control
    over the transmission system, and to reside control over the system in
    a barely accountable entity, the Independent Transmission Provider
    (ITP). Now this new entity, I fear, will have accountability problems
    similar to the RESC. Which master does it serve? Toward what ends is it
    managed? The possibilities for mistake and opportunism are replete.
        Next, SMD does not even solve the most pressing problem of adequate
    transmission investment. While the pricing mechanisms of SMD solve
    short-term allocation of transmission issues, FERC admits that it does
    not give the right long-term price signal to spur efficient investment.
    Accordingly, the long-term investment decisions the keystone to the
    robust wholesale markets we all presumably support are thrown into what
    will become a hyper-political, planning process. And when that happens,
    economic rationality is the first thing that will be thrown out.
        Finally, SMD imposes a regulatory vision on the national grid that
    will lock-in the current paradigm of electricity generation,
    transmission and distribution for years to come. Given the exciting
    innovations and cost reductions in technologies from the distributed
    generation side, to the superconductivity advances in the transmission
    area to the real-time and time-of- use metering in distribution it
    would be premature to cement the current industry structure in place
    through regulation, rather than allowing technology and know-how to
    transform how consumers are served.
        Our understanding of how complex, network markets like electricity
    work is primitive, at best. Electric markets are interdependent and
    require some degree of public control. Requirements for open and equal
    access seem sensible and necessary, and after the fact policing of
    those requirements is certainly a legitimate regulatory goal. However,
    I would urge FERC and this Committee to be modest in how far and how
    fast we want to change the regulatory paradigm for electricity.
                      ferc merger review, section 203 \1\
        One omission from the draft bill, as well as a change from the
    original Barton bill coming over to you from the House, is the
    retention of FERC's merger review authority under Section 203. I would
    urge you to use your bill to eliminate this duplicative and costly
    layer of regulatory review.
    ---------------------------------------------------------------------------
        \1\ 16 U.S.C. Sec. 824b.
    ---------------------------------------------------------------------------
        As it stands now, the Department of Justice Antitrust Division
    reviews any merger in the electric industry for its potential to harm
    consumer welfare. FERC, meanwhile, now reviews those same mergers under
    Sec. 203 using the vague and undefined ``public interest'' standard. At
    best, this review duplicates the antitrust review and adds costs that
    ultimately must be borne by consumers. I do not think that Congress
    wants to affect a net wealth transfer from American consumers to
    Washington regulatory lawyers.
        At worst, the merger review authority presents the opportunity and
    temptation for a regulatory shakedown by FERC or interested outside
    parties. The breadth of the review standard is simply too open an
    invitation for opportunistic behavior by other players in the industry
    and by regulators themselves, who may seek to accomplish through
    mergers what they have not been otherwise authorized to do by you here
    in Congress.
                                purpa and puhca
        Legislative and regulatory mistakes endure whereas market mistakes
    are corrected relatively quickly and often remorselessly, as the
    Internet bubble showed our 401(k) accounts. Nevertheless, with this
    electricity title, Congress has the opportunity to correct two enduring
    regulatory mistakes that are inhibiting investment and innovation in
    this sector specifically, I urge you to take the opportunity to repeal
    both the Public Utility Holding Company Act (PUHCA) and the Public
    Utility Regulatory Policy Act (PURPA).
        Both PUHCA and PURPA are outmoded pieces of legislation that stifle
    innovation, misallocate investment and mandate regulatory solutions
    that harm consumers.
        I have spoken today about how mistakes and opportunism, and how
    those considerations should influence your deliberations. I generally
    prefer privately-ordered markets over legislation or regulation because
    markets correct mistakes more quickly than regulatory mistakes can be
    undone. Likewise, markets real markets, not ``markets'' jury-rigged
    through regulation take opportunistic behavior and channel it for
    consumers benefit. I therefore urge you to approach all your
    legislative work with a deregulatory bent minimize regulation, allow
    markets organically to emerge and work where they can. In the end, that
    will benefit consumers most.

        The Chairman. Thank you very much, Mr. Gifford. Many of the
    things you have said with reference to attempting to regulate
    nationally I agreed with in my opening remarks. I thank you for
    it and for the constructive ideas and criticisms today.
        Let us now proceed. Mr. Norlander, chairman of the National
    Association of State Consumer Advocates; executive director of
    Public Utility Law Project of New York, Inc. Please proceed.

    STATEMENT OF GERALD NORLANDER, CHAIRMAN, ELECTRICITY COMMITTEE,
     NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES, AND
      EXECUTIVE DIRECTOR, PUBLIC UTILITY LAW PROJECT OF NEW YORK,
                                  INC.

        Mr. Norlander. Thank you, Senator Domenici and committee
    members. First, I would like to make a minor correction. I am
    the chairman of the Electricity Committee of NASUCA, the
    National Association of State Utility Consumer Advocates.
        The Chairman. All right.
        Mr. Norlander. And I speak here today on behalf of NASUCA,
    except at some points where we have not had an opportunity to
    take a position where I will be speaking for the Public Utility
    Law Project and myself.
        NASUCA is an organization of consumer advocate offices with
    members in 42 States and the District of Columbia. Some of our
    members are from States that restructured their utility
    industries. Others are from States that plan to do so but since
    2000 have either slowed their plans or in some aspects reversed
    them. Yet, other members are from States that have no plans at
    this point to restructure their utility industries and they
    retain the traditional, vertically integrated models. Thus, on
    issues such as SMD and so forth, NASUCA has not taken a uniform
    position on it, but instead, depending on the region, we have
    had a regional spokesman participating over at the FERC on
    these issues.
        But today I am speaking on behalf of all NASUCA members in
    opposition to changes in the Federal Power Act that we believe
    would weaken the statutory scheme for regulation of
    electricity.
        I would point out from our point of view, the Federal Power
    Act is a consumer protection statute. The purpose of the
    Federal Power Act is to protect consumers. And we believe that
    changes to the Federal Power Act should be a value proposition
    for consumers.
        There is great risk for consumers, as we have seen in
    California and from less well-publicized events in the New York
    City area where mistakes have been made and consumers have
    suffered. We all recognize when there is a flood or a fire or a
    hurricane or other event that creates utility outages that we
    have a humanitarian crisis, but there is a crisis going on
    every day in the homes of low income families throughout this
    country who cannot afford their electricity and who are shut
    off. So the things that are done here, that are done in the
    wholesale markets, that are done to affect the infrastructure
    of the electric industry have a great impact on people. And the
    original intent of the Federal Power Act was, we believe, to
    protect customers by requiring a comprehensive regulatory
    scheme at the Federal level.
        Some of the provisions that have been out there, NASUCA has
    supported for a number of years. Among them, I would mention
    the reliability provisions that would provide a firmer ground
    for setting reliability standards that heretofore have been
    voluntarily done. As there has been a transition to a more
    competitive industry, some of the cooperative structures for
    maintaining the reliability of the grid need to be shored up,
    and we think that those provisions have merit.
        Likewise, there has been a proposal for a national consumer
    advocate to participate in Federal agency proceedings. Again,
    NASUCA thinks that that is in concept a very good idea if we
    could have a function at the Federal level to intervene in
    cases like market-based rate applications or some of the
    generic proceedings where individual States and State consumer
    advocates have difficulty participating. Of course, such a
    function needs to be independent, needs to be able to take
    positions at variance from the agencies in which it is
    participating, and it needs to be sufficiently funded.
        Again, I would point out some of the features in several of
    these proposals that we are very strongly opposed to. One of
    those is the transmission incentive proposals. There are
    several of them out there. We have at NASUCA taken a position
    recently with the FERC opposing those as being unnecessary. The
    FERC proposal would reward companies for doing things they have
    already done such as joining an RTO and so forth.
        We also think that the repeal of PUHCA and the elimination
    of FERC merger authority should not be done, as has been
    proposed, and we think there is a function for the FERC to
    review electricity market mergers.
        Thank you.
        [The prepared statement of Mr. Norlander follows:]
         Prepared Statement of Gerald Norlander, Chairman, Electricity
     Committee, National Association of State Utility Consumer Advocates,
      and Executive Director, Public Utility Law Project of New York, Inc.
                              summary of testimony
        The National Association of State Utility Consumer Advocates
    (NASUCA) represents state utility consumer advocates from 42 states and
    the District of Columbia. A Senate Bill (S. 475), a recent House
    committee draft bill, and related staff proposals all would
    significantly alter the existing statutory paradigm for federal and
    state regulation of electricity, the primary purpose of which is to
    protect consumers. NASUCA opposes these proposals because they
    eliminate existing protections and add new risks without a clear
    demonstration of overriding benefit to electricity consumers. While we
    support the reliability provisions of S. 475, NASUCA generally opposes
    the broader proposals.
        Some proposals under consideration would authorize unnecessary and
    costly new federal financial incentives to encourage investment in
    transmission facilities, beyond the level of return on investors'
    equity normally sufficient to achieve reliable service and just and
    reasonable rates. A transmission incentives proposal now under
    consideration by the FERC could unnecessarily add $13 billion to
    consumers' bills, and should not be ratified by new legislation.
        The need for consumer protection against market power and
    prevention of utility holding company abuses remains. Yet some recent
    legislative proposals would have eliminated FERC merger review
    authority, and some current proposals would repeal the Public Utility
    Holding Company Act of 1935 (PUHCA). Despite unenthusiastic
    enforcement, PUHCA and FERC merger review authority are prophylactic
    measures discouraging the exercise of market power and re-creation of
    interstate utility holding company empires. Accordingly, NASUCA has
    concluded that passage of electricity legislation along these lines
    would not be in the overall interests of utility consumers.
                                   statement
        Chairman Domenici, and Members of the United States Senate
    Committee on Energy and Natural Resources, thank you for inviting me to
    testify today for the National Association of State Utility Consumer
    Advocates (NASUCA). My name is Gerald Norlander I am the Chairman of
    the Electricity Committee of NASUCA, and I am the Executive Director of
    the Public Utility Law Project of New York, Inc. (PULP).\1\ NASUCA is a
    national association of consumer advocate offices, with members in 42
    states and the District of Columbia. NASUCA members are charged by
    their respective state laws with the responsibility to represent
    consumers in utility proceedings before state and federal regulatory
    commissions and courts. NASUCA members have considered many of the
    issues addressed in the proposed Electric Transmission and Reliability
    Enhancement Act of 2003 (S. 475) and related proposals including in a
    draft House bill to amend the Electricity Title of the Federal Power
    Act.
    ---------------------------------------------------------------------------
        \1\ PULP, a non profit organization representing the interests of
    low income utility consumers, is an Associate Member of NASUCA, with
    offices at 90 State Street, Suite 601, Albany, New York 12207.
    ---------------------------------------------------------------------------
        NASUCA includes members from states that in the past five or six
    years restructured their wholesale and retail electricity industries;
    others are from states that planned to restructure, but have slowed or
    reversed that course since 2000; and still other NASUCA members are
    from states with the traditional vertically integrated utility industry
    structure. Today, I am speaking on behalf of all NASUCA members in
    opposition to measures we believe would weaken the statutory scheme for
    regulation of electricity, and unnecessarily create new risks for
    consumers without sufficient consumer benefits. This unified opposition
    reflects a national consensus of state consumer advocates that, despite
    the merit of some items, such as the reliability provisions in S. 475,
    the broader proposals, if enacted, would be detrimental to the public
    interest and interests of retail electricity consumers.
        NASUCA is particularly concerned about proposals to authorize
    unnecessary and costly transmission investment incentives, and
    proposals that would weaken consumer protections against market power
    and holding company abuses. I will now address the issues in the order
    suggested by the Committee.
                      regional energy services commissions
        Draft Senate Staff amendments to the Federal Power Act would
    authorize states to create new interstate regional energy services
    commissions (RESCs) to operate under FERC jurisdiction to address
    regional, interstate aspects of the electricity grid.\2\ The Staff
    Draft would give the RESC ``primary jurisdiction over energy services''
    \3\ in an interstate region, which would include the power to form and
    approve RTOs in the region, establish markets to set rates, and decide
    ``rate design and revenue requirements for transmission and wholesale
    sales in the RESC region,'' \4\ without clearly requiring all rates and
    charges demanded or received be just and reasonable, as is now required
    by Section 205 of the FPA. While the draft would give the RESC
    jurisdiction over ``market power review and market monitoring efforts
    in the RESC region,'' \5\ apparently it would lack authority to remedy
    market power and market manipulation problems.
    ---------------------------------------------------------------------------
        \2\ Staff Draft, Section 1211.
        \3\ Staff Draft, Section 403(a).
        \4\ Staff Draft, Section 403(b)(3).
        \5\ Staff Draft, Section 403(b)(4).
    ---------------------------------------------------------------------------
        NASUCA has not yet had an opportunity to develop a position on this
    issue, but in my view, these newly proposed entities may add further
    confusion to the picture in areas of the country that now have RTOs or
    are considering their formation. For example, in some regions,
    geographic and electric grid characteristics may not coincide with
    state lines, but under proposed Section 1211, a state apparently could
    be a member of only one RESC. Also, underlying issues of FERC
    jurisdiction and FERC-approved market rates still troubling some states
    and areas of the country are not resolved. Accordingly, it is not clear
    that the proposed RESC entities would meaningfully add to consumer
    benefits available under existing law.
                             reliability standards
        S. 475 addresses the issue of system reliability by allowing the
    FERC to recognize a standards-setting Electric Reliability
    Organization. At the present time, reliability standards for the bulk
    electric grid system are set by a voluntary organization, the North
    American Electric Reliability Council (NERC). In 1998, in recognition
    that the cooperative and voluntary underpinnings of NERC standards need
    strengthening, particularly in areas of the country where competitive
    concerns may weaken traditional cooperation among utilities, and thus
    threaten reliability, NASUCA adopted the following resolution:

              NASUCA supports efforts to develop a national reliability
            organization that will continue the vital functions now
            performed by NERC, and will do so in a manner that is
            competitively neutral and recognizes the paramount concerns of
            consumers in a reliable electric system;
              NASUCA supports efforts to establish an independent Board of
            Directors that will govern NERC (or any successor national
            organization) in a competitively neutral manner that will
            benefit all consumers and that will not be dominated or
            controlled by any particular industry participant or segment;
              NASUCA supports federal legislation that would clarify FERC
            authority to review the reliability requirements imposed by
            NERC (or any successor national organization) and to ensure
            that such requirements are adopted and implemented in a manner
            that benefits all consumers. . . .\6\
    ---------------------------------------------------------------------------
        \6\ NASUCA Resolution 1998-07, Urging the Establishment of an
    Independent Board to Govern Electric Reliability Matters and the
    Enactment of Federal Legislation of Ensure FERC Jurisdiction Over the
    Actions of Such a Board in the Future.

        Consequently, placing the development and review of electric system
    reliability on firmer statutory ground has been supported by NASUCA as
    an independent legislative reform in recent years. The enactment of
    reliability legislation, such as contained in S. 475 is supported by
    NASUCA.
                            open access (ferc-lite)
        It has been proposed that public power entities not now under FERC
    jurisdiction under the Federal Power Act (FPA) would be required to
    open their transmission systems and come under limited FERC
    jurisdiction (FERC-Lite). In numerous areas of the country, residential
    consumers receive the benefits of low cost power from federal dams and
    hydro power projects, often transmitted over the lines of public power
    entities currently exempt from FERC regulation. I have no objection to
    extra capacity of those public power transmission facilities being open
    to carry energy for other entities and other customers, so long as it
    does not interfere with longstanding statutory, regulatory and
    contractual commitments of public power to retail consumers at the
    lowest possible cost. There is a concern, however, that the benefits of
    low cost power from federal projects would be compromised if the
    transmission component of rates were set by the methods proposed by the
    FERC in its pending Standard Market Design (SMD) rulemaking.\7\ This
    concern for the continued provision of valuable public power benefits
    intended to be provided for the benefit of consumers is not
    sufficiently addressed in the legislative ``FERC Lite'' proposals.
    ---------------------------------------------------------------------------
        \7\ Notice of Proposed Rulemaking, Remedying Undue Discrimination
    Through Open Access Transmission Service and Standard Electricity
    Market Design 67 Fed. Reg. 55,452 (proposed August 29, 2002.
    ---------------------------------------------------------------------------
                              transmission siting
        Under state laws, utilities typically have the continued obligation
    to provide reliable and adequate service upon demand to all retail
    customers. State regulators have the ability to address the need for
    new facilities, and to determine the appropriate mix of solutions,
    whether they be transmission, generation, demand side, distributed
    generation, or other means. The proposed Staff draft would allow the
    Secretary of Energy to designate transmission congestion zones and
    gives FERC ultimate authority to issue certificates for siting new
    facilities. The states and a RESC would have the right to comment but
    apparently there would be no full hearing on the appropriateness of a
    FERC-proposed transmission siting plan.\8\ The House draft would give
    the FERC authority to grant transmission facility permits with eminent
    domain power.
    ---------------------------------------------------------------------------
        \8\ Section 1221(d) of the Staff draft would give parties ``a
    reasonable opportunity to present their views and recommendations with
    respect for the need for and impact of a facility coverted by the
    transmission development certificate.'' This suggests a written comment
    type of proceeding. Thus, there is no assurance of a hearing with an
    opportunity to present evidence and confront proponents before an
    impartial decision maker.
    ---------------------------------------------------------------------------
        Meanwhile, authority to make other transmission siting decisions,
    and decisions about the location of power generating plants, would
    still remain under state jurisdiction, and so it may prove to be even
    more difficult to evaluate the cost effectiveness of long term
    additions, improvements, and investments in either generation or
    transmission if siting responsibility is fragmented as proposed.
    Accordingly, NASUCA does not support federal eminent domain power for
    siting of transmission facilities.
                       transmission investment incentives
        NASUCA believes that rate incentives to promote capital investment
    in new transmission facilities beyond the just and reasonable standard
    of the FPA are unnecessary, and the added costs of such incentives are
    not justified.\9\ A very broad proposal of the FERC, now pending, would
    increase interstate electricity transmission rate allowances to provide
    financial incentives.\10\ The pending FERC proposal, made without the
    benefit of any enabling legislation to change the way electricity
    transmission rates are set under the FPA, is to allow automatic
    increases in the return on equity (ROE) for transmission investments,
    well beyond the level normally allowed in the development of just and
    reasonable rates. These ROE ``adders'' are intended to reward utilities
    for divesting control over their transmission assets to regional
    transmission organizations (RTOs), for outright divestiture of these
    assets to newly created ``Independent Transmission Companies (ITCs)''
    utilities, and for construction of new transmission facilities. Control
    and ownership of the facilities would shift to regional transmission
    organizations and the new transmission service utilities which would
    operate new and expanded transmission service spot markets. Cooperating
    utilities will receive ROE bonuses, well above the normally calculated
    reasonable rate of return on equity invested, of 200 basis points--2%--
    for existing transmission facilities, and 300 basis points--3%--for new
    investments in transmission. Nothing in the proposed FERC rule requires
    any showing that these bonus-conferring actions are cost effective, and
    nothing in the proposed bill places any upper limit on the rate making
    incentives.
    ---------------------------------------------------------------------------
        \9\ Section 7011 of the proposed House Energy Policy Act of 2003
    bill would add a new Section 215 of the Federal Power Act requiring the
    Federal Energy Regulatory Commission (FERC) within one year to
    establish new rules for ``incentive-based and performance-based rate
    treatments to promote capital investment'' by electricity transmission
    utilities, ``to support economically efficient markets for the sale of
    electricity at wholesale.'' The Senate Staff Draft, Section 1242, would
    also authorize the FERC to promote transmission solutions through
    ``proper price signals'' and an ``adequate return on investment.''
        \10\ Proposed Pricing Policy for Efficient Operation and Expansion
    of the Transmission Grid, FERC Docket No. PL03-1-000.
    ---------------------------------------------------------------------------
        In response to the FERC proposals for ROE ``adders,'' NASUCA
    commissioned an examination of the cost and policy implications, and
    recently filed comments in the pending FERC proceeding.\11\ I would
    like to highlight several conclusions of that study:
    ---------------------------------------------------------------------------
        \11\ The NASUCA comments on the FERC transmission incentives
    proposal are available at www.nasuca.org

       NASUCA calculates the cost of the current FERC initiative,
            if fully utilized by transmission owners, will cost consumers
            over $13 billion, or approximately $711 million per year for
            the 19 year time horizon in the FERC proposal. This is a
            conservative estimate of the potential cost of these investment
            incentives, and it virtually offsets the putative $725 million
            per year benefit of forming Regional Transmission
            Organizations, a benefit estimate that is controversial for its
            optimism.
       The $13 billion incentive is unnecessary and will provide no
            incremental benefit in many areas where transmission owners
            previously agreed to turn over control of their systems to
            regional transmission organizations (RTOs) or independent
            system operators (ISOs). There is no reason to provide new
            ``incentives'' to reward actions previously taken.
       If Congress seeks to encourage national adoption of the
            system proposed by FERC, such ROE incentives may only impede
            that result. States that have not approved divestiture of
            transmission facilities owned by state-regulated utilities may
            be more reluctant to do so if automatic cost increases are the
            result, without any clear, offsetting benefits.

        There has been no showing that the existing just and reasonable
    standard for ratemaking needs alteration. For these reasons, NASUCA
    opposes extraordinary financial incentives to stimulate transmission
    investment.
               transmission cost allocation (participant funding)
        The cost of transmission investments and other procedures needed
    for reliability purposes should be allocated fairly to the persons or
    entities benefitting from the added reliability. Transmission
    investments for purposes other than reliability, for example, to
    facilitate energy trading or performance under long term supply
    contracts, should be borne by the participants. These principles are
    already generally recognized.\12\
    ---------------------------------------------------------------------------
        \12\ See New York Independent System Operator, Inc., FERC Docket
    Nos. ER97-1523-071, OA97-470-066ER97-4234-064, Order on Compliance
    Filing, 102 FERC para.61,284 (March 13, 2003). ``[T]he Commission finds
    that the current allocation of [Con Edison's Thunder Storm Alert]--
    related costs is unjust and unreasonable. These procedures are mandated
    by a local reliability rule designed to prevent a recurrence of a major
    blackout in New York City, and which were, prior to the formation of
    the NYISO, the sole responsibility of Con Edison. The specific
    reliability benefits from these procedures inure solely to the benefit
    New York City load, so that the costs should be allocated solely to
    that load. . . . Neither the NYISO nor Con Edison make any convincing
    arguments justifying the continued statewide socialization of TSA-
    related costs.'' Id.
    ---------------------------------------------------------------------------
                        transmission organizations/rtos
        In recognition that voluntary regional transmission organizations
    (RTOs) have been formed in many areas of the country, and without
    endorsing their nationwide implementation, NASUCA adopted a resolution
    addressing its key concerns about RTOs.\13\ These concerns include
    reliability standards, independent governance, just and reasonable RTO
    costs, price transparency, prevention of the exercise of market power
    and anti-trust violations. The proposed legislation does not fully
    address these concerns and the need for added consumer protections in
    these areas.
    ---------------------------------------------------------------------------
        \13\ NASUCA Resolution on Regional Transmission Organizations,
    August 1999. www.nasuca.org. Click Resolutions.
    ---------------------------------------------------------------------------
                                     puhca
        The Public Utility Holding Company Act of 1935 (PUHCA) should not
    be repealed, as proposed in several of the legislative proposals. For
    example, Section 7043 of the draft House energy bill would repeal it.
    PUHCA remains as a statutory bulwark against reassembly of vast utility
    holding company empires. Even if not vigorously enforced, its very
    existence is a deterrent to abuse of captive ratepayers and
    inappropriate transactions between regulated utilities and unregulated
    affiliates. NASUCA has adopted the following resolution on this
    subject:

            ``in considering action affecting regulation or the structure
            of the electric industry, including PUHCA repeal or reform,
            Congress should require federal regulatory agencies to: 1)
            prevent abusive or preferential affiliate transactions, 2)
            continue oversight and protection over corporate and market
            structure to prevent abuses to consumers and competition, 3)
            disallow costs which are not prudent and reasonable from
            wholesale rates, 4) exercise sufficient regulatory authority to
            prevent ratepayers from bearing any risk of utility
            diversification and to prohibit cross-subsidies between
            regulated and nonregulated subsidiaries. . . .'' \14\
    ---------------------------------------------------------------------------
        \14\ NASUCA Resolution 1996-04, Urging the Congress and Federal
    Agencies to Address Market Power as a Component of Any Federal
    Restructuring Action.

        Recent events reveal the recurring tendency of holding companies in
    financial trouble to look to regulated affiliates as a source of
    credit, cash, or other resources, all at the expense of captive utility
    consumers. The bill would eliminate current PUHCA ownership
    restrictions on non geographically contiguous utilities, would limit
    state and federal regulatory agency and intervenor access to books and
    records of the holding company to the costs of regulated entities,
    would require a showing of necessity for regulators to examine holding
    company books, and could make information regarding holding company
    records and affiliate transactions, obtained in state regulatory
    proceedings, confidential. PUHCA remains an essential consumer
    protection. In light of recent utility holding company problems, it
    should be more vigilantly enforced, not repealed. A copy of NASUCA's
    resolution on PUHCA is attached.
                                     purpa
        No comment.
                        net metering & real-time pricing
        NASUCA is not opposed to net metering or to voluntary real-time
    pricing options. At the wholesale level, all rates and charges made,
    demanded or received must be just and reasonable under the Federal
    Power Act and FERC regulation. At the retail level, traditionally not
    an area of federal concern, states are experimenting with a variety of
    net metering and time of use pricing methodologies for retail rates.
    Federal measures to require or encourage states to address these
    issues, such as contained in the House Draft and the Staff Draft, are
    unnecessary.
        NASUCA is opposed to federal mandates for real-time pricing of
    electricity for residential consumers, and opposes the incorporation of
    volatile wholesale real-time price determinants into retail rates in
    states that ``unbundled'' their rates for generation. NASUCA adopted a
    resolution favoring rate methodologies that promote price stability and
    predictability of the ``default'' rates for customers, urging each
    jurisdiction which introduces competitive markets for the provision of
    elements of electric or natural gas service to design default service
    rates so that:

              The Default Service Provider is equipped and able to assure
            that the rates, terms and conditions, reliability and quality
            of customer service offered to such customer are no worse with
            such service than they would be with traditional utility
            service;
              The rates charged by such Default Service Provider are stable
            and predictable over the long term and that the rates or
            formulas to determine such rates are approved only after
            appropriate notice to the public, consumers, and adequate
            administrative review;
              The Default Service Provider shall not simply pass through
            wholesale spot market rates for the energy or gas commodity
            portion of Default Service, and shall be required to take
            prudent measures to provide least cost service and assure long
            term rate stability, through various means including but not
            limited to competitive bid, bilateral contract, or provider-
            owned generation or supplies. . . .\15\
    ---------------------------------------------------------------------------
        \15\ NASUCA Resolution 02-02, Urging Jurisdiction Introducing the
    Competitive Provision of Electricity or Natural Gas Service to Assure
    the Continued Availability of Reliable Service to Customers from a
    Default Service Provider at Just and Reasonable Rates, at
    www.nasuca.org.
    ---------------------------------------------------------------------------
                                renewable energy
        States are already making major efforts to increase the portion of
    renewable energy used by consumers and to foster the development of new
    technologies to make renewable energy sources more economically viable.
    I would agree that a federal role in this area is appropriate.
              market transparency, anti-manipulation, enforcement
        NASUCA is concerned that electricity rates at the wholesale level
    may at times be vulnerable to the exercise of market power, without
    effective remedies for consumers. There is a widespread concern that
    the FERC may lack certain powers needed to supervise markets
    effectively and to effectuate full remedies for consumers injured by
    the exercise of market power.\16\ In 2002, NASUCA adopted a detailed
    resolution supporting effective monitoring of such markets where they
    have been approved by the FERC.\17\
    ---------------------------------------------------------------------------
        \16\ A recent GAO report questions whether the FERC's capabilities
    and enforcement powers, originally designed for the traditional rate
    setting paradigm, are sufficient tools for an effective market
    overseer. Energy Markets: Concerted Actions Needed by FERC to Confront
    Challenges That Impede Effective Oversight, GAO-02-656, Table 4, 69
    (June 2002), Available at http://www.Gao.gov/new.items/d02656.pdf.
        \17\ NASUCA Resolution, Promoting Market Monitoring Functions
    Within Regional Transmission Organizations (Rtos) Whenever Such
    Regional Entities Are Created, June 2002, available at www.nasuca.org.
    ---------------------------------------------------------------------------
        The Staff Draft would authorize the FERC to implement an electronic
    rate filing system, in which rates demanded by sellers (except for the
    spot market clearing price actually received) might not be made public.
    This is apparently a less ``transparent'' substitute for existing
    sunshine principles long embodied in the FPA, such as those regarding
    public rate filing, notice of rate changes, and public inspection of
    all rate schedules.
        The proposed House Draft and Staff Draft include provisions to
    outlaw the specific abuse of ``round-trip'' trading, but they are not
    comprehensive enough to reach new market manipulation strategies that
    may not be expressly covered in the statute. For example, the bar of
    ``round-trip'' trading seems to apply only to bilateral strategies, and
    might not cover a triangular trading gambit. The refund remedy would be
    broadened, but would be prospective from the date of a complaint, so
    there may be no real refund remedy in situations where rates change
    every hour or day.\18\
    ---------------------------------------------------------------------------
        \18\ In just one day, June 26, 2000 ``[a]ccording to the NYISO,
    consumers bore over $100 million in excess costs before bid mitigation
    could be applied. As a result, and in light of FERC's unwillingness to
    allow retroactive price corrections, the NYISO subsequently implemented
    an automated mechanism for mitigating bids prior to setting the market-
    clearing price'' Best Practices in Market Monitoring, Synapse Energy
    Economics, et al., p. 18-19 (Nov. 9, 2001) (citing NYISO, Exigent
    Circumstances Filing of the [NYISO], p. 8 (May 17, 2001)).
    ---------------------------------------------------------------------------
                              consumer protections
        NASUCA does not view customer protections as a separate item within
    the overall statutory framework for federal oversight of the
    electricity industry. Rather, the fundamental purpose of the entire
    Federal Power Act of 1935 (FPA) is to protect customers and to assure
    reasonableness in the provision of a service essential to life in
    modern society.\19\ Accordingly, any effort to amend the FPA must
    address whether the proposed modifications assure real benefit to
    consumers, or at least maintain and not jeopardize the existing level
    of customer protection. From this broad perspective, the pending
    legislative proposals do not, in NASUCA's view, increase overall
    customer protection, and some measures may erode existing protections.
    ---------------------------------------------------------------------------
        \19\ ``The Federal Power Act's primary purpose [is] protecting the
    utility's customers.'' Electrical Dist. No. 1 v. FERC, 774 F.2d 490,
    493 (D.C. Cir. 1985) (Scalia, J).
    ---------------------------------------------------------------------------
        Some of the specific consumer remedies really add nothing to
    existing state measures. For example, states that allow retail utility
    competition quickly and effectively addressed the ``slamming'' issue--
    the unauthorized switching of providers. Accordingly, there is no need
    for federal legislation in this area of traditional state jurisdiction,
    especially when many states have not adopted retail energy competition
    models.
        On the other hand, several of the proposals would repeal PUHCA or
    and some would still urge repeal of existing FERC merger review
    authority, provisions intended to protect customers from holding
    company abuse and market power. For example, Section 7101 of the
    original House Draft bill would have repealed Section 203 of the
    Federal Power Act, which includes FERC review of proposed utility
    mergers. The rationale for the repeal is that review of a merger of
    electricity utilities is performed by other agencies and that any
    further review by FERC would be redundant. FERC review of mergers of
    electricity utilities under its jurisdiction, however, should be
    preserved. There is a growing understanding that the nature of
    electricity and evolving electricity markets may permit the subtle
    exercise of market power, even without overt collusion, by entities
    having market shares typically allowed by the FTC and regulators in
    other industries. Many of the benefits projected by the FERC in its
    efforts to create broader geographic markets for electricity, at
    significant expense, rest upon the assumption that flaws in existing
    markets will be mitigated if buyers can find more sellers in expanded
    regional trading areas. If, however, industry mergers and consolidation
    are allowed to occur simultaneously with costly transmission expansions
    to facilitate larger geographic marketing areas, the mergers could
    result in a shrinkage of the number of sellers, and a corresponding re-
    concentration and reappearance of market power. FERC should have
    continued authority to scrutinize and reject proposed electric industry
    mergers, under evolving standards for measuring market power in
    electricity markets, and Section 203 of the FPA should not be repealed.
                                   conclusion
        In conclusion, while some individual provisions, such as the
    reliability measures of S. 475, have merit, the various proposals
    before the Committee to amend the Federal Power Act of 1935 and to
    repeal the Public Utility holding Company Act of 1935 do not assure
    demonstrable benefits or added protection that would make their
    enactment a value proposition for consumers. Some proposals may
    increase consumer rates by allowing unwarranted rate increases for
    owners of electricity transmission lines and facilities, beyond the
    level that is just and reasonable. Some proposals would eliminate
    longstanding protections of the Public Utility Holding Company Act
    (PUHCA) intended to protect consumers from utility holding company
    abuses. Other proposals would for the first time provide explicit
    statutory authorization for the use of market mechanisms, but without
    providing adequate enforcement powers to the FERC to oversee the
    markets and market participants, and without the tools to provide full
    remedies to consumers. In light of recent instances of energy market
    manipulation, holding company abuses, and the possibility of further
    industry consolidation in the aftermath of major losses incurred by
    energy generation and trading companies, it is clear the consumers need
    greater, not less, protection from the exercise of market power in the
    electricity markets under FERC jurisdiction. For these reasons, NASUCA
    has concluded that the proposals to modify the Electricity title of the
    FPA now under consideration are not in the interests of utility
    consumers.
        I want to thank Chairman Domenici and the committee again for
    permitting me to share NASUCA's views on these important issues. I
    would be pleased to address any questions you may have at this time.

        The Chairman. Thank you very much. Did you have prepared
    remarks that you wanted admitted in the record?
        Mr. Norlander. Yes, we have submitted those.
        The Chairman. That will be done.
        John Anderson, executive director of the Electricity
    Consumers Resource Council. Thank you for coming.

      STATEMENT OF JOHN ANDERSON, EXECUTIVE DIRECTOR, ELECTRICITY
                      CONSUMERS RESOURCES COUNCIL

        Mr. Anderson. Thank you, Mr. Chairman, and I appreciate the
    opportunity to be here.
        ELCON is the national association of large industrial
    consumers of electricity. Our members come from virtually every
    segment of the manufacturing community and have operations in
    every State. We, along with other consumers, are the ones that
    pay the bills, and we care very much about these issues and we
    know that you do too.
        ELCON members compete in free and open markets, both here
    in the United States and abroad. We support competition, and
    accordingly, for well over 10 years, ELCON and ELCON members
    have sought free and open electricity markets both at the
    wholesale and retail levels.
        At present we find that progress toward competition is
    being made. It is slow, to be sure, but there is progress
    nonetheless. At the wholesale level especially, more power is
    being bought and sold than ever before. There are independent
    generators, marketers, and other participants buying and
    selling low cost electricity that we believe is beneficial to
    all consumers, industrial, commercial, and residential.
        I hasten to add that regarding wholesale markets, progress
    must be made at the national, rather than the State or regional
    level. Our grid is interconnected. Electrons cross State and
    regional boundaries with impunity. The Federal Energy
    Regulatory Commission is the regulatory body necessary to deal
    with Federal issues.
        Before I address the individual issues before this
    committee, I would like to state that while we as industrial
    customers do not oppose the eventual enactment of an
    electricity title, we do not encourage one either at this time.
        My fear, as I have observed in several States that have
    adopted so-called electricity restructuring plans, is that
    legislative solutions, almost by necessity, involve political
    compromises. And all too often, these compromises create market
    problems without providing market solutions.
        Unless we are sure of what will, in fact, make electricity
    markets more competitive, I urge the committee to take no
    action on electricity at this time.
        Let me now touch on couple of the subjects that you put
    before us today.
        The Holding Company Act, or PUHCA. ELCON members, as large
    industrial electricity users, have identified market power and
    market power abuse by utilities as the greatest issue they face
    in the electricity marketplace. Legislatively that issue is
    embodied in repeal of the Public Utility Holding Company Act. I
    emphasize no bona fide consumer group supports PUHCA repeal.
    PUHCA is the primary Federal statute available to address the
    abuse of market power by utilities today. I argue that PUHCA is
    needed at least as much today as it was when it was enacted in
    1935. In fact, in some ways, PUHCA should be strengthened. For
    the reasons set forth in our more detailed written testimony,
    we urge you not to repeal PUHCA at this time.
        RTOs. The transmission grid is the linchpin to the creation
    of truly competitive wholesale electricity markets. We will
    never see truly competitive electricity markets as long as
    monopoly utilities continue to use the transmission grid to
    benefit their own generation and deny access to power generated
    by others.
        ELCON strongly supports FERC's efforts to make the grid
    more open and less discriminatory. We strongly recommend that
    Congress does not restrict these efforts.
        As far as incentives, contrary to some assertions, lots of
    transmission, both new and upgrades, is being constructed
    today. In spite of this, there certainly are some critical
    areas where additional transmission investment is needed.
    However, the incentive provisions in both the House and Senate
    proposals are unnecessary, unneeded, and unwarranted the way we
    look at them. If FERC believes that incentive rates are
    necessary, a decision that can and should be made on a case-by-
    case basis, FERC has sufficient authority to order such rates
    under current law.
        Incentives certainly should not be offered in areas where
    new transmission is not needed. In areas where new transmission
    is needed and cost recovery is guaranteed, it should be
    recognized that there is very little risk. If the risk is low,
    the rate of return must also be low. Perhaps TEBO rates today.
        I emphasize the potential cost of these so-called
    incentives may be very large, billions and billions of dollars
    that consumers will be required to pay. Consumers must be
    assured they will actually receive benefits if they are going
    to have to pay these.
        Regional energy services corporations. I join with several
    with my other colleagues today to raise some problems with
    this. The proposal in the draft legislation truly amazes me. It
    barely has been discussed, and yet it is the central part of
    the legislation. I find it hard to believe that this committee
    is going to begin markup next week on a legislative proposal
    that has only been in the public domain for a couple of weeks.
    At a minimum, the creation of RESCs would create yet another
    layer of unnecessary and unwise bureaucracy. We urge the
    committee not to adopt this proposal, at least until it can be
    studied in full.
        The so-called reliability language is often referred to as
    consensus language. We do not believe it is a true consensus.
    We, along with everybody else, support reliability, but we do
    not believe that the language will serve its purpose. It is too
    long and prescriptive. It balkanizes the markets and it ignores
    commercial implications.
        And finally, last but not least, let me mention PURPA, the
    Public Utility Regulatory Policy Act. Although PUHCA and PURPA
    are different statutes, they are similar in that each gets a
    bad rap because of constant utility criticism, and each has
    been the subject of extensive lobbying by utilities to achieve
    its repeal. The utilities claim that they are mandated under
    PURPA to purchase power from co-generators and other renewable
    energy resources, though they do not tell you that the rates
    that are out there have been approved by the appropriate State
    commissions. They do not state that the cost of wholesale
    electricity has gone down since PURPA has been affirmed, and
    they do not tell you that qualifying facilities which sell
    power under PURPA are far more energy efficient and
    environmentally beneficial.
        Last year, the Senate approved Carper-Collins, and I hope
    that if you do anything with PURPA, you will do the same thing
    today.
        As I said at the outset, we support competitive markets.
    However, many of the proposals put forth in the Senate draft
    and other legislation would not only make the market less
    competitive, it would stifle the buds of competition that we
    have seen emerging.
        Thank you for the opportunity to be before you today.
        [The prepared statement of Mr. Anderson follows:]
           Prepared Statement of John Anderson, Executive Director,
                     Electricity Consumers Resource Council
                                    summary
        ELCON is the national association representing large industrial
    users of electricity. ELCON members seek competitive wholesale and
    retail competitive markets. ELCON supports including electricity
    provisions in a comprehensive energy bill only if such provisions
    clearly will advance the cause of competitive markets.

       Regional Energy Services Commission: This proposal is
            untested and could hinder, not facilitate, the flow of power.
       Reliability Standards: The ``consensus'' legislation could
            balkanize the market (by granting deference, or providing a
            rebuttable presumption to certain groups); it also does not
            take into account the intrinsic inter-relationship between
            reliability standards and their commercial impact.
       Open Access (FERC-Lite): Optimally, at some point, the
            entire grid, regardless of ownership, will be open and subject
            to uniform rules and regulations.
       Transmission Siting: Granting FERC a ``fallback'' right of
            eminent domain, as provided in the House draft, while rarely
            used, would provide a motivation to ensure that state inaction
            does not occur.
       Transmission Investment Incentives: Investment incentives
            will be costly to consumers. Investment incentives can already
            be offered by FERC on a case-by-case basis; there is no
            demonstrated need to utilize investment incentives in all
            instances.
       Transmission Cost Allocation (Participant Funding): This
            should be considered as a regulatory issues, not a legislative
            one. Under current law, FERC can allocate the cost of new
            transmission in any way it deems appropriate--one approach,
            i.e., participant funding, should not be locked into statute.
       Transmission Organizations/RTOs: ELCON supports large RTOs
            with independent governance; legislation is not needed on this
            issue.
       PUHCA: Given recent turmoil in electricity markets, repeal
            of PUHCA--which protects both consumers and investors--seems
            unwise.
       PURPA: PURPA guarantees to cogenerators regarding purchase
            of electricity and the availability of back-up power should be
            retained until functioning competitive markets are established.
       Net Metering and Real-Time Pricing: ELCON members support
            the concept of net metering; if real-time pricing is required,
            a utility's risk is reduced and, we believe, its potential rate
            of return should be reduced as well.
       Market Transparency, Anti-Manipulation, Enforcement: The
            suggested language seems minimal considering the abuses that
            have been revealed in electricity markets.
                                   statement
        Good morning. My name is John Anderson. I am the executive director
    of the Electricity Consumers Resource Council, or ELCON. ELCON was
    established in 1976 and is the national association of large industrial
    consumers of electricity. Our members come from virtually every segment
    of the manufacturing community and have operations in every state.
        ELCON members compete in free and open markets here in the U.S. and
    abroad. We support competition, and, accordingly, for over ten years,
    ELCON and ELCON members have sought free and open electricity markets
    at the wholesale and retail levels. We have testified to that purpose
    before this Committee on several occasions.
        At present we find that progress toward competition is being made--
    slow progress to be sure, but progress nevertheless. At the wholesale
    level especially, more power is being bought and sold than ever before.
    There are independent generators, marketers and other participants
    trading electricity that we believe is beneficial to all consumers,
    industrial, commercial and residential.
        The evolution to a truly competitive wholesale market is far from
    complete. That market is very much in transition. It is changing
    partially in response to the pro-competition directives of the Energy
    Policy Act of 1992 and from FERC, specifically Orders 888 and 2000, and
    partially in response to market developments.
        I hasten to add that, regarding wholesale markets, progress must be
    made at the national, rather than state or regional, level. Our grid is
    interconnected; electrons cross state and regional boundaries with
    impunity. The Federal Energy Regulatory Commission (FERC) is the
    plenary regulatory body with the statutory authority necessary to deal
    with interstate electricity issues. Last year's Supreme Court case
    affirmed FERC's jurisdiction over interstate transmission. We urge
    Congress and this Committee not to tamper or try to modify the basic
    holdings of that decision.
        Before I address the individual issues before this Committee, I
    would like to state that while we as industrial consumers do not oppose
    the eventual enactment of an electricity title, we do not encourage one
    either. Markets are rapidly evolving. Participants are aware of the
    rules and are responding to market forces. Legislation is not necessary
    at this point in time.
        My fear, and I have observed this in several states that adopted
    so-called electricity restructuring plans, is that legislative
    solutions, almost by necessity, involve political compromises. And too
    often those compromises create costly market problems without providing
    market solutions.
        So if this Committee is certain that it is crafting legislation
    that will make markets more competitive, that will remove the barriers
    that monopoly utilities have hidden behind for decades, and will
    provide more options and lower prices for consumers, I say go ahead and
    ELCON will support you.
        But if instead you are drafting legislation that you hope addresses
    one company's problems, one region's uniqueness, or one Senator's
    political needs, I urge you to go slow. In fact, unless we are sure of
    what will, in fact, make electricity markets more competitive, I would
    urge the Committee to take no action on electricity at this time.
        I will now elaborate on the various sub-issues that are part of the
    legislative proposals before the Committee today. Given the complexity
    of each issue, I have tried to state our objectives somewhat simply. In
    all cases, we are striving for more competitive markets.
    Regional Energy Services Commission (RESCs)
        From a personal perspective, let me say that I have worked on
    electricity policy issues for over twenty-five years. Although some
    claim that the issues rarely change, every now and then there emerges a
    completely new proposal. Today that proposal, as contained in the
    Senate staff draft, is for the creation of Regional Energy Services
    Commissions, an idea I never encountered before last week.
        I have heard this proposal called innovative. I have heard it
    called radical. Regardless, it is certainly untested--in fact it has
    barely been discussed as to its potential impact on markets and
    competition. I find it hard to believe that this Committee is going to
    begin markup next week on a legislative proposal that has only been in
    the public domain for two weeks.
        We oppose the concept of RESCs as outlined in the Committee draft.
    We do so because we believe that a primary component of achieving more
    competitive wholesale markets is uniform rules that make it easier for
    buyers and sellers of electricity to meet and do commerce. From the
    perspective of industrial users who have multiple electricity-consuming
    facilities across the country, we envision an eventual market that
    facilitates the purchasing of power for numerous facilities from one
    source. Such a market would provide lower cost power, reduce
    administrative costs, and make American manufacturing facilities more
    competitive.
        We base this position on the fact that the interstate transmission
    grid is divided into three interconnections, one in the East, one in
    the West, and one comprised of most of Texas. Within each
    interconnection, power is synchronized and flows without regard to
    state or regional boundaries. We believe consumers would benefit if
    access to power within any one interconnection were made easier, not
    more difficult. We believe the creation of RESCs as described in the
    Senate draft would hinder, not facilitate, the flow of power.
        Accordingly we support the concept of a standard market design,
    though we certainly do not endorse every provision of the proposal FERC
    put forth last year. We want to make markets more consumer friendly.
    Allowing each region's transmission infrastructure and tariff rate
    design to be governed by an RESC rather than by FERC would balkanize
    the market and, as we see it, benefit nobody--certainly not consumers.
        The creation of RESCs would create yet another layer of
    bureaucracy. Consumers, even if they are the largest corporations in
    the country, have limited staff time and money to participate in
    proceedings such as envisioned by the creation of RESCs. Utilities, on
    the other hand, have endless human and financial resources because,
    unlike corporations in competitive markets, they can pass those costs
    on to captive customers.
        I have tried, without success, to find the creator of this radical,
    new, and untested proposal. Although I have been unable to locate its
    progenitor, I can be reasonably certain that it is no one in the
    consumer community. We urge the Committee not to adopt this proposal,
    at least until it can be studied in greater detail.
    Reliability Standards
        All of the bills under discussion, with minimal degree of
    variation, contain what is commonly referred to as ``consensus
    reliability'' language. Though we recognize that many disparate
    stakeholders have endorsed this section in one form or another, we do
    not believe that it is a true consensus document and we do not believe
    that it will, in fact, enhance reliability.
        By way of background, ELCON was part of the process that developed,
    and endorsed, the original ``consensus reliability'' language roughly
    seven years ago. That language was unfortunately the result of a
    Christmas tree effort, as every stakeholder representative (including
    us) tried to add language to advantage their own particular group.
    Since then, when we have looked at that end product and subsequent
    revisions, we see that they all have similar flaws.
        We recognize that this is an issue in which few Members have an
    interest. All Members--and all industry stakeholders--support increased
    reliability. Certainly we do. But we do not believe that this language
    will serve that purpose.
        First, not one of the ``reliability'' proposals actually increases
    reliability--rather each establishes a regulatory process which is
    designed to authorize one organization to set standards that are
    supposed to maintain reliability. Although promoters of this language
    purport to model it on the securities industry, that model fails under
    scrutiny. For example, violators of rules promulgated by the National
    Association of Securities Dealers can be denied the ability to trade.
    It is unclear how violations and violators would be sanctioned or
    punished in the electricity industry. Clearly, removal from market
    activities would be difficult if not impossible when dealing with
    owners of interstate transmission lines. And, since electricity
    functions in ``real time,'' violations of reliability rules would cause
    real, possible irremediable, damage before any action could be taken in
    response.
        Second, the language in the four proposals grants deference (or
    provides a rebuttable presumption) to regional groups founded on an
    interconnection-wide basis. This is in response to demands from western
    officials that ``the West is different.'' This may be, and in fact
    reliability rules recognizing these regional differences can be
    developed without granting statutory deference in the standard-setting
    process to any regional group. If the facts support a regional
    standard, that regional standard should be adopted. But by granting
    deference to one group, this language opens the door for deference to
    be granted to other groups (perhaps to one organized on an RTO-wide
    basis; perhaps to consumers who actually pay the bills). Creating
    deference of any kind will encourage the development of a regional,
    rather than a national, standard, and generally make it more difficult
    for power to move from one region to another. In essence, what is
    supposed to be a ``standard'' is no longer a ``standard.''
        And third, for those truly interested in making wholesale markets
    more competitive, reliability should not be considered in a vacuum. The
    issues of reliability and commercial impact are inextricably
    intertwined. One would be hard pressed to imagine a reliability issue
    that did not have commercial implications, and vice versa. Reliability
    standards should not be developed without an examination of their
    impact on commercial practices. To do so is to invite the development
    of ``reliability standards'' that are in fact new trade barriers or
    disguised mechanisms for discrimination. Ideally the preparation of
    reliability standards and so-called commercial practices would be done
    by the same organization. This would ensure compatibility between the
    two and maximize the benefits of both reliability and markets to
    consumers. The current bifurcation of duties between the North American
    Electric Reliability Council (NERC) and the North American Energy
    Standards Board (NAESB) has a number of problems. For consumers and new
    entrants to the market, participation in NERC and NAESB standard-
    setting processes entails a considerable outlay of staff and other
    resources. Moreover, the fact that reliability and commercial practices
    will be made by two different organizations will lead to all sorts of
    complications and inefficiencies. We continue to believe that one
    organization, tasked with both standard-setting responsibilities,
    should consider both reliability and commercial practices.
        In conclusion, we support a clear and short statement that FERC has
    the responsibility and authority to assure reliability and to consider
    the commercial impact as well. Everyone wants reliability. We believe
    it is worth the time to develop the legislative language that will
    truly achieve it. The legislative proposals before the Committee today
    will not accomplish what we are seeking.
    Open Access (FERC-Lite)
        FERC jurisdiction or the equivalent over currently non-
    jurisdictional utilities is an important issue if the transmission grid
    is to be operated in a truly open matter. We are pleased that over the
    past several years non-jurisdictional utilities have seen fit to agree
    to many concessions. Optimally, at some point, the entire grid,
    regardless of its ownership, will in fact be open and subject to
    uniform rules and regulations.
    Transmission Siting
        Generally speaking, ELCON supports giving FERC a right of eminent
    domain for siting of electricity transmission lines similar to that
    enjoyed for the siting of natural gas pipelines. That having been said,
    we certainly recognize the political problems with such a position and
    find the language in the House draft to be a reasonable approach. We
    understand that in fact states have not been the principal reason for
    delay in siting and building new transmission lines. But having a
    ``fallback'' right of eminent domain, as laid out in the House draft,
    while perhaps rarely used, would provide a motivation to ensure that
    state inaction does not occur.
    Transmission Investment Incentives
        The Senate staff draft, as well as the House draft and last year's
    October 16 draft, all address the need for new transmission. We believe
    that there is a need for new transmission in some regions, but not in
    all. The directive in these pieces of legislation that FERC implement
    and utilize incentive rates for the construction of all new
    transmission seems unnecessary and overly restrictive. If FERC believes
    that incentive rates are necessary--a decision that can and should be
    made on a case-by-case basis--they have sufficient authority to order
    such rates under present law. In House hearings, witnesses from both
    Goldman Sachs and for-profit transmission companies testified that such
    incentives are not needed in every case.
        There certainly is no reason to provide incentives in areas where
    new transmission is not needed. Such efforts would merely reward
    monopoly transmission owners and increase costs for consumers.
        In areas where new transmission is needed and cost recovery is
    assured, it is intuitive that the risk involved is very low. Utilities
    enjoy an almost ironclad guarantee that they will receive both a return
    ``of'' and a return ``on'' their transmission investments. If the risk
    is low, i.e., the new transmission will be fully utilized, presumably a
    just and reasonable rate of return, not an incented one, is
    appropriate.
        A recent study undertaken at the request of the National
    Association of State Utility Consumer Advocates attempted to quantify
    what these incentive rates would mean to consumers. According to an
    affidavit filed at FERC, consumers would pay $711 million per year, or
    $13.5 billion over the next 19 years, if incentive rates were to be the
    norm just to build transmission that would be built anyway. Looked at
    another way, that would be $13.5 billion of ratepayer money that would
    not be invested in new transmission infrastructure. On behalf of all
    consumers, industrial, commercial and residential, I find that
    objectionable, especially since the North American Electric Reliability
    Council has stated that significant new transmission will be built
    regardless.
               transmission cost allocation (participant funding)
        The House bill's language on participant funding is less
    restrictive than language in the Senate draft and the language
    circulated last year. But participant funding ought to be a regulatory
    issue, not a legislative one. FERC has--and frequently uses--the
    authority to order such funding on a case-by-case basis. There is no
    reason to lock into statute an inflexible plan that mandates how
    transmission costs are to be assigned now and forever.
        As a practical matter, it is nearly impossible to determine who
    will benefit from transmission upgrades, and it is inevitable that such
    beneficiaries will change over time. In addition, since nearly all
    stakeholders agree that new transmission is necessary in some areas, I
    question why Congress would adopt a plan such as participant funding
    that will likely retard the growth of new transmission. All consumer
    groups and all non-utility generators--the groups most likely to suffer
    if new transmission is not built--believe that mandating participant
    funding will hinder, rather than help, the construction of new
    transmission. If there is an electricity title in legislation, we hope
    Congress will be silent on this issue.
    Transmission Organizations/RTOs
        Industrial users know from experience that the transmission grid is
    the lynchpin to the creation of truly competitive wholesale electricity
    markets. If monopoly utilities can continue to use the transmission
    grid to benefit their own generation and deny access to power generated
    by others, we will never see wholesale competition in any real way.
        ELCON has supported FERC's efforts to make the grid more open for
    many years. We support large, independent Regional Transmission
    Organizations (RTOs) with the day-to-day responsibility of running the
    grid (under FERC oversight). In order for an RTO to operate
    effectively, it needs independent governance so that monopoly
    transmission owners cannot develop self-serving rules and regulations.
        We are, in fact, a little disappointed that FERC now seems more
    positively disposed to smaller RTOs than those originally envisioned.
    The greater the number of RTOs, the more important the ``seams'' issues
    become. ``Seams'' is just another word for barriers. How power goes
    from one RTO to another--through the seams, so to speak--is an issue
    that can greatly effect whether consumers have access to low-cost power
    or not. The proposal to create RESCs could make that ``seams'' issue
    into a ``walls'' issue.
        Ideally an RTO would have administrative responsibility over all
    transmission, regardless of whether it is publicly or privately owned.
    It would also be responsible for the economic dispatch of merchant
    utility-owned generation within the RTO footprint. We believe the
    language in the House draft provides a positive first step toward
    ensuring that federally owned transmission does not become the hole in
    the doughnut.
        Although its efforts have not been perfect, we hope that Congress
    does not restrict FERC in its efforts to make the grid open and non-
    discriminatory. Legislation is not needed on this issue, other than
    perhaps to reaffirm FERC's authority to act.
    PUHCA
        Let me begin my comments on PUHCA by stating that I understand all
    too well why investor owned utilities have spent literally millions of
    dollars in lobbying and communication efforts over the last ten or so
    years to repeal PUHCA. It should be equally understandable why no bona
    fide consumer group supports PUHCA repeal. PUHCA is the primary federal
    statute available to address the abuse of market power by utilities
    that operate in more than one state.
        Proponents of PUHCA repeal argue that the statute is outdated--an
    anachronistic law that no longer applies to today's utility markets. I
    argue that it is needed at least as much today as it was when it was
    enacted, in conjunction with the Federal Power Act, in 1935. In fact,
    in some ways PUHCA should be strengthened.
        Indeed the current market structure, with so many regulated
    utilities having unregulated subsidiaries, provides a situation ripe
    for abuse. In fact no less a pro-business newspaper than the Wall
    Street Journal ran an article last December describing how utilities
    were taking debt from their unregulated enterprises and shifting it to
    their regulated entities so that ratepayers, rather than shareholders,
    were assessed the costs. PUHCA's language on cross-subsidization ought
    to be strengthened, rather than repealed, to protect consumers.
        Similarly, taped conversations between energy traders of a major
    company dramatically depict how consumers were gouged during the
    Western power crisis. Congress should not repeal PUHCA but rather enact
    needed legislation to make it unlawful for any entity, directly or
    indirectly, to undertake fraudulent, manipulative, or deceptive actions
    in wholesale energy markets. Such language was included in HR 5614 last
    Congress; it is not included in any of the four bills before this
    Committee today.
        A discussion of PUHCA is not complete without a discussion of
    mergers. Retaining FERC's merger review authority is essential given
    the number of recent utility mergers and the consolidation of the
    industry into a few large regional (and multi-regional) players. States
    and the federal antitrust agencies cannot do this--FERC therefore must
    be the fallback for this essential consumer protection. FERC also adds
    special expertise to the examination of these mergers.
        Finally I would add that maintaining PUHCA as a federal statute is
    necessary not just to protect consumers but to protect investors. At
    present roughly forty percent of all power companies are listed on
    Standard & Poor's CreditWatch as having a negative outlook. More than
    13 percent of all energy firm's have non-investment grade securities.
    On behalf of all consumers, we ask that you not repeal PUHCA at this
    time.
    PURPA
        Although PUHCA and PURPA are very different statutes, they are
    similar in that each gets a bad rap because of constant utility
    criticisms. And each has been the subject of extensive lobbying by
    utilities to achieve its repeal.
        Utilities claim that they are mandated, under PURPA, to purchase
    power from cogenerators and other renewable energy resources. They
    claim that such power is often available at a costly price. But they
    don't tell you that rates were approved by each state utility
    commission. They don't say that the cost of wholesale electricity has
    gone down since PURPA was affirmed by the Supreme Court in 1982. And
    they don't tell you that Qualifying Facilities which sell power under
    PURPA are far more energy efficient and environmentally beneficial than
    the conventional base load power plants owned by utilities.
        The Administration has recognized the benefits of cogeneration and
    combined heat and power (CHP) and has established a national goal of
    doubling our CHP output by 2010. It is totally inconsistent to endorse
    this objective and then repeal the mandatory purchase and sale
    requirements of PURPA.
        ELCON addresses this issue from two perspectives. First, many of
    our members cogenerate power on-site, sometimes for their own use,
    sometimes to sell, most often a combination of the two. They know that
    the mandatory purchase requirement of PURPA is necessary until there
    are truly open wholesale markets for cogenerators to sell into.
    Otherwise utilities--who routinely obstruct the development of
    customer-owned generation--will not buy cogenerated power or will use
    their market power to keep such electricity off the grid. Until that
    time, PURPA guarantees are not just desirable, they are essential.
        Similarly, the PURPA requirement that monopoly utilities supply
    back-up power to cogenerators at just and reasonable prices is
    necessary until there is a competitive retail market in which to
    purchase that power. Without a guarantee of back-up power, cogenerators
    cannot operate and the manufacturing facilities connected to it become
    useless.
        Second, all of our members are consumers--and big consumers at
    that. It is noteworthy that those companies that pay the largest
    electric bills in the nation recognize that PURPA was the first federal
    statute to inject any competition into the electricity marketplace.
    PURPA is at least partially responsible for the decrease in electricity
    rates over the years. Industrial consumers believe it would be both
    shortsighted and harmful to repeal in any way the guarantees available
    to cogenerators under Section 210 of PURPA.
        The language that the full Senate approved last year, in the
    Carper-Collins amendment, demonstrated the support that cogeneration
    enjoys. Similarly, the House Subcommittee on Energy and Power approved
    by voice vote the language now in the House draft. Both Carper-Collins
    and the House language recognize that PURPA protections should stay in
    place until working, competitive markets are available. We hope this
    Committee adopts a similar approach should it approve legislation.
    Retaining present law would also be acceptable if the Committee chooses
    not to act on electricity issues.
    Net Metering and Real-Time Pricing
        As I stated earlier, many ELCON members are cogenerators utilizing
    a combined heat and power system, often fueled by a renewable resource.
    Our members strongly support the concept of net metering as long as it
    does not require the disclosure of proprietary information or intrude
    upon the internal operations of a company's generation activities.
        Real-time pricing is a much more complicated issue than generally
    considered. Utilization of real-time pricing is a necessary but not
    sufficient condition to ensure that there is a functioning demand
    market (in contrast to demand programs as is generally the case in
    demand side management). All end users, and especially large end users,
    can assist in times of peak demand and congestion by reducing
    consumption. In real terms, a kilowatt hour of reduced consumption has
    the same effect as a kilowatt hour of increased generation. Many large
    industrial users are willing to play such a role assuming that
    compensation is appropriate. Real time pricing would be helpful in
    determining those levels, but only sophisticated consumers can assume
    the high risk of such actions. Hence, it is extremely important that
    real-time pricing is voluntary and not mandated on any customer class.
        Finally, it should be noted that requiring end use customers to
    purchase power under only real-time prices transfers all risk from the
    utility to the customer. If a utility requires real-time pricing, its
    risk is lowered and, we believe, its potential rate of return should be
    reduced as well.
        ELCON does not recommend that legislation address the issue of
    real-time pricing.
    Market Transparency, Anti-Manipulation, Enforcement
        The language in the Senate draft on information availability,
    disclosure requirements and the prohibition of round-trip trading are
    all good as far they go. But they don't go to the heart of the problem
    which is each utility's ability to exercise market power, the ability
    of a utility to manipulate markets, and the lack of significant market
    enforcement by any federal agency. These issues are related to the
    PUHCA issues discussed above. If Congress is to address this issue, it
    should take large steps, not small ones, and the steps should make
    markets more competitive and remover barriers to entry by new
    participants.
    Consumer Protections
        The issues found in the Senate draft and other pieces of
    legislation regarding slamming and cramming affect residential
    consumers far more than industrial. They are valid concerns and should
    be addressed.
    Other Issues
        An issue that has been the subject of much recent dialogue,
    including discussion at the recent House Subcommittee markup, is
    ``economic dispatch.'' The basic question is whether utilities should
    dispatch (put on the grid) the lowest cost power available, even if it
    is not from their own generating facilities. Many utilities refuse to
    do so, claiming that they are protecting their customers or ``native
    load.'' However, this claim fails. As a witness representing some of
    the largest customers in America, I can assert that we would certainly
    prefer to see the lowest cost power be made available whenever
    possible. Although I can understand why utilities try to protect their
    own generation, this practice is not beneficial to consumers and also
    discriminates against non-utility generators.
    Conclusion
        As I stated at the outset, we support competitive electricity
    markets. However, many of the proposals put forth in the Senate draft
    and in other legislation would not only make the market less
    competitive, it would stifle the buds of competition that we have seen
    emerging in recent year. We support positive legislation that
    encourages markets to develop and removes barriers to new entrants. But
    quite honestly, we do not see that emerging from this Congress. That is
    why we believe that no electricity language may well be the preferable
    option, and that no electricity language may in fact be the most
    positive way to promote competition.

        The Chairman. Thank you very much for your testimony.
        First, I want to compliment all of you for helping us stay
    on time.
        Now we will proceed to some questions. I can save mine
    until last. I will yield first to Senator Bingaman, then
    Senator Thomas, Senator Craig, Senator Alexander, in that
    order.
        Senator Bingaman. We had an earlier hearing with some
    people from the financial community--I think, Mr. Svanda, you
    testified at that hearing as well--and one of the main issues
    that was raised was the need for us to get to a point of
    regulatory stability as quickly as possible so that this
    industry could obtain and attract the capital it needed to make
    the investments that were needed.
        Frankly, one of the concerns that I have with the new
    proposal for regional energy services commissions is that, if
    that were adopted by the Congress, it would take a substantial
    period before it could be implemented, before Governors could
    gear up to appoint people, and it could be sorted out as to
    which States were grouping with which States. There is a lot of
    regulatory instability that I think might result, putting aside
    other problems with the proposal.
        I would be interested in Mr. Svanda's view as to whether
    that is a valid concern or one that he shares.
        Mr. Svanda. Thank you, Senator. It is a concern that I
    share and those very concerns are woven through my written
    testimony to you.
        The concern is I come from an area of the country in
    Michigan where we generally are working as a region to
    implement region-wide organizations for electricity markets. We
    have been doing that for quite a while and we have been doing
    it with States that are squarely behind restructuring the
    industry, such as Michigan, with States that are squarely not
    behind restructuring the industry, such as our immediate
    neighbor to the south, Indiana.
        But Indiana and Michigan agree completely with regard to
    how we structure the wholesale regional market. We have rolled
    up our sleeves, along with most of the rest of the States in
    the region, to make the MISO a living, breathing, and reliable
    entity both from a physical reliability and an economic
    reliability sense.
        To move away from those concepts that we have all been
    working on, to introduce the new RESC type of thinking and have
    each of the States in that region, multiplied times 50 across
    the country, evaluate how we can fit into the new structure, I
    think moves the horizon out considerably, and it is that
    horizon that is so important to creating investor confidence,
    that they can understand what types of investments are going to
    make sense, mid, short, long term.
        Senator Bingaman. Let me ask Mr. Anderson. I understand
    your testimony to the effect that PUHCA should not be repealed.
    If PUHCA were repealed by the Congress--we went to great
    lengths in the last Congress to try to strengthen FERC's merger
    authority in order to compensate for the repeal of PUHCA--do
    you think that is an important way to proceed if PUHCA were to
    be repealed, or do you have any thoughts on that?
        Mr. Anderson. Senator, we certainly do have thoughts on
    that, and we appreciate the efforts that you did last year
    working in this area. We compliment you on it very highly.
        But I think it is even more than just merger authority. I
    think it is also broader and the whole concept of market power.
    And I think there are a whole set of provisions that we
    support, and I will be glad to provide them for the record for
    you. But it is access to books and records and the idea of
    monitoring to make sure that the exercise of market power--let
    us be the first to recognize that a law that was created in
    1935 is probably one that is not perfectly tuned for today's
    times, and we think that there could be some modifications to
    it. At the same time, it is a very valuable consumer protection
    act in the market power area, and we urge the mergers and
    access to books and records and market power monitoring, things
    along that line, go along with it.
        Senator Bingaman. Mr. Gifford has suggested that the
    antitrust laws adequately meet these needs. Mr. Anderson, would
    you want to comment as to your view on that?
        Mr. Anderson. Thank you, Senator. The antitrust laws are
    very cumbersome and time consuming and expensive to use. They
    are extremely difficult to use. Besides it is a matter in the
    Holding Company Act, once a merger has gone together, it is
    very, very difficult to unscramble that egg, if you like. So it
    is a situation we have to be very careful up front on. The
    antitrust laws represent a tool that should be relied on at
    appropriate times. We would like to see the market power issue
    dealt with up front and directly and not after the fact when it
    is very difficult to come up with remedies.
        Senator Bingaman. My time is up. Mr. Chairman, thank you.
        The Chairman. Thank you very much, Senator.
        Senator Thomas.
        Senator Thomas. Thank you, Mr. Chairman. I am going to take
    just a second, since I did not make an opening statement, to
    comment just a little bit.
        Thank you, certainly all of you, for being here.
        This is an issue that is very important I think to all of
    us. I believe any comprehensive energy bill has to have an
    electric title. There is nothing that touches more people in
    energy than electricity. It seems to me we are at a crossroads.
    One path is based on opening competition, being able to
    compete, the way things have changed, the consumer to decide.
    The other is more Federal regulation, more command and control.
    I certainly am not interested in that. I am interested in
    letting the marketplace work.
        So it just seems to me that clearly we need to make some
    decisions. We can sit there and say, well, things are
    happening, but the fact is there are a lot of changes taking
    place in this country with respect to energy and with respect
    to electricity. It has to do with the investment. It has to do
    with organization. There is just no question about how it is
    happening.
        We had some folks here a while back that talked about the
    plans and how much investment there has been in generation
    recently. It is damn little, and the same is true with
    transmission. As demand goes up, our ability to fill that
    demand has not. So we need to make some decisions, it seems to
    me.
        Generation has changed. It used to be, of course, when you
    had a distribution system, why, you generated for yourself, and
    that was it, very easy. Now we have market generators. There is
    a movement of market generation around the country and you have
    to be prepared to handle that.
        We have regional differences. I am one who is not at all
    interested in SMD. I do not think that is the way to resolve it
    because there are differences. We see them very much in the
    West, as a matter of fact. But nevertheless, it moves
    nationally and so there has to be an element of national
    movement so that you can move those things.
        So reliability. We have had some experience with the lack
    of reliability. We need to be sure we strengthen that.
        Transparency into the deals that are being made in this
    market generation. You just mentioned that being open.
        I happen to think PUHCA can sufficiently be covered by SEC
    and Justice, and that is an out-of-date thing, and PURPA can be
    handled as well.
        So as you can see, I have my prejudices fairly well
    arranged on what we need to do. Now, how we do it is quite a
    different thing. It is interesting. One of our members said do
    it the right way. Well, if we ask everybody in this room which
    is the right way, I do not suppose we would come out with a
    consensus necessarily.
        In any event, let me ask Mr. Svanda. Do you think RTOs
    could be organized in such a way to do the job to represent the
    differences in needs in various areas?
        Mr. Svanda. I do believe that they can be, but I am also a
    strong advocate for large recognition, large respect for
    regional differences as they occur.
        Senator Thomas. Is that not what RTOs are for?
        Mr. Svanda. Absolutely, and that is why the RTOs should not
    be a cookie-cutter, prescribed type of organization. They
    should develop freely and voluntarily within the regions as
    they are necessary. But they are an organization that will
    work, and that is being proven out in many parts of the
    country.
        Senator Thomas. Hopefully that is something that can
    happen.
        Mr. Anderson, you suggest no action. How do you deal then
    with the clear problems that lie ahead in terms of adequate
    generation, in terms of movement of market wholesale power, and
    so on?
        Mr. Anderson. Senator, first of all, as far as generation
    goes, the numbers that I look at say that we have plenty of
    generation. I do not think that is the problem for the
    foreseeable future.
        Senator Thomas. You look at different numbers than I do, I
    am afraid.
        Mr. Anderson. Well, I would like to compare some numbers
    with you sometime, Senator.
        But I think that there are some problems in certain areas
    of transmission. That is a different one.
        If I could come back to the RTO issue just a minute and say
    that the RTOs are very useful, very important, necessary
    entities. But the RTOs cannot do everything. We have to have, I
    think, also some things that are done in an interconnection-
    wide basis, in a broader basis than this. All too often to us
    there are regional differences because there are regions, not
    because there are real differences. And if all we are going to
    do is codify the differences that are out there today, we are
    going to end up with balkanized markets.
        We would like to see Federal legislation that encourages
    competition. We would like to see Federal legislation that
    reduces barriers to entry and makes it where customers have
    more options in the purchasing of power.
        What my message today is is that we have not seen in
    legislation that looks likely to be enacted that it would
    achieve these kind of goals. We see legislation that, instead,
    would make it more difficult to have large, nondiscriminatory,
    seamless electricity markets. And that is why I said our
    recommendation is not to have legislation at this time.
        Senator Thomas. Very well. But if you cannot move power--we
    generate more power in the West, you do not generate much power
    in New England. You have got to get it there somehow if you
    want to have some choices. If you are going to put a throttle
    on the movement of power, then you are not going to have
    choices I believe.
        Thank you, sir.
        The Chairman. Thank you very much.
        Senator Alexander.
        Senator Alexander. I do not have any questions right now,
    Mr. Chairman.
        The Chairman. I thank you very much and thank you for
    coming.
        Let me just take a little bit of time. First of all, I
    thank all of you for your testimony, and there will be a lot
    more before we finish here today.
        I do want to suggest that it is extremely difficult. I
    think it is good that I am a new chairman and come in just
    brand new because I begin to understand the complexity of
    trying to put something together. There is a lot of concern
    about this new idea, the transition to something like RESCs,
    but the same kind of transition concerns plague the SMD or the
    RTO development. The RESCs may be a new concept, but regional
    solutions are not. Everybody has suggested there are. In fact,
    your testimony is eloquent with reference to it. Great progress
    is being made, even on a voluntary basis.
        There are obviously many regional things that are taking
    place, and I hope, as we move through--people are saying to me,
    we do not want things done nationally. We want them done
    regionally. We want the protection more of States' kinds of
    rights. Yet, we do not want SMD because we do not think they
    will do that.
        So from my standpoint, what I would like you to do, if you
    can, is to make some constructive recommendations in writing as
    to how you think we can facilitate the transition to more
    regional regimes that would be binding, not a set of voluntary
    joining up of organizations.
        The RESCs are not intended to be voluntary, nor are they to
    be without authority. They have a problem of how do you get
    them into existence, but they are intended to have the same
    kind of authority ultimately as FERC. They are regional FERCs,
    to put it in its simplest terms, with the Federal Power Act as
    its underpinning of authority.
        With that, let me just ask some general questions. Do all
    of you assume that there are regional markets, or are there
    single markets? Can we just go down the line?
        Mr. Svanda. There are regional markets, but there are very
    important interfaces between those regional markets that need
    particular attention too.
        The Chairman. Mr. Gifford.
        Mr. Gifford. Yes, there are most certainly regional
    markets. Your biggest challenges come out West where the
    distances are greater and the terrain is tougher. To say that
    there are regional markets in the West may be an ambitious
    overreach, but you have regional markets.
        Mr. Norlander. With the possible exception of Texas, I
    think that most of the contiguous States trade energy across
    State lines.
        The Chairman. And they were in to see me yesterday saying
    that they have what might be considered their own regional
    market.
        Mr. Norlander. For example, New York has its own system
    operator, and it does import energy from Canada. It exports a
    bit, although there are always inter-ties, but much of the
    energy is within the State.
        The Chairman. Let us get you, John, Mr. Anderson.
        Mr. Anderson. Mr. Chairman, yes, I think there are regional
    markets. But I think it is the definition of the region that we
    should look at, and I have quite a different definition. To me
    the United States is divided by the Rocky Mountains and by the
    sovereign Nation of Texas, which has decided to turn its
    electricity from AC to DC and then back into AC. The western
    interconnect is a market. The eastern interconnect is a market,
    and there are little flows across the Rockies.
        What I am concerned about is if we then start talking about
    subregional markets within those regions, we have artificially
    created and therefore balkanized and made the market smaller.
    And that is what we need to avoid.
        The Chairman. Just hypothetically, what do you think,
    starting on this end, the effect of FERC's proposed SMD
    rulemaking would have been if the RESCs had been an available
    option to the States?
        Mr. Svanda. I believe that many of the concerns that I have
    raised would have been a part of the discussion, and so some of
    the weaknesses that I highlighted would have been dealt with. I
    think that is true also of the SMD proposal by FERC. As my
    testimony indicated, we have all learned a great deal from the
    focused discussion, and I think that is beneficial. It has been
    painful, but nonetheless, the regional concepts that I have
    espoused and others have talked about in this panel have really
    come to the surface as an outgrowth of that standard market
    design discussion that FERC has fostered, and that is very
    beneficial for all of us.
        We do understand that the West is the hydro West and it is
    the fossil West. We understand that there are other components
    within Michigan and the Midwest that look very different from
    those aspects of the western region. So those can be
    accommodated and only on a regional basis and only by
    interacting regionally and understanding each other can we get
    to a solution that respects and yet moves us forward.
        The Chairman. Let us go quickly.
        Mr. Gifford. Yes. I think if it was an either/or, an RESC
    or the SMD, you would probably still have a lot of States and a
    lot of regions saying neither. As the Senator is very well
    aware, out West you have a big hole in the jurisdictional donut
    with large public power presence that is not FERC
    jurisdictional. And that problem would have to be solved to
    have anything resembling a coherent and fair regional market.
        The Chairman. Right.
        Mr. Norlander. I think the fundamental rift, if there is
    one, is between those who would adhere to the filed rate, cost-
    based system of setting wholesale rates, as the original Power
    Act provided, and those who would go to a market system. Those
    of our members who are participating in regional activities
    probably would be working on the same kinds of concerns of
    market design, market power, and market concentration.
        Thank you.
        The Chairman. Mr. Anderson.
        Mr. Anderson. I think the big difference between the RESC
    and the SMD is the ``S'' and that is called standardization. If
    you have a series of RESCs that are different, then you have
    balkanized the market. You have created seams around it. You
    have made smaller markets. If you standardize the market, if
    you had a series of RESCs that were all identical, they all had
    precisely the same rules and regulations and that sort of
    stuff, then we have the larger markets again, and that is what
    we think is very good. We need the large markets to be able to
    have real competition in electricity.
        Mr. Svanda. May I react to that?
        The Chairman. Yes, sure.
        Mr. Svanda. I agree in an ideal world with Mr. Anderson's
    comments, but we do not live in an ideal world. We also are not
    creating this system from scratch. We in fact have to recognize
    where we are coming from and move from there as opposed to an
    idealized type of beginning.
        I agree completely. Standardization not just across this
    country, but across this continent would be beneficial, but we
    need to move forward, and the reasonable way to move forward is
    working with the regions as they exist today.
        The Chairman. I have one last question, but I will make an
    observation. I would assume that all of the concerns that have
    been expressed will be harmonized when we hear from the
    Chairman of the FERC. I assume he will say everything you have
    said is so, and I will take care of them all. Just let me do
    it. That is what I assume SMD is all about. I think he is going
    to start by saying he thinks regionalization has great merit.
    In fact, I know he will. And then he will proceed to suggest
    that he will take care of it. And I know he has such authority,
    but I have so many Senators saying we do not want to let him do
    it. So everybody is looking for another way.
        One last rather technical thing. There are some who
    advocate legislating a jurisdictional delineation between
    bundled and unbundled transmission. Who feels expert enough to
    tell us the advantages and disadvantages to those kinds of
    proposals?
        Mr. Gifford.
        Mr. Gifford. I will take a shot, Mr. Chairman. I would
    think defining a regulatory category when we are not really
    quite sure if that is an actual product that a consumer or an
    end user would be interested in, be that end user an industrial
    or a retail customer, would be one of those instances of a
    potential regulatory mistake where we create an artificial
    legal category that creates a whole bunch of distortions
    throughout the market and inhibits kind of the organic
    organization of a really competitive market as opposed to kind
    of a fake, bounded competitive market.
        The Chairman. Would you want to answer that, Mr. Svanda?
        Mr. Svanda. I would be happy to. Thank you. There are great
    legal minds working on either side of the jurisdictional issue,
    and so I will not go there.
        I guess my answer is more from the practical aspect of
    this, and that is a recognition of the laws of physics that
    apply to electricity, that in fact much of transmission
    operates in interstate commerce, which squares with our
    principles in that regard. And the institutions that we create
    need to respect those and work with them.
        The Chairman. Yes, Mr. Anderson.
        Mr. Anderson. I would like to pick up on what my good
    friend Commissioner Svanda just said, which I agree with
    completely, but I would like to also say that all too often the
    difference between bundled and unbundled comes down to an idea
    that one entity, usually an investor-owned utility or its
    regulator, wants to protect its native load customers and say
    we have a duty and a responsibility to protect our native load
    customers. Therefore, we should control bundled service.
        A very wise FERC Commissioner roughly 10 years ago made the
    statement once that everybody is somebody's native load, and
    that is very, very true. So just because a customer is not the
    native load of that utility, that customer is the native load
    of somebody else's utility. So it is extremely important that
    transmission be treated in a nondiscriminatory way for every
    customer. That to me requires a single transmission tariff for
    all customers, whether they are bundled or unbundled.
        Thank you.
        The Chairman. All right. Yes, sir. You are last.
        Mr. Norlander. Well, I think the issue that kind of cropped
    up with the FERC-lite I think illustrates a bit of this
    problem. Much of public power is required by statutes or long-
    term contract to be provided for the benefit of customers. I
    know in New York residential customers get an allocation, as do
    industrial customers. And those allocations generally involve
    extremely low cost hydropower and, generally speaking, there is
    a transmission component of that price that is a cost-based
    component and the transmission is carried by the public power
    entity.
        The moment that the FERC jurisdiction comes in and says now
    we are going to perhaps auction off the transmission line to
    those who value it the most on a hot day, it destabilizes that
    price and makes it volatile, unpredictable. I think it is that
    nervousness that likewise affect State regulators in other
    areas of the country that still have bundled rates. I think
    from what I have heard at least, their objection is not so much
    to open access but as to the pricing and loss of control and
    lost of stability and predictability of the transmission
    component of rates.
        The Chairman. Senator Bingaman, do you have any further
    questions?
        Senator Bingaman. No. You have several others panels. I
    appreciate these witnesses.
        The Chairman. Let us move on. We thank you all very much.
    We are glad we stayed on time and you helped contribute to
    that.
        The next group of panelists, please. Mr. Phillip Harris,
    president and CEO of PJM Interconnection; James P. Torgerson,
    president and CEO of Midwest Independent Transmission System;
    and P.G. ``Bud'' Para, director of legislative affairs,
    Jacksonville Electric Authority.
        Mr. Harris, would you like to start please? Thank you very
    much for coming.
        Mr. Glazer. Mr. Chairman and members of the committee, the
    bad news is I am not Phil Harris. He is on his way here.
        The Chairman. You are not. Okay.
        Mr. Glazer. But if you wish, I will be happy to start out.
        The Chairman. What is your name?
        Mr. Glazer. My name is Craig, C-r-a-i-g, Glazer, G-l-a-z-e-
    r.
        The Chairman. G-l-a-z-e-r?
        Mr. Glazer. Yes.
        The Chairman. And why do you feel like you can take his
    place? Who are you?
        [Laughter.]
        Mr. Glazer. I do not feel like I can take his place. I am
    very humbled by this whole thing. I am the vice president of
    government policy for PJM Interconnection.
        The Chairman. We will tell him that you were all they had.
        [Laughter.]
        The Chairman. Go ahead.

    STATEMENT OF CRAIG GLAZER, VICE PRESIDENT OF GOVERNMENT POLICY,
                      PJM INTERCONNECTION, L.L.C.

        Mr. Glazer. Thank you, Mr. Chairman and members of the
    committee. I am Craig Glazer, vice president of government
    policy for PJM. Prior to serving in that role, I was for 10
    years a member, along with Dave Svanda, of the regulatory
    commission. I was chairman of the Ohio Public Utilities
    Commission and appeared before this committee in that role as
    well. So I have been around these issues for some time,
    including Federal-State issues.
        My basic message today is, as you deal with these complex
    issues, I have some good news for you and that is that the
    present system is working. It is working well in our region,
    and I think our region in many ways could potentially set a
    model for other regions. I am not saying, therefore, our region
    is the answer to all the rest of the Nation. I am not saying
    that at all. But I am saying that before we create new
    institutions, I would ask you to take a look at some of the
    lessons of experience, and the facts actually speak for
    themselves. Let me give you just some examples.
        In our region, we are the independent system operator,
    basically the air traffic controller, the grid operator, for a
    five-State region that includes Pennsylvania, New Jersey,
    Maryland, Delaware, Virginia, and the District of Columbia. It
    actually serves this building, among other things. We have had
    other companies join us and we are soon to be serving a seven-
    State region that will go out to Chicago, Illinois and
    encompass even more of the State of Virginia, as well as
    Indiana and parts of Tennessee.
        The good news story is that the market has really worked,
    and the lesson from that is these things can work I think with
    appropriate Federal-State partnerships and a lot of hard work.
    It is not to say that it is easy, but I think the facts speak
    for themselves.
        In the Mid-Atlantic region, we have seen improvements in
    generator performance, actually the efficiency being driven by
    competitive forces, with an increase of 35 percent in generator
    performance over the last 5 years. Prices in our marketplace
    have remained both stable and competitive. Although 2002 was 25
    percent warmer than 2001, the average load weighted price in
    PJM actually dropped by 13.8 percent. So the weather got
    hotter, but the prices got lower. And that is an example of
    more generators wanting to come in providing service in the
    region.
        Infrastructure investment. We have got more than 6,000
    megawatts of new generation that has gone on line, another
    24,000 megawatts in the queue, and over $725 million in
    transmission infrastructure investment since the year 2000.
        How has this worked? It has not been easy. The lessons that
    we have learned are this.
        One is--and Phil Harris would say this better than I--but
    little steps for little feet. Take an incremental approach. We
    worked with our State commissions. We introduced markets one at
    a time. We did not do the big bang theory like California did,
    and we made sure we cemented those relationships with the State
    commissions up front. We entered into a memorandum of
    understanding with our State commissions and worked with them
    on planning issues, as well as capacity and related issues. So
    lesson one was sort of take an incremental approach.
        Lesson two was that the system really can work, and it can
    work if in fact we do not get wrapped around the axle on
    Federal-State jurisdictional issues but we try to work through
    it. And let me take the siting issue as a good example.
        We have not run into the siting problems. We understand the
    issues in the West are far different with regard to siting. But
    we get the States involved in our regional transmission
    planning process up front. It ferrets out what are the siting
    issues, what are the siting problems, what is the best
    solution, be it transmission, generation, or demand side, up
    front. As a result of that, everyone has a seat at the table.
    It is an open and transparent process, and that has been very,
    very helpful to our processes.
        Just a couple of comments on the legislation itself. We do
    not think that the committee ought to divest FERC of
    jurisdiction over RTOs and RTO formation. We are concerned with
    some language in the staff draft that seems to say that an RTO
    can be basically any form or any shape that a particular entity
    proposes. These things have to make sense. They have to fit
    with regard to natural markets. So that is one of our concerns.
        The additional concern with the language is that, again, we
    have been able to work through these issues with our States. We
    are afraid we are going to get another entity that the industry
    has to deal with, and I am not sure this is the time to create
    new bureaucracies.
        The same with regard to transmission siting and the
    reliability issues that I had mentioned previously.
        Finally, let me touch on participant funding. We actually
    support participant funding. We have been doing participant
    funding in PJM from the beginning, basically that the person
    who causes the cost of the upgrades should pay for it. That
    being said, some of the language I think may take away
    flexibility. We have a system where if an upgrade is needed
    here in the Washington, D.C. area, the customers in that area
    pay for it. We do not want to have that cost transferred to
    Erie, Pennsylvania or customers in California paying for costs
    in Oregon, et cetera. So we think some more flexibility with
    regard to that might be helpful.
        On transmission incentives, we think the committee is going
    in the right direction. We think we need incentives to build
    transmission, and the kind of flexible language with policy
    direction from Congress has been very helpful.
        Let me close by saying the bottom line is the systems can
    work. Federal-State relationships in our region have been good.
    Our State commissions will attest to a good working
    relationship with FERC and with us. It does not mean we do not
    have issues and problems. We do. But there is an element of
    trust there. I think as we build that trust in other parts of
    the country, I think that rather than new institutions may be
    the way to move forward with these markets.
        Thank you very much.
        [The prepared statement of Mr. Harris follows:]
           Prepared Statement of Phillip G. Harris, President & CEO,
                            PJM Interconnection, LLC
                                    summary
            ``. . . (M)arkets don't always operate efficiently because
            buyers and sellers don't always have access to the information
            they need to make optimal choices.''
                                  Akerlof, Spence & Stiglitz, Nobel prize
                            winners for economics

        Mr. Harris urges that Congress both do no harm to markets and
    regions that have been successful and look to actual facts from regions
    that have been successful as it considers legislative solutions. In his
    testimony, Phillip Harris notes that with five years of operating
    experience, the successes in the Mid-Atlantic region underscore the
    fact that competitive wholesale markets can work and do provide real
    value to consumers both in bundled and unbundled states. He points out
    critical facts that have proven the success of the Mid-Atlantic
    competitive model:

              Performance: In the Mid-Atlantic region, generator
            performance has improved by nearly 35% over the last five
            years;
              Prices: Prices in PJM remain both stable and competitive.
            Although 2002 was 25% warmer than 2001, the average load
            weighted price in the PJM market dropped by 13.8%;
              Infrastructure Investment: More than 6000 MW of new
            generation have gone on line in the region with another 24,500
            MW in the interconnection queue. Over $725 million in
            transmission infrastructure has been committed since 2000;
              New Markets: PJM operates nine separate voluntary wholesale
            markets and recently successfully instituted new markets for
            regulation and spinning reserves.

        In commenting on the Staff March 20, 2003 draft, Mr. Harris details
    that there are existing institutions and processes presently in place
    in the Mid-Atlantic region which obviate the need for creation of a
    Regional Energy Services Commission. He argues against depriving FERC
    of authority to review the size and functions of RTOs. In addition he
    said that transmission planning and siting to relieve congestion should
    remain a collaborative effort between FERC, the states and the RTO
    rather than being assigned to the Secretary of Energy or exclusively to
    FERC or an RESC. He raises concerns with the lack of flexibility in the
    proposed Participant Funding language and the lack of a specific call
    for RTOs to administer competitive wholesale markets. Mr. Harris
    embraces the legislative language regarding transmission rate
    incentives both for its flexibility and its strong policy direction.
        He promises PJM's pledge to work with the Committee to ensure
    balanced legislation that identifies the real need to restore trust in
    the marketplace.
                                   statement
        This observation from these Nobel laureates highlights exactly the
    conundrum we face today. We are faced with a crisis of confidence in
    this industry. Our collective task must be to restore the trust and
    confidence which is so critical to fund and manage this essential
    product. By working together, providing real time information that
    makes markets work and by building institutions that can earn the trust
    of the public, we can restore the awe and respect for this industry
    that was first earned almost 100 years ago by Thomas Edison and his
    colleagues. We have begun down that road in the Mid-Atlantic region.
    With five years of operating history, we have proven that markets can
    work and do provide real value to consumers both in bundled and
    unbundled states.
        My name is Phillip Harris and I am the CEO and President of PJM
    Interconnection, L.L.C. PJM operates the world's largest competitive
    wholesale electricity market. We serve seven states, including the
    District of Columbia (including this building) and will soon be
    expanding our market to a 14-state region. Large systems such as those
    of American Electric Power and Commonwealth Edison have expressed their
    intent to voluntarily join our markets. We are working closely with our
    sister entity, the Midwest ISO, to develop a joint and common market
    that will provide the benefits of a transparent voluntary wholesale
    energy market to a region covering 27 state and a Canadian province and
    reaches 33 million customers. This market has been independently
    estimated to provide savings to customers of over $7 billion over the
    next ten years.\1\
    ---------------------------------------------------------------------------
        \1\ ``Impact of the Creation of a Single MISO-PJM-SPP Power
    Market'', July 2002 by Energy Security Analysis, Inc.
    ---------------------------------------------------------------------------
        As you struggle with these difficult issues, I urge you to look
    closely at the lessons of history. In the Mid-Atlantic region, we faced
    many of the same issues that other regions are facing today--federal/
    state jurisdictional disputes, the role of municipals and cooperatives
    in the marketplace, siting concerns etc. Although I am not here to
    indicate I have all the answers to these issues, I am here to urge that
    in drafting legislation you do no harm to markets and regions that have
    been successful. Moreover, I urge you not to reach snap judgments based
    on fiery speeches from various industry segments without looking at the
    actual facts from regions that have gone through many of the
    transformations you are considering today.
        The Mid-Atlantic Story: The critical test is the test of use. Our
    five years of history as a fully functioning Regional Transmission
    Organization (RTO) can provide critical lessons for what can work.
        Back in 1992, this Congress enacted the Energy Policy Act which
    made wholesale competition in electricity the law of the land. This was
    a natural consequence of other Congressional action including passage
    of the Natural Gas Policy Act of 1978 and orders from the Federal
    Energy Regulatory Commission (FERC) in both the gas and electric
    arenas.
        In the Mid-Atlantic, we made this Congressional mandate work. And
    although many say that the PJM model is different because we arose from
    a tight power pool, in April of last year we extended the concept once
    again to a service area that was never part of the original power pool
    and showed that one can develop a successful market over multiple
    states, including bundled states and over multiple reliability councils
    and regions. The expansion of PJM to encompass the Allegheny Power
    system alone has lead to a $100 million annual savings to entities
    serving customers in the overall region. And for this reason, new
    entrants such as American Electric Power, Commonwealth Edison, Dayton
    Power & Light, and Dominion Virginia Power which together comprise over
    64,000 MWs, have sought to join these markets.
        The facts speak for themselves:
        The market model has worked both in the original power pool area
    and in the broader region. Just a few real life statistics prove the
    point:

       Size: Size does matter. The eastern interconnection is one
            large 650,000 MW synchronous motor. With our expansion we will
            total over 130,000 MWs representing 20% of the entire eastern
            interconnection. We have over 215 members actively trading
            every day in our marketplace. In 2002 we cleared over 178,000
            transactions which have totaled over $15 billion in energy
            trades since the opening of the markets in 1997. Market
            participants come from every state including the southeastern
            part of the United States and the Canadian provinces;
       Performance: The performance record of generators has
            improved by nearly 35% since 1997. This improved performance
            translates into $1.2 million in savings on a hot summer day;
       Prices: Prices are both stable and competitive. Although
            2002 was 25% warmer than 2001, the average load-weighted
            wholesale price in PJM dropped by 13.8%;
       Generation Infrastructure: More than 6000 MW of new
            generation have come on line in the region, another 6500 MW are
            under construction with another 24,500 MW in our
            interconnection queue;
       Reduced Congestion: The total hours of transmission
            congestion actually decreased in 2002 from 2001 despite greater
            imports.
       New Markets Instituted: PJM currently operates over nine
            different markets that ensure both the delivery of energy,
            capacity and ancillary services to customers. We have most
            recently implemented successful markets for regulation and
            spinning, two ancillary services that traditionally were
            supplied through command and control processes. These new
            markets have performed extremely well. We continue to look for
            additional market-based solutions to the provision of key
            services associated with the delivery of electricity.

        This is not to say that our market is perfect--it isn't. We need to
    do a better job in areas such as achieving true demand response and
    finding market-based solutions to ensure reliability. Nevertheless,
    with the right mix of transparency, independence and trust, wholesale
    competition in our region has spurred the very sought of efficiency
    that has made Congress' 1992 vision a reality.
        With this backdrop, let me address each of the issues you raised
    through the Staff draft of March 20, 2003. I appreciate that this is a
    Staff draft intended to drive discussion on these critical issues. The
    staff should be applauded for framing the issues for debate and
    discussion.
             i. formation of a regional energy services commission
        You will undoubtedly hear much testimony, pro and con, on the
    minutiae of this proposal--who sits on the Commission, what is its
    relation to state PUCs, is it a creature of federal or state statute,
    what constitutes a region etc. Rather than becoming embroiled in the
    minutiae, I would like to go through each of the goals outlined for the
    Regional Energy Services Commission (RESC) in the Staff draft. I would
    suggest to you that there are institutions and processes presently in
    place that are already addressing these issues and that can meet these
    goals and the needs of the states without requiring the creation of yet
    another regulatory institution.
        The Staff draft allows the RESC to perform the following tasks:

       undertaking transmission infrastructure planning,
            certification and siting;
       identifying resource needs;
       setting rate design and revenue requirements;
       monitoring markets for the abuse of market power;
       promoting demand response, distributed generation and
            advanced technologies;
       cooperating with federal land agencies;
       promoting reliability standards; and
       undertaking enforcement.

        Within our region, each of these tasks is being accomplished
    collaboratively through close cooperation among ourselves as the RTO,
    the state and federal regulators. In short, the system is working, not
    because we have created new institutions but rather because we have
    worked hard to build trust among the existing institutions. As a
    result, although not without controversy on any given day, we believe
    the Mid-Atlantic/Midwest PJM region is a model of the appropriate
    balance between state and federal authority. And you should not take
    our word for it--rather look at the statements made by our own state
    commissions in numerous public filings.
        From its very inception, the PJM Board collaboratively developed a
    Memorandum of Understanding with the state commissions in our region.
    The MOU commits the RTO to work with the state commissions on these and
    other critical issues. We have subsequently built on the MOU to provide
    a key state role in each of the areas listed above. Specifically:
        Transmission Planning and Siting: We have the first approved
    regional transmission planning process. The states participate actively
    in that process to ensure that state needs are identified and
    addressed. Moreover, should there be difficulties in siting a
    particular upgrade, these issues are identified early on in the
    regional transmission planning process rather than at the end of the
    line after critical time has been lost or resources expended. Under
    this regional process, over $725 million of transmission investment has
    been undertaken since 2000 alone.
        Most recently, PJM has submitted to FERC a revised planning process
    that takes regional planning to the next level by addressing the need
    to plan to relieve congestion. Our proposal calls for a critical
    balancing between the role of the marketplace and the role of the
    regulator in economic planning and provides an active role for the
    states in addressing the particular needs of customers in load pockets
    where traditional market forces may not always provide adequate market-
    based solutions. These processes are either in place or proposed and
    all work under the existing structure of federal and state regulation;
        Identification of Resource Needs--The RTO independent Board
    presently sets the reserve margin for the region as part of its
    fiduciary duty to maintain the reliability of the system. We have begun
    discussion with our states on the concepts proposed by FERC for a
    Regional State Advisory Commission which would, among other things,
    provide critical input or even set the reserve margin for the region.
    At the end of the day, someone needs to be able to set this margin and
    meet the resource needs promptly and clearly without questions as to
    accountability or endless litigation. Nevertheless, the state role in
    this area is extremely important and one that we embrace. We are
    working to accommodate the state role under our existing model. No
    additional bureaucracies are needed to address this issue--simply hard
    work and trust between the RTO, the state commissions and the market
    participants;
        Rate Design and Revenue Requirements--This issue is one which
    involves the resolution of difficult equity and cost shifting issues.
    We embrace the elimination of pancaking of rates. But as we have seen,
    somewhere there is a border and a revenue stream which will be affected
    through rate pancaking elimination. In short, it is difficult to solve
    this issue merely by focusing on the needs of one region. Rather than
    creating a new institution, we need clear regulatory guidance on how
    these lost revenue and cost shifting issues should be addressed.
        Market Power Review--This too is an issue that is already being
    addressed both at the state and federal level in our region. Although
    more work is clearly needed, the answer here too is not to create
    another institution which will require its own staff and technical
    expertise that could duplicate the resources already available at FERC,
    the state level and within the RTOs.
        At the end of the day, someone needs to weigh the facts and
    determine whether market power has been abused. It does no good for a
    regional entity to find no market power in its region when an entity in
    an adjoining region finds that very same action has caused market power
    abuses in its own marketplace. Even within a region, the industry is
    entitled to some parameters to determine what constitutes acceptable
    and unacceptable practices as marketers make split second decisions.
        The PJM Market Monitoring Plan calls for the PJM Market Monitor to
    respond to state requests and perform analyses at the request of
    states. We have done this on a number of occasions. The lessons from
    our region demonstrate that we need proactive and prompt leadership
    from the Market Monitor, quick action from the regulator and state
    attention to the issue. What we do not need is to create yet another
    entity to address the critical dual role of FERC and the states in this
    area;
        Demand Side Response, Distributed Generation, Fuel Diversity and
    New Technology--In our region, the states rather than the FERC already
    dominate in these areas. The states worked with and supported before
    FERC adoption of our demand side response program. We have appointed
    individuals specifically assigned to these tasks to ensure that these
    programs are receiving the attention they deserve.
        More demand side response is needed. The key role here is for the
    states not for a Congressional mandate and new institutions that may
    interfere with appropriate state prerogatives.
        RTO Formation--Depriving FERC of authority in this area may be a
    solution in search of a problem. The states have played an extremely
    active role in addressing the appropriate borders of RTOs,\2\ whether
    RTO mergers should occur \3\ and RTO governance issues. In short, the
    states have held our feet and FERC's feet to the fire by appropriately
    demanding cost/benefit analyses and independent governance before
    lending their support. And history shows that the FERC has responded to
    state demands in each of the regions in the country. The track record
    of FERC/state collaboration in this area is a good one both in the
    Midwest and Northeast regions. Congress should avoid inadvertently
    setting this progress back by assigning the difficult task of drawing
    RTO borders to a new institution.
    ---------------------------------------------------------------------------
        \2\ Alliance Cos. 97 FERC 61,327 (2001).
        \3\ PJM Interconnection, 101 FERC para.61345 (2003).
    ---------------------------------------------------------------------------
        In short, we urge the Committee to look at models that have worked.
    They have worked well with minimal Congressional intrusion because the
    parties worked to build trust and confidence rather than resorting to
    political battles. We think that you should look at models such as
    ours, which are accomplishing the goals the Staff envisions for the
    Regional Energy Services Commission, before you enshrine yet another
    institution for this industry and for consumers to have to interface
    with.
                           ii. reliability standards
        We had raised considerable concerns with prior drafts of this
    legislation which, among other problems, lacked a definition of
    reliability. Prior drafts also did not reflect recent changes in the
    marketplace such as the development of RTOs. We worked with Committee
    Staff and stakeholders to improve the language and are pleased that it
    is much shorter and better drafted. Furthermore, it now contains a
    recognized definition of reliable operation, a conflict resolution
    provision, a requirement for FERC guidance on implementation and better
    consumer protection. We still remain concerned that we are creating yet
    another institution which, at least for the eastern interconnection,
    could move us towards a command and control approach to enforcement and
    away from using the market to extract far more appropriate penalties
    for non-compliance. The language is better than it was and for that we
    thank the Committee staff, both in the House and Senate for their work
    at improving this proposed legislation;
                            iii. transmission siting
        The staff draft removes siting authority from the states and places
    it in the hands of the Secretary of Energy and FERC (or, if applicable,
    a RESC) in those cases where the Secretary finds there to be congestion
    ``at a level that affects reliability or economic security.''
        Quite simply, the decision as to whether a particular area is
    congested is an extremely complex task--in PJM, we have found that the
    slightest changes in power flows can cause an area that is congested
    one day to not be congested the next. Moreover, not all congestion is
    bad--one need weigh, through an appropriate cost/benefit analysis,
    whether the cost to clear congestion that is causing increased costs
    but does not threaten reliability is outweighed by the cost to remedy
    that congestion. To automatically require that all congestion that
    ``affects economic security'' be relieved runs the risk of ``gold
    plating'' the network and not allowing new technologies in the areas of
    demand response and generation to compete with transmission solutions.
    In short, the decision as to whether or not an area is congested and
    needs relief should be determined by the marketplace relying on
    technical information provided by the regional transmission
    organization or the system operator. This highly complex issue should
    not be concentrated in a Washington agency far removed from the
    technical, minute-by-minute performance of the grid. By implementing
    regional planning as a first step combined with incentives for new
    construction and regional cooperation on siting issues, we can solve
    this issue without creating a new bureaucratic hurdle for the industry.
                     iv. transmission investment incentives
        The incentive language in the Staff Working Draft provides an
    appropriate level of flexibility while setting forth a broad
    Congressional principle. PJM is committed through its model to ensuring
    that proper information is provided in the marketplace so that
    generation, transmission and demand response solutions can all compete
    against one another.
        This language, although already reflecting actions that FERC has
    underway, appropriately reinforces the sense of Congress on these
    critical issues.
             v. transmission cost allocation (participant funding)
        PJM has long employed the principle of participant funding. We have
    turned it from an abstract concept to a working tool for the proper
    assignment of cost responsibility associated with network upgrades. PJM
    employs a ``but for'' analysis--but for the action of a particular
    generator, would the upgrade have been needed? If the action were
    otherwise needed in the future but the addition of a generator has
    accelerated the need for the upgrade, then the generator bears that
    cost but is entitled to a credit for the fact that the upgrade would
    otherwise have been needed. That being said, even if it is determined
    that the cost should be borne by the general class of ratepayers, those
    costs are borne by that particular zone--namely the service territory
    of the transmission provider. It would be no more fair for customers in
    Erie, PA. to pay for an upgrade needed in Northern New Jersey than it
    would be for customers in Oregon to pay for reliability upgrades needed
    in Los Angeles. In short, the language, although seemingly embracing
    participant funding, would rather have the effect of straitjacketing
    the FERC or RTOs from applying more tailored remedies to be funded by
    the local zone rather than throughout the system. By so doing, the
    language would decide by Congressional fiat critical judgments that
    need to be made on a regional level based on specific facts and
    circumstances.
             vi. market transparency/anti-manipulation enforcement
        This language would require that FERC establish ``electronic
    information systems'' to provide necessary price transparency. Although
    the language is well-intentioned, it focuses on the tool rather than
    the key ingredient that will make the tool work. In our market, we
    operate a transparent voluntary spot market for electricity. Making
    that market work requires the kind of information this proposed
    legislation calls for. However, since under the staff draft RTOs are
    not required to operate spot markets, there is no assurance that the
    tool will provide the kind of day ahead and real time open trading
    platform that an RTO can offer. In short, without a market-based system
    that works hand in hand between the financial market and the physical
    market, there will be little meaningful information to report. This
    would be the equivalent of disbanding the New York Stock Exchange but
    still requiring brokers to report individual bilateral transactions.
    One would still not have the organized marketplace that provides open,
    transparent prices that are verifiable. One need only look at the
    problems found recently in bilateral trader reporting of natural gas
    prices in trade publications to see why an approach without an actual
    exchange is problematic. We believe that RTOs should operate day ahead
    and real time spot markets which are voluntary. Through the operation
    of such markets, the kind of reporting called for in this language
    would be automatic and not require separate Congressional action.
        We feel the Staff draft is asking the right questions. We think the
    answer is in strengthening our existing institutions and learning from
    the incremental approach we have embraced in the mid-Atlantic in order
    to restore needed trust and confidence in the industry. We stand ready
    to work with the Committee on this pressing task.

        The Chairman. Thank you very much, Mr. Glazer.
        Now we are going to have Bud Para. If you will testify,
    please. Thank you for coming.

    STATEMENT OF P.G. ``BUD'' PARA, DIRECTOR, LEGISLATIVE AFFAIRS,
     JACKSONVILLE ELECTRIC AUTHORITY, ON BEHALF OF THE SETRANS RTO
                                SPONSORS

        Mr. Para. Thank you, Mr. Chairman and members of the
    committee. I want to thank you for this opportunity to be
    involved in this process.
        I am with JEA. JEA is the largest municipal electric
    utility in Florida. We provide electric, water, and sewer
    services to more than 1 million people in the city of
    Jacksonville, Florida.
        I am here today testifying on behalf of the SeTrans
    Sponsors. That is nine utilities in the Southeast that are
    currently developing the SeTrans RTO for the Southeastern
    United States. The SeTrans Sponsors include a diverse group of
    transmission owners. We have three investor-owned utilities:
    Cleco Power, Southern Company, and Entergy. We have three
    municipal utilities representing the city of Tallahassee,
    Florida, the city of Dalton, Georgia, and JEA. We have two
    electric cooperatives: the Georgia Transmission Company and the
    Sam Rayburn G&T Cooperative. And we have one municipal joint
    action agency, MEAG Power in Georgia.
        The SeTrans RTO would be one of the largest RTOs with
    electric systems in seven States: Alabama, Arkansas, Florida,
    Georgia, Louisiana, Mississippi and Texas.
        The SeTrans Sponsors support open access to the
    transmission system. We do not believe it is necessary, and we
    think that it may be inadvisable to make sweeping legislative
    or regulatory changes to the electric industry at this time.
    The electric system in the Southeast works today.
        The SeTrans Sponsors are working with other stakeholders,
    customers, generators, and State commissions, to develop an RTO
    that will work in the Southeast and that meets the FERCs
    requirements, but also one that will not cause tremendous harm
    to the electric industry, which is crucial to the Southeast.
        We do not now understand what happened to cause the energy
    crisis in California and the Northwest, and we feel that we
    must understand what went wrong there before we change the
    electric industry in the Southeast. We do not want to make that
    same mistake twice.
        The SeTrans Sponsors believe that to be successful in the
    Southeast, an RTO must be voluntary. It must be designed to
    recognize regional flexibility and that there must be no
    standard market design, no SMD. Non-FERC jurisdictional
    utilities like JEA must be able to join the RTO without
    becoming FERC jurisdictional. Non-jurisdictional utilities
    would, of course, comply with their contractual obligations to
    the RTO, when and if they voluntarily join the RTO.
        And that is why JEA is involved in developing the SeTrans
    RTO. We want an RTO in the Southeast that will work for us and
    that will benefit our customers. If we join the SeTrans RTO,
    JEA will live up to its contractual obligations and we will
    participate in the market according to the RTO rules.
        Joining the SeTrans RTO, however, should not make JEA
    subject to FERC jurisdiction, particularly not such that FERC
    can come in and change the rules, effectively change our
    contract unilaterally without our agreement. If FERC changes
    the rules, then JEA should be able to leave the RTO and get out
    of this changed contract.
        There are at least three impediments to completion of the
    proposed SeTrans RTO and to the continued participation of the
    current SeTrans Sponsors.
        First, there is the lack of regional flexibility. We must
    have regional flexibility in order to get our State and local
    approvals, without which there will be no RTO. Without the
    flexibility to structure the SeTrans RTO in a manner that meets
    our needs and the needs of the Southeast and that benefits the
    Southeast, we will not get the approvals from our State and
    local regulators that we must have for SeTrans to be
    successful.
        I ask you to read the letter from SEARUC to FERC which was
    attached to my testimony. It explains the views of the
    Southeastern Regulatory Commissioners quite well.
        The second impediment is the standard market design. The
    FERC SMD rulemaking is a distraction. It undermines regional
    flexibility and it cannot be right for every region no matter
    what is in the SMD because the regions are not standard.
    Congress, if it does anything, should direct FERC to abandon
    its SMD efforts.
        The third impediment to development of the SeTrans RTO is
    the recent FERC attempts to expand its jurisdiction. FERC has
    recently issued decisions in which it attempts to expand its
    jurisdiction over retail activities historically subject to
    State and local authority. FERC is also attempting to expand
    its jurisdiction over non-jurisdictional utilities that
    voluntarily join RTOs. These actions by the FERC discourage JEA
    from participating in RTOs.
        In conclusion, Mr. Chairman, members of the committee, the
    SeTrans Sponsors do not believe we need electricity legislation
    today. The time is not right. We do not yet understand what
    happened in the West, and there is no crisis to be fixed in
    Southeast.
        I thank you for your attention and welcome any questions.
        [The prepared statement of Mr. Para follows:]
        Prepared Statement of P.G. Para, Director, Legislative Affairs,
     Jacksonville Electric Authority, on Behalf of the SeTrans RTO Sponsors
        Mr. Chairman, Members of the Committee, my name is P.G. (Bud) Para,
    and I am the Director, Legislative Affairs for JEA, the largest
    municipal electricity utility in Florida. I am testifying today on
    behalf of the transmission owners that are developing a Regional
    Transmission Organization (RTO) in the Southeast, the SeTrans RTO. I
    will refer to this group of transmission owners throughout my testimony
    as the SeTrans Sponsors. The SeTrans Sponsors include the following:
    Cleco Power LLC; Dalton Utilities (acting as agent for the City of
    Dalton, Georgia); Entergy Services, Inc. (acting as agent for Entergy
    Arkansas, Inc., Entergy Gulf States, Inc., Entergy Louisiana, Inc.,
    Entergy Mississippi, Inc., and Entergy New Orleans, Inc.); Georgia
    Transmission Corporation; JEA (formerly Jacksonville Electric
    Authority); MEAG Power; Sam Rayburn G&T Electric Cooperative, Inc.;
    Southern Company Services, Inc. (acting as agent for Alabama Power
    Company, Georgia Power Company, Gulf Power Company, Mississippi Power
    Company, and Savannah Electric and Power Company); and the City of
    Tallahassee, Florida.
        We appreciate the opportunity to share with you our views on the
    proposed electricity legislation.
        The SeTrans Sponsors represent a diverse group of transmission
    owners in the Southeastern region of the United States. The SeTrans
    Sponsors' cumulative transmission investment is approximately $9.0
    billion, and our systems include approximately 48,000 miles of
    transmission lines rated 40 kV or higher. The SeTrans RTO would include
    electric systems in seven states: Alabama, Arkansas, Florida, Georgia,
    Louisiana, Mississippi and Texas. The proposed SeTrans RTO would be one
    of the largest RTOs in the nation.
        Mr. Chairman and Members of the Committee, the SeTrans Sponsors
    appreciate your efforts and the attention that you are giving to our
    industry. As a group, we join you in supporting a competitive, reliable
    wholesale power market to benefit consumers. Nonetheless, we believe it
    is not necessary at this time to make sweeping legislative or
    regulatory changes in the regulatory structure of the electric industry
    across the United States.
        Importantly for the SeTrans Sponsors, the existing regulatory
    structure performs well in the Southeast and there is no need for broad
    changes to the electric regulatory structure in the Southeast. We do
    not believe the electric industry in the Southeastern United States is
    broken, and we therefore see no need to fix it. The SeTrans Sponsors
    include a broad cross-section of transmission owners--electric
    cooperatives, municipalities, municipal joint-action agencies and
    investor-owned utilities. Three of the sponsors are public utilities
    subject to the general jurisdiction of the Federal Energy Regulatory
    Commission, but six are not. These utilities have co-existed in the
    Southeast for a long time and we believe our region enjoys a vibrant
    wholesale electricity market. Moreover, the SeTrans Sponsors are
    working together today to develop an RTO model that serves the needs of
    the wholesale market in the Southeast, as well as those of the
    investor-owned, publicly-owned, and cooperatively-owned utilities in
    the Southeast.
        In addition, we have serious reservations with regard to efforts to
    significantly restructure the electric industry across the nation.
    There is not yet a clear understanding of what went wrong in
    California, nor how or why those problems then spread across
    electricity markets in the Northwest. Until we know more and better
    understand the reasons that underlie the problems experienced in the
    electric industry in California and the Northwest, we should not
    promote comprehensive national restructuring of the electric industry.
    Although there may be a need for legislation to address discreet issues
    faced by certain segments of the electric industry or unique
    circumstances in certain regions of the United States, the SeTrans
    Sponsors as a group do not support legislation that would mandate any
    particular industry structure or that would change the way electric
    service is provided in our region. We appreciate, however, the
    opportunity to be involved in the legislative debate and are willing to
    assist in crafting targeted legislation. There are some areas for which
    clarification by Congress would be useful and I will describe those
    further.
        I would now like to comment more specifically on the issues that
    are the focus of the Committee's attention today. We are providing
    comments here on only those issues with which we have agreement as a
    group, and more specifically, in order to support and advance a process
    that would allow further, expeditious development of the proposed
    SeTrans RTO. In that vein, I will begin my comments with a discussion
    of ``Transmission Organizations/RTOs''.
                        transmission organizations/rtos
        The SeTrans Sponsors support the voluntary formation of regional
    transmission organizations, or RTOs, as is evidenced by our active
    participation, and the consequent time and resources we are spending on
    the development of the proposed SeTrans RTO. It is important to note
    that if RTOs are to go forward and succeed, they must be proven to
    provide benefits to all the stakeholders involved. At JEA, we have an
    efficient and cost-effective electric system of which we are very
    proud. We are working hard on the development of the proposed SeTrans
    RTO in order to make sure it will meet our customers' needs and provide
    benefits for our system, as well as work for and secure benefits for
    the entire Southeastern region. Every one of the SeTrans Sponsors is
    doing the same thing.
        The proposed SeTrans RTO is organized around the key governance
    concept of an independent, incentive-driven, third party operator, the
    SeTrans Independent System Administrator (ISA), that will manage, but
    not own, the transmission facilities dedicated to the RTO. The SeTrans
    Sponsors are currently negotiating with the preferred ISA candidate, a
    team made up of ESB International, Ltd. and Accenture, LLP. The ISA
    model provides a platform for the formation of, and a role for,
    independent transmission companies (ITCs), as well as individual
    participating transmission owners. The proposed SeTrans RTO offers a
    common market design for the Southeast that includes in ``Day 2'' a
    broad, seamless market for energy and ancillary services, a congestion
    management model based on Locational Marginal Pricing (LMP), tradable
    Financial Transmission Rights (FTRs) to hedge against the impact of
    congestion costs, and Participant Funding of certain new transmission
    facilities. The SeTrans Sponsors believe our proposed market design
    would minimize seams issues, support a robust competitive wholesale
    market, and encourage market-driven planning and expansion, while
    protecting native load customers.
        As I stated before, the SeTrans Sponsors are trying to develop an
    RTO that will meet the needs of the competitive wholesale market, as
    well as those of the investor-owned, publicly-owned, and cooperatively-
    owned utilities in the Southeast. This is a difficult task given the
    disparate types of utilities in the Southeast and the fact that
    substantial portions of the region's transmission facilities are owned
    by state and federal authorities, municipalities and electric
    cooperatives. In developing the proposed SeTrans RTO, the SeTrans
    Sponsors have identified a number of concepts that are critical to
    demonstrate that the RTO will provide benefits to everyone and ensure
    the voluntary participation of the Sponsors. Those concepts include:

       the ability of non-jurisdictional entities to withdraw from
            participation due to tax concerns;
       the Participant Funding concept;
       the ability to avoid cost shifting by utilizing a zonal rate
            structure through at least 2012;
       the ability to charge for power being exported from the
            SeTrans region, as a way of recovering revenues lost through
            the elimination of multiple transmission rates across the RTO
            footprint;
       the ability to honor grandfathered agreements;
       the ability to ensure that native load continues to get
            priority in use of the transmission system;
       the concept of installed capacity requirements; and
       the ability for state regulators, local authorities (in the
            case of municipals), or governing boards (in the case of
            cooperatives) to set rates for retail electric service,
            including retail transmission rates.

        The SeTrans Sponsors believe the proposed SeTrans RTO, which
    includes these concepts and contemplates voluntary participation by
    transmission owners, can and will support a robust competitive
    wholesale market.
        I must point out, however, that there are impediments to completion
    of the proposed SeTrans RTO, and to the continued participation of all
    current SeTrans Sponsors. First, although it is not clear the
    Commission will approve a proposed RTO that includes certain of the
    critical concepts outlined above, the Southeast Association of
    Regulatory Utility Commissioners (SEARUC) has made clear that FERC must
    accept regional flexibility in its efforts to develop electricity
    markets in the Southeast. I draw your attention to an attachment to my
    testimony, a February 21, 2003, letter from SEARUC to Pat Wood, the
    Chairman of the Federal Energy Regulatory Commission.* In its February
    21 letter, SEARUC listed the following commitments that were necessary
    ``as a foundation for cooperatively developing appropriate
    modifications to the structure of the electric industry in the
    Southeast'':
    ---------------------------------------------------------------------------
        * The letter has been retained in committee files.

       retention of state jurisdiction over the transmission
            component of bundled retail rates and service;
       protection of native load customers from increased costs;
       avoidance of cost shifting between regions or between
            consumers within the region;
       voluntary RTOs and recognition of joint jurisdiction over
            RTO formation; and
       a SMD in the form of broad guidelines with substantial
            regional flexibility.

        The SeTrans Sponsors believe it would be helpful for the Congress
    to clarify for the Federal Energy Regulatory Commission the need to
    recognize regional flexibility in order to ensure that the RTO
    proposals currently underway are completed, and that the proposed
    SeTrans RTO will have a chance to be granted necessary state approvals.
        A second potential impediment to RTO formation is the Federal
    Energy Regulatory Commission's recent rulemaking on Standard Market
    Design (SMD). In the proposed rule on SMD, the Commission proposes to
    order FERC-jurisdictional utilities to either become Independent
    Transmission Providers (ITPs), or to join an approved RTO. This mandate
    to become an ITP or join an RTO is extremely counter-productive at this
    time. Indeed, the SeTrans Sponsors have made great progress on a
    voluntary basis toward developing the proposed SeTrans RTO, and in the
    middle of their efforts, along comes a rulemaking that eliminates the
    voluntary nature of RTO participation for jurisdictional utilities. I
    would point again to the February 21 SEARUC letter that is attached to
    my testimony and note that state public service commissions are more
    likely to approve participation in a voluntary organization. The
    SeTrans Sponsors believe that if the Congress were to direct the
    Federal Energy Regulatory Commission to abandon its SMD efforts, or
    make significant modifications to the SMD rule to accommodate regional
    differences and allow voluntary participation, it would greatly enhance
    the chances for the proposed SeTrans RTO to become a reality and
    succeed in meeting FERC and the Congress' objectives for a competitive
    wholesale electricity market.
                      regional energy services commissions
        The SeTrans Sponsors have not studied this new concept in detail
    and cannot offer comments on its substantive provisions. It is
    encouraging to see a proposal that allows for regional differences.
    However, there are many important components left undefined, including
    the relationships between RESCs and with FERC and overlapping RTOs. The
    SeTrans Sponsors believe that this concept deserves full consideration
    by stakeholders and this cannot be resolved before the Committee's
    mark-up that is scheduled for next week. We therefore encourage the
    Committee to focus on what needs to be done to ensure efficient and
    reliable wholesale markets under the existing regulatory scheme.
                             reliability standards
        The SeTrans Sponsors believe that participation by transmission
    owners in RTOs, like the proposed SeTrans RTO, may provide additional
    administration and more uniform enforcement of reliability standards.
    We do not support the reliability provisions contained in the staff
    discussion draft dated March 25, 2003. Assigning reliability
    enforcement authority to regional energy service commissions (RESCs),
    as does the March 25 draft, substitutes a brand new governmental
    entity, with no technical competence or experience whatever, for the
    industry-led enforcement, subject to government oversight, that is the
    essence of the S. 475 reliability provisions. Introduction of the
    concept of regional energy service commissions into the reliability
    context also raises a host of unanswered questions concerning the
    intended relationship between the existing electric reliability
    organization and RESCs.
                            open access (ferc-lite)
        The FERC-lite language in Section 2071 of Congressman Barton's
    bill, as marked by the subcommittee, gives FERC sufficient authority to
    ensure that non-jurisdictional utilities provide open access, non-
    discriminatory transmission service.
        The individual SeTrans Sponsors have supported various moves toward
    open, non-discriminatory transmission systems as have been developing
    in the electricity industry over the past few years. As a group, the
    SeTrans Sponsors agree that development of RTOs must provide for
    participation of utilities that are not subject to the general
    jurisdiction of the Federal Energy Regulatory Commission without those
    utilities becoming, in effect, jurisdictional.
        In the proposed SeTrans RTO, the SeTrans ISA will be a FERC-
    jurisdictional electric utility. Each participating transmission owner
    will enter into a contractual relationship (the Transmission Operating
    Agreement (TOA)) with the SeTrans ISA, providing the SeTrans ISA the
    right to use its transmission facilities to provide service under the
    SeTrans open access transmission tariff (OATT). We intend that a TOA
    between the SeTrans ISA and a non-FERC-jurisdictional transmission
    owner will not be a jurisdictional contract. Therefore, a non-
    jurisdictional utility that joins the SeTrans RTO will not subject
    itself to the jurisdiction of the Federal Energy Regulatory Commission
    simply by virtue of joining the RTO.
        The SeTrans Sponsors believe this proposal strikes a reasonable
    balance between the goals of the FERC and the Congress to establish
    efficient, reliable and competitive wholesale markets and the goal of
    non-jurisdictional utilities to retain their current status. The
    SeTrans Sponsors ask the Congress to direct FERC to accept that non-
    jurisdictional utilities that voluntarily join an RTO do not subject
    themselves to FERC jurisdiction and to approve RTO proposals that
    include provisions to achieve such a result.
                              transmission siting
        The SeTrans Sponsors do not believe that transmission siting is a
    major problem in the Southeastern region of the United States. Unless
    specific problems are demonstrated, we believe Federal pre-emption for
    purposes of transmission siting is not required.
                               service obligation
        The SeTrans Sponsors support legislation to ensure that a utility
    which reserves transmission service to meet its service obligations
    will not be considered as engaging in undue discrimination or
    preference.
                              participant funding
        In developing the proposed SeTrans RTO, the SeTrans Sponsors have
    included Participant Funding of certain new transmission investment.
    For purposes of the proposed SeTrans RTO, Participant Funding refers to
    a mechanism whereby a party or parties seeking the economic expansion
    of the transmission network, as compared to an upgrade that is required
    to maintain existing reliability levels, will be responsible for
    funding the cost of the expansion. In return for funding the expansion,
    the funding parties will receive the net incremental financial
    transmission rights, FTRs, created by the expansion for a 30-year term.
        Participant Funding is important in the Southeast. Over the past
    few years, a lot more new generation capacity has been announced than
    is needed to serve the load in the region. Since this excess planned
    growth in generation appears to be caused by the abundant natural
    resources in the Southeast, including proximity to natural gas, water
    and available land, the region may continue to attract more generation
    than is needed to serve the load. This issue did not emerge when
    utilities planned both generation and transmission in an integrated
    manner. Today, however, much of the new generation is to be built by
    independent power producers. If all transmission upgrades needed to add
    these generators to the grid are ``rolled-in,'' generators will not see
    a transparent and accurate signal as to the cost their locational
    decisions are imposing. The SeTrans Sponsors proposed the Participant
    Funding concept to provide a transparent and accurate price signal, and
    to act as a market surrogate for the integrated planning traditionally
    employed by utilities.
        Participant Funding in the proposed SeTrans RTO is part of the Day
    2 market and is consistent with the broad principles outlined in the
    Infrastructure Cost Allocation Principles in Subtitle E, Section 33 of
    the Discussion Draft. However, the SeTrans Sponsors are concerned that
    the proposed language may require the Federal Energy Regulatory
    Commission to socialize costs even in cases where the transmission
    improvements are made that would not have been required absent a
    specific request for transmission service. Any transmission investment
    may have system-wide reliability benefits. However, if the transmission
    investment would not have been made in the region absent a specific
    request, then it should be paid for by the party that benefits from the
    investment. Otherwise, existing customers are paying for system
    improvements that they did not need.
        I would note that forms of participant funding have been adopted in
    PJM and the New York Independent System Operator. In addition,
    Participant Funding is a critical component of the market in the
    proposed SeTrans RTO. Therefore, the SeTrans Sponsors request that if
    this Committee addresses transmission pricing in energy or electricity
    legislation, it ensures that Participant Funding is not precluded.
                                   conclusion
        I appreciate the opportunity to testify before this Committee and
    to provide the views of the SeTrans Sponsors on these important issues.
    Our first obligation is to our native load customers. We believe that
    we must be able to continue to fulfill our obligation to serve those
    customers and provide them with reasonably priced, reliable electric
    service. As a group, we believe that one way we can continue to meet
    this obligation under the existing electricity statutory scheme is by
    further developing, and then participating on a voluntarily basis in,
    the proposed SeTrans RTO. We do not believe that the Congress or FERC
    should mandate wide ranging changes to the electricity market before we
    understand what caused the western energy crisis.
        At the same time, we believe it would be extremely helpful as we
    continue our RTO development efforts if the Congress would direct the
    Federal Energy Regulatory Commission to:

       recognize the need for regional flexibility in the
            development of RTOs;
       abandon its SMD efforts or modify the rule to accommodate
            regional differences;
       allow voluntary RTO participation; and
       approve RTO proposals that allow non-jurisdictional entities
            to join an RTO without becoming subject to FERC jurisdiction.

        In addition, we ask the Congress to support Participant Funding if
    FERC itself does not adequately address transmission pricing.
        I will be happy to answer any questions you have.

        The Chairman. Thank you very much.
        We will proceed now with Mr. Torgerson. Thank you for
    coming.

      STATEMENT OF JAMES P. TORGERSON, PRESIDENT AND CEO, MIDWEST
             INDEPENDENT TRANSMISSION SYSTEM OPERATOR, INC.

        Mr. Torgerson. Good morning, Mr. Chairman and members of
    the committee. I am Jim Torgerson, president and CEO of the
    Midwest Independent Transmission System Operator, the Midwest
    ISO, the Nation's first FERC-approved RTO. I want to thank you
    for this opportunity to discuss energy legislation before the
    Congress.
        Headquartered in Carmel, Indiana, the Midwest ISO serves
    over 16 million customers in 15 States and controls more than
    $13 billion in installed assets. This hearing comes at an
    important time for us, our customers, and the Nation as a
    whole. The task before us is significant.
        The Midwest ISO believes that it is correct to analyze
    transmission and energy markets regionally. Electrons cross
    borders. Power lines cross State lines. Actions in one State
    can significantly affect customers in another.
        A properly organized region energy market offers benefits
    to all users of the grid.
        Nonetheless, competitive markets continue to face
    challenges.
        Mr. Chairman, let me first state that none of the bills
    which are the subject of the hearing this morning would unduly
    interfere with the voluntary arrangements that the Midwest ISO
    has reached among its members and Federal and State regulators
    under existing Federal and State statutes and regulations.
    However, the staff draft presents us with the most significant
    questions. Obviously, the members of the Midwest ISO would like
    to retain the benefits that we have achieved to date. We are
    anxious to work with this committee to ensure that, where
    appropriate, legislation permits Midwest ISO to maintain
    current arrangements.
        As a general proposition, we believe that consistent
    Federal and State policies that encourage participation in
    stable, rationally sized and transparent transmission and
    electric energy markets will go a long way in attracting much-
    needed capital to our electric utilities, which in turn can
    strengthen our infrastructure. Midwest ISO would like to
    continue to be able to assist in the attraction of much-needed
    capital for critical infrastructure improvements.
        I will now turn to two of the specific issues on which the
    committee has requested comment.
        Section 1211 of the staff draft would create RESCs as a
    means of resolving jurisdictional disputes between State and
    Federal authorities. I am pleased to note that the States
    within which the Midwest ISO operates have set forth a proposal
    that will advance development of wholesale markets and promote
    efficient Federal and State interaction. Specifically, these
    States have proposed to form a Midwest multistate committee
    which would coordinate State expertise and inputs on matters
    related to RTO implementation, systems operation, planning, and
    transmission siting. I have every reason to believe that the
    MMSC will be successful and highly effective.
        At this time for our region, the Midwest ISO would support
    further encouragement of voluntary associations between Federal
    and State authorities and RTOs. Appropriate regional
    differences should be respected and States have critical
    interests in the protection of retail customers. The MMSC
    approach offers a promising vehicle by which basic national
    consistency and flexibility to meet regional needs may both be
    addressed.
        I should also point out that under the definition section
    of the bill, a transmission organization is defined as being
    approved by either the FERC or an RESC. It might be helpful to
    clarify that for consistency the approval should be based on
    the same standards and criteria to be applied by either body.
    It is also critically important for the Midwest that those
    transmission organizations, already unconditionally approved by
    the FERC, do not need further approvals.
        The Midwest ISO is in agreement with the legislative
    requirements for a viable and workable RTO.
        In addition, while we certainly agree with the policies set
    out that RTOs should provide for the elimination of pancaked
    transmission rates within the RTO's region, we would suggest
    that the committee might use this legislation to also eliminate
    pancaked rates between RTOs.
        We are also in full agreement with the sense of the
    Congress provisions contained in the Senate counteroffer and
    the House Energy and Air Quality Subcommittee bill indicating
    that all transmitting utilities should voluntarily become
    members of RTOs and that the FERC should provide any
    transmitting utility that becomes a member of an RTO a return
    on equity sufficient to attract new investment capital for
    expansion of transmission capacity.
        We believe it is particularly helpful that RTOs be provided
    with tools to identify and manage congestion on the wholesale
    grid.
        In conclusion, Mr. Chairman, the Midwest ISO believes that
    the legislation being considered by Congress can bring
    significant benefits to energy consumers. The Midwest ISO has
    been on the forefront of RTO development, regional oversight of
    transmission and electricity markets between States and the
    Federal Government, regional planning, attracting crucial
    investment to our electricity infrastructure, planning for grid
    enhancements necessary to utilize wind resources, and vigilant
    monitoring of our energy markets.
        The Midwest ISO looks forward to continuing to build on its
    activities to date in these and other areas and to working with
    you, Mr. Chairman, and this committee on these important
    matters.
        Thank you.
        [The prepared statement of Mr. Torgerson follows:]
          Prepared Statement of James P. Torgerson, President & CEO,
             Midwest Independent Transmission System Operator, Inc.
        Good morning, Mr. Chairman and members of the Committee. I am James
    P. Torgerson, president and CEO of the Midwest Independent Transmission
    System Operator--or Midwest ISO.
        I want to thank Chairman Domenici, Senator Bingaman and the entire
    Committee for this opportunity to discuss energy legislation before the
    Congress. Headquartered in Carmel, Indiana the Midwest ISO serves over
    16 million customers in fifteen states and controls more than $13
    billion dollars in installed assets. This hearing comes at an important
    time for us, for our customers, and the nation as a whole. The task
    before us is significant.
        After the Federal Energy Regulatory Commission (FERC) issued its
    Order Nos. 888 and 2000 creating Regional Transmission Organizations
    (RTOs), the transmission owners of the Midwest were the first to step
    to the plate, voluntarily creating Midwest ISO and becoming the
    nation's first FERC-approved RTO.
        The Midwest ISO believes that it is correct to analyze transmission
    and energy markets regionally. Electrons cross borders. Power lines
    cross state lines. Actions in one state can significantly affect
    customers in another.
        A properly organized regional energy market offers benefits to all
    users of the grid. It offers transparent pricing. It offers improved
    peak resource management. It offers more options and more flexibility
    for market participants to meet their needs. It offers the increased
    efficiency of an interconnected transmission system. Finally, markets
    offer enhanced reliability.
        Nonetheless, competitive markets continue to face challenges. I
    would like to address some of those issues now and would then be
    pleased to answer your questions.
        Mr. Chairman, let me first state that none of the bills which are
    the subject of the hearing this morning would unduly interfere with the
    voluntary arrangements the Midwest ISO has reached among its members
    and federal and state regulators under existing federal and state
    statutes and regulations. However, the Staff Draft presents us with the
    most significant questions. Obviously, the members of the Midwest ISO
    would like to retain the benefits that we have achieved to date. We are
    anxious to work with this Committee to ensure that, where appropriate,
    legislation permits Midwest ISO to maintain current arrangements.
        As a general proposition, we believe that consistent federal and
    state policies that encourage participation in stable, rationally sized
    and transparent transmission and electric energy markets will go a long
    way in attracting much needed capital to our electric utilities, which
    in turn can strengthen our infrastructure. At this Committee's recent
    hearing on March 4th on the financial condition of the electricity
    market, the President of the National Association of Regulatory Utility
    Commissioners, Mr. David Svanda, pointed to two recent transactions in
    his home state of Michigan that resulted in a substantial infusion of
    new investment dollars in the transmission sector. Mr. Svanda said:

              ``It is interesting to note that both of these transmission
            sales, almost one billion dollars of new investment, were made
            possible in part because of consistent state and federal
            policies that encourage participation in the new regional
            Midwest Independent Transmission System Operator (MISO). The
            stability of regional open access rules and the promise of
            transparent and vibrant midwest transmission markets no doubt
            encourage investors to commit substantial capital to an
            otherwise stagnant utilities sector.''

        I not only share in these observations but would also add that
    stable markets with transparent rules continue to be actively sought
    out for investments of the type described above. Midwest ISO would like
    to continue to be able to assist in the attraction of much needed
    capital for critical infrastructure improvements.
        Given this general background, I would now like to turn to the
    specific issues on which the Committee has requested comment.
                      regional energy services commission
        Section 1211 of the Staff Draft would create Regional Energy
    Service Commissions (RESCs) as a means of resolving jurisdictional
    disputes between state and federal authorities. The Midwest ISO
    believes that addressing this issue is very important. Both federal and
    state authorities have serious issues at stake in how the electric
    service industry is restructured to bring the benefits of competitive
    wholesale markets to consumers. In some areas of the country, the
    debate over the jurisdictional divide has slowed progress toward robust
    wholesale markets.
        I am pleased to note, however, that the states within which the
    Midwest ISO operates have set forth a proposal that will advance
    development of wholesale markets and promote efficient federal and
    state interaction. Specifically, these states have proposed to form a
    Midwest Multi-State Committee (MMSC), which would be a regional
    organization designed to achieve a flexible approach to energy market
    design and transmission infrastructure enhancement. Membership in the
    MMSC would be open to all state regulatory authorities that have
    jurisdiction over the retail electric or distribution rates of
    transmission-owning members of the Midwest ISO and regulatory
    authorities in states in which transmission-owning members of the
    Midwest ISO or independent transmission companies associated with the
    Midwest ISO own transmission facilities. The MMSC will coordinate state
    expertise and input on matters related to RTO implementation, systems
    operation, planning and transmission siting.
        I have every reason to believe that the MMSC will be successful and
    highly effective. The Midwest ISO has been fortunate to work with state
    authorities that have strongly supported its creation and who have
    contributed significantly to its development. Representatives of state
    utility commissions serve on the Advisory Committee of the Midwest ISO
    and have provided invaluable insights concerning the integrated
    provision of transmission service over a large geographic area.
        Guidance from states will continue to be of paramount importance to
    the Midwest ISO. The MMSC structure should facilitate the development
    of comprehensive, state-supported approaches to the challenges facing
    the Midwest ISO and should allow it to more effectively provide the
    wholesale service that benefits the retail activities that the state
    commissions regulate. Even more importantly, the Midwest ISO recognizes
    that, in many instances, the guidance it seeks from the states will be
    provided based on a regional perspective. The bulk power grid is
    regional and the market for electricity, just like the physical flow of
    electricity, does not always respect state or utility boundaries. At
    certain points the states will consider regional solutions to secure
    maximum benefits in their individual states. The MMSC, where
    appropriate, should facilitate regional solutions to regional
    challenges. Regional solutions for transmission upgrades and siting
    issues are particularly important. Cooperation among the interested
    parties rather than coercion, is key to the success of this effort.
        Nevertheless, there should be a consistent framework within which
    regional state authorities act. The staff suggests that a regional
    approach based upon the Colorado River Compact, which I understand to
    be a blend of regional state control and residual federal supervision,
    may be useful here. While the apportionment of water rights and uses,
    such as the management of the Colorado River, may lend itself to a
    governance structure in which regional and federal authorities are
    separated, it is the Midwest ISO's view that the wholesale electric
    energy market, in order to succeed, requires basic national
    consistency. As we have seen, and continue to see, in many areas of the
    United States, electric energy conformity among regions is desirable to
    relieve congestion, diminish opportunities for market manipulation and
    maintain reliability efficiently.
        At this time, for our region, the Midwest ISO would support further
    encouragement of voluntary associations between federal and state
    authorities and RTOs. Our experience shows that the concept can work
    and that it is not necessary that there be recurrent jurisdictional
    disputes. At the federal level, it is important that there be a
    comprehensive and compatible structure to the wholesale market. Such an
    approach will lower transaction costs in sales between states and
    regions, and will promote larger and liquid markets for electricity at
    the wholesale level. Appropriate regional differences should be
    respected and states have critical interests in the protection of
    retail customers. The MMSC approach offers a promising vehicle by which
    basic national consistency and flexibility to meet regional needs may
    both be addressed.
        As I mentioned, these issues are similar in nature to the issues
    which the proposed Regional Energy Services Commission would have under
    the proposed new Sec. 402 of the Federal Power Act. In that sense, we
    would prefer that the MMSC be allowed to proceed with its efforts until
    such time as the states in our region choose to form a RESC and it
    becomes operational.
        I should also point out that under the definition section of the
    bill at Sec. 1201 a ``Transmission Organization'' is defined in
    subparagraph (26) as being approved by either the FERC or a RESC. It
    might be helpful to clarify that for consistency the approval should be
    based on the same standards and criteria to be applied by either body.
    It is also critically important for the Midwest that those Transmission
    Organizations already unconditionally approved by the FERC do not need
    to seek further approvals.
                             reliability standards
        The Midwest ISO generally supports the establishment of a self-
    regulating Electric Reliability Organization (ERO) to be approved by
    the FERC as contemplated by Subtitle D of the Staff Draft. Similar
    provisions can be found in Sec. 206 of the Proposed Senate
    Counteroffer, Sec. 104 of Senator Thomas' Electric Transmission and
    Reliability Enhancement Act of 2003 and Sec. 7031 of the House Energy
    and Air Quality Subcommittee bill. However, I would note that under the
    new proposed Sec. 215 (e)(4) of the Staff Draft the ERO would delegate
    its authority to a RESC for purposes of proposing reliability standards
    to the ERO and enforcing those standards. This delegation to regional
    authorities could result in varying reliability standards across the
    country.
                                  open access
        The Midwest ISO generally supports the Open Access provisions in
    Subtitle E of the Senate Discussion Draft as a way to ensure that all
    transmission operates under the same rules at comparable rates while
    being used in interstate commerce. Similar provisions are contained in
    Sec. 101 of the Thomas bill, in Sec. 205 of the Senate Counteroffer and
    Sec. 7021 of the House Energy and Air Quality Subcommittee bill.
                       transmission investment incentive
        The Midwest ISO supports reasonable investment incentives such as
    those found in Subtitle E of the Discussion Draft, Sec. 219 of the
    Senate Counteroffer and in Sec. 7011 of the House Energy and Air
    Quality Subcommittee bill. We believe these provisions would encourage
    investments to expand transmission facilities that may not otherwise be
    undertaken. The Midwest ISO would also support a forum whereby affected
    states would have the opportunity to evaluate the impact of these
    incentives on their retail customers.
                          transmission cost allocation
        The Midwest ISO supports transmission cost allocation principles
    which recognize that the entity seeking to interconnect with the
    transmission grid should pay the cost for that transaction, as
    currently proscribed. Also, where the addition to the grid can be shown
    to provide benefits to existing load, those consumers with their
    state's concurrence, should pay a portion of these transaction's costs.
    Under all circumstances, the identification of these costs and benefits
    must be made by an independent transmission organization. Subtitle E of
    the Senate Staff Discussion Draft and Sec. 219 of the Senate
    Counteroffer that directs FERC to undertake a rulemaking in this regard
    to ensure that all the costs are shared by all users that benefit from
    the expansion, appears to support this position.
                       transmission organizations (rtos)
        The Midwest ISO is in agreement with the legislative requirements
    for a viable and workable RTO as set out in the proposed new Sec. 407
    of the Federal Power Act contained in the Staff Draft. The Midwest ISO
    has already undertaken the process for recovery of legitimate,
    verifiable and prudently incurred costs of forming the RTO as
    contemplated by subparagraph (10) of that section. FERC has provided
    reasonable assurances that transmission owners that participate in the
    Midwest ISO will have an opportunity to recover operation and
    development costs incurred by the Midwest ISO. By order dated November
    22, 2002, FERC conditionally accepted Schedules 16 and 17 of the
    Midwest ISO's Open Access Transmission Tariff, which provide for the
    recovery of costs associated with the creation of an energy market and
    Financial Transmission Rights (``FTR''). Midwest Independent
    Transmission System Operator, Inc., 101 FERC para. 61,221 (2002). Under
    existing law, utilities are entitled to recover wholesale costs that
    have been approved by FERC. On February 24, 2003, FERC issued a
    Declaratory Order approving the general direction that the Midwest ISO
    is taking to develop energy markets and FTRs. Midwest Independent
    Transmission System Operator, Inc., 102 FERC para. 61,196 (2003). This
    order provides greater certainty to transmission owners that the costs
    incurred for these efforts are prudent and reasonable. And finally, on
    March 12, 2003, FERC issued a Declaratory Order stating that any
    transmission owner may file with FERC pursuant to Section 205 of the
    Federal Power Act in the event that they cannot otherwise recover the
    administrative costs billed to them by the Midwest ISO. Midwest
    Independent Transmission System Operator, Inc., 102 FERC para. 61,279
    (2003).
        In addition, while we certainly agree with the policy as set out in
    subparagraph (11) that RTOs should provide for the elimination of
    ``pancaked'' transmission rates within the RTOs region, we would
    suggest that the Committee might use this legislation to also eliminate
    ``pancaked'' rates between RTOs.
        We are also in full agreement with the sense of the Congress
    provisions contained in Sec. 212 of the Senate Counteroffer and
    Sec. 7022 of the House Energy and Air Quality Subcommittee bill
    indicating that all transmitting utilities should voluntarily become
    members of RTOs and that the FERC should provide any transmitting
    utility that becomes a member of a RTO a return on equity sufficient to
    attract new investment capital for expansion of transmission capacity.
    I should also note that while Senator Thomas' proposed Electric
    Transmission and Reliability Enhancement Act does not directly address
    RTO issues, we would agree with the principle contained in the
    Senator's Introductory Statement that RTOs encompass large regional
    areas.
        We believe it is particularly helpful that RTOs be provided with
    the tools to identify and manage congestion on the wholesale grid.
                                renewable energy
        In its regional planning process, the Midwest ISO has had the
    opportunity to develop scenarios for Renewable Energy based on the
    availability of various fuels. In the Midwest ISO operating area, the
    renewable fuel source that has attracted the most interest is wind. The
    Midwest ISO is currently working with officials from the Dakotas,
    Kansas and Texas to identify and model sources of wind power. Earlier
    this week, Midwest ISO had the opportunity to participate in Senator
    Dorgan's conference on Wind Energy. Working with affected parties,
    Midwest ISO is identifying transmission solutions that would allow for
    up to 10,000 MW of rural wind energy to serve urban markets to the
    east.
              market transparency, anti-manipulation, enforcement
        The Midwest ISO fully supports the efforts in all of the subject
    legislation to prohibit fraudulent activities in the electricity
    market. Moreover, the Midwest ISO supports the requirement that FERC
    institute a proceeding to make information on availability and price of
    wholesale electricity and transmission services available. We believe
    such information, properly dispersed will increase the vitality of
    markets.
        We would also note that Midwest ISO has an Independent Market
    Monitor who reports directly to its independent Board of Directors and
    FERC. Additionally, we believe that enforcement of these legislative
    provisions would need to be coordinated between FERC and the RESC to
    ensure that potential improper behavior could be monitored across the
    boundaries of regional organizations.
                                   conclusion
        In conclusion, Mr. Chairman, the Midwest ISO believes that the
    legislation being considered by Congress can bring significant benefits
    to energy consumers. The Midwest ISO has been on the forefront of: RTO
    development; regional oversight of transmission and electricity markets
    between states and the federal government; regional planning;
    attracting crucial investment to our electricity infrastructure;
    planning for grid enhancements necessary to utilize wind resources; and
    vigilant monitoring of our energy markets.
        The Midwest ISO looks forward to continuing to build on its
    activities to date in these and other areas. Many people have worked
    diligently forming the Midwest ISO. We look forward to continuing our
    work to make available to the states the benefits of efficient
    wholesale transmission and electricity markets. The states have shown
    that they are in the best position to determine the method of
    allocating these benefits to their retail consumers. Together with our
    states we will continue to identify and capture these benefits.
        The Midwest ISO looks forward to working with you, Mr. Chairman and
    this Committee in these important matters.

        The Chairman. Thank you very much.
        Let me ask just a couple of questions and then I will yield
    to you, Senator Bingaman.
        Mr. Para, you suggest a congressional ban on SMD?
        Mr. Para. Yes, sir.
        The Chairman. Do you not think that if we did that, FERC
    would continue to apply SMD-like principles on a case-by-case
    basis using their authority in any event?
        Mr. Para. Well, I think that would be a danger, but I think
    then FERC would understand that the Congress agrees that a
    single standard for the country is too far to go. I cannot
    predict what FERC would do.
        The Chairman. Do either of the other of you have a thought
    about that? That is a suggestion, as you know, that puts
    something on an appropriation bill and take away the authority,
    which I assume could be done and it would pass, I assume, the
    way things are now.
        Mr. Glazer. Mr. Chairman, this is one of those tough
    issues, sort of how much do you standardize something versus
    how much do you allow regional flexibility. I know FERC--I do
    not want to speak for them, but clearly they have gotten the
    message loud and clear that maybe we need regional approaches.
        But I sort of analogize this back to the interstate highway
    system. If I go from State to State, I have got green signs
    that tell me it is an exit. I have got blue signs that tell me
    there is a hospital or a place to eat, et cetera. That
    consistency is important when I drive from State to State. On
    the other hand, there is regional flexibility. There are
    different routes. There are different speed limits. There are
    different number of exits, et cetera, different maintenance
    practices.
        I think some balance between those two is needed. An
    incremental approach. That is what we have learned in our Mid-
    Atlantic region and in the Midwest region: an incremental
    approach is what is needed.
        I think FERC is going to go there anyway, but that is sort
    of our lesson. I do not think Congress ought to ban it because
    then it would ban any standardization at all, and I think that
    would create some of the problems that I mentioned like we
    would have with the highway system.
        The Chairman. Mr. Torgerson.
        Mr. Torgerson. Mr. Chairman, I think it would be helpful to
    have basic consistencies between the different regions, between
    the RTOs. So some standardization I think is helpful from an
    operational standpoint. But I think there are regional
    differences that have to be respected. So I think that is what
    is going to be needed throughout this.
        The Chairman. So would your answer be if that happens, you
    assume that FERC would proceed in any event? That was kind of
    the question. Do you not think they would, on a case-by-case
    basis, do what everybody is concerned about anyway? One answer
    is they might, but it would not be nearly as bad or some such
    effect.
        Mr. Torgerson. Not speaking for FERC, but I think they
    would proceed on some basis with regional differences being
    addressed.
        Mr. Glazer. Mr. Chairman, they respond to cases that are
    before them. And we do not put proposals before them that have
    not been thoroughly vetted with our own stakeholders. I would
    say about 99 percent of our proposals in fact have gotten
    extensive approval from all different sectors of the industry
    and State utility commissions. So I do not think they would
    just go off and march. In fact, they would have proposals in
    front of them that already had stakeholder support or it never
    would have gotten there in the first place.
        The Chairman. Senator Bingaman.
        Senator Bingaman. Thank you very much.
        Let me just give sort of my broad perspective on this. My
    impression is that this whole exercise we have been going
    through here for several years of trying to enact Federal
    legislation related to wholesale electricity markets is a
    result of the reality on the ground, which is that we are
    moving to more and more of a national transmission system and
    there is, in fact, more and more interaction between the
    various regions and within the regions and more groupings
    taking place. So we are trying to essentially find a way to
    modernize or update the legislation which was passed back in
    the 1930's so that it accommodates this new reality. That is
    what I have always thought, and I think you stated it very
    well, Mr. Harris, when you said that that involves a balancing
    of to what extent do you standardize and to what extent do you
    make accommodation to regional differences. I think that is
    what we are working through.
        Many in Congress have felt like, by issuing this standard
    market design and trying to do as much as that proposes to do,
    FERC has gone too far too fast, and that should not be allowed
    to happen.
        At the same time, my own view is that the general direction
    toward moving us to have a national system and the benefits of
    competition within that system, the benefits that accrue to
    consumers within that system, makes a lot of sense. So I think
    that is sort of what has been driving this whole exercise.
        I guess I would ask Mr. Harris first and then the other two
    witnesses if you agree with that general view. You think I am
    off-base with that view. I would be anxious to hear your
    thoughts.
        Mr. Glazer. Yes. That is Mr. Glazer substituting for Mr.
    Harris who is on his way over.
        Senator Bingaman. Sorry. Mr. Glazer. Excuse me.
        Mr. Glazer. It is a great question, Senator.
        This is the difficulty. That is why it has been so
    difficult to legislate in this area. You have got a speed-of-
    light product that does not respect State borders, does not
    even respect national borders. Yet, you have a history of it
    being regulated at the State and local level and you have each
    utility sort of financed and planned its own system, almost
    like silos. And the trick is to balance all of those and come
    up with a solution that respects that history but moves us
    forward into the future.
        I think it is happening. I mean, the good news is it is
    happening in the Mid-Atlantic region. We are working very
    closely with Midwest ISO to have a large 27-State market that
    will have it happen voluntarily. It is a voluntary market. That
    is the key point.
        I think the 1930's act is actually flexible enough at this
    point in time to allow that to happen. I think Congress needs
    to monitor it very closely, but I am not sure this is the time
    to legislate. I think FERC is actually moving in the right
    direction. I think they are realizing, as we realized in the
    Mid-Atlantic, you have got to do it step by step. Not every
    region is going to be there at the same time. But do we
    eventually need some common rules of the road? Absolutely.
        Senator Bingaman. Mr. Para, did you have a comment?
        Mr. Para. Yes, Senator. We agree with you that we need to
    continue to go forward. We also agree that it needs to be step
    by step. We think the FERC has the appropriate authority and
    that FERC has been listening to what people have been saying.
    We look forward to seeing their white paper at the end of
    April, and we expect to see where FERC can show that they have
    been listening to the concerns. And we think that the movement
    toward voluntary RTOs is a giant step in the direction of
    dealing with the issues that you bring up.
        Senator Bingaman. Mr. Torgerson.
        Mr. Torgerson. Senator, I would agree. We are moving to
    more of a national system. The electric system was designed
    originally to bring generation to a specific load within a
    utility. It was not designed originally to be the interstate
    highway system. But that is where we are heading. And we are
    there already with much of the trading that goes on today. So
    we have to accommodate this new reality. And there are benefits
    we see from the wholesale transactions. But we need new
    transmission and transmission investment in order to
    accommodate the new reality that you talked about.
        Senator Bingaman. Let me just ask one question since I have
    still got a few seconds here.
        There is a lot of consolidation going on or being
    discussed. The Midwest ISO has pursued consolidation with the
    Southwest Power Pool, with members of PJM. PJM has tried to
    negotiate consolidation with MISO, the New York ISO, and the
    ISO for New England. All of that seems to me to be beneficial,
    all of that discussion that is going on.
        I am concerned that this proposal to establish these
    regional energy service commissions might inhibit that. Is that
    a valid concern?
        Mr. Glazer. Senator, I think you raise a good point. One of
    the concerns with the language is it does not define a region,
    and a region could end up not being a natural market area. It
    could be just some gerrymandered thing that people came up with
    in a back room.
        We are really not doing consolidation with the Midwest ISO.
    I think we are actually sort of one step beyond that, and that
    is we are creating a natural market that will span this large
    region but we are still respecting that we are two separate
    institutions. We are not looking to merge. We are two separate
    companies, and we have got our own State commissions and our
    own regional practices to deal with. So my compliments to the
    Midwest ISO. I think we have sort of gone beyond any kind of
    consolidation to let us get the real product to the customer
    which is a voluntary wholesale market.
        Senator Bingaman. Mr. Torgerson.
        Mr. Torgerson. I think the Midwest ISO was going to merge
    with the Southwest Power Pool. That has been called off. The
    transmission owners just simply did not end up joining,
    sufficient numbers of them.
        But to answer your question, Senator, if we had the RESC in
    place already, it would depend on which States were involved.
    Which geographical footprint would we be looking at, and would
    some States want to have a consolidation and would others not?
    So it could be an impediment. It could be a help depending on
    which States were actually involved.
        Between us and the Southwest Power Pool, we believe there
    was one market there. We still believe that is the case, and it
    might have been helpful, but only if all of the States had been
    involved in it, which, since it is voluntary, it is hard to
    determine that could have occurred.
        Senator Bingaman. Thank you, Mr. Chairman.
        The Chairman. Well, Senator Bingaman, I am going to yield
    to Senator Thomas in a minute. But I think your question is a
    good one. It is generic to any major transition. If you are
    making a major transition to a new system, there would have to
    be rules that would permit the ongoing activities of mergers
    and acquisitions that were in process. You could not have them
    all held in abeyance or canceled, even under an SMD I would
    assume. If he was doing some of that, he would provide for
    that. But I think it is a genuinely valid concern.
        Senator Thomas.
        Senator Thomas. Thank you.
        Well, thank you. I agree with the things you have said. I
    think that is really the purpose of much of what we are trying
    to do here, is to set up these RTOs that work, leave the
    authority there to make the differential among areas. And I
    think we could do that.
        Mr. Glazer, you are an ISO?
        Mr. Glazer. We are a regional transmission organization. We
    have been certified by FERC.
        Senator Thomas. You are not in the generating business.
        Mr. Glazer. No. We are basically the air traffic controller
    that runs the grid and we also----
        Senator Thomas. If I was in the generating business in your
    area and wanted to ship power out, the market power, how do I
    get on the transmission outside of your area?
        Mr. Glazer. Our whole market--reserving transmission is all
    done over the Internet. We have tools on the Internet where
    people can go on and order transmission capacity to our border.
    At that point, there is a hand-off to the next entity.
        Senator Thomas. Beyond your border is what I am talking
    about.
        Mr. Glazer. Yes, beyond our border then, what we are
    working through--and this is what we are going to do with
    Midwest ISO is to not have a seam between us and Midwest ISO,
    for example, so that power could move with one system, that it
    would be transparent to the customer.
        Senator Thomas. That is what we are talking about doing
    here, is it not, is to have RTOs that have local authorities
    and then set up a nationwide system so that can move? And
    someone has to be in charge of that, I believe, do they not?
        Mr. Glazer. Well, Senator, the way we are doing it with
    Midwest ISO is that for the customer it looks like it is one
    system. They put in one order in one place. Behind the scenes
    there in the back room, there are two different entities, one
    in Carmel, one in Valley Forge, Pennsylvania, that are actually
    processing that----
        Senator Thomas. How about Wyoming? We want to ship some out
    there.
        Mr. Glazer. I am sorry?
        Senator Thomas. We would like to ship some power out there.
        Mr. Glazer. We would love to have it.
        Senator Thomas. Well, we have to have a way to do that.
        Mr. Glazer. Right.
        Senator Thomas. I mean, I agree with you guys entirely, but
    I do not think just doing the RTOs is going to settle this
    whole change that is taking place in the country. And I think
    you all said that.
        Are there not some other things that we ought to be talking
    about? How about reliability and how about conservation? This
    is a policy. We are trying to set up an energy policy. So it
    goes a little beyond what you are doing today, but rather a
    view of where we want to be tomorrow in the overall, not just
    transmission, not just generation.
        For instance, what are we going to use for fuel? I think we
    are going to find that the fuel we have the most supply of is
    probably coal, but the way things are now with transmission,
    why, we are doing gas-fired, small units close to the market.
    Is that the policy we need to have over time? I do not know.
        I guess what I am asking you, even though you seem to be
    reluctant to take up anything in electric energy, would we not
    be wise to have sort of oversight among these RTOs and have
    some direction in where we are going, Mr. Para?
        Mr. Para. Yes, sir. I would agree that you need an
    oversight, and I think the FERC can provide that.
        I think more important what you said was that we are
    talking about an energy policy here, and we cannot think that
    we can deal with one piece of it without dealing with all the
    pieces. We have to think about the fuels. Indeed, we have to
    think about how that fits in with the clear skies proposal. If
    we know that coal is going to be a big part of our resources in
    the future, we need to make sure that we deal with that
    appropriately on the environmental side as well. There we look
    to you, sir.
        Senator Thomas. My point is I just hope we can think of it
    in as broad a scope as possible because that is what this is,
    is a policy. This is not a regulatory activity.
        Mr. Torgerson. Senator, in the Midwest ISOs planning
    process, which our initial plan will be out in the next couple
    of months, we look at whether generation of electricity is the
    best way to solve constraints whether you need to build new
    transmission, whether a demand-side resource can help relieve
    constraints and add to the resource adequacy.
        We then also look at the different scenarios such as is
    wind power an alternative that could be utilized. Is investing
    in more coal resources, more coal generation a possibility? Or
    what would happen if we do with natural gas? So we are looking
    at these different scenarios and looking at the impacts it
    would have on the transmission system. We are not totally
    addressing the policy issue, but we are looking at the economic
    impacts of these different things in our plan.
        Senator Thomas. That is great. I hope you will share.
        I think it is basically Congress' role to take a look at
    policy and not get into the day-to-day details as much as it is
    to set up a framework within which you all can work. Again, I
    am very impressed with what all three of you had to say. That
    is what we are seeking to do, is to set up these regional kinds
    of operations. So, thank you.
        Thank you, Mr. Chairman.
        The Chairman. Thank you very much.
        Did our questions prompt something that any of the three of
    you think you ought to add here before we excuse you? Mr. Para?
        Mr. Para. No, sir.
        The Chairman. Mr. Glazer.
        Mr. Glazer. Just a quick comment, picking up on Senator
    Thomas' point. The language in the staff draft, for example, on
    transmission incentives sets an appropriate--it sends a sense
    of Congress. It does not try to then micro-manage and say, you
    know, you have to do it this way or that way. That is, I think,
    an example of Congress setting the policy, which Congress ought
    to be doing. I think those are good parts of whatever we come
    up with.
        But the bottom line is we ask you sort of do no harm to the
    markets that are working in the region, learn from those
    lessons, and I think with an incremental approach, we are going
    to get there and find the balance that Senator Bingaman and
    you, Mr. Chairman, talked about as well.
        The Chairman. Very fine. Thank you all very much.
        We are going to take about a 15-minute recess, and then the
    next panel will follow. That is the panel that is led by Glenn
    English.

        [Recess.]

        The Chairman. The committee will come back to order. thank
    you all for being patient.
        I went down to the Armed Services Committee to see if I
    could inquire of the Secretary of Defense, but there are still
    a number of Senators. So I thought maybe we would try to finish
    here and then I perhaps would get a chance.
        We will proceed now with this panel. Why do we not start
    this way with you, Mr. Franklin, then Mr. English, Mr.
    Richardson, Mr. Tollefson, and Mrs. Moler? Please proceed.

     STATEMENT OF H. ALLEN FRANKLIN, CHAIRMAN, PRESIDENT, AND CEO,
        SOUTHERN COMPANY, ON BEHALF OF EDISON ELECTRIC INSTITUTE

        Mr. Franklin. Thank you very much, Mr. Chairman. My name is
    Allen Franklin. I am president and CEO of Southern Company, a
    large utility in the Southeast. I am here testifying on behalf
    of the Edison Electric Institute which is the trade association
    that represents investor-owned utilities in this country.
        As you have heard several times, this is a very difficult
    and turbulent period in the history of our industry, the
    electricity industry and electricity markets. But I think I
    understand the views from different parts of the country. You
    have to understand that the impact of these difficult times is
    very, very different from one part of the country to the other.
    From the west coast where both customers, investors, utilities,
    and all market participants have been devastated in one way or
    the other, to the Southeast, for example, where there really
    are very few problems from the standpoint of consumers--the
    reliability is good. Costs are low. Investors have not lost
    money. Regulators are happy and customer service is high.
        So when you hear comments about regional differences, they
    are very real. They are not fictitious and they explain why
    different parts of the country have such a different view of
    sweeping changes to the regulatory scheme for this country
    related to electric power.
        The central issue that you have talked about and I want to
    talk about also is standard market design because this is a
    very important issue for this industry and all participants. I
    can say, even though there are somewhat different views from
    different companies in different regions on the standard market
    design, I can say with confidence that every utility that we
    have talked to that is a member of EEI supports and likes parts
    of standard market design. Every utility we have talked to
    dislikes parts of the standard market design. And I think
    everyone agrees that if SMD goes forward, it must be with
    changes.
        Some of the things that are in standard market design that
    are universally supported by EEI members is, first, the
    objective; that is, to create better, more efficient wholesale
    markets. And I will also say in the South, even where States
    oppose standard market design, I think regulators also support
    that objective.
        Everyone in EEI that I have talked to also supports the
    need for and value of independent control of transmission so
    that no one can use transmission to favor their generation or
    their power. And everyone agrees that some broad guidelines or
    market rules of the road need to be applied across the country.
    We agree with that.
        I think where the disagreement comes, especially when you
    look from region to region, are in other areas. And areas that
    EEI believes that need to be addressed that are not addressed
    or changed in SMD, one is native load priority. And I have
    heard people give short shrift to that. It is a real issue and
    a serious issue.
        For example, if you are a customer in a State anywhere and
    for years you have paid for transmission and it has been in
    your electric rates since the transmission was built and if
    there is really not enough transmission to accommodate the
    retail user going forward and the new generation being built
    for export, it is not a trivial issue and it is not fair in my
    judgment to say just because someone located generation in that
    State to export to another State, that somehow the retail
    customer has to give up part of their transmission rights. And
    the likelihood--and this is not again a trivial issue--or the
    possibility is that lights would actually go out in that State
    for retail customers so that power can be exported elsewhere.
        In addition to that practical issue, the concern about
    making sure native load customers' lights stay on is a huge
    part of the reason you see objections to SMD among local and
    State political leaders. So it is not only a technical issue,
    it is also a political issue.
        Other areas where we disagree with the standard market
    design is in transmission pricing. We believe very strongly in
    the industry that cost shifting, as a result of change in
    Federal policy, should not take place. In other words, those
    that cause additional transmission costs should pay, and those
    costs should not be socialized and put on retail consumers.
        The third area that we think is important is especially in
    States that are still vertically integrated where retail access
    is not in place, where States regulate the total cost of power
    to retail consumers. We think, going forward, that should
    continue, that FERC should not assert jurisdiction over the
    transmission component of retail rates. That is a technical
    issue, but it is also a very political issue in certain parts
    of the country where the States do not want to lose that
    jurisdiction that they have had or at least exerted forever.
        There are some very difficult challenges. Given the need to
    move forward nationally, but needing also to recognize these
    very real and substantial regional differences, we are starting
    from very different points as far as market structure, cost,
    reserves. So we have to take into account the regional
    differences but also hopefully, as you have pointed out, move
    forward on a national basis.
        Looking at the chairman's draft, it is an intriguing,
    innovative, and interesting proposal. And I think it tries and
    makes a good faith effort to deal with this conflict between
    national effort and regional differences and I think long term
    could have some potential.
        But, on the other hand, I think there are many, many
    difficult, unanswered questions, and I think it would take a
    very, very long time to work through those. In some cases State
    law will actually have to be changed to implement that
    proposal. And I think we are in a position today that we need
    more clarity sooner as opposed to later. As opposed to adding a
    new regulatory body, which this proposal would do, and a third
    level of regulation, which could turn into an even greater
    bureaucracy, I think it would be much wiser for Congress to
    simply clarify and instruct more clearly the existing
    regulatory bodies as opposed to creating a third regulatory
    body to deal with.
        An approach that we think makes sense--and not the only
    approach--is to reach an agreement, probably through Federal
    legislation, that lays out the broad areas where every region
    needs to comply to make the markets work. That would be things
    like independent transmission control. It would be things such
    as make sure the scope of the RTO was large enough. It would
    include other broad provisions that really are needed across
    the country to be sure some consistency is applied across the
    country. But it should be a limited number of principles. But
    reach agreement on those, maybe codify those in legislation,
    and then leave it to the regions, leave it to the States to
    work out the details. I believe we probably ultimately will go
    that way, one way or the other, and I think Congress could help
    push that issue along a bit.
        A lot of other issues in my testimony and issues that you
    asked us to speak to. I will answer questions, but I will not
    try to address those now.
        One issue that is important that I will just mention
    briefly is--and referring to one of the Senator's comments
    earlier--we do not have a national market. I do not think we
    are moving to a national market yet. We are talking about it,
    but until we have the capability and the transmission capacity
    to move power between these regions--and that is very limited
    now--it is going to be more talk than actual markets. So I
    think we need to concentrate not just on how to divide up the
    current limited transmission capacity, but also find some ways
    to increase the transmission capacity so we can really take
    advantage of cost differentials in different regions.
        Some things that would help. I think in some cases many of
    our members would support some kind of limited Federal backstop
    siting authority in areas where transmission is desperately
    needed for inter-regional transactions and it simply cannot get
    done without it.
        Improvement in the Federal permitting process where it does
    not take so long to get a permit across Federal lands would be
    helpful.
        Financial incentives to bring capital into the market to go
    into new transmission would be most helpful.
        Let me just conclude, Mr. Chairman, with that, and I will
    be happy to address any specific questions you have.
        [The prepared statement of Mr. Franklin follows:]
         Prepared Statement of H. Allen Franklin, Chairman, President,
                           and CEO, Southern Company
        Mr. Chairman and Members of the Committee: My name is H. Allen
    Franklin, and I am Chairman, President and CEO of Southern Company.
    Southern Company is the parent company of Georgia Power, Alabama Power,
    Savannah Electric, Gulf Power and Mississippi Power. These five
    operating companies serve 4 million customers in Alabama, Florida,
    Georgia and Mississippi. We are a vertically integrated utility
    business with over 38,000 MW of generation, 28,000 miles of
    transmission lines, and sales of 180 billion kilowatt-hours. I am
    testifying on behalf of the Edison Electric Institute (EEI). EEI is the
    association of U.S. shareholder-owned electric utilities and industry
    affiliates and associates worldwide. We are pleased to have the
    opportunity to testify today on several electricity proposals from last
    Congress and this Congress.
        I plan to discuss EEI's priorities in an electricity bill and
    comment on specific provisions in the various electricity proposals.
    But, first, I would like to provide a brief overview of the current
    financial crisis affecting our industry, which serves as a critical
    backdrop against which you are considering legislation.
              financial challenges facing the electricity industry
        The electricity industry is facing its worst financial crisis in
    decades, as the aftermath of the Enron implosion, a boom and bust cycle
    in generation in some areas and the economic slowdown have combined to
    erode investor confidence. This has had a devastating impact on the
    ability of many utilities to access capital on reasonable terms. As the
    most capital-intensive industry in the country, the higher cost of
    capital makes it more difficult to finance infrastructure projects to
    maintain reliable electric service. EEI submitted a written statement
    explaining in greater detail the financial conditions facing our
    industry for this Committee's hearing on March 4 on this subject.
        Utility stocks used to be the safe haven for ``widows and
    orphans,'' who relied on steady utility dividends to help meet their
    income needs. Now, however, the capital markets view much of the
    electricity sector as high risk. Consolidation in the banking industry
    and federal barriers to investment in the electricity industry increase
    the difficulty of finding willing investors who are able to provide the
    needed capital infusions to the electricity industry.
        The last year has seen a ``return to basics'' movement in the
    industry. Utilities and their customers have been painfully reminded by
    the upheaval in electricity markets that electricity is not just
    another commodity, but is instead an essential service for all
    consumers. And, we have recognized the importance of assuring the
    integrity of electricity markets to investors, customers and the public
    at large.
            overview of electricity legislation and eei's priorities
        According to the Department of Energy, competition in wholesale
    electricity markets reduces consumers' electricity bills by nearly $13
    billion annually. While experience with retail competition clearly has
    been mixed, wholesale competition can benefit consumers. Congress
    should focus its legislative efforts on promoting the benefits of
    wholesale competition, while ensuring that retail consumers continue to
    receive affordable and reliable electricity.
        Congress can promote a more efficient competitive wholesale
    electricity market by addressing those electricity issues that only
    federal legislation can resolve in a way that provides the right
    incentives to increase capital investment in the nation's energy
    infrastructure, ensures efficient and reliable wholesale markets, and
    sets a clear direction for the future.
        Many in our industry are concerned that federal electricity
    legislation could add to the industry's challenges in these financially
    turbulent times if legislation decreases regulatory flexibility or
    increases the uncertainty and costs of providing affordable electric
    service to our consumers. To put it in engineering terms, the margin
    for error in our industry is significantly reduced right now.
                      improving wholesale electric markets
        EEI supports the development of more liquid, transparent wholesale
    electricity markets that provide regional flexibility for participants
    to design those markets to best fit regional needs while fostering
    greater efficiency. The Federal Energy Regulatory Commission (FERC)
    issued last summer its proposed Standard Market Design (SMD), which was
    intended to resolve some issues that the Commission believes are
    impeding robust competition. EEI believes that FERC was trying to
    achieve the right goals in issuing the SMD NOPR--most notably to bring
    certainty and efficiency to wholesale markets. And while the SMD
    proposal appeals to some EEI members more than others, and some regions
    more than others, there is universal agreement that changes are needed
    to the proposal. SMD must be formulated in a way that makes it workable
    both in regions that have chosen to deregulate retail markets, and
    those regions that have chosen to continue the vertically-integrated,
    utility franchise model of electric service.
        There are elements of the SMD proposal that we do agree with.
    Specifically, we support the development of regional markets that have
    the following characteristics:

              1. Independent system control, by either not-for-profit or
            for-profit regional transmission organizations (RTOs), that
            have no financial ties to market participants. However, FERC
            has focused too narrowly on structural divestiture as the test
            for independence and has disregarded state decisions preferring
            integrated utility companies. For example, FERC's proposed
            policy offering an additional 150 basis points to return on
            equity demonstrates its preference for transmission
            divestiture. In addition, FERC is threatening to impose
            standards of conduct that unnecessarily interfere with least-
            cost planning and corporate governance. Integrated utilities
            should not have to divest transmission or adopt extraordinary
            measures beyond those in Order Number 2000 in order to
            establish independence of transmission operations;
              2. A role for independent transmission companies within RTOs;
              3. Establishment of real-time markets;
              4. The elimination of pancaked transmission rates within
            regions to promote wholesale trade;
              5. A means for managing congestion on transmission networks;
              6. A regional approach on issues such as transmission
            planning, resource adequacy and transmission siting decisions,
            possibly through a multi-state entity; and
              7. Finally, the same rules must apply to all transmission
            facilities, including those owned or operated by entities that
            are not currently subject to FERC jurisdiction.

        There are, however, significant regional differences in matters
    such as the extent of retail competition, generation reserves, past
    organization and uses of the grid, the role of various fuel sources
    such as hydro, and the extent of development of competitive markets
    which affect the potential economic benefits of wholesale regional
    markets to ultimate customers that have caused the SMD proposal to be
    extremely controversial in many quarters. Part of this divide is simply
    due to the fact that the economic benefits of wholesale markets to
    ultimate customers can be much greater in regions which allow retail
    competition than in states where pervasive retail regulation remains.
    These regional differences cause the cost benefit of implementing a
    detailed SMD to be very different in different parts of the country and
    account for the vastly different views of, and political support for,
    FERC's SMD.
        Therefore, because there are real and legitimate regional
    differences, we believe that FERC has to give much greater credence, to
    and allow much more flexibility for, regional concerns. This is
    particularly important with respect to the following issues:

              1. Assurance that native load will continue to have priority
            in use of the transmission system that was built to serve their
            needs. In the case of states that have retail competition, the
            transmission rights should follow the load and go to whomever
            serves the retail customer.
              2. Pricing of transmission expansion and interconnections,
            including participant funding concepts, so that costs of new
            facilities are not imposed on customers who do not benefit from
            those facilities. This issue is particularly important in
            regions where generation is being built far from load to take
            advantage of fuel availability, siting considerations, and for
            other reasons. Solving this issue will also go a long way to
            assuaging state opposition to siting facilities that primarily
            benefit out-of-state users and removes a hurdle to state
            support for RTOs in some regions.
              3. Allocation of the costs of the existing transmission
            system. In regions where significant generation is being
            constructed for export, or significant amounts of power are
            being transmitted through the region, these wholesale users of
            the transmission system should pay an equitable share of the
            fixed costs of the existing system.
              4. State control of rates for bundled retail transactions.

        Many question whether FERC's rules and decisions will allow for
    adequate regional flexibility on these issues. And while not all EEI
    members agree, many believe that Congress needs to deal with these
    issues in energy legislation to ensure that regional differences are
    properly accounted for by the FERC. This would clearly increase
    political support in some regions for moving forward with RTOs. One
    approach might be to statutorily require FERC to give substantial
    deference to the views of states and regional organizations in the
    process of approving the formation of and changes to regional
    transmission organizations, especially related to the four items listed
    above. We would be pleased to work with the Committee to further
    develop these concepts.
                  regional energy service commissions (rescs)
        Clearly, one of the most controversial issues that has been raised
    by the FERC SMD proposal is how to align competitive wholesale markets
    that operate on a regional basis with state responsibilities over
    retail sales and service. We have long advocated close cooperation
    between FERC, the states and stakeholders in designing regional
    institutions, and we certainly recognize the difficulties in designing
    any institution that achieves the right balance between legitimate
    state and federal concerns. We believe the Committee RESC proposal,
    outlined in the March 20, 2003. Senate Staff Discussion Draft (``Senate
    Staff Discussion Draft'') is a good faith effort to address this
    problem, and we commend the Committee for floating a potential model
    for addressing the tensions between state and federal regulation. But
    as currently drafted, we believe the proposal raises more questions
    than solutions. The proposal is much more problematic and appears to
    add more uncertainty and complexity than needed.
        There is the fundamental constitutional question of whether
    Congress may delegate to the Department of Energy (DOE) authority to
    approve a multi-state agreement. There are also questions as to what
    standards DOE must apply to approve such an agreement and what criteria
    DOE could apply to disapprove a RESC submission. We have major concerns
    about the inability of interested parties, particularly those who own,
    operate or would use regional transmission facilities. to comment on
    any RESC submission.
        As drafted, the RESC would add a third level of rate regulation
    unless the RESC covered an entire interconnected network (an unlikely
    outcome). And, it would still leave FERC with significant regulatory
    authority and the last word in resolving issues. This is clear if we
    look at the West. If we were to have two or more RESCs (a very likely
    option), FERC would continue to regulate transactions between the
    RESCs. FERC would also continue to regulate transactions between a RESC
    and any state that did not join a RESC. This would create two levels of
    interstate regulation--the RESC and FERC. In the West, this is very
    likely to lead to a significant FERC role since so much power is
    imported from or exported to different regions. If a RESC continues to
    allow a state to regulate bundled retail transmission (as many would),
    we would have three layers of regulation.
        In addition, under the draft, FERC would resolve disputes between
    states and RESCs and between RESCs. It is not clear what criteria FERC
    would apply. It is also not clear whether FERC could impose new
    standards or requirements on RESCs. However, it is clear that FERC
    would have the ``last word,'' which ultimately provides very
    significant power.
        If the RESC regulates interstate transmission within the RESC, a
    number of important practical, due process and transitional questions
    arise. The suggestion that the RESC ``have the capability to address
    rate requirements'' is very unclear. Must the RESC apply the standards
    of Section 205 and 206 of the Federal Power Act, or may it apply
    different standards? How is the transition to RESC-approved rates
    conducted? What happens to rates that have previously been approved by
    FERC and that come under RESC jurisdiction? Are those decisions
    grandfathered or must every transaction be resubmitted for RESC
    approval?
        What is the process for judicial review and what are the rights of
    parties? Will transmission owners, operators, users and other
    interested stakeholders have rights to participate before the RESC and
    to appeal RESC decisions? The draft is silent on this very important
    issue. Are appeals by parties submitted to FERC, state court or federal
    court? Can these parties participate when a state or RESC seeks FERC
    resolution of a dispute? If FERC does not hear appeals of RESC
    decisions, how are FERC dispute resolution decisions reconciled with
    inconsistent court decisions arising from an appeal of a RESC decision?
    Can a RESC decision preempt conflicting state law? If a RESC standard
    conflicts with a FERC standard, how is the conflict resolved? Where
    does a RESC get its enforcement authority?
        The organizational structure of the RESC raises a fundamental issue
    of state input. Will all states agree to have only one vote or will
    populous states want a larger say? Is the RESC a governmental agency
    that must comply with procedures like those in the Administrative
    Procedures Act, or do references to its ``charter,'' ``protocols,'' and
    ``by-laws'' suggest the RESC is more of an advisory or consultative
    body? And, why must a state be limited to a single RESC if it operates
    in more than one electrical interconnection?
        The potential breadth of RESC authority, while desirable in many
    circumstances, also raises many questions. Any regional organization
    should be able to assert authority over all transmission-owning
    entities. However, with the exception of the provisions authorizing
    federal utilities to participate in a transmission organization
    approved by a RESC, there is no clarification of RESC authority over
    other government-owned utilities or cooperatives. Also. the RESC's
    authority over ``reliability standards and rules'' should be more
    carefully defined to assure consistency with the reliability section of
    the Senate Staff Discussion Draft.
        While EEI supports regional flexibility in the development and
    design of wholesale electricity markets, we believe that the RESC
    proposal, while very well intentioned, does not achieve the proper
    balance of interests between the states, the federal government, owners
    and users of the grid and other affected parties. And, this proposal
    threatens to add redundant regulation and far too much uncertainty to
    an industry that needs more certainty, not less.
        We appreciate the attempt to devise a creative solution to a
    complex issue and are pleased to continue to work with the Committee,
    FERC, the states and other shareholders to refine a workable regional
    approach. However, an issue this complex will take time to work out. In
    the interim, we believe that issues of state and federal jurisdiction
    under the current regulatory framework need to be addressed, as
    discussed earlier in this testimony.
          improving the operation of, and investment in, transmission
                                 infrastructure
        Healthy competitive wholesale markets depend on robust transmission
    systems to move power to where it is needed. Unfortunately,
    transmission growth has not kept pace with electricity demand. Our
    current transmission infrastructure was never built for the purpose of
    moving large quantities of power across long distances. According to
    the North American Electric Reliability Council (NERC), the volume of
    actual transmission transactions has increased by 400 percent in the
    last four years. Increased congestion on transmission lines not only
    increases costs to consumers, but it also threatens the system's
    reliability.
        At the same time that congestion is increasing, investments in
    transmission have actually been declining. Over the past 25 years,
    investments in transmission have fallen at a rate of $103 million per
    year compared to the investment needed just to maintain the current
    level of transmission adequacy. Difficulties in siting new transmission
    lines, on both private and public lands, and in raising capital are
    significant obstacles that have contributed to this decline in
    transmission investment.
        In addition, most new transmission currently is being built to
    serve local load and to connect new generation to the grid, instead of
    the high-voltage wires needed to strengthen regional electricity
    markets. The relative annual growth rates in lower voltage lines and
    higher voltage lines have changed significantly since the early 1970s.
    In the early 1970s, the annual growth rate in lower voltage line-miles
    (69 kV and below) that support localized grid operations and
    interconnections was 1.9 percent, while the annual growth rate for
    high-voltage line-miles (115 kV and higher) was 3.2 percent. By the
    latter half of the 1990s, this relationship had reversed: the higher
    voltage line-miles were growing at only 0.3 percent, while lower
    voltage line-miles were growing at 3.5 percent.
        We were very disappointed that the electricity title being
    negotiated as part of last year's energy bill appeared unlikely to
    include any provisions designed to improve our transmission
    infrastructure. Therefore, we are encouraged that a number of
    electricity proposals being considered this year include provisions to
    enhance transmission infrastructure. We strongly believe that these
    issues should be addressed in any final electricity title approved by
    Congress.
        Reliability--Increasingly competitive wholesale electricity markets
    and traditional voluntary reliability standards are no longer
    compatible. We need a new reliability regime capable of developing
    mandatory reliability rules that are enforceable on all users of the
    transmission system.
        We believe the reliability provisions in S. 475, the electricity
    bill introduced by Senator Thomas, best meet this objective (the
    ``Thomas bill''). The Thomas bill reflects the latest consensus among
    stakeholder groups that have been working on reliability legislation
    for several years now. We strongly support its inclusion in the
    electricity title to be considered by this Committee.
        Open Access (FERC Lite)--The benefits of a robust transmission
    system are threatened not only by insufficient investment in
    transmission infrastructure, but also by the lack of FERC jurisdiction
    over government-owned and cooperatively owned transmission facilities,
    which constitute almost 30 percent of the nation's interstate
    transmission system. In the Pacific Northwest, the federal Bonneville
    Power Administration (BPA) alone owns and controls nearly three-
    quarters of the region's high-voltage transmission capacity. The entire
    state of Nebraska and most of Tennessee are served by non
    jurisdictional utilities, creating huge geographical gaps in FERC's
    authority.
        According to a December 2002 GAO report, ``Lessons Learned From
    Electricity Restructuring,'' because of this lack of jurisdiction

              FERC has not been able to prescribe the same standards of
            open access to the transmission system. This situation, by
            limiting the degree to which market participants can make
            electricity transactions across these jurisdictions, will limit
            the ability of restructuring efforts to achieve a truly
            national competitive electricity system and, ultimately will
            reduce the potential benefits expected from restructuring.

        We believe that this bifurcated regulation of interstate
    transmission lines is ultimately unsustainable as the industry's
    structure continues to evolve. The nation's transmission and is
    physically integrated. Electrons do not recognize boundaries between
    public and private transmission ownership.
        We believe sound public policy to protect consumers would mean
    putting all utilities participating in interstate wholesale electricity
    markets under FERC's full ``just and reasonable'' requirements. At a
    minimum, EEI's member companies strongly support inclusion of an
    effective ``FERC lite'' provision in any electricity bill. We believe
    that the March 24 version of the Senate Staff Discussion Draft meets
    these objectives.
        With regard to a provision in both the Thomas bill and the Senate
    Staff Discussion Draft, we note that the ability of government-owned
    utilities to finance transmission facilities with tax-free ``private
    use'' financing no longer provides a barrier or excuse for their
    failure to participate in RTOs or to offer open access upon terms
    comparable to that required by FERC. Last year the Treasury Department
    promulgated regulations that permit ``private use"-financed
    transmission facilities to participate in FERC-approved RTOs. As a
    result, the provisions referring to ``private use'' are no longer
    necessary.
        FERC Backstop Siting Authority--We believe that state siting
    processes will continue to be adequate for the construction of most new
    transmission and that limited, new FERC backstop authority will be used
    only as a last resort in very limited instances. However, we believe
    that the authority could be critically important in those instances.
        Wholesale electricity markets are becoming increasingly regional as
    power flows across multiple states and as multi-state RTOs gain
    operational control of utility transmission lines. Most state siting
    laws do not recognize the role new entities such as RTOs will play in
    transmission planning nor do they specifically allow for the
    consideration of regional, not just state benefits of new transmission
    lines. If states consider only intrastate benefits and not regional
    benefits, they may have little choice under state law but to reject the
    proposed line, even if the benefits to the region are significant.
        Regional electricity markets require a siting process that has the
    ability to consider regional and even national needs. FERC has
    jurisdiction over wholesale electricity markets, but it currently does
    not have the authority over transmission siting to help ensure that
    there is sufficient transmission capacity to support those markets. In
    comparison, FERC has the authority to site interstate natural gas
    pipelines. We believe the Commission should have at least limited
    backstop siting authority.
        We believe that the limited FERC backstop transmission siting
    provisions included in both the Senate Staff Discussion Draft and the
    House Energy and Commerce Committee Draft Electricity Title (``House
    Committee Draft'') are intended to achieve this goal. We would be happy
    to work with the Committee to fine-tune this language.
        Federal Permitting of Transmission Lines--The length and
    complicated nature of the federal permitting process makes it difficult
    to address transmission infrastructure issues adequately and in a
    timely fashion. The federal permitting process for rights-of-way when
    multiple federal jurisdictions are involved is fragmented and
    duplicative, with each agency working under its own deadlines and
    without any coordination with the state process.
        Indeed, we are finding that our member companies are going to
    extraordinary lengths to avoid siting on federal land if at all
    possible because of that process. This places a greater burden on
    private lands and, in some cases, state lands to meet the nation's
    needs for grid infrastructure enhancement. The byproduct is the
    potential for more conflict with private landowners and an
    underutilization of federal lands, even where those lands may be best
    suited to help fulfill the nation's infrastructure needs.
        The House Committee Draft generally addresses our objectives in
    improving the federal permitting process, and we strongly support
    including these provisions in the electricity title to be considered by
    this Committee. The Thomas bill also recognizes the need to address
    federal permitting issues by including provisions on federal agency
    coordination and rights-of-way across federal lands, although these
    provisions are not likely to be as effective as those in the House
    Committee Draft because of the highly decentralized way that
    transmission and distribution facilities are certificated.
        The House Committee Draft provisions would provide the opportunity
    for the Department of Energy to serve as a lead agency and would give
    that agency the authority to develop and set deadlines for the federal
    environmental review and permit process and to coordinate the process
    with state siting processes.
        In addition, the House Committee Draft includes helpful provisions
    on interstate compacts, and we believe the House Committee on Resources
    is likely to address federal corridors. We have a concern with the
    application of the House Committee Draft's savings clause that we would
    be happy to work with this Committee to remedy. Finally, in this area,
    we would be concerned if this Committee adopted a provision that would,
    intentionally or unintentionally, require a federal agency to foreclose
    the opportunity to site a transmission line on land within their
    jurisdiction that is presently available, albeit under considerable
    restrictions. to site transmission.
        Transmission Investment Incentives--While FERC has existing
    authority to address transmission pricing issues, this has not been a
    high priority of the Commission's. In addition, while FERC's recent
    pricing initiatives appropriately provide incentives for independent
    operation and control of transmission facilities, FERC has focused too
    narrowly on complete divestiture of transmission facilities and has not
    adequately recognized vertically integrated utilities that are turning
    operational control, but not ownership, of their transmission lines
    over to regional transmission organizations (RTOs). Congressional
    encouragement to FERC on transmission pricing would be helpful.
        Both the House Committee Draft and the Senate Staff Discussion
    Draft would direct FERC to issue a transmission pricing policy rule
    within one year to promote investment in new transmission and address
    cost allocation issues.
        Regional Transmission Organizations--We are pleased that none of
    the electricity proposals being considered at this hearing include
    mandatory RTO participation provisions. EEI's member companies are
    moving aggressively to comply with FERC Order Number 2000 on RTOs.
        We believe it is essential to eliminate any legal uncertainty about
    whether federal utilities can delegate authority over their
    transmission systems to a RTO. We believe the provisions in both the
    Senate Staff Discussion Draft and the House Committee Draft accomplish
    this goal. However, we encourage this Committee to add the House
    language clarifying existing statutory obligations.
       removing federal barriers to wholesale competition and investment
        Among the electricity issues that only Congress can address are
    repeal of the Public Utility Holding Company Act (PUHCA) and reform of
    the mandatory purchase obligation under the Public Utility Regulatory
    Policies Act (PURPA). The structure and regulation of electricity
    markets have changed dramatically since these federal statutes were
    enacted, and they are in desperate need of reform. PUHCA was enacted in
    1935 during the New Deal; PURPA represents the only part of the Carter
    Administration's 1978 energy plan still in effect.
        PUHCA Repeal--We strongly support PUHCA repeal, which has been part
    of every major electricity bill and has long been recommended by the
    Securities and Exchange Commission and other federal agencies. PUHCA is
    a long-standing barrier to capital investment in the utility industry,
    the creation of independent regional transmission companies and the
    entry of additional players in wholesale and retail electricity
    markets. The current capital investment crisis in the utility industry
    makes PUHCA repeal more important now than ever.
        We believe that the PUHCA provisions included in the Senate Staff
    Discussion Draft should be included in any electricity title considered
    by this Committee. These provisions both repeal PUHCA and protect
    consumers by providing FERC and the states with enhanced access to
    holding company books and records.
        PURPA Reform--PURPA's mandatory purchase obligation is incompatible
    with competitive wholesale electricity markets. PURPA requires electric
    utilities to purchase power from certain legislatively-favored
    generators at government-determined prices.
        These prices were supposed to ensure that consumers would pay no
    more for PURPA power than for other power. Unfortunately, due to a
    confluence of factors not foreseen by the authors of PURPA, FERC or
    state regulators, this has not been the result. Instead, long-term
    PURPA contracts generally have proven to be at rates far above
    competitive market prices of electricity.
        Competition in electricity generation has been unleashed by the
    enactment of the Energy Policy Act of 1992 and the issuance of FERC
    open-access rules in 1996 (Orders No. 888 and 889). Consequently,
    electricity generators and wholesale customers have access to each
    other under the same terms and conditions applicable to the utility
    owning the transmission wires. QFs favored by PURPA have the right to
    request transmission service and to sell power to any wholesale
    customer, just like any other generator. They do not need the special
    privilege of being able to sell to a purchasing utility at the
    utility's ``avoided cost'' rate.
        We oppose predicating repeal of PURPA's mandatory purchase
    obligation on FERC findings that certain market tests have been
    satisfied. For example, the test included in the October 16, 2002,
    Senate Offer (``Senate Offer'') was derived directly from FERC's
    proposed Standard Market Design (SMD) rulemaking. Memorializing in
    legislation the specific market attributes proposed by FERC in the SMD
    would codify a rigid view of what constitutes a workably competitive
    electricity market. FERC, itself, subsequently has indicated that there
    should be greater regional flexibility in structuring markets than this
    test envisions and has already approved an RTO with a real-time but no
    day-ahead market.
        We strongly support the PURPA provisions contained in the Thomas
    bill. These provisions should be included in any electricity title
    considered by this Committee.
                         retail electric service issues
        Net Metering--Because net metering is a retail electric service
    issue, we are pleased that the net metering provisions in the Senate
    Staff Discussion Draft, the Senate Offer and the House Committee Draft
    are all a PURPA Section 111(d) requirement that the states consider
    such a program. We oppose a federally mandated net metering program
    that would preempt state decisions or existing programs.
        To the extent that any state follows the net metering provisions in
    these drafts as guidelines, we do have a number of concerns. The
    provisions that would prohibit any standby, capacity or interconnection
    charge create an uneconomic subsidy when such charges are economically
    justified. In addition, the provisions that would measure net metering
    ``in accordance with normal metering practices'' are confusing because
    net metering is not the norm at this time, and this language implicitly
    prevents the use of more advanced ``smart'' metering technologies. The
    better approach is to require simultaneous metering of energy sold to
    and sold by an on-site generating facility.
        In addition, these proposals go beyond encouraging renewable energy
    resources when they endorse net metering for combined heat and power
    facilities up to 500 kilowatts in size at commercial facilities. As we
    have learned from PURPA, cogeneration in and of itself does not always
    mean a facility that is more energy efficient or desirable.
        Real-Time Pricing and other PURPA Standards--Real-time pricing and
    time-of-use metering obviously are retail electric issues that should
    be addressed by the states. If these issues. as well as other such
    retail electric issues, are addressed in a federal electricity bill, we
    believe they should be PURPA 111(d) requirements. We prefer the
    provisions in the House Committee Draft to the Senate Staff Discussion
    Draft with regard to the adoption of additional PURPA standards.
                      promoting renewable energy resources
        EEI's member companies support a growing role for economically
    affordable renewable energy resources in meeting our energy needs. We
    support extending and expanding the Section 45 production tax credit,
    as well as increased funding for renewable energy research and
    development. However, because of the significant regional differences
    in availability, amount and types of renewable energy resources, we
    believe it is important for the states to determine whether requiring a
    certain percentage of electricity to be generated from renewable energy
    resources makes sense for their consumers.
        States already are encouraging the development of renewable energy
    resources through a variety of programs that best fit their own
    circumstances. More than 90 utilities in 30 states have implemented or
    announced green pricing programs to support investment in renewable
    energy technologies. Forty-three states support programs that offer
    incentives, grants, loans or rebates to consumers using renewable
    energy resources. And, 13 states have adopted renewable portfolio
    standards. Electric suppliers in nine states with competitive retail
    markets are offering green power products to consumers.
                          maintaining market integrity
        The integrity of wholesale electric markets must be restored and
    maintained. The public, our investors and our customers must have
    confidence in our markets. That is why EEI supports FERC's efforts to
    foster transparent, liquid regional wholesale electric markets. We
    believe such markets will provide the basis for price transparency and
    an effective platform for market monitoring and oversight. We also
    believe that FERC's authority to assure that rates are just and
    reasonable gives it broad authority to prohibit fraudulent and
    deceptive practices.
        Anti-Manipulation and Enforcement Provisions--The three most recent
    electricity proposals--the Senate Staff Discussion Draft, the Thomas
    bill and the House Committee Draft--address several market manipulation
    concerns. The market transparency provisions would make sure that FERC
    develops appropriate price and market information. Round trip trading,
    which we agree is improper, would be prohibited. The Senate Staff
    Discussion Draft and the Thomas bill also appropriately prohibit the
    filing of false information. In addition, all of these proposals would
    beef up FERC's enforcement authorities and make the refund effective
    date essentially the date that a complaint is filed. In light of events
    that have occurred in electricity markets over the last several years,
    we understand Congress's desire to make these changes to the Federal
    Power Act.
        Our biggest concern with these provisions is that they do not
    extend to all participants in interstate wholesale electricity markets.
    Neither the Thomas bill nor the Senate Staff Discussion Draft cover non
    jurisdictional utilities because they are not a ``person'' under the
    Federal Power Act and must be specifically referenced, pursuant to
    Section 201(f) of the Federal Power Act in order for the section to
    apply to them. Use of the word ``entity'' alone is insufficient.
                              consumer protections
        FERC Refund Authority--We strongly urge the Senate to include
    language in its electricity title that would give FERC authority to
    order refunds from government-owned utilities and electric cooperatives
    that it determines have charged unjust and unreasonable rates. We
    believe this provision is essential to protect consumers from any
    electricity supplier that overcharges consumers. The House Committee
    Draft takes a first step in this direction, although that provision is
    too narrowly drafted and has so many qualifications as to be virtually
    ineffective.
        No market participant in interstate wholesale electric markets
    should be immune from FERC's investigative and remedial authority.
    Recent news accounts make it clear that alleged improper activities in
    electricity markets are not limited to jurisdictional utilities. The
    state of California and other parties recently submitted a massive
    filing to FERC that, according to news stories, alleges that California
    municipal utilities engaged in a number of Enron-type manipulative
    market strategies. These alleged market schemes include municipal
    utilities engaging in ``Ricochet'' trades, involving selling power out
    of state and then back into the state to avoid price caps, and ``Death
    Star,'' in which companies created false congestion on the transmission
    system and then were paid a premium to remedy the problem. We note that
    the alleged ``Death Star'' activities were facilitated because the
    California Independent System Operator does not operationally control
    government-owned utilities' transmission systems.
        We firmly believe that all participants in competitive interstate
    wholesale markets, including government-owned utilities, should be
    subject to the same rules and requirements and to FERC's full rate
    refund authority. As California's electricity crisis painfully
    demonstrated, retail consumers desperately need the consumer
    protections offered by FERC's ``just and reasonable'' rate standard and
    refund authority applied to all electricity suppliers.
        Consumer Privacy/Unfair Trade Practices--The provisions relating to
    consumer privacy and unfair trade practices (prohibiting slamming and
    cramming) are essentially identical in both the House Committee Draft
    and the Senate Staff Discussion Draft. We support these provisions.
        Information Disclosure--The Senate Staff Discussion Draft includes
    provisions requiring the Federal Trade Commission (FTC) to issue rules
    proscribing what type of information must be provided to electricity
    consumers. While we believe the FTC already has the authority to issue
    ``truth-in-advertising'' rules, we are concerned about forcing
    utilities to track and report the share of electricity generated from
    each type of energy resource and the generation emissions
    characteristics of electricity.
                                   conclusion
        As we have stated, only Congress can address a number of critically
    important electricity issues. We hope our comments on these electricity
    proposals are useful to the Committee as it prepares to mark up a
    comprehensive energy bill. We look forward to working with you to
    produce the first comprehensive energy bill since the passage of the
    Energy Policy Act of 1992.

        The Chairman. Thank you very much.
        Mr. English, a former member of Congress. Glad to have you
    here.

                   STATEMENT OF GLENN ENGLISH, CEO,
            NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION

        Mr. English. Thank you very much, Mr. Chairman. I
    appreciate it. I am Glenn English, the chief executive officer
    of the National Rural Electric Cooperative Association. We
    represent nearly 1,000 electric cooperatives in 47 States,
    which is privately owned by some 35 million consumers. And I am
    very pleased to be here, Mr. Chairman.
        Mr. Chairman, much of the discussion that we have heard
    today both from members of the committee, as well as from those
    who are testifying, have alluded in one way or another to the
    whole question of instability, talked about instability in the
    electric utility industry. And there is no question we have
    seen tremendous instability in recent months, and from what we
    are told by those who are analysts and experts in the industry,
    we are probably going to see even more in the not too distant
    future.
        Mr. Chairman, I think we have got to look to the causes of
    much of the difficulty that is coming about in the electric
    utility industry, and not all of it I think can be pointed to
    from a standpoint of legislation or change within the industry.
    We have also got to take a hard look at the actions of the
    people within the industry. We have had scandals and we have
    had some very bad business decisions by those who are involved
    in this industry that have brought about much of this
    uncertainty, this insecurity.
        If you talk to the financial markets, you find that there
    is no single answer other than the fact that the whole electric
    utility industry seems to be unstable, and there is not a
    willingness to invest money. I know in the discussions that we
    have had--and certainly the testimony we have heard before this
    committee and the other body--have really focused on the
    question, well, is the answer incentive rates? We simply have
    to put more money in to build more transmission.
        Is that the only answer? What we are told by those who are
    in the business of investing that money, you can reach the same
    kind of destination if you reduce the risk if you bring about
    more stability.
        I think that Senator Thomas certainly put his finger on it
    that it is the job of the Congress to establish policy.
    Certainly there is a need for the Congress to bring about some
    stability in the electric utility industry at this time, to
    bring some common sense to this business so people have some
    kind of certainty, some kind of expectation.
        I would suggest to you, Mr. Chairman, that as we look at
    the four pieces of legislation that you asked each of us to
    examine, we endorsed the legislation that came forth from this
    body last year, H.R. 4. If we were required to make a decision
    today, would we endorse H.R. 4 as it stands? I think we would
    have to say no. The reason we would have to say no is because
    H.R. 4 was based on the assumption that we were going to be
    operating under FERC Order 888, but we cannot say today we are
    going to be operating under FERC Order 888. And this completely
    changes everything as to whether or not electric cooperatives
    would find that they could carry out their responsibilities.
        Standard market design is a very uncertain thing, and I
    would suggest that all the elements of the various pieces of
    legislation that are going to be affected by standard market
    design or in some way related to standard market design really
    should be withheld until we know for certain what we are
    dealing with.
        It is true from a policy standpoint, the Congress may need
    to address these issues again when the Federal Energy
    Regulatory Commission finally works its way and completes the
    rules and regulations. True, we will have the white paper next
    month, but until we see those final rules and regulations, we
    do not know for certain what we are dealing with and we do not
    know what kind of changes need to be brought about.
        Certainly, as we look at this issue of taking a time out on
    those kind of SMD-related issues, does not mean that Congress
    could not move forward with regard to other pieces of
    legislation. Reliability, many other elements may need to be
    advanced and included in any kind of an energy bill. We are not
    suggesting an energy bill be held up, but we would feel much
    more comfortable if we knew that the Congress intended to act
    on electricity legislation after we knew what the final rules
    and regulations are.
        Mr. Chairman, that may be a result of my experience as a
    legislator, and far too often I have seen legislation that I
    have been a part of crafting go to regulators and see it
    changed and implemented in ways that I never intended. So
    perhaps I am being a little too cautious, but I think not.
        Let me also suggest, Mr. Chairman, that what has taken
    place in the last few months, what we are learning about this
    industry, the scandal and the bad management that has taken
    place, I think also urges the Congress to include consumer
    protection as one of the elements that they have as their
    policy. Certainly merger review is very important, but it has
    been suggested and contained in virtually every one of the
    proposed pieces of legislation that the Public Utility Holding
    Company Act be removed. We would much prefer to see that
    modernized and updated to fit the situation we are dealing
    with, but that does not seem to be an option that the Congress
    is considering.
        As a result of that, we would certainly urge that it be
    replaced with consumer protection. We do not think that you can
    simply trust that everyone will do the right thing, and
    certainly that is not true in the electric utility industry
    anymore than it is true anywhere else in the country. We need
    rules and regulations to deal with wrongdoing.
        Let me also say, Mr. Chairman, that small utilities should
    be considered. I know in the proposed legislation over on the
    House side as it originated, we had small electric cooperatives
    that would be having to report to the Federal energy regulatory
    agency. In one case we had one cooperative that only had five
    employees that was going to have to deal with the same
    regulatory hurdles as some of the largest electric utilities in
    this country. That simply does not make sense. We would hope
    that the Congress would include, as a part of its policy, the
    fact that these resources, very limited and scarce resources,
    be focused on where the problem lies, be focused on the area in
    which we have come to recognize the most abuse is taking place,
    to come to recognize that it would be focused on the area where
    they would have the greatest return.
        I would be happy to answer your questions, Mr. Chairman.
        [The prepared statement of Mr. English follows:]
         Prepared Statement of Glenn English, Chief Executive Officer,
                National Rural Electric Cooperative Association
                               executive summary
        Congress should take a ``time out'' on comprehensive electricity
    legislation. The forces underlying the current industry turmoil are not
    clearly understood by the industry or the public.

       Many elements of electricity legislation are inextricably
            tied to the Federal Energy Regulatory Commission's proposed
            Standard Market Design. It is important to give FERC time to
            more fully explain its implications. The White Paper from FERC
            requested by Senator Domenici is an important step in informing
            Congress for how they should approach the SMD proposal
            legislatively.

        Legislation should not impose burdensome new regulatory obligations
    on electric cooperatives. FERC Chairman Wood says that new regulations
    on cooperatives are unnecessary.
        A critical statutory duty of FERC is to establish ``just and
    reasonable'' policies. Therefore proposals to restrict FERC's current
    ability to protect consumers by narrowing their options to respond to
    evolving markets and regional differences should not be codified. Such
    harmful provisions include mandates for particular forms of
    transmissions pricing, transmission structures, and transmission
    functions.
        The laws that are designed to protect consumers in the electric
    utility industry have never been more important particularly as we
    transition to a competitive market place. This is not the time to
    repeal the Public Utility Holding Company Act (PUHCA) without careful
    thought and replacement of consumer protections or undermine FERC's
    current merger review authority.
        The federal Power Marketing Administrations' and TVA's statutory
    and contractual obligations to their consumers and their regions must
    not be overridden.
        When Congress considers an electricity title, it should enhance
    FERC's existing authority to protect consumers without limiting FERC's
    discretion and flexibility or distracting it from its core mission of
    ensuring just and reasonable rates, terms, and conditions of interstate
    transmission and wholesale electricity sales, by:

       Giving FERC clearer authority to ensure that utility mergers
            are in the public interest;
       Encouraging FERC to review the standards under which it
            approves market based rates;
       Providing for limited federal siting authority for
            facilities determined by a regional planning process to serve
            consumers in the region;
       Creating an industry-based national self-regulating
            reliability organization;
       Providing for greater market transparency;
       Prohibiting round trip trading;
       Enhancing criminal and civil penalties for violations of the
            Federal Power Act; and,
       Moving up the refund effective date under Federal Power Act
            Sec. 206 to the date that a complaint is filed at FERC.
                                  introduction
        Chairman Domenici and Members of the Committee, I appreciate this
    opportunity to continue our dialogue on the restructuring of the
    electric utility industry. For the record, I am Glenn English, CEO of
    the National Rural Electric Cooperative Association, the Washington-
    based association of the nation's nearly 1,000 consumer-owned, not-for-
    profit electric cooperatives.
        These cooperatives are locally governed by boards elected by their
    consumer owners, are based in the communities they serve and provide
    electric service in 47 states. The more than 35 million consumers
    served by these community-based systems continue to have a strong
    interest in the Committee's activities with regard to restructuring of
    the industry.
        Electric cooperatives comprise a unique component of the industry.
    Consumer-owned, consumer-directed electric cooperatives provide their
    member-consumers the opportunity to exercise control over their own
    energy destiny. As the electric utility industry restructures, the
    electric cooperative will be an increasingly important option for
    consumers seeking to protect themselves from the uncertainties and
    risks of the market. I would like to thank you, Mr. Chairman, and
    Members of the Committee for your receptiveness to the concerns and
    viewpoints of electric cooperatives.
                            time out on electricity
        Congress should take a time-out on comprehensive electricity
    restructuring. It should take time to review the failed deregulation
    schemes of recent years before it acts. Further, because many elements
    of the electricity title are closely tied to the Federal Energy
    Regulatory Commission's proposed standard market design, Congress
    should wait on electricity legislation until FERC has completed that
    broad rulemaking process. And, Congress should avoid bogging down
    important energy legislation with a controversial electricity title.
        The electricity industry is in a state of turmoil and rapid change.
    In some parts of the country, the competitive wholesale power
    marketplace is rapidly developing. In other regions, wholesale
    competition is developing at a more deliberate pace. Retail competition
    continues forward in a few states, has stalled in many, and is in full
    retreat in some others. Wall Street, FERC, and the industry are all
    still trying to determine what lessons we should take from the disaster
    in California's market, Enron's bankruptcy, and the rapid decline of
    many power marketers, independent power producers, and investor-owned
    utilities. Investors, the Commission, and the industry are still
    working to piece together the causes of this turmoil.
        Now, therefore, is not the time for Congress to act on
    comprehensive electricity restructuring. If Congress moves now, and
    enacts electricity legislation before the causes of the turmoil have
    been thoroughly analyzed, Congress risks codifying the very problems
    that it seeks to solve.
        Just as important, the Federal Energy Regulatory Commission is in
    the process of drafting its dramatic new standard market design
    proposal. While NRECA believes that rule needs significant changes if
    it is to bring consumers the promised benefits of robust wholesale
    markets, NRECA believes that FERC should be given the time to
    reconsider, refine, and remake its standard market design proposal
    before Congress acts on electricity legislation. Many elements of
    proposed electricity legislation are closely intertwined with SMD. For
    example, legislative proposals with respect to incentive rates,
    participant funding, FERC's jurisdictional reach, and even PUHCA repeal
    have the potential to undermine FERC's ability to promote a robust
    wholesale electric market and protect consumers.
        If, after FERC has completed its SMD, Congress concludes that FERC
    has erred, that would be the time for this Committee to hold hearings
    and call the Commissioners back to their task. And if that fails, the
    time will be ripe for Congress to enact an electricity title that
    corrects the Commission's failures. But we are not yet at that point.
        By acting now, Congress risks denying FERC the resources and
    flexibility it needs during this time of change. While the Commission
    has the authority today to respond quickly to evolving conditions and
    the expertise to anticipate the consequences of its actions, the same
    cannot be said of any rigid congressional mandate. Given the rapid pace
    of change and the existence of enormous regional differences in power
    markets, a policy that might make sense today in one part of the
    country may not make sense tomorrow or in another part of the country.
                        the competing electricity bills
        The Committee asked that witnesses address the provisions of four
    bills, the Senator Thomas' electricity bill S. 475, Staff Discussion
    Draft, the House draft that was marked up on March 19, and the 2002
    Senate Counteroffer.
        As I've noted, NRECA does not believe that this is the time for a
    comprehensive energy title. Nevertheless, I'm pleased to discuss these
    proposals with the Committee.
        First, in light of our belief that Congress should take a time-out
    on electricity legislation, we believe that Senator Thomas' more
    minimalist approach is the wisest. Senator Thomas does not restrict
    FERC's flexibility with respect to Regional Transmission Organizations,
    transmission pricing, and transmission cost recovery; does not repeal
    FERC's merger review authority; and does not address any retail
    electric issues. His bill does, however, properly include the NERC
    reliability legislation and repealing prospectively the mandatory
    purchase and sale requirements. We are concerned, however, that S. 475
    repeals PUHCA without enacting sufficient market power and consumer
    protections to replace the Holding Company Act.
        In the 107th Congress, NRECA supported the Senate Energy title.
    That bill contained many admirable provisions. It included NERC's
    reliability title, PURPA reform, and several critical market and
    consumer protections, including enhanced FERC merger review authority.
    NRECA was also pleased that it lacked provisions restricting FERC's
    flexibility with respect to transmission pricing, transmission cost
    recovery, and Regional Transmission Organizations.
        This year's Staff discussion draft includes some interesting ideas.
    However, as discussed in detail in the written comments, NRECA believes
    it requires a great deal more discussion. The important details of
    scope, jurisdiction, and authorities of regional energy services
    commissions do not yet appear to have been adequately worked out.
        NRECA would like to see the reliability provisions revised to be
    consistent with the NERC proposal. Due to changes in FERC regulation,
    NRECA believes that the so-called ``FERC-lite'' provisions need to be
    revised and updated.
        And, because the bill repeals PUHCA, NRECA would like to see more
    market and consumer protections included in the bill as well.
                   specific issues within the competing bills
    Regional Energy Services Commissions
        NRECA certainly understands the problems that underlie the desire
    to develop something like RESCs. Along with many others, NRECA has
    called on the FERC to be more sensitive to regional differences. We
    understand as well as anyone that what works in PJM will not work in
    the Northwest. Nevertheless, NRECA believes that the concept of a
    Regional Energy Services Commission found in the Staff Discussion Draft
    needs more discussion and development before Congress should adopt it.
        As we read the Staff Discussion Draft, the RESC would be a mini-
    FERC, but with much broader jurisdiction and nearly unlimited authority
    with respect to interstate transmission and wholesale markets.
        Unlike FERC, RESCs would apparently have full jurisdiction over
    municipal utilities, Federal power agencies, and cooperatives with
    financing from the Rural Utilities Service. The RESCs could adopt
    regulations that conflict with the PMAs' statutory obligations or RUS
    regulations, apparently without any process for resolving disputes.
        Unlike FERC, it also appears that RESC's would not be required to
    follow the ``just and reasonable'' standard or the decades of
    jurisprudence defining it. In fact, the draft appears to lack standards
    governing the RESC's decisions with respect to rate design, open
    access, reliability, or it's other functions.
        Unlike FERC, it also appears that RESC's would not be subject to
    the Administrative Procedures Act. It is unclear whether RESCs would
    have to follow any particular procedures, provide hearings, or
    otherwise ensure procedural due process. It is even unclear whether the
    decisions of RESCs could be appealed to federal court.
        Finally, while the Staff Discussion Draft includes processes for
    resolving disputes between RESCs and states, or between RESCs, there
    does not appear to be a procedure to help those multi-state utilities
    that might serve consumers in more than one RESC, or in an RESC and a
    state that is not in an RESC. Utilities could find themselves subject
    to numerous conflicting obligations that increase the cost of service
    and decrease reliability.
    Reliability Standards
        NRECA supports the North American Electric Reliability Council's
    legislative proposal to create the North American Electric Reliability
    Organization as a single national self-regulating reliability
    organization with the authority to set mandatory reliability standards
    applicable to all users of the bulk transmission system. That proposal
    is critical to the continued reliability of the interstate transmission
    grid in a competitive environment. For that reason, NRECA supports the
    language in the House draft of the bill.
    Open Access (FERC-lite)
        NRECA opposes any expansion of FERC jurisdiction over cooperatives.
    Such expansion is unnecessary, as cooperatives have not denied third
    parties access to their transmission systems. Provisions subjecting
    cooperatives with RUS financing to additional FERC jurisdiction are
    simply a solution in search of a problem.
        Even had cooperatives not provided open access to their systems,
    FERC already has adequate authority to protect other market
    participants. Under Sections 211 and 212 of the Federal Power Act, as
    amended and expanded by the Energy Policy Act of 1992, FERC has the
    direct and explicit authority to require transmission-owning
    cooperatives to provide transmission service to third parties at just
    and reasonable rates. Under the principle of reciprocity, FERC has also
    required cooperatives to provide transmission service to public
    utilities pursuant to terms and conditions comparable to those FERC
    imposes on those public utilities.
        Even the Chairman of the FERC has stated that the Commission does
    not require any additional jurisdiction over cooperatives. Speaking to
    reporters in January, Chairman Wood stated ``FERC would not seek
    congressional authority over municipals and co-ops, preferring
    voluntary approach to entice such utilities into the marketplace.''
    ``Wood Says He Wants Munis, Co-ops To Want To Be Part Of SMD, But Won't
    Force Them,'' Platts, Electric Power Daily, Thursday, January 30, 2003.
        NRECA recognizes that it supported the 2002 Senate Counteroffer
    even though it included a ``FERC-lite'' provision. That was because
    when the idea of ``FERC-lite'' first appeared, the ``Commission rules''
    referenced and applied to cooperatives by the provision were Order 888
    and its progeny. Since Order 888's reciprocity provisions already
    required to some degree that cooperatives provide service comparable to
    that imposed on public utilities by Order 888, ``FERC-lite'' did little
    more than codify an existing regulation with which cooperatives were
    already complying.
        Today, however, the ``Commission rules'' that would be incorporated
    into the statute are in FERC's standard market design requiring
    transfer of operational control over transmission facilities that they
    built to serve their own member owners. This would require electric
    cooperatives that are not now subject to FERC jurisdiction to:

       Incur the substantial transaction costs required to
            establish an ITP that operates their transmission facilities, a
            day-ahead energy market, a real-time energy market, and any
            other mandates that are part of a final SMD rule.
       Incur costs required to schedule service for member-owners
            in the SMD markets.
       Pay congestion charges for use of their own facilities,
            built to serve their own member-owners.
       Participate in auctions to obtain congestion revenue rights
            for use of the transmission facilities that they built to serve
            their own member owners.
       Permit third parties to take transmission service out of, or
            across their transmission facilities without making any
            contribution to the fixed costs of the system.
       Be subjected to market monitoring and mitigation procedures
            and the associated costs.

        These obligations go far beyond the requirements to which
    cooperatives are currently subject, and far beyond what could possibly
    be necessary to ensure third parties fair open access to the limited
    transmission facilities owned by rural electric cooperatives with RUS
    financing. These obligations could deny cooperatives control over and
    reasonable access to the very facilities that their members own, paid
    for, and built to serve their own needs. Such a broad expansion of FERC
    authority over these facilities threatens cooperatives' ability to meet
    their core purpose: to bring reliable, affordable electric service to
    their member-owners.
        For these reasons, NRECA is far more concerned by the language in
    the 2002 Senate Counteroffer, Thomas bill, and Staff Discussion Draft,
    than it is by new language in the House draft that would require
    cooperatives to provide transmission service ``on terms and conditions
    (not relating to rates) that are comparable to those under which such
    unregulated transmitting utility provides transmission services to
    itself. . . .'' This language would not subject cooperatives to the
    broad burdens of SMD.
        On the other hand, NRECA prefers the small distribution utility
    exemption found in Senator Thomas' bill and the 2002 Senate
    Counteroffer to the language found in the other two drafts. For a
    couple of reasons, the exemption is even more important to NRECA's
    small members and their consumers this year than it was in the past.
        First, FERC decided for the first time in its SMD NOPR to take
    jurisdiction over and regulate bundled retail transmission. That means
    that ``FERC-lite'' would now apply not only to those cooperatives
    providing wholesale transmission service, and to those very few
    cooperatives providing unbundled retail transmission, but also
    potentially to hundreds of distribution cooperatives that use a small
    amount of radial, high voltage transmission line to serve bundled
    retail consumers. These distribution only entities whose facilities
    could not possibly have any use to the competitive wholesale market
    could be subjected by ``FERC-lite'' to all of the expensive and
    complicated burdens imposed by SMD.
        Second, in several cases FERC has asserted that any facility that
    carries a wholesale electron is transmission subject to its
    jurisdiction, even if the facility would otherwise be considered a
    local distribution line. That means that any distribution-only
    cooperative that serves only bundled retail consumers could also be
    subjected by ``FERC-lite'' to all of the expensive and complicated
    burdens imposed by SMD if a single retail consumer installs their own
    generator no matter how small and no matter how little role the
    generator could play in the wholesale market.
        For these reasons, it is more important than ever, that Congress
    adopt the small utility exemption contained in last year's Senate
    Energy bill or the Thomas bill.
    FERC Refund Authority
        NRECA was pleased to see that the 2002 Senate Counteroffer, Senator
    Thomas' bill, and the Staff Discussion Draft all lack a provision found
    in the House draft that would, for the first time, subject RUS
    borrowers' wholesale rates to FERC review and regulation. At a time
    when Congress and FERC are seeking to move towards a competitive
    wholesale market for electric energy, this provision of the House draft
    would move in the opposite direction, increasing the regulatory burden
    on electric cooperatives that seek to sell power in the wholesale
    market. Yet, electric cooperatives have not been part of the problem.
    Not-for-profit electric cooperatives have not gamed markets, they have
    not abused consumers, and they have not exercised market power. It
    would be impossible for them to have done so. Cooperatives do not own
    enough generation and are not large enough players in electric markets
    to exercise market power. All together, electric cooperatives generate
    only about 5% of the electric power in the country, which is less than
    half of the power they need to serve their own consumers. All combined,
    electric cooperatives' sales to public utilities represent less than 1%
    of all sales in the wholesale market.
        Instead of solving a problem, the House draft would distract FERC
    from its core responsibilities and increase uncertainty for electric
    cooperatives, their member-owners, and their creditors. To date,
    cooperatives have been one of the most financially stable sectors of
    the electric utility industry. While other sectors have seen their
    credit ratings decline precipitously, cooperatives have experienced
    more credit upgrades than downgrades. Because cooperatives stuck to
    their knitting and did not engage in speculative generation
    construction or speculative trading, they have continued to have access
    to the credit they need to serve their consumers' electricity needs at
    a reasonable rate. Increasing FERC jurisdiction over RUS borrowers'
    wholesale sales threatens that stability.
    Transmission Siting
        NRECA supports the requirements found in the Thomas, House, and
    Staff Discussion drafts requiring coordination among federal agencies
    to simplify and speed the process of siting transmission facilities
    across federal lands.
        NRECA also understands that limited federal siting authority may be
    necessary to permit the construction of some regional transmission
    facilities and upgrades that are critical to the continued reliable and
    economic service of consumers. Nevertheless, NRECA believes the rights
    of permitting; siting and eminent domain authority come with the
    responsibility for serving the public interest. That means that any
    provision providing for federal permitting, siting, or grant of eminent
    domain must meet the following criteria:

       Federal permitting, siting, and eminent domain must be used
            solely to create an interstate high voltage transmission grid
            that will help utility systems meet their obligations to the
            states and their consumers;
       The facility for which federal permitting, siting, or
            eminent domain authority is sought must have been specifically
            reviewed and determined by an RTO-led or other appropriate
            multi-state regional planning process to be necessary for the
            reliable and/or economic operation of the regional transmission
            grid, and thus provide benefits to the consumers within the
            region; and
       Federal permitting, siting, or eminent domain must be used
            only as a backstop to state permitting, siting, or eminent
            domain authorities.

        Both the Staff Discussion Draft and the House draft make a good
    start in that direction. The limited federal authority they provide is
    restricted to interstate transmission and may only be used as a
    backstop where state authority fails.
        Moreover, as a member of the Secretary of Energy's Energy Advisory
    Board, I supported the idea of having the Department of Energy identify
    those congestion points on interstate transmission system that affected
    the national interest. That was one approach that would ensure that
    federal siting authority would not be broadly granted to every
    transmission project proposed by transmission investors. It is not
    necessarily, however, the best approach. The drafts' requirement, for
    example, that facilities receiving federal siting and eminent domain
    authority be within federally determined interstate congestion areas is
    both somewhat too broad and somewhat too narrow. On one hand, not all
    transmission upgrades within a congested area may be properly located
    or designed to address the congestion. Thus, some facilities built
    within ``interstate congestion areas'' or ``congestion zones'' might
    receive federal siting authority without providing significant benefit
    to the consumers within a region. On the other hand, the process for
    designating interstate congestion areas appears ill suited to
    identifying the most serious problems in regional transmission grids.
    Conducted in Washington, D.C. only once every three years, the process
    seems rather too distant both physically and temporally from the
    problems to be addressed.
        NRECA believes it would be more effective to trust the regional
    planning processes conducted by FERC-approved Regional Transmission
    Organizations or other multi-state entities to make good, timely,
    decisions about the transmission requirements of their regions.
    Transmission construction proposals that meet the other criteria for
    federal siting should qualify where a regional planning processes has
    determined that the proposals are necessary to serve consumers within
    the region more reliably and more economically.
    Transmission Investment Incentives
        For several reasons, NRECA believes that Senator Thomas' bill and
    the 2002 Proposed Senate Counteroffer address this issue best: by not
    addressing it at all.
        First, it is unnecessary for Congress to legislate on the issue.
    The Federal Power Act already provides FERC with the authority to
    approve incentive rates to the extent that they are just and
    reasonable. FERC has had a pricing policy for many years that
    encouraged transmission owners to come forward with incentive rate
    proposals. And, FERC has already begun work on a new transmission
    pricing policy that offers specific incentives, including higher rates
    of return for new transmission construction, participation in an RTO,
    and transfer of transmission facilities to an independent transmission
    company that is participating in an RTO. Congress does not have to
    force FERC to do something it is already doing.
        Second, NRECA believes it is wrong for Congress to restrict FERC's
    discretion to adopt those approaches that it believes will best
    encourage the construction of needed transmission facilities and
    otherwise serve the public interest. As discussed above, with the
    market in the beginning of an evolutionary process, a good approach to
    transmission pricing today in one part of the country may not be a good
    approach tomorrow or in a different region. FERC already has authority
    today to adopt a transmission policy with incentives--and is doing so.
    It also has the authority to rescind or alter that policy if, at a
    later date, it considers incentives to be unnecessary or contrary to
    the public interest. The draft House bill would deprive the FERC of
    that critical authority. FERC would have to include incentives in its
    transmission pricing policy no matter how unnecessary, unjust, or
    unreasonable, it later considers them to be.
        Finally, NRECA believes that arbitrary increases in rates of return
    are already an unnecessary and unwise approach to encouraging
    investment in needed transmission facilities. As explained by the
    Department of Energy's National Transmission Grid Study, ``authorizing
    higher rates of return is not the only approach to stimulating needed
    investments in transmission facilities over the long term. Reducing
    regulatory uncertainty should also be a focus of efforts to stimulate
    needed investments'' (NTGS at 31) As the NTGS notes, the rate of return
    required by investors varies with the level of risk. The lower the
    risk, the lower the return required to attract capital.
        Similarly, the Department of Energy's Energy Advisory Board looked
    at how best to encourage the construction of needed new infrastructure,
    given that ``there is a clear reluctance from the financial community
    to finance transmission projects.'' (Report at 22.) The Board
    determined that ``[I]investment in the grid will only occur when
    regulatory policy provides (a) reasonably certain cost recovery, (b)
    regulatory certainty, in terms of who can operate the system and under
    what rules and (c) provides a return that makes investment in
    transmission a reasonable option, considering other available
    investment options.'' (Id).
        That conclusion is significant. As NRECA has been saying for
    several years, FERC can best encourage the construction of new
    transmission facilities by providing investors with certainty that they
    will recover their costs. While the rate of return may be important,
    the level of return required to attract capital investment is a product
    of the level of risk faced by investors: the lower the regulatory risk,
    the lower the rate of return required to attract investment.
        NRECA believes it is far better to increase regulatory certainty
    than to simply throw more money at the transmission shortage. By
    increasing regulatory certainty, Congress and the Administration can
    attract greater investment in transmission infrastructure without
    raising rates of return. That approach keeps costs down for consumers
    and strengthens electric markets by permitting more generation from
    across a region to compete economically. Higher rates of return should
    be a last resort, not a first resort.
        The competing approach, granting transmission owners higher
    ``incentive rates'' would raise costs for consumers and narrow electric
    markets by building tollgates between generators and consumers.
    Interestingly, recent Moody's reports indicate that the regulated
    (i.e., transmission) component of the industry may now provide a more
    attractive investment vehicle than the unregulated (i.e., generation
    and trading) component of the industry. Similarly, Fitch recently rated
    the newly formed American Transmission Company's senior unsecured debt
    ``A'' because:

              Cash flow is expected to be stable and healthy. ATC is a
            monopoly provider whose transmission franchise is supported by
            state regulation and [FERC] approved tariff. Its costs are
            recovered through an annual revenue requirement allocated as
            fixed demand charges to regional electric utilities using the
            transmission network.\1\
    ---------------------------------------------------------------------------
        \1\ Yahoo! Finance Press Release, ``Fitch Rates American
    Transmission Company LLC `A/F-1' '' March 16, 2002.

        In other words, ATC has an excellent debt rating (and associated
    low cost of capital) because it faces low risk.
        If Congress adopts language such as that in the House draft or in
    the Staff Discussion Draft, that requires FERC to adopt transmission
    pricing policies that support transmission expansion, the language
    needs two significant amendments. First, the language should clearly
    state that FERC could adopt other policies--besides transmission
    pricing policies, which it believes will better promote economic
    transmission expansion, such as policies that reduce risk to
    transmission investors. Second, the language should clearly state that
    FERC should only offer transmission pricing incentives where that
    approach will encourage needed transmission investment at the lowest
    cost to transmission customers. Why should FERC bribe investors with
    consumers' money when it could encourage the same investment at lower
    cost?
    Transmission Cost Allocation (Participant Funding)
        Again, NRECA believes that Senator Thomas' bill and the 2002
    Proposed Senate Counteroffer best address this issue by not addressing
    it at all. NRECA also recognizes and appreciates that the Staff
    Discussion Draft includes a narrower approach to participant funding
    than that found in the House bill. Although, as discussed below, NRECA
    does not believe Congress should legislate on this issue, NRECA does
    believe that the Staff Discussion Draft could, with a few minor
    language changes, be consistent with the approach to transmission cost
    allocation that NRECA has itself promoted.
        First, the Federal Power Act already provides FERC the authority to
    allocate the costs of transmission investments as it believes best
    serves the public interest and FERC is already considering adopting
    participant funding for certain transmission facilities as part of its
    SMD rulemaking. Congress need not order FERC to do something it already
    intends to do.
        Second, NRECA believes it is wrong for Congress in this bill to
    restrict FERC's discretion to adopt those approaches that it believes
    will best encourage the construction of needed transmission facilities
    and otherwise serve the public interest. The House draft would deprive
    the FERC of that critical authority. FERC would have to permit
    participant funding even if it later considers participant funding to
    be unnecessary, unjust, or unreasonable.
        Third, NRECA believes that a broad participant funding mandate will
    discourage the construction of much needed transmission facilities,
    raise costs to consumers, and entrench existing market power.
        NRECA does not oppose the concept of participant funding of
    transmission. Like many others, NRECA supports participant funding for
    those transmission facilities that would not be required but for the
    interconnection of new generating facilities that plan to export power
    outside of the region where they are sited. That approach protects
    native load consumers in one region from paying for transmission
    facilities that provide them no benefit. If the new transmission
    facilities benefit a generator, or consumers in another region, the
    generator or the consumers in the other region should pay the costs of
    the transmission facilities.
        On the other hand, NRECA believes that the cost of any new
    transmission facilities required in a region to serve consumers in that
    region reliably or economically should be rolled into the cost of
    transmission in that region. NRECA and many others, including the
    Louisiana Public Service Commission, believe that this is the equitable
    approach. If consumers in a region benefit from a particular
    transmission upgrade, those consumers should all pay the cost of the
    facilities.
        NRECA also believes that this is the best approach to encourage
    investment in needed transmission facilities. Rolling the costs of new
    transmission facilities determined by a regional plan to provide
    benefits to consumers in the region into the regional revenue
    requirement gives investors precisely the assurance they need that they
    will recover the costs of their investment as well as a reasonable rate
    of return. Participant funding as envisioned in the House bill, on the
    other hand, makes cost recovery extremely uncertain. Under the House
    participant funding approach, investors receive no direct income from
    the use of their facilities. Instead, they receive ``congestion revenue
    rights,'' or CRRs. CRRs, however, only entitle their holders to revenue
    in the event of congestion, which may be substantially reduced or even
    eliminated due to the construction of new transmission. An allocation
    of CRRs alone thus discourages investment in new facilities, or at the
    least creates a perverse incentive to undersize upgrades to maintain
    congestion on the system, since that is the only way they get paid.
    Transmission Organizations/RTOs
        NRECA strongly supports the development of RTOs. Nevertheless, it
    believes that Congress should take only a very limited role with
    respect to RTOs, at least for the present. Thus, NRECA agrees with the
    Sense of the Congress in the House draft supporting the formation of
    RTOs. NRECA also supports the very simple provision in the Staff
    Discussion Draft authorizing the PMAs and TVA to join RTOs subject to
    their existing statutory and treaty obligations.
        On the other hand, NRECA is concerned by language in the Staff
    Discussion Draft that outlines in detail the necessary elements and
    functions of Transmission Organizations. While NRECA does not
    necessarily disagree with any of the elements listed in the Staff
    Discussion Draft, NRECA does not believe it is wise to freeze them in
    place in law. Over just the last few years, we have already seen
    movement from regional planning groups, to Regional Transmission Groups
    (RTGs), to Transcos, to ITCs, to ISOs and now to RTOs. As wholesale
    markets evolve in the next few years, we are likely to see further
    evolution in best practices for regional coordination and operation of
    the transmission system. This is one of the issues on which a ``time-
    out'' is particularly important.
    PUHCA and Market Power
        NRECA opposes the repeal of PUHCA. Now is the wrong time to repeal
    PUHCA. While it has not been adequately enforced, PUHCA is more
    critical today than ever to protect consumers from abuses in the
    utility industry. It was PUHCA that prevented Enron from owning, and
    abusing, more than one electric utility. It was PUHCA that should have
    prevented Enron and many other companies in the industry from shifting
    the risks of their unregulated and offshore activities to retail
    consumers in the United States.
        If repealed, NRECA believes it should be replaced with modern
    legislation that takes a practical approach to controlling market
    power, focusing on the substance of consumer protection and market
    power abuses, as well as the acquisition of undue market power through
    ownership and affiliation. Such legislation should give federal
    regulators an array of tools that they can use to protect consumers and
    enhance competition in electric markets. If circumstances require it,
    regulators should have the authority to impose structural solutions
    that will prevent investor-owned utilities from accumulating undue
    market power, or remedy already existing market power that threatens
    competitive markets.
        For these reasons, NRECA also was pleased that Section 7101 of the
    House draft--which repealed FERC's authority to review dispositions of
    jurisdictional property, including utility mergers--was deleted during
    mark-up. Section 7101 moved far in the wrong direction. Without PUHCA
    it is more important than ever that FERC not only exercise its existing
    authority to review utility mergers but also new authority. As the 2002
    Senate Counteroffer provided, FERC needs new authority to review
    transfers of generating facilities and clearer authority to review
    mergers between electric utility holding companies. The standard of
    review for large utility mergers should also be strengthened to ensure
    that such mergers enhance competition. At a time when competition is
    just beginning to develop in the nascent wholesale electric market,
    Congress and FERC should not allow it to be choked through the rapid
    consolidation of generation assets in the hands of a few large
    companies.
        NRECA also believes that Congress should encourage FERC to
    reconsider the standards FERC uses to grant utilities and others the
    right to sell power at market-based rates. As FERC has conceded,
    inadequately competitive wholesale markets have often led to exorbitant
    rates for consumers. Thin markets, inadequate transmission, market
    power and market manipulation have singly or together caused rates to
    rise far above just and reasonable levels. Under such conditions, only
    traditional rate regulation can ensure that rates are consistent with
    the law and that consumers are protected from abuse. The 2002 Senate
    Counteroffer provided a good start in this direction, though the
    language could still be improved.
    PURPA
        NRECA supports the PURPA reform language in Senator Thomas' bill.
    NRECA believes that PURPA imposes on the electric utility industry
    regulatory and financial burdens that far exceed any benefit that the
    Act might still provide. In many cases, application of the Act
    increases the retail cost of electricity.
    Net Metering and Real-Time Pricing
        Net metering, real time pricing, and advanced metering are all
    policies that can play an important role in some states, under some
    circumstances. There are cooperatives today already providing net
    metering, time-of-use pricing, and advanced metering to their member-
    owners either under state law or because the cooperatives have
    concluded that those policies best serve their members' interests.
        The value of each of these policies, however, is very situation
    specific. Handled incorrectly, or adopted under the wrong
    circumstances, each of these policies could dramatically increase costs
    to consumers while providing little or no benefit.
        NRECA believes that Senator Thomas's bill best addressed these
    issues. Our second choice would a voluntary approach, much like the one
    employed in the Staff Discussion Draft, the House draft, and the 2002
    Senate Counteroffer. States and cooperatives are already considering
    these policy ideas, and in many cases adopting them. Over 34 states
    already have net metering policies. In any event, NRECA is pleased that
    none of the bills being considered by this Committee impose strict
    mandates on states or cooperatives to adopt broad, inflexible net
    metering, real-time pricing, or advanced metering policies.
    Renewable Energy
        NRECA supports fuel diversity, including the use of renewable
    resources where they can be economically integrated into the resource
    mix. Many electric cooperatives are actively using and developing
    renewable resources, including hydropower, wind, solar, and landfill
    gas. Dozens of cooperatives are also offering their members special
    ``green power'' choices, where consumers can demonstrate their support
    for renewable energy by paying a little extra each month to cover the
    incremental cost of renewable power.
        NRECA believes there is an important federal role in supporting the
    development of renewable energy through research and development and
    through financial support for some renewable technologies.
    Nevertheless, NRECA would oppose a federal mandate requiring all
    utilities to include a fixed percentage of renewable power in their
    resource mix. In most circumstances, renewable resources are still
    considerably more expensive than traditional generation technologies.
    Wind and solar are also intermittent resources, whose value to
    consumers varies considerably depending on weather and time of day.
    They must still be ``firmed'' with dispatchable generation resources.
    Because of these characteristics, an inflexible federal mandate could
    dramatically increase power costs to consumers. For this reason, NRECA
    is pleased to see that the House draft, Senator Thomas' bill and the
    Staff Discussion Draft all lack mandatory renewable portfolio
    standards.
    Market Transparency, Anti-Manipulation, Enforcement
        NRECA supports provisions found in the Staff Discussion Draft,
    Senator Thomas' bill, and the House draft that authorize FERC to
    collect data from sellers of electric energy about the availability and
    market price of wholesale electric energy. To prevent manipulation of
    market prices, market price information must be transparent to buyers
    and sellers. NRECA believes, however, that this section should include
    language that ensures that data collection is implemented in a manner
    that minimizes the cost and burden to those that must provide the
    information and requires all relevant agencies to coordinate with one
    another to prevent duplicative requirements. By focusing on aggregate
    sales information, the two Senate bills probably do this best.
        NRECA also supports language in the three bills prohibiting round
    trip trading; enhancing criminal and civil penalties for violations of
    FERC rules; and moving up the refund effective date to the day that a
    complaint is filed with FERC. NRECA also supports language in the
    Thomas bill prohibiting the provision of false information to any
    entity for fraudulent purposes. Each of these provisions enhances
    FERC's existing ability to protect consumers without limiting its
    discretion and flexibility or distracting it from its core mission of
    ensuring just and reasonable rates, terms, and conditions for
    interstate transmission and wholesale electric sales.
    Consumer Protections
        NRECA believes it is important that consumers be protected from
    abuses in the wholesale markets. The provisions discussed above under
    PUHCA and Market Power and Market Transparency are all important for
    that purpose. NRECA is less convinced that Congress needs to address
    retail issues in this bill, though it does not oppose any reasonable
    provisions of law required to protect consumers.

        The Chairman. Thank you very much. I would say the Chairman
    of FERC has indicated that a white paper is going to be
    forthcoming. I am very pleased that that commitment was made in
    response to an inquiry by me as chairman in behalf of a number
    of Senators. We will have the Chairman before us here today,
    and we will find out with more certainty about his agenda for
    that white paper and other questions that will bear on some of
    the things you have raised and others have raised today.
        Let us proceed now to you, Mr. Richardson, please.

          STATEMENT OF ALAN H. RICHARDSON, PRESIDENT AND CEO,
                   AMERICAN PUBLIC POWER ASSOCIATION

        Mr. Richardson. Thank you, Mr. Chairman. My name is Alan
    Richardson. I am the president and CEO of the American Public
    Power Association representing the interests of the Nation's
    2,000 publicly owned electric utilities located in virtually
    every State.
        Mr. Chairman, I would like to respond to a comment that you
    made in your opening statement first before addressing some
    other issues. You had noted that there are essentially two
    camps and said that public power opposed open access and
    opposed SMD. And in fact, public power has not opposed open
    access. We are one of the leaders in efforts to amend the
    Federal Power Act in 1992 to promote open access, and in fact
    we have been the victims of discriminatory access for decades.
    And so open access and competition is very important to us, and
    we have benefitted from it.
        Now, we do have some members that have some concerns about
    standard market design and we also have concerns about whether
    the goal is to promote competition or whether competition is
    simply a means to an end of just and reasonable rates that
    benefit consumers. I think my members believe that it is the
    latter, not the former. So just comments on your opening
    statement.
        I do have a formal statement organized along the lines
    recommended or requested by the committee that I have submitted
    for the record, and I ask that that be inserted.
        Senator Thomas, you mentioned the need for energy policy
    and electricity policy. Electricity is a derivative of many
    different sources, as you know, from coal to wind to hydro. And
    we do support an energy policy bill that deals with the need
    for diverse supplies of energy and deals with things like clean
    coal technology, reauthorization of the Price-Anderson Act,
    Senator Craig, hydroelectric relicensing and licensing reform,
    which is a critically important to us, renewable energy
    programs such as REPI and so forth. All of those I think fit
    into the issue of energy policy and they are elements of
    electricity policy.
        We do have some serious concerns about whether we need
    electricity policy and an electricity title in legislation at
    this point. We are concerned that there are some things that
    should be done that would not be done, some things that would
    be done that should not be done.
        This is one of the most difficult times that has been faced
    by the electric utility industry certainly since the late
    1920's and the 1930's. The industry is in turmoil. A shorthand
    list of things include deceitful reporting of natural gas
    prices, withholding of capacity in Western States--California
    is shorthand for the Western energy crisis--the Enron
    implosion, debt and liquidity crises for numerous traders and
    marketers, legislative and regulatory uncertainty leading to
    investor uncertainty, and legislative retrenchment in a number
    of States, pulling back from restructuring, and the embrace of
    retail deregulation. These problems we have encountered,
    particularly in the West, in the last 2 years.
        These are issues that are the subject of ongoing
    investigations by the Federal Energy Regulatory Commission.
    Yesterday they received a voluminous staff report outlining
    problems in the West. I have not even begun to try to digest
    that, but I think there are many issues there that should be
    addressed, should be considered by this committee and this
    Congress before moving forward on electricity legislation.
        In addition, there has been much debate about standard
    market design in this hearing, and as was mentioned, both the
    Federal Energy Regulatory Commission, as well as the Department
    of Energy, are coming forward with their reports on standard
    market design, and it seems prudent to wait to see what they
    have to say before moving forward with legislation. It may well
    be that looking over what the Commission has done or is likely
    to do with respect to its investigation of problems in the West
    and what the commission is proposing to do with standard market
    design could help develop the consensus that is necessary to
    move electricity legislation, but we do not see that consensus
    at the present time.
        While the industry has been severely stressed, public power
    has been doing quite well. Our ratings are stable. We have the
    ability to raise capital, to invest in needed infrastructure to
    meet the needs of our communities, and obviously, we do not
    want to see any changes in Federal legislation that would
    undermine our ability to continue to perform this valuable
    public service.
        If you are going to move forward on electricity, we have
    concerns that have been expressed by others in this panel and
    prior panels. We are very concerned about repeal of the Public
    Utility Holding Company Act. We do not think that this going to
    spur investment in new facilities. It is simply going to
    facilitate investment in existing facilities as assets change
    hands.
        If the act is to be repealed, Senator Bingaman, you had
    some very good proposals in your proposals last year and your
    comments this morning about things that needed to be done. We
    certainly agree with those recommendations in terms of merger
    review authority, expanding the role of the commission to deal
    with different types of mergers than they currently are
    authorized to do under existing law.
        I also agree with the comments that John Anderson made
    earlier this morning that while that is important, we do not
    think that is sufficient. There are other issues that need to
    be addressed, including market transparency, market
    manipulation, practices that need to be understood and
    addressed and prohibited, market-based rate authority when it
    is appropriate, when it is inappropriate, and how it should be
    withdrawn. All of these things I think need to go into a mix,
    and frankly, we do not see that mix congealing into the kind of
    electricity legislation that we would find appropriate. So in
    sum, we do believe that now is not the time to move forward on
    electricity legislation.
        We have been asked to address the RESC issue. This is a
    very new proposition for us. It is obviously an attempt to
    address regional differences. I think regional differences can
    be addressed in different ways. We do see some problems in
    terms of jurisdictional conflicts, conflicting interpretations
    of the underlying statute, the Federal Power Commission forum
    shopping, the fact that utility boundaries are not the same as
    State boundaries, that are not the same as regional
    transmission organization boundaries, and we see all those as
    causing potential problems as well.
        I see my time is expired, Mr. Chairman. Thank you very much
    again for the opportunity to testify. I look forward to
    answering your questions.
        [The prepared statement of Mr. Richardson follows:]
          Prepared Statement of Alan H. Richardson, President & CEO,
                       American Public Power Association
        Mr. Chairman and members of the subcommittee, my name is Alan
    Richardson and I am the President and Chief Executive Officer of the
    American Public Power Association (APPA). Thank you for the opportunity
    to appear before you today to discuss APPA's views on electricity
    legislation.
        APPA represents the interests of more than 2,000 publicly owned
    electric utility systems across the country serving approximately 40
    million customers. APPA member utilities include state public power
    agencies and municipal electric utilities that provide electricity and
    other services to some of the nation's largest cities. However, the
    vast majority of these publicly owned electric utilities serve small
    and medium-sized communities in 49 states, all but Hawaii. In fact, 75
    percent of our members are located in communities with populations of
    10,000 people or less.
        The first and only purpose of public power systems is to provide
    reliable, efficient service to their customers at the lowest possible
    cost. Like hospitals, public schools, police and fire departments, and
    publicly owned water and waste water utilities, public power systems
    are locally created governmental institutions that address a basic
    community need: they operate to provide an essential public service at
    a reasonable, not-for-profit price. Publicly owned utilities also have
    an obligation to serve the electricity needs of their customers and
    they have maintained that obligation, even in states that have
    introduced retail competition. And, because they are governed
    democratically through their state and local government structures,
    public power systems operate in the sunshine, subject to open meeting
    laws, public record laws and conflict of interest rules. Most,
    especially the smaller systems, are governed by an elected city
    council, while an elected or appointed board independently governs
    others. Democratically governed, not-for-profit, obligated to serve all
    customers--understanding the underlying structure and mission of public
    power is essential in promoting policies that will maintain industry
    diversity and protect the consumer interest.
        While the majority of my testimony will focus on those provisions
    directly related to electricity, I will briefly review several other
    areas of interest to APPA. As has been the case since President Bush
    introduced his national energy policy plan in 2001, APPA believes that
    there are a number of areas where the Administration and Congress
    should act to maintain or enhance the viability of traditional fuels
    used to generate electricity, promote the commercialization of new,
    alternative sources of electricity, increase energy conservation,
    provide adequate energy assistance to low-income households, and
    maintain infrastructure security.
        APPA supports the inclusion of provisions in an energy bill that
    address the following:
        Hydroelectric Relicensing--Over the next 15 years, two-thirds of
    all non-federal hydroelectric capacity--which totals nearly 29,000
    megawatts of power and can provide enough electricity to serve six
    million retail customers--must undergo the Federal Energy Regulatory
    Commission (FERC) relicensing process. The relicensing of each hydro
    project may potentially result in a significant loss of existing
    capacity due to the exceedingly complex, fragmented, costly and
    inefficient relicensing process. Such lost capacity must be replaced by
    less efficient generation sources that both impose additional costs to
    the consumer and produce greenhouse gas emissions.
        Therefore, we believe improvements to FERC's hydroelectric
    licensing and relicensing processes are needed. Specifically, we
    support legislation that will allow current licensees, for the first
    time, to offer alternative conditions to those mandated by the federal
    resource agencies under Sections 18 and 4E of the Federal Power Act as
    long as those alternatives accomplish the same level of environmental
    protection. In addition, federal resource agencies should be required
    to document that they gave ``equal consideration'' to the economic,
    environmental and other public impacts of their mandatory conditions
    before imposing them on licensees--something that agencies are not
    doing now.
        Renewable Energy Production Incentive--APPA supports the
    reauthorization of and changes to the Renewable Energy Production
    Incentive (REPI) proposed in S. 421, recently introduced by Senators
    Cantwell, Murray, Smith and Feinstein. REPI was established by the
    Energy Policy Act of 1992, and authorizes the Department of Energy
    (DOE) to make direct payments to publicly- and cooperatively-owned
    electric utilities for electricity generated from solar, wind,
    landfill-gas, and certain geothermal and biomass projects. Since 1995,
    REPI has funded more than 36 renewable energy projects in 17 states.
    REPI's authorization is set to expire in September of this year.
        Future plans for acquiring or installing additional renewable
    capacity will in large part be dependent on the continued availability
    of REPI funds to help offset the additional cost to our customers. As
    the only incentive available to locally-owned, not-for-profit utilities
    to make new investments in renewable energy projects, REPI delivers
    important and significant air quality benefits to the communities
    served by project owners and operators. The REPI program merits
    extension, requires reform, and deserves congressional attention.
        Price-Anderson Act Reauthorization--The Price-Anderson Act, a law
    that indemnifies DOE contractors and Nuclear Regulatory Commission
    (NRC) licensees for damages resulting from nuclear incidents, is
    scheduled to expire this year. APPA supports the reauthorization of the
    Act.
        Clean Coal Technology--Legislation is needed that will authorize
    and fund the development of a program at DOE to deploy clean coal
    technologies. APPA supports clean coal technology research and
    development, as well as incentives as long as they are linked to a
    tradable tax credit available for public power and rural electric
    cooperatives.
        Energy Conservation--APPA supports the authorization of increased
    funding for energy efficiency and conservation efforts. Specifically,
    APPA supports an increase in the funding authorization for the Low
    Income Home Energy Assistance Program (LIHEAP) and weatherization
    assistance. Recent weather and economic conditions underscore the need
    for an increase in this federal program that helps thousands of
    families pay their home energy costs.
        APPA supports the inclusion of the provisions mentioned above in an
    energy bill. As it pertains to electricity, APPA believes that
    electricity should not be part of an energy bill at this time. In a
    February policy meeting, APPA members unanimously voted in favor of a
    resolution urging Congress to review the results of various ongoing
    investigations into consumer abuses and market manipulation in western
    electricity markets and then develop consensus for further action based
    on those results before imposing any new requirements on electric
    industry participants, or experimenting with further industry
    restructuring.
        Before proceeding with electricity legislation it is critical that
    there be a full understanding of the western energy market crisis. The
    crisis has had and continues to have broad and far-reaching adverse
    effects throughout the West. The western energy crisis resulted in huge
    increases in the wholesale price of electricity that will ultimately
    cost consumers billions of dollars. The crisis has forced several
    companies to file for bankruptcy resulting in thousands of employees
    losing their jobs and in some cases their pensions. Ongoing discoveries
    of market manipulation and abuse by energy traders and others continue
    to send shockwaves through the industry and prompted credit downgrades
    of numerous investor-owned utilities.
        We realize that last year the Senate debated and passed an
    electricity restructuring title as part of a comprehensive energy bill.
    However, events in our industry, including FERC's dramatic proposal for
    a standard market design, have progressed during this same time frame.
    In addition, restructuring proposals advanced in the past were premised
    on the expected near-term success of competitive wholesale electric
    markets operating in a world populated with many energy traders and
    independent power producers. That certainly has not happened.
        Revelations in recent months have made it more clear that the
    results of these deregulation efforts have been disastrous in the West
    and questionable elsewhere. Rather than proceed with legislation
    modeled on the failed Enron vision of the industry, we believe that
    Congress should take a fresh look at the electricity industry and
    examine the characteristics that are fundamentally different from those
    of other industries. These characteristics include, among others, the
    fact that electricity is a real-time product produced and consumed
    simultaneously, cannot be stored, is a necessity of modern life, and
    has no reasonable substitute. Delivery of electricity requires hard-
    wire connections, making this function a natural monopoly that must be
    regulated in some manner. Further, it is a complex network industry and
    all parts--generation, transmission and distribution--must work
    together. This situation necessitates planning to ensure optimum use of
    individual facilities and the network, as well as associated
    infrastructure investments. All of these unique characteristics make it
    very difficult to displace regulation with a purely competitive market
    in the electricity industry.
        Despite promises that the deregulation of both wholesale and retail
    markets would be beneficial to consumers by reducing electricity
    prices, the western experiment caused power costs to skyrocket and has
    had a detrimental impact on consumers and investors. We urge Congress
    to reevaluate the merits of moving forward with legislation until there
    is a greater understanding of what can be done by FERC under existing
    law to ensure effective competition, including how FERC may proceed on
    proposals to institute a standard market design. Only then will it
    become clear as to what legislation, if any, is required.
        The Committee requested that in my testimony I address specific
    issues outlined by the Committee. My comments on those issues are
    below.
        Regional Energy Service Commissions--The Regional Energy Service
    Commissions (RESC) outlined in the Committee's draft electricity title
    is a new concept that merits further study. Since this is such a new
    concept APPA has no formal policy position on the creation of RESCs.
    Among the issues that need to be carefully considered with respect to
    the proposition are: the probability of inconsistent interpretations of
    the Federal Power Act by different RESCs; whether RESCs will promote
    certainty and stability in this critical industry; the seams issues and
    other difficulties that will arise when the RESC footprint does not
    match the footprint of individual utilities within the RESC or the
    footprint of a regional transmission organization; and the additional
    costs of proceedings before RESCs with subsequent appeals to FERC.
        Reliability Standards--APPA believes that ensuring the reliability
    of the interstate electric transmission grid is one of the most
    fundamental functions of electric utilities. Industry restructuring and
    the resulting increase in transactions on the grid have made it
    increasingly difficult to ensure reliability. Over the last few years
    APPA has worked with a coalition of industry representatives to develop
    legislative language granting NERC the ability to enforce national
    reliability standards. The consensus reliability language developed by
    the coalition is included in Section 104 of S. 475, and APPA supports
    this language with minor technical changes. The special treatment of
    New York State in the energy bill proposed by Congressman Barton and
    recently marked-up by the House Subcommittee on Energy and Air Quality,
    is problematic, particularly if it prompts other states or regions to
    seek their own exemptions or exceptions.
        Open-Access (FERC-Lite)--Open, non-discriminatory access to the
    interstate transmission system has been a longstanding principle of
    public power. FERC Order 888 required jurisdictional entities to file
    an open access tariff and to provide transmission service based on the
    principles of comparability and reciprocity. The FERC-Lite agreement
    reached in 1997 represented an understanding that while public power
    systems, as well as other non-jurisdictional entities such as rural
    electric cooperatives and federal power marketing administrations
    (PMAs) were not required to file tariffs under Order 888 they would be
    required to file a tariff at FERC consistent with Order 888. FERC would
    review the tariff to ensure that it met the conditions of comparability
    and reciprocity before approving the tariff, but would not have the
    authority to set the actual rates for transmission services. Rates
    would continue to be set at the local level under the relevant existing
    regulatory authority. If FERC found that the rates where somehow
    inconsistent with the comparability requirement, it could remand the
    rates to the local authority for re-consideration and/or modification,
    but FERC could not itself change the rates.
        APPA continues to support FERC-Lite language that clarifies that
    FERC-Lite is limited to the review and approval of transmission service
    tariffs for consistency with the comparability standard. This language
    is contained in Section 7021 of the House energy bill and is supported
    by APPA. FERC-Lite language contained in the Senate Committee's draft
    and S. 475, introduced by Senator Thomas, does not reflect the
    comparability standard and original intent of the FERC-Lite agreement.
        Transmission Siting--APPA recognizes that federal backstop siting
    authority is a necessary tool to facilitate the siting of new
    transmission lines that are stymied by the current balkanized, state-
    by-state siting approval process. In most cases difficulties associated
    with the siting of transmission, not the lack of capital or
    insufficient rate of return, act as obstacles to the development of
    transmission. Transmission lines are necessary to support interstate
    commerce, as well as security interests, and thus a federal role in the
    siting of these lines is appropriate. APPA would strongly urge that
    every reasonable effort be made first at the local and state levels to
    resolve siting issues and that federal siting authority should only be
    used as a last resort.
        Transmission Investment Incentives--APPA is opposed to legislation
    that would require FERC to adopt ``incentive transmission pricing''
    rules. FERC, under the Federal Power Act and Order 888, already has
    sufficient authority and flexibility to design transmission rates to
    ``promote economically efficient transmission and generation of
    electricity.'' For example, the Commission on January 15, 2003, issued
    a proposed policy on incentive transmission rates and already has
    approved incentive rates based on the facts in individual proceedings.
    These rates remain subject to the ``just, reasonable, and not unduly
    discriminatory or preferential'' standard that has been the hallmark of
    FERC ratemaking authority for decades. Further, mandatory incentive
    pricing would lead to higher transmission rates that would ultimately
    be passed on to consumers.
        Proponents of this language have asserted that incentive pricing is
    necessary in order to raise the capital needed for investments in new
    transmission facilities. They argue that incentives are justified
    because transmission investment is risky. This is clearly not the case.
        In fact, as Wall Street representatives have testified before
    Congress, transmission is a safe and stable investment and current
    rates of return are sufficient to attract needed capital. Moreover, the
    widely recognized need for additions to the currently constrained
    system indicates the prudence of this type of investment. A case in
    point is the infamous Path 15 in California where approximately a dozen
    entities responded to the Department of Energy's request for proposals
    to finance the new line. Developing new transmission facilities is
    difficult, but the problem is not lack of financing. There are
    substantial obstacles involved in the siting and permitting processes.
    Rights of way may be denied for parochial reasons with no consideration
    given to broader public interest considerations. Many of these
    obstacles to transmission development will be resolved by the enactment
    of federal siting language.
        Congress should allow the Commission to continue to assess the
    facts and provide for rates of return on a case-by-case basis.
        Transmission Cost Allocation (Participant Funding)--FERC already
    has sufficient authority to permit or require participant funding where
    appropriate. Therefore, reiterating in legislation this ability is
    unnecessary and would in fact create a preference for participant
    funding. Furthermore, ``participant funding'' is an untested concept
    and, in most parts of the country, is likely to delay and limit
    transmission construction at a time when congestion and curtailments
    are increasing, to the detriment of consumers.
        Transmission Organizations/RTOs--FERC has maintained in Order 2000
    and subsequent orders and proceedings, that it has the authority to
    order RTO participation by jurisdictional utilities to remedy undue
    discrimination or facilitate competition. In addition, the substantial
    authority already provided to FERC under the Federal Power Act to
    promote the creation of RTOs and to determine the appropriate size,
    scope and functions to be performed, makes legislation unnecessary.
        In regard to federal transmission-owning entities, it is critical
    that any legislation addressing their participation in RTOs not impair
    the existing statutory authorities and obligations of those entities.
    Further, the rights of federal transmission-owning entities to withdraw
    from an RTO should not be impaired by legislation. It should be no more
    difficult for a federal transmission-owning entity to withdraw from an
    RTO than for any other RTO participant. The energy bill recently
    marked-up in the House Energy and Air Quality Subcommittee stated that
    a Federal Power Marketing Agency would have withdrawal rights from an
    RTO ``in the event of a material breach by the regional transmission
    organization of the contract, agreement or other arrangement necessary
    to allow the Federal utility to transmit electric power or to comply
    with applicable statutory requirements.'' APPA views this language as
    problematic since ``material breach'' can be difficult to prove and
    could involve time-consuming litigation before a decision would be
    made.
        PUHCA--The Public Utility Holding Company Act (PUHCA), enacted as a
    companion to the Federal Power Act, establishes passive restraints on
    the structure of the electric utility industry in order to mitigate the
    formation and exercise of market power, preclude practices abusive to
    captive consumers and competitors, and facilitate effective regulation.
    Those advocating repeal argue that the Act no longer serves its
    original purpose of protecting investors, consumers and the general
    public interest. This is simply not the case.
        In fact, the turbulence in the utility industry over the past two
    years--financial and accounting abuses, improper affiliate
    transactions, market manipulation and consumer abuse--underscores the
    importance of retaining and strengthening consumer and investor
    protections provided by PUHCA. It is APPA's belief that many of the
    serious financial and other problems facing the electric utility
    industry can be traced directly to exemptions from PUHCA that were
    enacted by Congress in the 1992 Energy Policy Act. The 1992 Act
    exempted developers of independent power generation facilities, called
    Exempt Wholesale Generators, whether they were owned by operating
    utilities, utility holding companies, or parties not involved in the
    electric utility business. This exemption resulted in a substantial
    number of electric utilities and utility holding companies taking
    advantage of the new freedom from Securities and Exchange Commission
    scrutiny to create unregulated power production subsidiaries--the very
    subsidiaries placing many operating utilities in financial jeopardy
    today.
        APPA has a long-standing position to oppose any efforts that repeal
    PUHCA unless they are accompanied by appropriate structural and
    regulatory safeguards designed to promote fair and open competition and
    satisfy the underlying purposes of the Holding Company Act: consumer
    protection, effective oversight and accountability, prevention of undue
    market concentration and fair competition.
        The electricity industry is in a state of turmoil. In 2002, 182
    investor-owned utilities received credit downgrades from Standard &
    Poor's. Given the current turmoil in the industry and considering the
    adverse consequences of the partial repeal of PUHCA in 1992, it is
    APPA's belief that now is not the time to repeal the Holding Company
    Act.
        However, if Congress does go forward with repeal of PUHCA there are
    certain structural safeguards that must be in place to protect
    consumers. First, FERC must be given strong authority to establish
    clear rules for determining when competitive market conditions exist
    and when suppliers can charge market rates. FERC should be required to
    review markets in which a public utility is authorized to sell
    wholesale electric energy at market-based rates to determine whether
    such sales are subject to effective competition. If FERC determines
    that the sales are not subject to effective competition FERC should be
    required to modify or revoke market-based rate authority. Lastly, FERC
    should be required to take corrective action, when necessary, to
    enforce market rules, protect consumers and prevent market abuses and
    manipulation. If FERC finds that a public utility has intentionally
    engaged in an activity that violates any rule, or tariff or has engaged
    in fraudulent, manipulative, or deceptive activities in wholesale
    electric energy markets FERC should be required to immediately revoke
    or modify the authority of that public utility to sell electric energy
    at market-based rates. Many of these provisions are contained in
    legislation Senator Cantwell introduced last week, S. 681, that APPA
    supports.
        Repealing PUHCA will eliminate legal barriers for certain utility
    mergers and acquisitions and lead to increased consolidation and
    reduced competition in the industry--and could lead to higher prices
    for consumers. To offset this impact, APPA has consistently urged
    adoption of a higher merger standard in the Federal Power Act that
    would condition merger approval upon an affirmative finding that the
    proposed merger will promote the public interest, as opposed to the
    current standard that only requires the merger to be consistent with
    the public interest. In addition, FERC's merger authority needs to be
    clarified and expanded to cover mergers of utility holding companies as
    well as the disposition of generation assets by jurisdictional
    utilities and ``convergence'' mergers of electric and gas utilities.
        PUHCA repeal should also be accompanied by provisions that protect
    consumers from the costs and risks of utility diversifications and
    prevent utilities from unfairly subsidizing affiliates that compete
    with independent businesses. In addition, state and federal regulators
    should be given enhanced access to books and records. Legislation
    repealing PUHCA in the bills outlined by the Committee sharply
    circumscribes the access that would be permitted. Regulators must have
    full and complete access to holding company books and records. The
    current language places the burden on the regulator to show, with some
    degree of specificity, why requested books or records are relevant to
    jurisdiction over rates. However, given that a holding company may have
    hundreds or even thousands of subsidiaries (Enron--an exempt utility
    holding company--had thousands of subsidiaries), it would be extremely
    difficult for regulators to find the relevant books and records.
        Net-Metering & Real-Time Pricing--While there can be positive
    benefits to net metering, such as its potential to increase the use of
    renewable resources and provide generation alternatives, net metering
    is essentially a ``retail'' program and is best left to the
    jurisdiction of states and local entities. In addition, 34 states
    currently have some form of a net metering program in place. While
    Congress may have a role in ensuring that net-metering receives
    appropriate consideration, decisions as to how and if it should be
    implemented are best made at the local level. Therefore, the best way
    for Congress to deal with these issues, if it addresses them at all, is
    by requiring the consideration of standards but leaving the adoption of
    those standards to the appropriate regulatory authority. This is how
    those issues are handled in the Committee staff draft and the Barton
    bill.
        Real-time pricing can provide a price signal to customers and give
    them a monetary incentive to reduce their demand when the supply of
    power is limited and demand is high. However, like net-metering,
    decisions related to the implementation of real-time pricing programs
    are best made at the local level.
        Renewable Energy--APPA supports legislation and programs that
    provide incentives to investments in renewable energy. Recently,
    Senators Grassley and Baucus introduced legislation, S. 597, which
    creates tradable tax credits that provide an incentive for public power
    to generate from renewable resources and clean coal. APPA supports this
    legislation.
        As it pertains to renewable energy mandates or portfolio standards,
    APPA believes that these decisions are best made at the local level.
    Numerous states have already implemented renewable portfolio standards
    and many utilities offer green power-pricing programs to their
    customers. Furthermore, the opportunities for developing renewable
    energy are not equally available across the country.
        Market Transparency, Anti-Manipulation, Enforcement--The market
    transparency provisions outlined in the Senate Energy Committee's draft
    only require FERC to provide ``statistical information'' regarding the
    availability and market price of wholesale electricity and transmission
    services. APPA is concerned that limiting the release of information to
    ``statistical information'' will not provide an adequate picture of the
    marketplace. Rather, APPA prefers the broader transparency language in
    Congressman Barton's bill that does not limit the release of
    information to ``statistical information.'' In addition, legislation
    should clarify to FERC that close calls regarding whether information
    will be made public should be resolved in favor of transparency, not
    secrecy.
        As mentioned previously, APPA supports the market manipulation
    language contained in Senator Cantwell's legislation, S. 681. In cases
    when a public utility has been found to have engaged in market
    manipulation or fraudulent practices that entity should immediately
    lose its privilege to sell electric energy at market-based rates. Also,
    rather than identifying a specific manipulative practice, such as round
    trip trades, the legislation should give FERC broad authority to
    identify the type of activities that are prohibited (in general terms,
    just as the antitrust laws define in general terms what is prohibited).
        Consumer Protection--Subtitle I, Sections A and B of the
    Committee's draft requires the Federal Trade Commission to promulgate
    rules in regard to information that each utility would have to provide
    to their customers concerning: the nature of electric service being
    offered; the price of electricity including a description of any
    variable charges; a description of all other charges; the percentage of
    electricity generated by each fuel mix; and the environmental emissions
    produced in generating the electricity. These types of decisions are
    best made at the local level. While the means and frequency of
    providing this information has yet to be determined, this could be
    extremely burdensome and costly to small and mid-size utility systems.
        FERC Jurisdiction--One additional provision I would like to comment
    on is contained in Section 7092--Jurisdiction over Interstate Sales, of
    Congressman Barton's bill. This provision would unnecessarily extend
    FERC jurisdiction over public power systems by imposing FERC's refund
    authority over the spot market sales made by public power systems. This
    language is an encroachment on local authority that is neither prudent
    nor warranted. Public power systems have been regulated differently
    under federal law for more than 66 years. This is neither an accident
    nor an oversight, but rather good public policy that recognizes the
    differences between not-for-profit public power systems operating in
    the public interest and regulated at the local level, and multi-state,
    investor-owned private utilities. Public power systems do not represent
    a significant presence as sellers in the wholesale markets, and public
    power systems are, and will continue to be, net purchasers of
    electricity. The limited volume of surplus energy from public power
    systems precludes their ability to set a market-clearing price--public
    power systems are price takers, not price makers.
        Service Obligation--APPA supports language that would ensure that
    both transmission owners and transmission dependent utilities
    (investor-owned utilities, rural electric cooperatives, public power
    systems, and the federal Power Marketing Administrations) holding firm
    transmission rights under long-term contracts would be able to meet
    their wholesale and retail service obligations under federal, state, or
    local law or long term contract. This legislation simply reaffirms the
    existing rights of load serving entities so that regardless of the
    transmission regime in the future--SMD or otherwise--they would be
    assured firm transmission access in accordance with the terms of their
    existing contracts. The essential elements of this concept were
    embodied in an amendment offered on the Senate floor last year by
    Senator Kyl during consideration of the Energy Policy Act.
        In conclusion, it is critical that Congress understand the lessons
    of the western energy crisis, and the reasons behind the industry's
    financial crisis, before proceeding with changes affecting the $200
    billion wholesale electric utility market. Enacting electricity
    legislation without a full understanding will almost surely result in
    unintended adverse consequences that will cause further harm to energy
    markets and the overall economy as well as consumers. For these reasons
    we urge you to oppose efforts to include an electricity title in an
    energy bill.

        Senator Craig [presiding]. Alan, thank you very much for
    your testimony.
        Now let us move to Phil Tollefson.

     STATEMENT OF PHIL TOLLEFSON, CEO, COLORADO SPRINGS UTILITIES,
                ON BEHALF OF LARGE PUBLIC POWER COUNCIL

        Mr. Tollefson. That is correct.
        Senator Craig. Thank you. Colorado Springs Utilities.
        Mr. Tollefson. My name is Phil Tollefson. I am the CEO of
    Colorado Springs Utilities in Colorado. I am here today
    testifying on behalf of The Large Public Power Council which
    represents 24 of the largest public power systems in the
    Nation. Our members directly or indirectly provide service to
    about 40 million.
        Thank you for the opportunity to appear before you today to
    express the views of LPPC on your draft energy legislation. I
    will not be commenting on all of the different provisions of
    interest or concern to LPPC today but will, instead, focus on
    several issues of primary concern to our members, that of FERC
    jurisdiction, service obligation, and the regional
    organizational options.
        First, I would like to address the need for market reforms
    at this time. Similar to several previous speakers, we
    recognize that Congress has struggled with electricity
    restructuring legislation for several years. Over the course of
    that debate, the industry has undergone tremendous change.
    Once-robust IOUs are now in serious financial shape with many
    credit downgrades in the last year. Some have filed for
    bankruptcy, major instabilities. You have heard all of that.
        What we are seeing, however, is that in the midst of this
    turmoil, that there are many, many allegations having been made
    and many questions raised and many investigations have yet to
    be initiated, yet alone completed. As a result, many LPPC
    members and our customers have serious concerns about
    legislating major changes to electric power markets at this
    time, concerns which are shared in our cities and towns.
        Let me turn now to our issue of primary concern today. That
    is the issue of expanded FERC jurisdiction. LPPC and its member
    companies support open access transmission. LPPC has worked
    with Congress to guarantee open access transmission by non-
    jurisdictional entities. Public power agreed that limited FERC
    jurisdiction could be extended to public power systems and
    cooperatives in order to assure that open access would be
    provided to all market participants on an equal and comparable
    basis. That is the provision that is traditionally referred to
    as FERC-lite. LPPC continues to support this limited expansion
    of FERC jurisdiction for the purpose of open access
    transmission.
        However, a recent Supreme Court decision and a subsequent
    issuance of FERC's proposed standard market design rule have
    raised questions that the current language of FERC-lite may be
    read to allow expansion beyond its original intent, possibly to
    impose full FERC jurisdiction over public power systems and
    cooperatives, which is unacceptable.
        Your draft electricity title currently includes a provision
    on open access transmission. However, the provision, as
    currently drafted and in particular proposed section
    211A(a)(2), cannot be supported by LPPC unless the language is
    modified to restore its original intent. In particular, the
    modification that we seek to FERC-lite would make it clear that
    FERC may require public power, co-ops, TVA, and PMAs to provide
    open access transmission services; that is, service to others
    that is comparable to the service they provide themselves. This
    is completely consistent with FERC's reciprocity requirements
    in Order 888.
        Recently, the House Subcommittee on Energy and Air Quality
    reported out their legislation which contains language that is
    acceptable to LPPC on this matter, and we urge this committee
    to take a similar approach to FERC-lite and restore this
    provision to its original intent.
        Also, it bears remembering that public power systems
    continue to be constrained to some extent by private use rules
    from the IRS. Certainly we appreciate that the IRS has recently
    issued some rulings which clear up many of those questions, but
    there are still a number of outstanding issues related to bond
    covenants and the applicability of some State statutes.
        Now, with regard to service obligation, the ability of
    public power systems to serve our local communities is an issue
    of paramount concern. Let me just reiterate, we do support open
    access transmission. However, we do not want to risk the
    reliability and reasonably priced power that our customers
    expect and are entitled to receive.
        In summary, the key point for us is that our customers
    should not have to pay twice for their transmission systems,
    first to build it and then again to use it when someone else
    outbids our customers. Our customers have paid for the critical
    transmission lines necessary to move power from our sources to
    meet service obligations, and if we are required to pay
    congestion charges whenever our use and the demands of others
    exceed the capacity of the line, then in effect, our customers
    would be double-billed for the same transmission capacity.
        For that reason, last Congress we supported the service
    obligation amendments that Senator Kyl and others put forward.
        Lastly, to sum up, as this committee is well aware, the
    FERC is considering a significant rulemaking initiative
    denominated as standard market design. We have submitted other
    comments to you twice in writing and believe that the SMD
    proposal, as currently configured, is unworkable.
        With respect to the regional energy services commission, we
    echo some of the comments that you have heard earlier today. It
    is a notable recognition of regional differences. It is a step
    towards a more productive dialogue, but there are still many,
    many questions that need to be studied before we can reach any
    conclusive recommendation to you.
        Thank you for the opportunity to comment.
        [The prepared statement of Mr. Tollefson follows:]
    Prepared Statement of Phil Tollefson, CEO, Colorado Springs Utilities,
                  on Behalf of the Large Public Power Council
        My name is Phil Tollefson and I am the Chief Executive Officer of
    Colorado Springs Utilities, located in Colorado Springs, Colorado. I am
    testifying today on behalf of the Large Public Power Council (LPPC), an
    association of 24 of the largest public power systems in the United
    States. LPPC members directly or indirectly provide reliable,
    affordably priced electricity to almost 22 million customers. Our
    members own almost 33,000 miles of transmission and control over 61,500
    MW of generation. LPPC members are located in states and territories
    representing every region of the country, including several states
    represented by members of this Committee--including my home state of
    Colorado, as well as Arizona, Tennessee, Florida, New York, California,
    and Washington.
        LPPC has testified before the Committee in previous Congresses
    during consideration of energy policy and electric restructuring.
        Thank you for this opportunity to express the views of LPPC on your
    draft energy legislation. I will not be commenting on all provisions of
    interest or concern to LPPC members today but will, instead, focus on
    several issues of primary concern to our members--FERC transmission
    jurisdiction, service obligation, and the regional organizational
    options. Attached to my testimony is a short outline of the issues on
    which the Committee requested comment and LPPC's position on those
    issues.
                             public power is unique
        Public power systems are owned by the communities we serve, not by
    investors. We are not-for-profit entities, which makes us different.
    Public power systems have been a part of the nation's electric system
    since the late 1800s, with many created as a part of city governments.
    Many LPPC member systems continue to provide numerous services to their
    communities in addition to electricity, such as flood control and
    natural gas, water and wastewater services, like we do in Colorado
    Springs. In fact, Colorado Springs Utilities is one of the largest
    four-service utilities in the country.
        Electricity is a vital component of our lives now and is a
    cornerstone of the economy. There are dire consequences if electricity
    is not reliable and affordable.
        As the electric supply of the country has been ``deregulated,''
    many providers of electricity have sold off their generation or
    transmission assets or have severed their direct relationship with
    electric customers. But public power systems still have an obligation
    to serve the customers for which their systems are built. This service
    obligation is generally imposed by state law or local ordinance,
    sometimes by the statute creating the public entity. As a result, all
    available resources go first to serving those customers. Power is sold
    and surplus transmission made available only if it is surplus to those
    needs.
        Our rates reflect the fact that we are not-for-profit entities. Our
    rates include only the costs of producing and delivering power to our
    customers and, in some cases, payments to our governing boards or
    municipal entities as a component of the local budget. Our system, for
    example, Colorado Springs Utilities, contributes $24 million annually
    to general fund of the city. Since public power systems are locally
    controlled, decisions about policies such as rates are made by people
    who are in touch with local concerns. A city council sets policies for
    many LPPC members, while other public power systems have a separately
    elected or appointed utility board that governs their policies. Local
    control helps ensure that we respond to community needs. In addition,
    since public power systems are community based, our revenues stay close
    to home. This helps keep the local economy strong.
                          the need for market reforms
        Congress has struggled with electric restructuring legislation for
    several years. Over the course of that debate, the electric utility
    industry has undergone tremendous change. Once robust investor-owned
    utilities are now in serious financial shape with 180 rating downgrades
    in the past year. Some significant players in the market have filed for
    bankruptcy. There are instabilities in the market at this time. The
    capital market for utility infrastructure has basically collapsed. Many
    LPPC members and our customers have serious concerns about legislating
    major changes to electric power markets at this time, concerns which
    are shared by our cities and states.
        Standard & Poor's recently issued a credit analysis report on the
    public power sector that noted that the credit rating stability of
    public power ``is a testament to the sector's ability to withstand
    periodic shocks as well as respond to new challenges.'' More than 80%
    of the public power sector has an ``A'' rating or better at this time
    and public power systems are functioning well in competitive wholesale
    markets. A strength of public power systems is our focus on providing
    the lowest-cost power to our customers.
            expansion of ferc jurisdiction (open access--ferc-lite)
        Our issue of primary concern today before this Committee, one that
    affects our willingness to continue to support legislative action and
    our ability to exhibit the strength and resilience market watchers see
    in our sector, is the issue of expanded FERC jurisdiction.
        LPPC and its member companies support open access transmission.
    LPPC has worked with Congress to guarantee open access transmission
    service by non-jurisdictional entities. Public power agreed that
    limited FERC jurisdiction could be extended to public power systems and
    cooperatives in order to ensure that open access transmission service
    would be provided to all market participants. That is the provision
    that is known as ``FERC-lite.'' LPPC continues to support this limited
    expansion of FERC transmission jurisdiction--for the purpose of open
    access transmission. A recent Supreme Court Decision and the subsequent
    issuance of FERC's proposed Standard Market Design rule have raised
    concerns that the current language of the FERC-lite provision could be
    read to allow expansion beyond its original intent, possibly to impose
    full FERC jurisdiction over public power systems and cooperatives,
    which is unacceptable.
        The staff discussion draft dated 3/26/03, Electricity Title,
    includes a provision on ``Open Access Transmission.'' However, the
    provision, as currently drafted, and in particular the proposed Section
    211A(a)(2), cannot be supported by LPPC--unless the language is
    modified to restore its original intent. The modification we seek to
    ``FERC-lite'' would make it clear that FERC may require public power,
    coops, TVA and PMAs to provide open access transmission services--that
    is, service to others that is comparable to the service they provide
    themselves. This is completely consistent with FERC's reciprocity
    requirements in Order 888. We remain committed to providing such open
    access transmission.
        Recently, the House Subcommittee on Energy and Air Quality reported
    out their legislation which contains language that is acceptable to
    LPPC in Section 7021. We urge this Committee to take a similar approach
    to FERC-lite and restore the provision to its earlier intent. This will
    respect the long-standing agreement between LPPC and policy makers and
    will ensure that open access transmission service is provided in
    furtherance of a robust competitive wholesale market.
        FERC Chairman Pat Wood has not asked Congress to expand federal
    authority over public power systems, preferring a ``voluntary approach
    to entice such utilities into the marketplace.'' The Administration and
    Commission have generally supported the concept of open access
    transmission but have not sought additional jurisdiction over the
    transmission assets of public power. We hope that the Chairman and this
    Committee recognize this issue and return FERC-lite to its original
    intent--a limited extension of FERC jurisdiction to ensure open access
    to the transmission system.
        It bears remembering that public power systems continue to be
    somewhat constrained by IRS ``private use rules'' from providing open
    access transmission service using facilities financed with tax exempt
    bonds. We appreciate that the Senate understands that the ability of
    public power to make its transmission facilities available to all users
    depends on a solution to the private use problem. Last year's Senate
    bill reflected that understanding, as does the current staff discussion
    draft by including subsection (f) in the Section 211A. The IRS did
    issue final regulations on private use which resolve many of the issues
    facing public power. However, the regulations do not address all
    situations or concerns that may arise with bond covenants and, as a
    result, public power may be restricted in its ability to provide open
    access transmission service in all circumstances. Therefore the Senate
    language is still necessary.
                               service obligation
        The ability of public power systems to serve our local communities
    is an issue of paramount concern to LPPC member systems. Let me just
    reiterate--we support open access transmission policies. However, we do
    not want to risk the reliable, reasonably-priced power that our
    customers expect and are entitled to receive. We hope that you will
    address this issue because, for us, it is about protecting our
    customers.
        Public power systems are established by state law and are
    obligated, generally by state law, to provide electric service to their
    customers. We need to maintain and preserve the ability to fulfill this
    obligation. Some LPPC member systems have built their transmission
    system specifically to serve their customer base, as is the case with
    Colorado Springs Utilities. This transmission has been and is being
    paid for by our customers/owners. Our customers want to be assured that
    the transmission system which they paid for and which provides them
    their electric power at reasonable rates, will continue to be available
    to them first--with any excess to be made available to others who are
    not customers.
        LPPC members have also entered into long-term bilateral contracts
    in making their long-term generation and transmission decisions. These
    firm commitments allow for stable and secure electric rates and
    reliability. They provide for certainty in the market and allow the
    parties to make operational and investment decisions over the long-
    term, decisions that are necessary for the continued expansion of a
    functioning electric generation and transmission system. Without this
    kind of certainty as to the future, obtaining approval from public
    governing bodies for generation and transmission investments will be
    difficult, if not impossible.
        In summary, the key point for us is that our customers should not
    have to pay twice for their transmission system--first to build it and
    then to use it when someone else outbids our customers. Our customers
    have paid for the critical transmission lines necessary to move power
    from our own or distant generation sources to meet our service
    obligation to our communities. If we are required to pay congestion
    charges whenever our use and the demands of others exceed the capacity
    of the line, our customers would, in effect, be ``double billed'' for
    the same transmission capacity. Although the SMD NOPR seeks comment on
    a transition proposal that offers limited protection against this
    outcome, we think that direction from Congress is needed.
        For that reason, last Congress, we supported the Kyl amendment--SA
    3184--placed in the record during the Senate debate on S. 517. We
    believe that the amendment is good energy policy and good public
    policy. It protects our consumers and helps ensure the reliable
    delivery of electricity to our customers. Under the amendment, a
    utility that has firm transmission rights (by ownership or under
    contract) can retain those rights to meet its state law service
    obligation. The amendment makes it clear that customers don't have to
    pay twice for transmission: once to build it and then a second time to
    use it if congestion occurs. The amendment is consistent with FERC
    policy objectives and has wide support from industry--both transmission
    owners and transmission dependent utilities.
                      regional energy services commission
        LPPC has no formal position on the new proposal by the Committee on
    Regional Energy Services Commissions (RESCs).
        LPPC continues to believe that regional differences need to be
    respected in any legislative or regulatory framework and we are
    appreciative that this proposal recognizes that principle. As an
    organization of 24 member systems from all over the country, we are
    very well aware of the distinctions that exist in the markets around
    the country. We have member systems located in New York State that are
    fully participating in the NY ISO. Other member systems are located in
    ERCOT. Still other systems are in the Pacific Northwest, the Southeast,
    Midwest, and the West. Genuine diversity exists among our members. This
    leads to an awareness on the part of LPPC that ``one size doesn't fit
    all''--especially in the West. The RESCs may be intended to address
    this fundamental issue. But the proposal is so sweeping, so new, that
    we feel that more details will have to be known and understood by all
    parties before we would feel comfortable commenting substantively.
                             standard market design
        As this Committee is well aware, the FERC is considering a
    significant rulemaking initiative denominated as Standard Market
    Design. The LPPC and many of its members filed comments on this
    proposal. Colorado Springs Utilities made two filings, one addressing
    issues unique to the Western Interconnect. In its comments Colorado
    Springs Utilities opposed implementation of SMD, particularly in the
    Western Interconnect.
        Speaking for my own company, Colorado Springs Utilities favors open
    access transmission and was one of the first nonjurisdictional
    utilities to file a reciprocal open access tariff with the FERC.
    Colorado Springs Utilities has participated in a number of initiatives
    to create Regional Transmission Organizations. Nevertheless, Colorado
    Springs Utilities believes the SMD proposal is unworkable, especially
    in the Western Interconnect, and will impose significant new costs upon
    electric consumers without any corresponding benefit.
                            transmission investment
        Many LPPC members have built transmission systems to accommodate
    load growth. To the extent permissible under the private use rules, any
    excess is made available to the market. It is in our members' best
    interest to both build for load growth and to make excess transmission
    capacity available to the market place. Load serving entities and their
    customers who prudently built transmission to accommodate future load
    growth should not be deprived of the benefit of that investment by
    having their future right to use that transmission taken away.
        There are mechanisms in place by which entities can assure that
    transmission upgrades are made when transmission customers are willing
    to bear the cost of those upgrades. We believe that the building of new
    transmission should be encouraged and believe that properly structured
    incentive rates might be able to encourage such investment. However,
    any incentives must be tied to acceptable and demonstrable benchmarks
    of performance. Most importantly, the form of incentives or savings
    must not disadvantage or discriminate among different types of
    wholesale energy customers or transactions. Moreover, any incentives or
    savings should not be imposed on all systems or in all circumstances.
        This Committee and FERC have both expressed an interest in
    encouraging investment in transmission facilities. In this respect,
    public power is part of the solution, not the problem. Unlike most of
    the industry, LPPC member systems, such as Sacramento Municipal
    District (SMUD), the Lower Colorado River Authority (LCRA), Long Island
    Power Authority (LIPA), JEA, and the Salt River Project (SRP), are
    continuing to invest in transmission upgrades and expansions. In some
    cases, we are building transmission for others. It is our understanding
    that the Committee is looking for a mechanism that makes sense, allows
    for planning, and facilitates reliable expansion. We will be happy to
    work with the Committee and demonstrate how public power is helping to
    build needed new transmission today.
                              energy conservation
        LPPC supports increased funding for energy efficiency and
    conservation programs. Low-income families spend a significant portion
    of their income on energy costs. Colorado Springs Utilities and the
    other LPPC members are committed to providing our eligible low-income
    customers with the assistance they need and continue to strive for
    rates as low as possible so that our customers can have an easier time
    paying their utility bills.
                             clean coal technology
        Although this is not a primary issue for the LPPC in the context of
    the electricity title, LPPC strongly supports fuel diversity. Colorado
    Springs feels strongly that a national energy policy must recognize the
    role that coal plays as part of a diversified fuel base for the
    generation of electricity. There are some that advocate the elimination
    of coal. Colorado Springs believes this is the wrong approach.
        Our nation has an abundant supply of coal that is inexpensive and
    can be easily delivered using existing technology and infrastructure.
    Coal is a domestic energy source that is not tied to foreign suppliers
    and exists in such quantity that we can supply our energy needs for
    generations to come. Our existing fleet of coal based generation
    supplies approximately 43% of the current electricity consumed in the
    United States.
        Congress should recognize that coal is a fundamental part of our
    energy supply portfolio and allocate resources to address the major
    challenge to coal as a generation fuel. Scientific research and
    federally supported projects to explore and demonstrate new and better
    methods to eliminate the emissions of coal based generation is needed
    to help address the concerns related to human health and the
    environment.
             lppc positions on the issues on which committee staff
                           requested specific comment
    Regional Energy Services Commissions
        LPPC has no official position on the staff discussion draft dated
    3/26/03 at this time. LPPC continues to believe that regional
    differences need to be respected in any legislative or regulatory
    framework. As an organization of 24 member systems from all over the
    country, we are very well aware of the distinctions that exist in the
    markets around the country. We have member systems located in New York
    State that are fully participating in the NY ISO. Other member systems
    are located in ERCOT. Still other systems are in the Pacific Northwest,
    the Southeast, Midwest, and the West. Genuine diversity exists among
    our members. This leads to an awareness on the part of LPPC that ``one
    size doesn't fit all''--especially in the West. The RESCs may be
    intended to address this fundamental issue. But the proposal is so
    sweeping, so new, that we feel that more details will have to be known
    and understood by all parties before we would feel comfortable
    commenting substantively.
    Reliability Standards
        LPPC supports mandatory reliability criteria and standards
    developed by national or regional reliability organizations overseen by
    FERC. We supported the NERC reliability consensus legislation last
    Congress, which was included in the Senate counter-offer dated 10/16/
    02. LPPC believes that there is a need to clarify FERC authority over
    reliability, that there should be binding electric reliability
    standards, and that there should be a clear mechanism to enforce these
    reliability standards.
    Open Access (FERC-Lite)
        LPPC supports open-access transmission. However, LPPC cannot
    support FERC-lite as contained in the staff discussion drafted dated 3/
    26/03 unless the language is modified to restore its original intent.
    The House bill reported out of the Energy and Air Quality Subcommittee
    dated 3/19/03 moves in that direction.
    Transmission Siting
        LPPC does not have a position on the staff discussion draft dated
    3/26/03 at this time. LPPC supports giving FERC carefully circumscribed
    authority to provide the right of eminent domain where the installation
    of transmission facilities is required to ensure adequate and reliable
    service. However, the role of the state and local governments must be
    given adequate weight.
    Transmission Investment Incentives
        LPPC does not have a position on the staff discussion draft dated
    3/26/03 at this time. LPPC believes that incentive rates may be
    appropriate in limited circumstances, if properly tied to acceptable
    and demonstrable performance benchmarks. However, LPPC does not support
    mandating universal application through legislation.
    Transmission Cost Allocation (Participant Funding)
        LPPC does not have a position on the staff discussion draft dated
    3/26/03 at this time. LPPC believes that there are circumstances under
    which transmission cost allocation may be useful. However, LPPC does
    not support mandating universal application through legislation.
    Transmission Organizations/RTOs
        LPPC opposes the concept of an RTO mandate. There are legal
    constraints--such as private use tax restrictions, bond indenture
    requirements, and state statutory obligations--that are unique to
    public power. Most of our members are currently working voluntarily to
    join RTOs. RTOs, to be effective and worth the initial costs, will have
    to deliver the promised benefits to consumer and LPPC strongly feels
    that any participation must be accompanied by consumer benefits.
    PUHCA
        Each of the proposals would repeal the Public Utility Holding
    Company Act (PUHCA). LPPC believes that PUHCA should be modernized. If
    PUHCA is repealed, FERC's merger authority under section 203 of the
    Federal Power Act should be strengthened, not eliminated, and consumer
    protection provisions must be enhanced. FERC must be provided with
    adequate tools to review mergers, including holding-company-to-holding-
    company mergers, and to prevent abuses of market power.
    PURPA
        LPPC has no position on the staff discussion draft.
    Net Metering & Real-Time Pricing
        LPPC does not have a position on the staff discussion draft dated
    3/26/03 at this time.
    Renewable Energy
        LPPC supports legislation that provides incentives to investment in
    renewable energy, including tradable tax credits and the REPI program.
    Market Transparency, Anti-Manipulation, Enforcement
        Public power believes that there should be strong mechanisms to
    ensure market transparency and prevent manipulation in the market. As
    governmental entities, public power systems are subject to ``sunshine''
    laws and good governance principles, requiring complete pubic
    dissemination of information and openness of decision-making. We
    support provisions such as those contained in the House draft bill
    dated 3/19/03 and believe they can be strengthened.
    Consumer Protections
        Public power has continued to advocate for strong consumer
    protection provisions in federal legislation.

        Senator Craig. Well, thank you very much, Phil.
        Now let us move to Betsy Moler, executive vice president,
    Government and Environmental Affairs and Public Policy for
    Exelon Corporation.
        Welcome back to the committee.

      STATEMENT OF ELIZABETH A. MOLER, EXECUTIVE VICE PRESIDENT,
    GOVERNMENT AND ENVIRONMENTAL AFFAIRS AND PUBLIC POLICY, EXELON
      CORPORATION, ON BEHALF OF ELECTRIC POWER SUPPLY CORPORATION

        Ms. Moler. Thank you very much, Senator Craig. It is a
    pleasure to be here today.
        Exelon is a registered holding company. Our utility
    subsidiaries, Commonwealth Edison in Chicago and PECO Energy in
    Philadelphia, serve over 5 million electric customers, roughly
    15 million people. We have the largest customer base of any
    utility in the United States.
        I am here today representing the Electric Power Supply
    Association, known as EPSA. EPSA is the national trade
    association representing competitive power suppliers, including
    independent power producers, merchant generators, power
    marketers, as well as some major utilities. These suppliers
    account for more than a third of the Nation's installed
    generating capacity.
        Unlike some of my fellow panelists, EPSA strongly urges you
    to enact long overdue energy legislation. In addition, EPSA
    agrees with Senator Thomas' recent statement that if we pass a
    comprehensive energy bill, it must include an electricity
    title.
        Various electricity marketing reforms have been pending
    before this committee for nearly a decade. On March 4, this
    committee heard compelling testimony that highlighted the
    financial crisis facing our industry and that Allen Franklin
    mentioned to you. We desperately need legislation that will
    provide much needed reform outdated laws that hamper our access
    to capital and thwart infrastructure development. Congress came
    close to passing an electricity title in the comprehensive
    energy policy legislation last year. Unfortunately that effort
    fell short. We urge you to act this year.
        We believe that the focus of any legislation should be on
    repealing outmoded laws that impede competition and capital
    formation, further the progress of wholesale competition, and
    assure reliability. Wholesale competition, incomplete as it is,
    has already benefitted consumers. Inflation-adjusted
    electricity prices decreased from 1985 to 2001, the latest year
    for which statistics are available. They decreased on average
    by 31 percent for residential customers and by 45 percent for
    industrial and commercial customers. Studies have repeatedly
    shown that efficient wholesale markets bring real benefits to
    consumers. Actions such as forming regional transmission
    organizations could save consumers as much as $60 billion by
    2021.
        At your staffs' request, my written testimony today focuses
    on the four major proposals before the Congress either this
    year or last: Senator Thomas' bill, the majority staff draft,
    the Senate offer from last year, and the electricity provisions
    of the House Energy and Air Quality Subcommittee bill.
        By focusing on the list of proposals that are or have been
    pending and analyzing them very carefully, it is obvious that,
    contrary to the impression you may get from today's discussion,
    we believe the differences are actually narrowing among the
    proposals. EPSA believes that by taking various parts of the
    four pending proposals, that this committee could forge a
    compromise proposal that would have very broad industry and
    stakeholder support.
        In the limited time I have today, I do want to focus on one
    brand new topic, that is the proposal by the majority staff
    discussion paper to create regional energy services
    commissions, or RESCs. The staff draft, unveiled last week,
    does propose a fundamental shift in the way the electricity
    industry would be regulated. By authorizing RESCs, Congress
    would be signaling the end of a system of regulation that has
    brought this Nation an electricity network that is the backbone
    of our modern economy and the envy of the modern world. The
    staff RESC proposal is not a minor or incremental change. It
    represents a radical shift in the regulation of wholesale
    electric power markets.
        EPSA simply cannot support the RESC proposal. We do
    recognize that it is a well-intentioned proposal to address the
    jurisdictional questions that have arisen in the wake of FERC's
    standard market design initiative. But the RESC proposal, as it
    currently stands, further complicates an already too
    complicated jurisdictional split between FERC and the States.
        We also believe that it raises serious constitutional
    questions and those constitutional questions are outlined in
    some detail in my testimony.
        It also has a bunch of practical issues. It would create
    another layer of bureaucracy with authority over rates for
    transactions in interstate commerce. The industry would be
    hamstrung with multiple overlapping layers, including FERC,
    State PUCs, RESCs, RTOs, electric regional organizations, and
    municipal and cooperative entities. Our goal should be to
    simplify and streamline the regulatory model, not to complicate
    it.
        We also have serious questions about the transition to
    RESCs. There are staffing issues. There are State issues with
    respect to requiring legislation to implement it. There are
    funding issues when States are having financial crises. There
    is a question of recruiting appropriate staff to run these
    organizations and people these organizations, and there is a
    question of whether they could handle the caseload.
        We think that RESCs would exacerbate the seams problem
    rather than help them. A State could opt in one year, opt out
    the next year, as Virginia has just done, opt in the next year,
    and where would you be? In short, we think it is a mess.
        Mr. Franklin's testimony on behalf of EEI had some further
    practical questions, and I would also call your attention to
    some testimony that is being submitted for this record by the
    North American Electric Reliability Council which calls into
    question the reliability implications of this proposal.
        We do understand that one goal of the staff draft is to
    stir creative thinking, and we give them a great deal of credit
    for that. We do believe that there are aspects of our industry
    that would benefit from greater cooperation among the States.
    The include regional transmission planning, including expansion
    of the transmission grid, and regional approaches to
    determining generation adequacy. We would urge Congress to
    focus on incremental improvements to enhance regional efforts
    rather than adopting the RESC approach.
        EPSA does support passage of an electricity title that
    includes reliability language, FERC-lite provisions, PUHCA
    repeal with safeguards to ensure that there are no cross-
    subsidies by utilities, access to books and records by State
    commissions, prospective PURPA repeal, voices support for RTOs,
    has market transparency, anti-manipulation and enforcement
    provisions, information disclosure, consumer privacy, and
    unfair trade practices provisions. Some of these issues have
    been highlighted, particularly by Senator Bingaman, as a
    precondition for his degree of comfort with repealing PUHCA.
        Exelon does support the Barton draft siting proposal, and I
    would note that there are three panelists on this panel that
    are members of the Department of Energy's Electricity Advisory
    Board. We helped develop that proposal and we are delighted to
    see it emerge in the Barton bill.
        Again, I do believe that this committee has a wonderful
    opportunity to forge a consensus where a consensus has eluded
    the committee for years, and we would urge you to put your
    efforts to that task.
        Thank you.
        [The prepared statement of Ms. Moler follows:]
      Prepared Statement of Elizabeth A. Moler, Executive Vice President,
    Government & Environmental Affairs & Public Policy, Exelon Corporation,
               on Behalf of the Electric Power Supply Corporation
        Mr. Chairman and members of the committee, thank you for the
    opportunity to testify today; it is a pleasure to be back before this
    Committee. I am Elizabeth A. (Betsy) Moler, Executive Vice President,
    Government and Environmental Affairs and Public Policy for Exelon
    Corporation. Exelon is a registered utility holding company. Our two
    utilities, Commonwealth Edison (ComEd) of Chicago, and PECO Energy of
    Philadelphia, serve over 5 million electric customers, the largest
    electric customer base in the United States. We have more than 40,000
    MW of generating capacity, the second largest portfolio in the United
    States. Our wholesale power marketing division, known as the Power
    Team, markets the output of our generation portfolio throughout the 48
    States and Canada with a perfect delivery record.
        I am here today representing the Electric Power Supply Association
    (EPSA). EPSA is the national trade association representing competitive
    power suppliers, including independent power producers, merchant
    generators and power marketers. These suppliers, which account for more
    than a third of the nation's installed generating capacity, provide
    reliable and competitively priced electricity from environmentally
    responsible facilities serving global power markets. EPSA seeks to
    bring the benefits of competition to all power customers. On behalf of
    the competitive power industry, I thank you for this opportunity to
    comment on pending energy legislation.
        I strongly urge you to enact long-overdue energy legislation. In
    addition, EPSA agrees with Senator Thomas' recent statement that, ``If
    we pass a comprehensive energy bill, it must include an electricity
    title'' \1\ Various electricity market reform bills have been pending
    before this Committee for nearly a decade. On March 4, 2003, this
    Committee heard compelling testimony that highlighted the financial
    crisis facing our industry; we desperately need legislation that will
    provide much-needed reform of outdated laws that hamper our access to
    capital and thwart infrastructure development. Congress came close to
    passing an electricity title in the comprehensive energy policy
    legislation last year; unfortunately that effort fell short. We urge
    you to act this year.
    ---------------------------------------------------------------------------
        \1\ ``Secretary Abraham and Senator Thomas Agree; Electricity
    Essential for Comprehensive Energy Bill,'' Press Release (February 27,
    2003).
    ---------------------------------------------------------------------------
        We believe that the focus of any legislation should be on repealing
    outmoded laws that hinder competition and capital formation; furthering
    the progress of wholesale competition; and assuring reliability. EPSA
    members agree with the vision statement from a recent Western Business
    Roundtable proposal \2\ that recommends, ``All transmission users enjoy
    access to a robust regional transmission system capable of efficiently
    moving adequate supplies throughout the grid.'' Wholesale competition--
    incomplete as it is--has already benefited consumers; inflation-
    adjusted electricity prices decreased from 1985 to 2001 on average by
    31 percent for residential customers and by 35 percent for industrial/
    commercial customers.\3\ Studies have repeatedly shown that efficient
    competitive wholesale markets bring real benefits to consumers. Actions
    such as forming Regional Transmission Organizations (``RTOs'') could
    save consumers as much as $60 billion by 2021.\4\ Congress can foster
    further savings by encouraging the use of the most economically
    efficient generation and opening up the transmission system. Consumers
    in areas of the country which do not have robust wholesale markets are
    not reaping the full benefit of competition-if markets were established
    in which the least expensive and most-efficient generation had the
    opportunity to be deployed first, regardless of ownership, all
    electricity customers would save.
    ---------------------------------------------------------------------------
        \2\ Western Market Design, A Proposed Model to Encourage Greater
    Investment in Western Wholesale Electricity Markets,'' Western Business
    Roundtable Proposal, www.westernroundtable.com.
        \3\ The ``2003 Data Update: Assessing the `Good Old Days' of Cost-
    Plus Regulation'' prepared for EPSA by the Boston Pacific Company.
        \4\ ``Economic Assessment of TRO Policy'' for FERC by ICF
    Consulting on February 26, 2002.
    ---------------------------------------------------------------------------
        At your staff's request, my testimony today will discuss three
    major proposals pending before the Congress: S. 475, Senator Thomas's
    Electric Transmission and Reliability Enhancement Act of 2003 (``Thomas
    Bill''); the Majority Staff Discussion Draft, dated March 20, 2003
    (``Staff Draft''); the Senate Offer of October 16, 2002 (``2002 Senate
    Offer''); and the electricity provisions included in the comprehensive
    bill reported last week by the House Energy and Air Quality
    Subcommittee (``Barton Bill''). As your staff requested, the testimony
    is organized to focus on specific areas of concern to this Committee.
        Our analysis of these three proposals keeps in mind three basic
    principles:

       First, any structural or procedural change brought about by
            legislation must be aimed at providing consumers with the
            lowest-cost reliable power available;
       Second, maximum consumer benefits will flow from competition
            built around seamless regional markets in which power is
            generated at the least expensive and most efficient facilities
            regardless of who owns them; and
       Third, the basic concept of ``first do no harm'' should
            apply--the collateral effects from incomplete or poorly thought
            out policy changes could have a negative impact on all
            electricity users.
                      regional energy services commissions
        The Staff Draft, unveiled last week, proposes a fundamental shift
    in the way that the electricity industry would be regulated. By
    authorizing the creation of ``Regional Energy Services Commissions''
    (``RESCs'') Congress would be signaling the end of a system of
    regulation that has brought this nation an electricity network that is
    the backbone of our modern economy; it provides reliable service, at
    reasonable cost and is the envy of the world. The Staff Draft RESC
    proposal is not a minor or incremental change; it represents a radical
    shift in the regulation of wholesale electric power markets.
        EPSA simply cannot support the Staff Draft RESC proposal. We
    recognize that it is a well-intentioned proposal to address the
    jurisdictional questions that have arisen in the wake of the Federal
    Energy Regulatory Commission's (``FERC'') recent market design
    initiatives. But the RESC proposal, as it currently stands, further
    complicates an already too-complicated jurisdictional split between
    FERC's regulatory authority over wholesale sales and transmission under
    the Federal Power Act and the states' authority to regulate retail
    matters.
        As a threshold matter, we believe that the RESC proposal, as
    drafted, raises significant issues under the U.S. Constitution. The
    Commerce Clause of the Constitution grants to Congress--and solely to
    Congress--the power to regulate commerce among the states. Supreme
    Court precedent has long established that transmission of electricity
    is commerce among the states--out of reach of state regulation under
    the Commerce Clause.\5\ In addition, the RESC concept implicates issues
    under the Appointments Clause by legislating a new level of regional
    government that is not contemplated by the Constitution. Congress can,
    of course, abolish FERC's authority to set transmission rates, but it
    is not at all clear that Congress can delegate that authority to the
    states, or to congressionally appointed executives.
    ---------------------------------------------------------------------------
        \5\ The very case cited in the Staff Draft as the introduction for
    the creation of RESCs, Public Utilities Comm'n v. Attleboro Steam &
    Electric Company, 273 U.S. 83 (1927), held that a direct transfer of
    power from a utility in Rhode Island to a utility in Massachusetts is
    in interstate commerce and cannot be regulated by the states, even
    though there was no federal authority then to regulate those
    transactions. Federal Power Commission v. Florida Power & Light Co.,
    404 U.S. 453 (1972), held that power generated and delivered solely
    within Florida was nonetheless transmitted in interstate commerce
    because it commingled in a bus with power from another state. New York
    v. Federal Energy Regulatory Commission, 535 U.S. 1 (2002) held that
    the transmission of power, even for retail services, was interstate
    commerce, subject to Federal Power Act jurisdiction. These cases make
    clear that the Commerce Clause of the Constitution precludes states
    from regulating transmission of power in interstate commerce.
    ---------------------------------------------------------------------------
        The RESC proposal raises significant practical concerns, and it
    would create another layer of bureaucracy governing some unquantifiable
    percentage of transactions in interstate commerce. The industry would
    be hamstrung with multiple overlapping layers of jurisdiction including
    regulation by FERC; state regulation through public utility commissions
    (``PUCs''), RESCs, RTOs, Electric Reliability Organizations (``EROs''),
    and municipal and cooperative entities. Our goal should be to simplify
    and streamline the regulatory model, not to complicate it.
        The proposal builds on a questionable model: the multi-state
    compact. These organizations, even when successful, tend to move
    slowly, and are ill equipped to respond to rapidly evolving, dynamic
    circumstances. They require state legislation for approval and lack
    federal enforcement authority. I think that one must be very careful
    before turning over regulation of an essential commodity, which is the
    basic engine of our economy, to a new and unproven regulatory regime
    when so much is at stake.
        RESCs could quickly become a hodgepodge of highly-politicized
    regulatory organizations that would practically guarantee huge
    ``seams'' issues, as even the most fundamental definitions and rules of
    the road get set locally. A state could opt-in to an RESC one year, and
    opt-out the next, which by the Staff Draft's contiguous requirement
    could immediately disqualify other states from being part of the RESC.
    Some states would have RESCs; others would not. Additional ``seams''
    would be created as additional regional organizations come and go. This
    is just one example of how one state's action could impact the
    interstate transmission market in multiple states.
        Further development of competitive wholesale markets would be
    thwarted as different regions develop different rules. Whole new
    regional bureaucracies would have to be created, funded, and qualified
    staff recruited in an era of unprecedented state budget deficits. We do
    not believe that is likely to happen smoothly. Furthermore, the RESCs
    simply would not be prepared to handle the caseload.
        I could elaborate on the list of questions that have been raised
    since the proposal was revealed last week. The Edison Electric
    Institute (``EEI'') testimony, and the North American Electric
    Reliability Council (``NERC'') testimony, elaborate on many of the
    practical issues presented by the Staff Draft.
        Representatives of the capital markets that testified at the FERC's
    capital availability technical meeting on January 16, 2003, uniformly
    advocated that clear rules and regulatory certainty are a prerequisite
    for the return of affordable capital to this industry as a whole.
    RESCs, as formulated in the Staff Draft, likely would create even
    greater uncertainty for an even longer time as they progress through
    the state approved process, get organized, and sort out responsibility.
    In the meantime, a financially beleaguered industry would be unable to
    take sure steps to recovery.
        The goal of Congress should be to encourage competition at the
    wholesale level, and to simplify rather than complicate the regulatory
    regime (``do no harm''). Putting all interstate transactions under FERC
    jurisdiction, as provided in the Thomas Bill, rather than adopting the
    Staff Draft can achieve this goal. EPSA members agree with Senator
    Thomas' conclusion that the current [wholesale] electric market is
    inefficient and fragmented; it does not allow the industry to provide
    consumers with the savings they could otherwise receive with a system
    that works.\6\
    ---------------------------------------------------------------------------
        \6\ Supra, n. 1.
    ---------------------------------------------------------------------------
        We understand that one goal of the Staff Draft is to ``stir
    creative thinking'' about solutions to problems in our industry. EPSA
    believes there clearly are aspects of our industry that would benefit
    from greater cooperation among states. These include regional
    transmission planning, including expansion of the transmission grid;
    and regional approaches to determining generation adequacy. We would
    urge Congress and FERC to focus on incremental improvements to regional
    efforts, rather than adopting the radical RESC approach.
                             reliability standards
        EPSA supports the passage of electric reliability language
    establishing a nation-wide organization that would have the authority
    to establish and enforce reliability standards with the oversight of
    FERC. Although we are not yet convinced that any of the proposals is
    ideal, we believe that the reliability language contained in the Thomas
    Bill represents the best approach of the four bills under discussion.
                          open access (``ferc-lite'')
        The expansion of FERC authority to include limited jurisdiction
    over the transmission systems of public power and cooperatives is a
    very important step toward creating an integrated national transmission
    grid. We urge Congress to include the FERC-Lite provisions because they
    will: support competitive market development; help prevent gaming of
    the transmission system; and promote reliability by eliminating the
    ``holes'' in the regulatory oversight of the system. According to a
    December 2002 GAO report, ``Lessons Learned From Electricity
    Restructuring,'' because of this lack of jurisdiction:

              FERC has not been able to prescribe the same standards of
            open access to the transmission system. This situation, by
            limiting the degree to which market participants can make
            electricity transactions across these jurisdictions, will limit
            the ability of restructuring efforts to achieve a truly
            national competitive electricity system and, ultimately will
            reduce the potential benefits expected from restructuring.

        In theory, sections 211 and 212 of the Federal Power Act allow any
    person to request FERC to issue an order requiring interconnection and
    the wheeling of electricity. In practice, proceedings under sections
    211 and 212 are expensive, time consuming and are a poor substitute for
    a requirement that all transmitting utilities provide open, non-
    discriminatory access under comparable rates, terms and conditions.
    Access under these cumbersome rules and procedures merely perpetuates
    opportunities for abuse and foot dragging by non-jurisdictional,
    transmitting utilities until the competitive threat they face
    disappears. One of the principle reasons that FERC initiated the Order
    No. 888 open access rulemaking initiative in 1996, while I chaired the
    Commission, was the recognition that individual case-specific
    adjudications over the scope of open access requirements were simply
    not working.
        Unless FERC-Lite is included, regulation of the transmission grid
    will continue to look like ``Swiss Cheese'' where the holes are the
    Bermuda Triangles of competition. We endorse giving FERC the very
    limited authority called for in the Staff Draft, the Thomas Bill or the
    2002 Senate Offer. We also believe that the refinements to the FERC-
    Lite provisions contained in the Barton Bill have the potential to make
    the FERC-Lite provisions acceptable to a broader audience of industry
    participants.
                              transmission siting
        EPSA does not have an official position on transmission siting, but
    its members do support the timely expansion of the transmission
    infrastructure to support delivery of needed generation. Exelon as an
    owner of generation and transmission assets does support providing the
    FERC limited ``backstop'' authority to issue a certificate of public
    convenience and necessity to site transmission needed to relieve
    ``National Interest'' bottlenecks as is called for in the Barton Bill.
    The Barton Bill implements the recommendations of the Department of
    Energy's Electricity Advisory Board (``EAB''). It was my privilege to
    chair the Transmission Grid Solutions Subcommittee of the EAB, which
    developed the recommendations. The EAB includes representatives of a
    broad cross-section of the economy, including regulators,
    environmentalists, financial services, utilities, public power and
    consumer groups. In September 2002, the EAB published a comprehensive
    report,\7\ which contained a set of recommendations that were provided
    to the Secretary of Energy. The report identified ``important
    initiatives that must be undertaken in order to ensure the nation's
    transmission grid continues to be a reliable, strong engine for our
    economy.'' The report recommended that the FERC backstop authority
    should be provided only if the pending application for siting of a
    ``National Interest Transmission Facility'' is not acted on by State
    and/or Federal authorities after 12 months of its filing.
    ---------------------------------------------------------------------------
        \7\ ``Transmission Grid Solutions Report,'' Electricity Advisory
    Board (September 2002). Both reports can be found at
    www.eab.energy.gov.
    ---------------------------------------------------------------------------
        We believe that this carefully crafted approach will provide
    Federal siting authority only for a limited number of critical projects
    found to be in the national interest. It is responsive to those that
    have opposed a very broad grant of Federal siting authority by
    balancing national interest with the concern of overriding existing
    state siting processes. Exelon endorses the Barton Bill provision. The
    Staff Draft provisions are not acceptable because they include cross-
    references to the RESC proposal.
                       transmission investment incentives
        EPSA has no position on whether there is a need to adopt statutory
    provisions to encourage transmission investment. We certainly recognize
    the need for a robust transmission system that will support a reliable,
    efficient system. We have filed comments in support of the pending FERC
    Policy Proposal to develop a pricing policy for efficient operation and
    expansion of the transmission grid; those comments strongly endorse the
    Commission's primary objectives of promoting RTO membership and
    encouraging efficient infrastructure investment. We have made some
    specific suggestions on how FERC should improve its policy proposal.
        EPSA believes that efficient transmission investment is stalled and
    should be promoted; investors considering transmission expansion
    projects need to see commensurate reward for their commitment of
    capital. We recognize that transmission owners must be able to recover
    their investments, plus a fair return on those investments, in order to
    encourage the necessary grid expansion. We believe that transmission
    incentives should be tied to creating RTOs and developing competitive
    market structures. The Barton Bill, the Staff Draft, and the 2002
    Senate Offer are acceptable. We are especially supportive of the Staff
    Draft's addition of provisions calling for proper price signals and
    reduction of congestion on transmission networks.
               transmission cost allocation (participant funding)
        We do not believe that Congress needs to include any statutory
    language to address the transmission cost allocation issue; intrusive
    federal legislation on this topic could be both unnecessary and
    harmful. Cost allocation is a quintessential example of the type of
    work that is performed best by regulatory agencies, rather than enacted
    into statutory law; the regulators are best-suited to address the
    specifics facts of the cases requiring their expertise. Any
    transmission cost allocation should provide flexibility and ensure that
    transmission costs are born by those who benefit from the transmission.
    Mandating one type of funding for expansion of the transmission system,
    however, would be a serious mistake. We support participant funding in
    the context of RTOs and competitive market structures as a general
    rule, but do not believe the requirements should be set forth in a
    statute.
                        transmission organizations/rtos
        EPSA believes that forming RTOs is a crucial next step towards
    furthering more competitive wholesale markets and that FERC has ample
    authority under existing law to promote the formation of RTOs. Congress
    should steer clear of proposals that would inhibit RTO formation.\8\
    With the ``do no harm'' principal in mind, EPSA opposes the RESC
    section of the Staff Draft because it would throw serious doubt on the
    future viability of RTOs, and be deeply harmful to the operation of the
    transmission grid. We endorse the Barton Bill provision on RTOs, which
    supports membership in an independent RTO, requires a report to
    Congress on pending RTO applications and authorizes Federal utilities
    to enter into an agreement transferring control of all or part of their
    transmission system to an approved RTO.
    ---------------------------------------------------------------------------
        \8\ One such proposal is being considered as a possible amendment
    to the Barton Bill. It is an amendment by Rep. Norwood that would
    severly restrict FERC's authority over interstate commerce by
    overturning a recent landmark Supreme Court case reviewing FERC's
    authority, New York v. FERC, op. cit. n. 3.
    ---------------------------------------------------------------------------
                                     puhca
        PUHCA repeal is an important and long-awaited move towards
    eliminating expensive, pointless restrictions that only create
    additional regulatory costs and limit the ability of companies to
    provide much-needed investment in the electric sector. PUHCA repeal is
    included in the Thomas Bill, the Barton Bill, the 2002 Senate Offer,
    and the Staff Draft. The draft bills all provide FERC sufficient
    authority to ensure that utilities do not take enter into abusive
    transactions with their affiliates that would harm utility customers.
    They also provide states with an appropriate means to secure access to
    utilities' books and records so that they can do their job. We endorse
    including PUHCA repeal in any electricity bill approved by this
    Committee. We specifically endorse the PUHCA repeal provisions in the
    Thomas Bill; the Staff Draft provisions are not acceptable because they
    include cross-references to the RESC proposal.
                                     purpa
        EPSA supports prospective PURPA repeal in regions where competitive
    wholesale markets exist. PURPA facilities are currently an important
    and efficient generation source. The current PURPA ownership
    requirements, however, should be repealed in all cases, because they
    are outdated limitations that are no longer required to promote
    diversity in generation ownership. The Staff Draft provisions are not
    acceptable because they include cross-references to the RESC proposal.
                                renewable energy
        EPSA supports renewable energy and specifically endorses the
    extension and expansion of the Section 45 production tax credit to
    include the full range of renewable sources. This provision is not
    included in any of the bills currently pending before this Committee
    because the Senate Finance Committee has jurisdiction over tax credits.
    EPSA believes that, if Congress chooses to adopt an RPS, it should be
    set at a level that is supported by market demand, and should include a
    broad definition of renewable resources. The Barton Bill contains a
    number of useful provisions that support broader development of
    renewable energy options, including renewable energy production
    incentives, inclusion of landfill gas as a Qualifying Renewable Energy
    Facility, and reports to Congress on use of renewables on federal lands
    and an assessment of renewable energy resources by the DOE.
              market transparency, anti-manipulation, enforcement
        FERC has substantial authority under existing law to address issues
    of market transparency, and manipulation. The recent enforcement
    activities on the part of the Department of Justice (``DOJ'')
    definitively make the case that there is not a regulatory ``gap'' among
    Federal agencies charged with enforcing the laws against market
    manipulation, collusion, anti-competitive pricing, and other illegal
    activities. Nonetheless, we welcome additional statutory authority that
    complements the FERC and DOJ activities on this front. Members of FERC,
    the Bush Administration, the Senate and the House of Representatives
    have all supported increasing civil and criminal penalties under the
    Federal Power Act. EPSA supports these efforts because they give the
    proper authorities additional tools to punish bad actors. The penalty
    provisions in the Thomas Bill, the Barton Bill, the 2002 Senate Offer
    and the Staff Draft are virtually identical, and we would endorse
    including them in any bill reported by this Committee.
                              consumer protections
        EPSA supports information disclosure, consumer privacy, and unfair
    trade practices provisions. The Staff Draft would direct the Federal
    Trade Commission to take appropriate steps to provide consumers
    additional information about prices and sources of their electric
    energy, and would avoid some unsavory business practices that have
    emerged in the telecommunications industry. We are encouraged that the
    Staff Draft provisions are applicable to all entities, including
    municipals and cooperatives, because all electricity consumers deserve
    this protection.
        Thank you again for the opportunity to testify. EPSA, and Exelon,
    look forward to continuing to work with you to promote effective
    competitive electricity markets.

        The Chairman. Thank you. We will certainly try.
        Let us start with the questions. Senator Bingaman, you are
    first.
        Senator Bingaman. Thank you very much. Thank you all for
    your excellent testimony.
        Let me start with Mr. English and ask you to respond. Your
    suggestion, as I understand, your view is that until FERC
    completes whatever it is going to do with this standard market
    design, Congress should hold off trying to legislate. Now,
    Betsy Moler has just testified very differently that she
    believes we should proceed to legislate, that we have had this
    before the committee for 10 years and it is time we went ahead
    and legislated on the things we could agree on and that there
    is a whole list of things that she believes has pretty broad
    consensus on, and she listed those off. What is your response?
    Do you disagree that there is reasonably broad consensus on a
    variety of things we ought to go ahead and do?
        Mr. English. And I think that is the key that you made, is
    with regard to consensus, those things that are not going to be
    affected by SMD are in some way in which the Congress could
    make certain are not going to be affected by SMD.
        The point that I was trying to make is that any of these
    items that are going to be affected in some way by standard
    market design, we are putting the cart before the horse. If the
    Congress can pass those and then suddenly we find out we have
    got--and even if we had the white paper, Mr. Chairman--and I
    want to applaud you for encouraging that to come forward. Until
    we know for sure that is it, then suddenly we are into a
    situation, we have passed a policy assuming one thing and we
    are dealing with something else.
        The other thing that troubles me a little bit--and again, I
    may be overly cautious, Senator, but the thing that bothers me
    a little bit is that I have been on the receiving end far too
    often as a legislator of passing something, assuming certain
    things are going to happen, and then when it gets within the
    regulatory body, that is not the way that it is actually
    implemented. What I would like to feel a bit of a comfort level
    about here is if I knew there is something hanging in the
    wings, there is a legislative vehicle in which we can come in
    and deal with or make changes or make sure that we get it right
    in line with what the regulatory body is doing. That just
    raises my comfort level.
        Senator Bingaman. Let me ask Mr. Franklin. How do you come
    out on this question about whether we should wait on SMD or go
    right ahead and do a list of these things that Ms. Moler went
    through in her testimony?
        Mr. Franklin. Senator, I think you can almost argue that
    either way. Glenn and I were talking about it earlier, and
    since he argued that we should hold off, I will argue that we
    should go ahead.
        Here is the situation in many States and many regions of
    the country. There is an impasse. At this point let me speak
    for the Southeast not for EEI. There is an impasse between the
    FERC and the States on how to proceed. As much as we all talk
    about getting past that impasse, I do not see that we are
    making a lot of progress. I think the white paper coming out
    from FERC, if it accommodates the regional differences
    adequately, could help.
        I have a concern if Congress does nothing, that we will not
    proceed, we will not proceed, will not proceed to an orderly
    regional market RTO scheme in many parts of the country. It
    will simply continue to have this impasse between the States
    and FERC.
        It would be helpful--and it will have to be done
    skillfully--that if Congress could lay out some basic
    parameters, that could better define, first of all, the sense
    of Congress as to how the market should develop and, number
    two, could clarify these jurisdictional issues, I think that
    would relieve some of the tension between the States and FERC
    and perhaps let us go forward more orderly than simply hoping
    that the States and FERC ultimately will work this out because
    I just do not see, at least in the Southeast, those two parties
    getting closer.
        Senator Bingaman. Let me ask, Ms. Moler. Betsy, did you
    have anything else you wanted to add on this issue?
        It does seem to me that that is sort of the crucial
    question before the committee right now. Do we basically hold
    off and wait to see what FERC winds up with or where they wind
    up on this standard market design, or do we proceed to
    legislate in all of the areas you have described? And do you
    see that we would be in any way impeding or altering the way
    FERC would be coming out on SMD by virtue of doing what you
    think we ought to do legislatively?
        Ms. Moler. Senator Bingaman, I think you have waited long
    enough. This process is not known for its speed. It is rather
    tortoise-like. And I feel fairly confident that we will have
    plenty of opportunity to review the standard market design, the
    changes that the FERC is going to make in the standard market
    design before we get to the Rose Garden. So I would urge you to
    go full speed ahead, certainly keeping track of what FERC is up
    to.
        There is a myth--and I call it that--that FERC is not
    accommodating regional differences. I could tote down a bunch
    of regional differences that they have already accommodated. I
    still read FERC orders. I do not write them anymore, but I
    still read them. Pricing flexibility, resource adequacy,
    planning, RTO governance. There is just a whole host of things
    where they have already accommodated regional differences as
    they have acted on individual RTO orders.
        I feel fairly confident that they will recognize that in
    the white paper, and I hope that, as Mr. Franklin said moments
    ago, the white paper, if it accommodates regional differences,
    could help. Assuming that that happens--and I think it will--
    then I would absolutely urge you to go full speed ahead.
        The Wall Street implications of the financial crisis, the
    access to capital markets, what has happened to lots of
    utilities is very serious and it needs to be dealt with.
        Senator Bingaman. Thank you very much, Mr. Chairman.
        Senator Thomas. Thank you, Mr. Chairman. Thank you all. I
    think that was very helpful.
        Mr. Franklin, you I thought mentioned better wholesale
    markets, independent transmission, some countrywide rules. I
    think that is good.
        You indicated that there is no likelihood of a national
    market. Last time we dealt quite a bit with the Louisiana to
    Wisconsin transmission. We talk about Wyoming to Chicago. Is
    that not pretty much of a national market?
        Mr. Franklin. When I said I do not think we are moving to a
    national market and not likely to have a national market, I am
    speaking in the broadest sense. I do not think within the
    foreseeable future, you are going to see power generated in
    Georgia and sold in California. I do not think you are going to
    see any major contribution to electric power source in New
    England from the Southwest, for example. So I do not see a
    national market as we see in many other commodities.
        I think clearly we are evolving to regional markets, and as
    more transmission is built, if it is economically justified, I
    think those regions will get larger and larger. But I think we
    are long way from what we traditionally think of as a
    ``national'' market.
        Senator Thomas. Well, you are probably right, but I think
    we are going to move outside of what we know now as RTOs. That
    means we have to have some arrangement that goes beyond the
    RTOs.
        Mr. Franklin. I think what will naturally happen, Senator,
    is if we can get these--and do not assume we have not had
    regional markets for a long time. There has been power moved
    around in these regions for many, many years, economy
    transactions between utilities. What we are trying to do is
    simply make these regional markets more efficient and more
    systematic with more players. So we are not going from not
    having regional markets to having regional markets.
        As these regional markets develop and as we begin to see
    price differences between markets, that is going to create the
    opportunity for somebody to make money by moving power from one
    regional market to another. I think just the economics will
    drive those regions to be larger as we go forward.
        Senator Thomas. We also have to proceed for the consumers'
    benefit, not only for the producer.
        Mr. Franklin. I think that is the only reason to proceed is
    for consumers' benefit. I do not think we should be developing
    legislation to favor one producer over another. It seems to me
    the whole purpose of moving in this direction is lower cost to
    consumers and more reliability for consumers.
        Senator Thomas. Glenn, you mentioned small co-ops. Is 4
    million megawatt hours elimination--does that deal with most of
    your members?
        Mr. English. Well, that certainly helps and I think that
    you have a very good understanding of electric cooperatives and
    the transmission and the realities between those. That I think
    gets into this question of whether there is going to be a
    bright line test between those that are truly distribution
    cooperatives as opposed to those that are generation, and that
    has been a problem.
        Could I follow up just a little bit on the question that
    you previously had? And you hit the point and I think it is an
    excellent point.
        I am not sure at this time that the Congress has really
    focused on this issue of a transmission system that will
    provide for the inter-regional sales of electric power as
    perceived under the 1992 act. I think there is a real question
    here on the way that it is being approached. We have had this
    analogy from time to time, the interstate highway system, and I
    think it is a good one. We do not seem to be following that or
    looking at that. It is all or nothing. In our case it is a
    small distribution that has a line of a certain magnitude.
    Because of the distance, they have to have that to be able to
    move that power. They are looked at in the same way as what we
    would any kind of interstate system.
        The question is whether we should, in fact, be a bit bolder
    and look beyond this and truly try to establish a
    differentiation between those high voltage systems that are
    inter-regional or interstate in nature as opposed to those that
    are not.
        Senator Thomas. I agree. I hate to be redundant. I mean, in
    this whole energy thing, there is where there is production and
    where there is consumption. And they are not necessarily the
    same. We have not had the demands to move that energy in the
    past, but we are going to I believe.
        One final quick one, Ms. Moler. I think you mentioned
    investment and all that. We had a panel here a while back, and
    they claim there is $120 million a year reduction in investment
    in transmission. Generation has not been kept up as it has in
    the past. There has been production. What can we do to
    encourage the kind of investment in transmission that you talk
    about?
        Ms. Moler. The DOE Electricity Advisory Board that I
    mentioned did create a transmission subcommittee. I chaired the
    subcommittee. Mr. Franklin and Mr. English were also members of
    the subcommittee as well. We looked at this issue.
        We believe the backstop siting proposal for national
    interest lines--not every line, but national interest lines--
    would be very beneficial. We also think that you have to have
    more appropriate returns that recognize the risks and the
    permitting times that are involved in siting transmission. We
    also need planning on a regional basis so that there will not
    be as much opposition, that people in the region will
    understand that you have to have the facilities. And then
    proper pricing.
        Senator Thomas. It is interesting. California had a big
    problem partly because they did not want any transmission, did
    not want any generation, but they wanted a hell of a lot of
    power.
        Ms. Moler. You need both.
        Senator Thomas. It is a tough deal.
        Yes, sir.
        Mr. Richardson. If I could just add APPA's voice on this
    also. We also support Federal eminent domain authority as a
    backstop. So this is a very tough issue to deal with and I
    understand that, Senator. This is a very tough issue to deal
    with. Transmission is the weakest link in our industry. It is
    the most critical issue. We have members that are building
    suboptimal generation because of concerns over transmission.
    Dealing with the seams issue, dealing with the transmission of
    power in some cases we think is going to require some Federal
    presence.
        Senator Thomas. Thank you.
        Mr. Franklin. May I comment on that?
        Senator Thomas. Yes, sir.
        Mr. Franklin. I agree with what the other panelists have
    said, but there is another very important impediment to
    building transmission for inter-regional transactions. And that
    is that, first of all, the States have primary siting authority
    and permitting authority for transmission. Some States are very
    concerned that a great deal of transmission will be built in
    their State to export power outside and the parties outside the
    State will benefit and the State where the transmission is
    built will be stuck with the cost of the transmission and no
    benefit. So you cannot de-link getting the pricing of
    transmission right.
        One of the issues that we are very interested in is
    participant funding, that is, let us make sure that as we build
    all this new transmission, that the people that benefit pay.
    And that will go a long way to relieving State opposition to
    transmission because there would be assurance that their
    customers would not be paying.
        Senator Thomas. We got into an endless discussion about
    that last time. It happened to be in Louisiana going up to
    Wisconsin. But the problem is if you do it based on benefits,
    why, the close people get some benefit but strengthening the
    transmission line so it will be predictable, and they should
    not have to pay. But you are right. That is really one we have
    to deal with.
        I am taking too much time.
        The Chairman. No, that is fine, Senator.
        Senator Craig.
        Senator Craig. Well, let me thank all of you for your
    testimony. As we try to sort this out, it is a difficult issue
    in my opinion about an electrical title. It has been pretty
    clear throughout this until the financial side of the industry
    sorts itself out a bit, and yet, at the same time, there are
    those who argue--and Betsy just has--that we might offer some
    stability here. I would like to think we could do that. I am
    not confident we can do that.
        The Chairman. Well, you should sleep well, and the more you
    sleep, you will get more confident.
        Senator Craig. Is that it? All right.
        [Laughter.]
        Senator Craig. I will work on rest over the weekend, but
    only on the weekend.
        The Chairman. Rest before we meet. Then you will feel very
    confident.
        [Laughter.]
        Senator Craig. Mr. Franklin, it seems to me that many of
    the electricity provisions that we will be considering during
    the next weeks' markup have a distinct purpose, and that is to
    make the vertically integrated utility model obsolete. Do you
    believe the vertically integrated utility model can continue to
    be viable in an era of competitive wholesale electricity
    markets?
        Mr. Franklin. Absolutely. I not only think it can be
    viable, it has served customers extremely well.
        Let me speak for Southern here because we are vertically
    integrated as opposed to EEI. If you look at the regions of the
    country which have had the least problems, where investors have
    suffered least, if at all, where consumers have benefitted most
    and where there has been the greatest stability, it is where
    there is vertical integration of utilities. Utilities were
    vertically integrated to begin with because there are real
    economies of scale in vertical integration.
        Even with vertically integrated companies, a competitive
    wholesale market can still be beneficial because those
    companies still have to either build generation or go out and
    buy in the wholesale market and have a competitive wholesale
    market. It can be an economic plus to consumers even where you
    have vertical integration.
        Senator Craig. Do you agree that utilities should be
    allowed to continue to reserve transmission capacity for their
    native load customers even in an era of wholesale electricity
    competition?
        Mr. Franklin. Absolutely, especially in the transition
    period. There are a lot of the concerns of States where there
    is not enough transmission to continue to serve retail
    consumers and accommodate all the new generation that is being
    built. So I think it would be a huge mistake to take away
    transmission that was built for retail consumers, dedicated to
    retail consumers, so that we can export power from one region
    to the other. I think politically that would be a very serious
    problem. I think from a fairness standpoint, it makes no sense
    at all.
        Senator Craig. Well, I think the FERC has shown that it is
    seeking to assert jurisdiction over all transmission facilities
    and is even trending toward expanding its jurisdiction over all
    retail services. If Congress acts to protect the reservation of
    transmission capacity for native load customers, but does not
    address the Federal-State jurisdictional issues, would that be
    sufficient to protect customers?
        Mr. Franklin. I think it is one step short of what many
    companies and most State commissions would like to see,
    especially in those States that still have vertically
    integrated companies and regulated retail markets. I think that
    would be seen as a half-measure in the regions where there is
    vertical integration and regulated retail rates.
        Mr. Richardson. Senator Craig.
        Senator Craig. Yes.
        Mr. Richardson. Could I just add one point on the
    reservation of transmission so that it is not lost?
        Senator Craig. Yes, please.
        Mr. Richardson. The comments that have been offered so far
    have been offered in terms of transmission owners and the
    transmission facilities that they have constructed that they
    need to serve to meet their own service obligation to the
    extent that they have a service obligation. And that is a very
    legitimate concern.
        But there are a large number of public power systems and
    some rural electric cooperatives as well that are transmission-
    dependent utilities who have contractual rights to
    transmission, and their need is every bit as significant in
    terms of using those facilities for which they have contracted
    to meet their own service obligations. So I want to make sure
    that that point is not lost.
        Senator Craig. Okay, thank you.
        Phil, you are head of a large public power entity. Have you
    been asked to provide open access transmission?
        Mr. Tollefson. Yes, we have. In fact, we were one of the
    first----
        Senator Craig. How many times, do you know?
        Mr. Tollefson. Once that I can recall.
        Senator Craig. By whom?
        Mr. Tollefson. I believe that was by West Plains Energy, a
    private IOU in the area that was looking to do some maintenance
    on some of its system, and certainly we agreed to do so.
        Senator Craig. You did grant the request.
        Mr. Tollefson. Yes.
        Senator Craig. Alan Richardson, Mr. Franklin of Southern
    Company says this has been a terrible time financially for
    investor-owned utilities. In fact, I think we have all
    understood that in general. There have been over 180 IOUs
    downgraded and pending bankruptcies of the merchant power
    sector. These are, indeed, tough times. How has the public
    power sector fared during the same period?
        Mr. Richardson. The public power sector has fared very
    well. Our model is obviously one that has demonstrated that it
    can work in these difficult times. I believe there have been
    perhaps 12 to 15 downgrades and almost an equal number of
    upgrades, and the credit rating for public power going forward
    is very stable.
        If I could add one more point on Wall Street implications
    and financial security. You get different answers from Wall
    Street depending upon who you ask.
        Senator Craig. I was just going to say, what is Wall Street
    saying?
        Mr. Richardson. Who is Wall Street? I have talked to a
    number of the rating agencies, and what they want is security
    and stability, not turmoil and churn. And they look very
    favorably on the regulatory safety net, and they are concerned,
    in fact, about the standard market design and its implications
    for financing going forward because they recognize that while
    it may be a long-term solution, it is a long-term solution, if
    that, and there will be instability during the period of time
    when it is challenged in court and is being implemented.
        Senator Craig. Are you building transmission?
        Mr. Richardson. Yes, sir, we are.
        Senator Craig. What is your debt load?
        Mr. Richardson. I would have to answer that for the record,
    sir. Across the board, I could not say.
        Senator Craig. Thank you, Mr. Chairman.
        The Chairman. Thank you, Senator.
        Senator Bingaman, did you have any follow-up questions?
        Senator Bingaman. No, I did not, Mr. Chairman.
        The Chairman. I have a number that I am going to submit to
    you, and if you would answer them for me, in a week to 2 weeks.
    I would comment, Mr. English, your statement that we ought to
    perhaps wait until we get more clarification--oh, Senator Kyl.
    You had not been here before. Let me withhold my last comments
    and yield to you.
        Senator Kyl. Well, thank you. Mr. Chairman, it is true I
    was not here at the beginning. We had to deal with getting some
    judges out of the Judiciary Committee which met at the same
    time. So I apologize for not being here to hear all of the
    testimony. But I did hear the comments of this panel. It was
    just that I am so far down here, I know it is kind of hard to
    see me down here. So thank you for calling on me.
        The Chairman. You are welcome.
        Senator Kyl. I had a couple of questions. Let me just make
    sure that I understand the position, Mr. Richardson, that you
    articulated and that, Mr. Franklin, you articulated is
    essentially consistent with respect to the concerns expressed
    about the standard market design and also specifically the
    question that Senator Craig asked about the protection of
    native load. Is there a difference of opinion between you there
    or is it consistent?
        Mr. Franklin. I do not believe there is a difference. I
    think what we are saying is that retail customers that have
    helped pay for transmission and depend on their transmission to
    keep the lights on should not give way to new players that have
    an economic interest in moving power across the region, that
    the retail customer should have some priority. And that applies
    to transmission-dependent public power entities that also
    depend on that transmission and over time has helped contribute
    to the payment of it. I certainly have no disagreement with
    that concept.
        Mr. Richardson. And, Senator, in principle, yes, I think we
    agree. But as you know, the devil is in the details, and I
    think you had two or three or four alternative proposals that
    went through different iterations before they were even
    publicly released. This is a tough issue. In concept, yes, I
    think we do agree, but how it is accomplished legislatively is
    a tough issue.
        Senator Kyl. Sure. Well, the point I wanted to make is
    there seems to be a substantial agreement, at least among a lot
    of Senators, that this notion of protecting native load is very
    important, and while we do need to be careful how we do it,
    obviously I wanted to be sure that there was a consensus there.
        Also, is it your view, Mr. Richardson, that it would also
    be important, as Mr. Franklin noted, that not only is it
    important to do that, but also we have got to deal with this
    Federal-State jurisdictional issue with respect to the
    application of FERC jurisdiction?
        Mr. Richardson. As an association, we have not taken a
    position in opposition to the standard market design or
    requested Congress to either pull the plug or put a halt to
    that. We do recognize and urge the commission to recognize
    regional diversity. You have PJM, for example, that is a 75-
    year-old institution where some of the proposals that they are
    advancing fit very well, and you have the Pacific Northwest or
    your region in the Southwest where the configuration of the
    utility industry and the transmission and the generation is
    significantly different. They are not as mature in terms of an
    organizational structure as PJM, and FERC simply has to address
    that. That is the association's position.
        Now, as you know, you have some members in your region,
    public power systems in the Pacific Northwest who are pretty
    concerned about where the commission is going and would like to
    see the standard market design simply taken off the table.
        Senator Kyl. That is what I am hearing. You are right.
        Let me ask you a question, Mr. Gifford. I am hearing a lot
    from regulators in my State expressing concern about the
    peculiarities of differences among regions, the point that was
    just made by Mr. Richardson. Based on your experience as a
    regulator, are there circumstances that you are aware of that
    are peculiar to the western region that would cause particular
    concern about the standard market design proposal?
        I am sorry. Did I say Mr. Tollefson? I am sorry. I meant to
    refer that to you. I am sorry.
        Mr. Tollefson. I believe in the West there are certain
    differences. For example, the Western Area Power Administration
    facilities are ubiquitous throughout many of the Western States
    and are capable of carrying a lot of transmission a long way.
    Certainly there are a number of different entities operating
    there.
        But it is my sense that the issue in the West is not so
    much access to transmission, primarily because of WAPA and some
    of the other larger utility systems that are out there, but
    rather certain congestion points. In Colorado, for example,
    along the front range, it is difficult to import power from the
    West and from the North. And certainly additional transmission
    would be very beneficial there. We are working with a number of
    folks to see how that can be accomplished, but it is, I think,
    more of an issue of congestion in the West as opposed to the
    East where it is more of an access issue.
        Senator Kyl. Thank you. I guess my time is up. Thank you
    and thank you, Mr. Chairman.
        The Chairman. Are you finished, Senator Kyl?
        Senator Kyl. Yes, sir.
        The Chairman. Thank you very much.
        I was just going to say I do not think we want to wait,
    although your reasons and justifications clearly have some
    merit. I assume we are going to move as quickly as we can. We
    have plenty of people giving us advice and plenty to look back
    on and review.
        We want to thank all of you for your testimony.
        I would comment on the staff draft of the new idea. We have
    heard a lot of concern about it and a lot of ideas. It clearly
    is a very difficult to implement entity, but I am not sure
    that, in reading the legislation and in writing it, that the
    staff put down what they had intended as they told me in that
    there is nothing voluntary about what they do once you are in.
    Once you are in, they have the same power that the Federal
    Power Commission gives to FERC. So part of it, getting in, is
    voluntary and choosing, but once you are in, it will not be
    just sitting around doing planning. They will have tariff
    responsibilities just as FERC does under the Federal Power
    Commission. Of that I am certain. I am not sure in reading it
    that people understood that.
        It still has all the other impediments that have been
    spoken here to today, and I understand that.
        Did you have some comment?
        Senator Bingaman. Mr. Chairman, could I just ask that we
    include in the record a statement that the Union of Concerned
    Scientists has sent in?
        The Chairman. That will be made a part of the record.
        Now, we have a hearing with the Commissioners, including
    the Chairman, scheduled for 2 o'clock, but I understand,
    Senator Bingaman, we have three or four consecutive votes at
    the same time. So, Mr. Wood and the fellow Commissioners, if
    you would be here at 3 o'clock, we will have the hearing then.
    It should not take more than an hour, hour and a half, I would
    think, although a number of Senators left saying they wanted to
    come back and interrogate.
        Thanks to all of you. Nice to be with you all.
        [Whereupon, at 12:47 p.m., the hearing was recessed, to
    reconvene at 3 p.m., this same day.]

                          AFTERNOON SESSION--3:00 p.m.

        The Chairman. The committee will please come to order.
        We have three witnesses this afternoon. Senator Bingaman
    will be along shortly. The first witness will be the Honorable
    Pat Wood, Chairman of the FERC. Our second witness will be the
    Honorable William Massey, Commissioner, and third, the
    Honorable Nora Mead Brownell, Commissioner.
        Would you please lead off, Mr. Chairman? We are glad to
    have you and both Commissioners with us today.

                 STATEMENT OF PAT WOOD III, CHAIRMAN,
                  FEDERAL ENERGY REGULATORY COMMISSION

        Mr. Wood. Thank you, Mr. Chairman and Senator Craig. We are
    also glad to be here and we appreciate the opportunity to
    comment on the important concept of Federal electricity
    legislation. I know from last session of Congress these issues
    are familiar to the committee.
        Senators, I am sorry. I did not see you over there,
    Senators Wyden, Cantwell, and Feinstein.
        The issues raised on the several bills that you all asked
    us to look at are very important and ones that the committee
    has looked at over the past couple of years in some detail. So
    rather than go through a lot of that, I would just ask if our
    written testimony from the three of us could be in the official
    record here.
        As stated in that testimony, I generally support, with very
    few modifications, the FERC-type language in the electricity
    proposals here. There has been a lot of, I think, negotiation
    among interested parties over the past couple of years on these
    important issues, and I think they will certainly give some
    guidance and balance to the industry.
        I think from just our point of view, it is important to
    just get an answer. I think what we have tried to do is fill in
    the vacuum here, and as you know and certainly you have
    commented to me personally and to others, Senator Domenici, it
    is time to kind of nail down what it is we want power markets
    to look like.
        FERC has put forth some outlines of a vision there last
    summer after consultation with a broad bunch of people for the
    prior year. We have gotten a lot of comment on that, as I
    mentioned to you, Senator Domenici, back in January. The
    Commission is working on a white paper which will be basically
    the current statement of where we see the best way to go
    forward being on the issues raised on wholesale power market
    design. We anticipate, as I mentioned to you in January,
    putting that out in the month of April.
        As you know, yesterday, the Commission took a lot of
    action, although not final action, on a number of items related
    to the 2000-01 electricity and power and now gas market issues
    in California and in the other Western States. We have had
    really a tremendous commitment of resources at our agency and
    from parties across the West to getting some resolution on
    those issues. I do think that the end is in sight, but we do
    have, as a result of yesterday's disclosures or findings, a
    number of issues that still are before the commission and need
    to be wrapped up. So we are trying to do that.
        It is important to learn and remedy everything that we can
    under the law with what has happened out in the West in 2000-
    01, and it is important for us and I think we are all committed
    to making sure that we lay the groundwork for the rules and the
    framework and the platform so that that does not happen again
    anywhere else in the country, not just in California.
        So that is what we are about. We are trying to fix the past
    and also lay down a future that for the electric customers in
    this country is better than the one we have had to live
    through.
        We as always, of course, appreciate and welcome any
    congressional guidance on how we should best accomplish that
    effort. I think that the vehicles before you today, before the
    committee, before ultimately the Congress are an excellent way
    to get that moving and allow us to get the uncertainty behind
    us and get a positive future before us.
        So I appreciate the opportunity here today and welcome any
    questions from the committee.
        [The prepared statement of Mr. Wood follows:]
                 Prepared Statement of Pat Wood III, Chairman,
                      Federal Energy Regulatory Commission
                                    Summary
        Federal electricity legislation can help make existing regional
    competitive electricity markets work to benefit all of the American
    customers they now serve. The legislative proposals under consideration
    today generally recognize the realities and challenges of regional
    electricity systems and would benefit energy customers in numerous
    ways. I generally support the FERC-related parts of the legislative
    proposals, with minor modifications and certain additional provisions.
    For example, I support Congressional proposals allowing for greater
    transparency in energy markets and customer access to the broadest
    range of useful market information. I also favor legislative proposals
    that would increase significantly the penalties available under the
    Federal Power Act in order to further discourage potential market
    manipulation. In addition, I support legislative proposals that would
    provide greater customer protection by changing the refund effective
    date under Federal Power Act section 206 and extending refund
    liability.
                                   Statement
                                 i. background
        Thank you for inviting me to testify on the legislative proposals
    to restructure electricity regulation. These legislative proposals
    address a wide range of electricity restructuring issues confronting
    our Nation. I will focus on the issues affecting the responsibilities
    of the Federal Energy Regulatory Commission (FERC or the Commission).
    On these issues, the legislative proposals generally respond to the
    challenges facing competitive wholesale electricity markets to meet our
    future electricity needs. I would suggest a few modifications and some
    additional provisions, as described below.
        Before discussing specific issues, I would emphasize the overall
    need for certainty. For more than a decade, the wholesale power
    industry has been stuck in the transition from its heavily-regulated
    past to a competitively-driven future. The uncertainty of this
    transition has discouraged investment in transmission and generation
    infrastructure. Almost as important as the outcome the Congress may
    reach on each issue under consideration at today's hearing is the need
    for a decision of any kind. Once the Congress reaches resolution on
    these issues, then utilities, their customers and others can implement
    appropriate plans for the future, without having to hedge these plans
    against legislative uncertainty.
          ii. pending legislative proposals on electricity regulation
    A. Regional Energy Services Commissions
        Section 1211 of the Senate Staff Discussion Draft would authorize
    States to enter into agreements to establish ``Regional Energy Services
    Commissions (RESC).'' A RESC would be composed of one member from each
    State in the RESC, appointed by the Governor as provided by state law.
    A RESC could be vested with jurisdiction over, inter alia, transmission
    planning and siting, interconnection of generating facilities to the
    interstate transmission grid, rate design and revenue requirements for
    transmission and wholesale sales, incentive rates for transmission,
    market power review and market monitoring, formation and approval of
    ``Transmission Organizations,'' reliability standards and rules, and
    adequate enforcement mechanisms.
        A RESC or State regulatory authority may petition the Commission to
    resolve a conflict on transmission of electric energy or wholesale
    power sales between adjacent regions. Public utilities in States in a
    RESC would not be subject to Commission authority under Federal Power
    Act (FPA) Part II, except for section 204 and parts of sections 202 and
    209, as well as any authorities not exercised by the RESC.
        The Commission has long supported regional efforts, including
    Regional Transmission Groups in the early 1990s, Independent System
    Operators (ISOs) in Order No. 888, and Regional Transmission
    Organizations (RTOs) in Order No. 2000. More recently, we have
    supported greater state involvement in RTO policies through Regional
    State Committees (RSCs) and Multi-State Entities (MSEs). All of these
    efforts recognize that power systems are regional, and most significant
    policy issues must be addressed on a regional basis by entities with
    accountability to make the system work. The RESC proposal appears to
    recognize the regional nature of today's power systems and is
    consistent with the goal of establishing better regional governance to
    solve regional problems. Certainly FERC would have less of a void to
    fill if regional problems are resolved in the regions. Therefore, I
    support the objectives of the RESC proposal and would like to help
    advance regional governance to address regional issues.
        Based on a quick review of this new draft RESC proposal, I have
    some concerns that it may significantly delay the modernization of the
    nation's electric grid and its operations due to the time needed to
    establish the RESC institutions. I honestly do not think we can afford
    that much time anymore. I am concerned that the proposal may not
    adequately preserve current features of the Federal Power Act. The
    draft language is unclear on whether the procedural protections in FPA
    Parts II and III extend to the actions of a RESC. These protections
    include the due process right to notice, an opportunity to be heard at
    the Commission, and judicial review of Commission decisions which is a
    fundamental right now afforded to all affected parties in any
    Commission proceeding. Another example is the right to file a complaint
    against existing rates, terms and conditions. Also, it appears that
    public utilities governed by regional commissions would not be required
    to have rates on file for public inspection.
        The RESC draft proposal may also result in gaps in regulation in
    cases where regional boundaries overlap and are smaller than the
    Eastern or Western Interconnect. Many RTO regions have significant
    power flows and transactions between and through neighboring regions.
    Management of these seams between regions significantly affects
    reliability, efficiency, and the opportunities for manipulation. As to
    size, a RESC should be no smaller than the U.S.-jurisdictional part of
    an existing NERC region.
        It is unclear whether RESCs would be bound by the provisions in the
    legislative proposals on, e.g., transmission rate incentives and
    interconnections. There may also be broader legal issues concerning the
    current draft language on RESCs. These issues include, for example,
    questions involving the Compacts Clause and the Appointments Clause of
    the U.S. Constitution. Commission Staff and I would be happy to provide
    more detailed comments in the future.
    B. Reliability Standards
        Each of the legislative proposals under consideration at today's
    hearing addresses the establishment and enforcement of electric
    reliability standards for the bulk-power system. Under these proposals,
    the Commission could designate an ``Electric Reliability Organization
    (ERO),'' which would have authority to set and enforce such standards
    subject to Commission review. The ERO would be allowed to assign to a
    regional entity the ERO's authority to propose and enforce reliability
    standards.
        The approach to reliability in these proposals is a step in the
    right direction. I am told that federal legislation is needed to ensure
    the enforceability of reliability standards. The legislative proposals
    take a reasonable and efficient approach to this problem.
    C. Open Access (FERC-Lite)
        The legislative proposals would allow the Commission to require
    open access transmission service by transmitting utilities. Currently,
    the Commission has authority to require such service only by public
    utilities, and the legislative proposals would expand this authority to
    the large part of our Nation's transmission grid controlled by non-
    public utilities.
        The proposals differ in one key respect. In one version (e.g.,
    section 101 of S. 475), the terms and conditions of service must be
    comparable to those ``under Commission rules that require public
    utilities to offer open access transmission services and that are not
    unduly discriminatory or preferential.'' In the other version (e.g.,
    section 7021 of the House Subcommittee bill), the terms and conditions
    of service must be comparable to those ``under which such unregulated
    transmitting utility provides transmission services to itself and that
    are not unduly discriminatory or preferential.''
        The former version would appear to do a clearer job of ensuring
    that all customers can get the same high quality of service, regardless
    of whether the portion of the grid they need to use is owned by a
    public utility, a municipality, a RUS-financed cooperative or
    otherwise.
    D. Transmission Siting
        In recent years, the expansion of our Nation's transmission
    infrastructure has lagged behind the need for expansion. One obstacle
    to needed expansions is the process of obtaining siting authority.
        Several of the bills under consideration would address this
    problem. For example, section 1222 of the Senate Staff Discussion Draft
    would give the Commission siting authority for transmission facilities
    in ``congestion zones'' determined by the Department of Energy if a
    State fails to start action on an application within 60 days of its
    filing and finish within 18 months. However, the Commission would have
    no authority if the State has vested its siting authority in a Regional
    Energy Services Commission. Section 210 of the Senate Counter-Offer
    would allow two or more States to enter into a compact for regional
    transmission siting agencies. Section 7012 of the House Subcommittee
    bill includes many of these same points, but without the concept of a
    Regional Energy Services Commission.
        Congressional action on this issue is appropriate to help ensure
    that enough transmission is built to provide customers with reliable
    and reasonably-priced electricity. I am not advocating that FERC must
    have a role in siting; Congress can best make that determination.
    E. Transmission Investment Incentives
        Several of the legislative proposals would require the Commission
    to adopt rules on transmission pricing to encourage, inter alia, the
    economically efficient enlargement of transmission networks, the
    deployment of transmission technologies to increase capacity and
    efficiency, and the reduction of transmission congestion. Ensuring an
    adequate return on equity invested in transmission facilities is also
    listed as a goal in the proposals.
        I support these proposals and note that the Commission has already
    taken steps in this direction. On January 15, 2003, the Commission
    issued a ``Proposed Pricing Policy for Efficient Operation and
    Expansion of Transmission Grid'' (Proposed Pricing Policy) on incentive
    rate treatments to promote transmission independence and enhancement.
    This Proposed Pricing Policy is consistent with the transmission
    pricing incentives and other language in the proposed legislation. The
    Proposed Pricing Policy encourages investments in grid expansion by
    allowing a higher return on equity when a utility participates in an
    RTO, sells its RTO-operated transmission asset to an independent
    company, or pursues additional measures that promote efficient
    operation and expansion of the transmission grid. Under the proposal, a
    utility's return on equity could be increased by 50 basis points for
    joining a Commission-approved RTO, 150 basis points for selling RTO-
    operated transmission assets to an independent company and 100 basis
    points for investing in new transmission facilities found appropriate
    pursuant to an RTO planning process.
    F. Transmission Cost Allocation (Participant Funding)
        Section 210 of the Senate Counter-Offer would require the
    Commission to adopt new rules on transmission pricing, including rules
    to ``define the costs and benefits of new transmission facilities and
    how such costs should be allocated.''
        Section 1243 of the Senate Staff Discussion Draft would require the
    Commission to adopt rules on allocating the costs ``associated with the
    interconnection of new transmission facilities as well as the
    modification, expansion or upgrade of existing transmission facilities.
    . . .'' The rules must ensure that all users of a transmission
    expansion ``bear the appropriate share of its costs.'' The cost of
    transmission expansions not providing ``system-wide benefits'' and
    instead primarily benefitting only a subset of users or market
    participants must be recovered from that subset incrementally. System-
    wide benefits would include providing reliability and adequacy for
    regional needs; accommodating load growth on a regional level;
    increasing transmission capability into congested areas; and
    facilitating major regional and inter-regional power transfers.
        Section 7011 of the House Subcommittee bill provides that ``upon
    the request of a regional transmission organization or other
    Commission-approved transmission organization, new transmission
    facilities that increase the transfer capability of the transmission
    system shall be participant funded.'' The Commission would be required
    to ``provide guidance as to what types of facilities may be participant
    funded.''
        Allocating the costs of new interconnections and grid expansions
    has been, and remains, a contentious issue before the Commission.
    Allocating these costs in a way that ensures economic efficiency and
    fairness to all affected parties is always difficult. Cost allocation
    policies vary significantly from one region to the next, and on a case
    by case basis. Although we are attempting to define bright line
    distinctions in our current wholesale markets rulemaking, it is a
    difficult task for many reasons and is probably best left to regional
    variation. I am not sure that national legislation is the appropriate
    way to handle issues that may vary by region, depend on fact-based
    distinctions between investment types, and may evolve over time. The
    Commission has already proposed to allow participant funding in certain
    circumstances, if requested by an independent transmission provider.
    Thus, the Commission has the authority and the intent to achieve the
    goals of the legislative proposals. While I do not oppose the ideas in
    the proposed legislation, I am not persuaded that national legislation
    on cost allocation is prudent.
    G. Transmission Organizations/RTOs
        Section 1212 of the Senate Counter-Offer and section 7022 of the
    House Subcommittee bill state the sense of the Congress that all
    transmitting utilities ``should voluntarily become members of
    independently administered regional transmission organizations [RTOs]
    that have operational control of interstate transmission facilities and
    do not own or control generation facilities used to supply electric
    energy for sale at wholesale.'' Both sections also state the sense of
    the Congress that the Commission should provide utilities joining an
    RTO ``a return on equity sufficient to attract new investment capital
    for expansion of transmission capacity. . . .'' Finally, both sections
    would require the Commission, within 120 days of the law's enactment,
    to submit a report to its oversight Committees in the House and Senate
    on the status of pending applications on RTOs.
        Section 1211 of the Senate Staff Discussion Draft specifies
    requirements for a Transmission Organization within the jurisdiction of
    a Regional Energy Services Commission. These requirements are in some
    (but not all) ways similar to the criteria established by the
    Commission for RTOs. One key example of a difference is that, under the
    Commission's criteria, an RTO must operate the relevant transmission
    facilities, while, under the proposed bill, Transmission Organizations
    must control or oversee the operation of transmission facilities.
    ``Oversight'' is not defined. Additionally, the bill would appear to
    permit regional commissions to apply varying definitions of what
    constitutes ``independence'' for an RTO.
        I believe RTOs (or Transmission Organizations) will benefit
    customers by operating the grid more efficiently, on a regional basis,
    than the fragmented arrangements used in most regions today. The
    Commission has strongly encouraged the formation of RTOs. Our policy
    has had some success. RTOs are being developed in most of the United
    States, and the Commission has approved many aspects proposed by those
    working on these RTOs.
        Congressional encouragement of RTO formation, as in the Senate
    Counter-Offer and the House Subcommittee bill, may expedite the
    process. Thus, I support these proposals.
        Section 1211 of the Senate Staff Discussion Draft assumes the
    formation of Regional Energy Services Commissions, which I have
    addressed above. Subject to the concerns identified above, I believe
    the provisions on Transmission Organizations are generally acceptable.
    I am concerned, however, about the fact that Transmission Organizations
    may only ``oversee'' but not operate the transmission facilities within
    their geographic boundaries. If these facilities are still operated by
    market participants, concern about discriminatory services may
    discourage investors from supporting new generation in a region,
    ultimately limiting the supplies available to serve the region's
    customers.
    H. PUHCA
        S. 475 and the other legislative proposals would repeal the Public
    Utility Holding Company Act of 1935 (PUHCA), but give the Commission
    and State regulatory commissions broad access to the books and records
    of holding companies and their affiliates. This is appropriate. PUHCA
    was enacted primarily to undo harms caused by certain holding company
    structures that no longer exist. In the almost 70 years since PUHCA was
    enacted, utility regulation has increased substantially under the
    Federal Power Act (including oversight of corporate restructurings such
    as electric utility mergers), federal securities laws and state laws,
    all of which ensure that customers are fully protected.
    I. PURPA
        I agree with the core concept of the legislative proposals that
    Congress should repeal PURPA but ``grandfather'' existing PURPA
    contracts. As in several of the proposals, it may be appropriate to
    limit its prospective repeal to those states where all generation
    entities have the ability to sell their output to the widest possible
    range of customers.
    J. Net Metering & Real-Time Pricing
        These provisions generally do not affect the Commission's
    responsibilities, but they are beneficial to infrastructure development
    needed to make power markets more efficient.
    K. Renewable Energy
        I have no comment on these provisions, since they do not affect the
    Commission's responsibilities.
    L. Market Transparency, Anti-Manipulation, Enforcement
        Some of the legislative proposals would require FERC to issue rules
    establishing an electronic information system, accessible by the
    public, specifying the availability and price of wholesale power and
    transmission services. I support such proposals because more
    transparency is needed in energy markets and customers should have
    access to the broadest range of useful market information.
        I note that these proposals refer to ``markets subject to the
    Commission's jurisdiction,'' but do not explicitly mention natural gas
    markets. I suggest modifying these proposals to clarify the
    Commission's authority to obtain information on natural gas prices
    (since these are an important factor in wholesale power prices), or
    that a separate section be added to the legislation clarifying FERC's
    authority under the Natural Gas Act (NGA) to obtain such information
    for purposes of price discovery.
        The legislative proposals also would prohibit round trip trading
    and the filing of false information on wholesale power prices. Banning
    these practices will help ensure customers that power prices are not
    being manipulated.
        The legislative proposals also would significantly increase the
    penalties available under the FPA. I have long supported increasing
    these penalties, and believe the increases proposed here are
    appropriate. I recommend including similar penalties under the NGA.
    M. Consumer Protections
        Several of the legislative proposals would change the refund
    effective date under FPA section 206, so that refunds would be allowed
    from the date on which a complaint is filed, instead of 60 days later.
    I support this change, and would support allowing refunds to the same
    extent under the Natural Gas Act.
        The proposals also would extend refund liability under FPA section
    206 to large non-public utilities for spot market sales violating
    Commission rules. I support this idea since I see no reason why only
    public utilities, and not other large sellers, should be liable to
    customers for refunds of spot market sales violating applicable
    Commission rules. In the Senate Staff Discussion Draft, however, it
    appears that these provisions would not apply to rates charged by
    public utilities that are governed by Regional Energy Services
    Commissions.
                                iii. conclusion
        Thank you again for the opportunity to offer my views on the
    legislative proposals to restructure electricity regulation. While I
    have discussed the approaches in the bills generally, I would be happy
    to provide technical comments in the future or make our staff available
    as a resource if it would be helpful to the Committee.

        The Chairman. How about the other Commissioners? Do you
    have anything to say? Did you have prepared remarks, Mr.
    Chairman, or are your remarks what you just said?
        Mr. Wood. My prepared remarks were filed testimony, and
    that was it. I do not have a written statement of what I just
    said.
        The Chairman. That will be made a part of the record.
        Mr. Massey.

             STATEMENT OF WILLIAM L. MASSEY, COMMISSIONER,
                  FEDERAL ENERGY REGULATORY COMMISSION

        Mr. Massey. Mr. Chairman, I have a written statement as
    well, which I would like to be included in the record, and I
    will be very brief.
        Yesterday, the Commission received and publicized a massive
    staff investigation dealing with price manipulation in Western
    markets. It made a number of very disturbing findings of
    manipulation of epidemic proportions. The commission is still
    digesting this report and its implications for energy markets.
    Clearly this report will spawn new proceedings against several
    market participants who may have employed manipulative bidding
    strategies or engaged in other techniques.
        And the Commission still must provide economic justice for
    Western markets. We have taken big steps in that direction, but
    more must be done. We must provide assurances that this kind of
    a debacle will never occur again. We must insist on markets
    that are well-structured, that markets produce prices that
    comply with the Federal Power Act's often repeated requirement
    that prices be just and reasonable, markets that cannot be
    easily gamed, markets with clear and enforceable rules defining
    acceptable and unacceptable behavior, markets with consumer
    protections built in, markets that are well monitored where
    manipulation is detected immediately and remedied. These are
    our goals.
        A number of provisions in pending legislation will help to
    promote markets that work, mandatory reliability provisions,
    transmission investment incentives, some reasonable
    transmission siting authority at the Federal level, language
    promoting RTOs, a number of provisions toughening our
    enforcement authority and penalty authorities, language
    authorizing an office of consumer advocacy on FERC matters.
    These are all excellent provisions that I would recommend, and
    the list is longer than that, but I will cut my opening
    statement short and thank you for the opportunity to be here.
        [The prepared statement of Mr. Massey follows:]
     Prepared Statement of William L. Massey, Commissioner, Federal Energy
                             Regulatory Commission
                                i. introduction
        I want to thank Chairman Domenici and the members of the Committee
    on Energy and National Resources for inviting me to testify about
    pending legislative proposals regarding electricity regulation.
        All over the country, producers and transporters of energy want
    policies that encourage investment in critical infrastructure such as
    production wells, pipelines, high voltage electric transmission
    capacity, electric generation, and demand resources. Customers want the
    same things, plus assurances of reliability and reasonable prices. All
    seem to want a level playing field where everyone gets fair treatment.
    State regulators want their views respected. They want to be co-equal
    partners in regulatory policy, and they insist on being in charge of
    ensuring reasonable prices and fair treatment for end use consumers of
    natural gas and electricity.
        Broadly stated, the Commission's mission is to make energy markets
    work for consumers. This has required a steady evolution of federal
    regulatory policies. The issue is no longer--and has not been for quite
    a number of years--whether to have wholesale markets for electricity
    and natural gas. The issue now is this--will we tolerate poorly
    structured markets, or will we insist on good markets, well structured
    markets that provide customer benefits?
        This is an important question, because wholesale markets don't
    structure themselves and don't fix themselves. They don't oversee and
    monitor themselves. They don't establish or enforce the rules. These
    are the responsibilities of federal regulators under current law.
        Markets that work--that is the clarion call at the Commission. Yet,
    we still have much old business to tend to. The Commission is now
    taking aggressive steps to take care of some old business even as we
    press a number of initiatives aimed at better markets.
        The old business involves the herculean effort to resolve all of
    the pending issues and investigations arising out of the western energy
    crisis of 2000-2001. Last year, we charged our staff with getting to
    the bottom of all allegations of market manipulation and abuse in both
    natural gas and electricity markets. Yesterday, staff presented to the
    Commission a comprehensive report with recommendations for further
    Commission action, including proposed remedies for the abuses they
    found. This may spur additional Commission proceedings necessary to
    ensure that justice is done.
        This staff report has a bearing on the level of refunds that are
    necessary to make western customers whole for electricity prices during
    2000-2001, that the Commission has already found were unjust and
    unreasonable.
        This staff investigative report may also have relevance in
    resolving the litigation pending before the Commission over complaints
    about whether certain long term power contracts, negotiated when spot
    electricity prices were out of control, should be set aside by the
    Commission as either unjust and unreasonable or against the public
    interest.
        The Commission must resolve these Western matters as soon as we can
    while ensuring that our investigation is thorough and our remedies
    appropriate.
        Resolving this important old business involves huge levels of
    Commission resources. It also provides a painful daily reminder that
    poorly structured electricity markets can wreak economic havoc and fail
    miserably. The unfortunate result is loss of faith in electricity
    markets, massive investigations, two year old refund cases, contract
    abrogation fights, and lots of uncertainty for investors, lenders,
    market participants and consumers.
        There must be a better way. Why not insist that wholesale markets
    are well structured from the start? By that I mean a market structure
    that relies primarily on long term contracts negotiated in the context
    of a transparent spot market that is producing just and reasonable
    prices and locational price signals. I mean independent grid and
    independent market operation to create a level playing field on which
    all resources--supply and demand resources, renewable resources,
    distributed generation--can compete; where there is no tolerance for
    affiliate abuse; where clear rules define acceptable and unacceptable
    behavior; where reasonable customer protections, reasonable price
    mitigation measures, and solid market power screens are built in to the
    market design; where there is potential for a robust demand response,
    and where there is a highly professional and aggressive market
    monitoring unit on the ground to serve as an early warning device
    should problems arise.
        Wholesale markets that are fair to all, that spur investment,
    produce just and reasonable prices, and provide substantial consumer
    benefits. After all, these are the core values that define our role as
    federal regulators.
        Two other related areas of electricity policy evolution are also
    critical. The first is the establishment of regional grid operation and
    market platforms we call RTOs. RTOs will create a level playing field
    by operating without bias toward particular merchant interests, and
    they will eliminate the multiple transmission rates over regions that
    can make transactions uneconomic.
        The second is our proposal to streamline the process and agreements
    associated with generator interconnection. The thorniest issue in the
    interconnection arena seems to be how to price the grid upgrades
    necessary for the new generator. Traditionally, our policy has been to
    roll in most of the cost over time, but state commissions and some
    utilities have argued that the upgrades should be paid for by the
    generator and the customers or ratepayers who benefit from the upgrade.
    This concept of beneficiary pays, often referred to as participant
    funding, has been formally proposed by the Commission, and the concept
    is also being debated in the comments to our interconnection NOPR.
        With this introduction, now let me turn to the specific legislative
    proposals on which I have been asked to comment.
                       ii. pending legislative proposals
        At the outset, in the interest of brevity let me point out that I
    am in general agreement with the testimony of Chairman Wood.
    A. Regional Energy Service Commissions
        I agree with the comments of Chairman Wood. Delegating federal
    powers to regional bodies of state policymakers and regulators may risk
    the regional balkanization of electricity markets. I am not yet
    persuaded, for example, that the interpretation and implementation of
    the ``just and reasonable'' standard of the Federal Power Act should
    vary from one region to the next.
        I would recommend that the Committee consider whether the enactment
    of this proposal, representing a fundamental shift in the manner in
    which utilities and markets are regulated, would create uncertainty for
    an industry already burdened by the substantial uncertainty inherent in
    a decade-long transition to competitive wholesale markets.
        Finally, I would suggest that the Committee consider whether
    regional regulatory bodies exercising broad federal authority may be an
    unnecessary new layer of regulation that would outweigh potential
    regional benefits.
    B. Reliability Standards
        I agree that legislation to enforce mandatory reliability standards
    for the bulk power system is necessary. All proposals seem to address
    this issue appropriately.
    C. Open Access
        I am generally in agreement with Chairman Wood. I would add that it
    remains my hope that municipals, rural electric cooperatives and other
    governmental entities will choose to participate in RTOs because they
    conclude that these institutions are structured and operated to provide
    substantial long-term benefits to all wholesale market participants.
    D. Transmission Siting
        I would recommend that the Commission at least have a backstop role
    where a state fails to act within a reasonable time on an application
    for new transmission facilities necessary to enable wholesale markets
    to produce just and reasonable prices. The congestion zone proposal of
    the Staff Draft is also a good step in the right direction. Authorizing
    states to address the siting issue through regional compacts is worthy
    of serious consideration, but perhaps there should still be a federal
    backstop role where the health of wholesale markets is at stake.
    E. Transmission Investment Incentives
        I agree with the thrust of these various proposals. The provision
    of the Senate Staff Discussion Draft is probably the closest to my
    thinking on this important issue.
    F. Transmission Cost Allocation (Participant Funding)
        The Commission has proposed generically that the concept of
    participant funding govern the allocation of costs for grid expansions
    within RTOs. I support this policy direction, and hence would support
    legislative proposals that move toward this concept as a national
    policy.
    G. Transmission Organizations/RTOs
        I endorse any legislative proposal that sends an unmistakable
    signal to the industry that these institutions are in the public
    interest and participation is expected. Both the Senate Counteroffer
    and the House Subcommittee bill meet this recommendation. I agree with
    Chairman's Wood's comments about the Senate Staff Discussion Draft.
    H. PUHCA
        In the wake of the collapse of Enron, I have mixed views about the
    repeal of PUHCA. PUHCA actually tilts toward regional concentrations of
    facilities that may be harmful to robust wholesale competition. This
    would argue for repeal. On the other hand, the PUHCA provisions that
    limit complex corporate structures and place reasonable limits on
    capital formation by holding companies may still remain in the public
    interest. An important consideration is whether other laws enacted
    since PUHCA provide similar protections that make PUHCA unnecessary. If
    PUHCA is repealed, it is certainly appropriate to ensure broad access
    to books and records of holding companies and their affiliates by the
    Commission and state regulatory bodies.
    I. PURPA
        Existing PURPA contracts should be grandfathered if PURPA is
    reformed. I support in particular the concept in the House Subcommittee
    bill conditioning PURPA reform on access to a well functioning
    wholesale market. I support a national policy of promoting renewable
    resources, so I would recommend that the Committee consider other
    effective ways to achieve such a goal in the absence of PURPA. A
    reasonable renewable portfolio standard is worthy of serious
    consideration.
    J. Net Metering & Real-Time Pricing
        I have not studied these provisions in detail, but I am generally
    supportive of net metering, real-time pricing and streamlining the
    standards for interconnection for distributed generation resources.
    K. Renewable Energy
        Please see my comments under Section I above.
    L. Market Transparency, Anti-Manipulation, Enforcement
        I generally support all reasonable proposals to provide greater
    market transparency via a public electronic information system with
    respect to natural gas and electricity sales and transmission services.
    I support proposals to ban both round trip trading and filing false
    information on wholesale transactions. I have long advocated an
    increase in and expansion of the Commission's FPA and NGA penalty
    authority. I support reasonable proposals to strengthen the
    Commission's authority to order refunds under section 206 of the FPA.
    M. Miscellaneous
        The provisions of the October 16, 2002 Draft with respect to the
    Commission's merger authority are reasonable, and I endorse them. The
    Draft also establishes an Office of Consumer Advocacy within DOE to
    represent consumers on FERC matters. This is an excellent proposal and
    I endorse it.
        In addition, Senator Feinstein has introduced S. 509 and S. 517.
    Both bills would increase FERC's penalty authority and investigative
    powers in several respects, and ensure that derivative products for
    energy are regulated by the CFTC. I would recommend that these bills be
    given favorable consideration by this or other appropriate Senate
    committee. Senator Cantwell has introduced S. 681, legislation to
    strengthen the Commission's authority to remedy market manipulation and
    to ensure just and reasonable prices. I suggest that this consumer
    protection legislation be given serious consideration by the Committee.

        The Chairman. Thank you very much.

            STATEMENT OF NORA MEAD BROWNELL, COMMISSIONER,
                  FEDERAL ENERGY REGULATORY COMMISSION

        Ms. Brownell. Thank you, sir. I have a written statement
    that I would asked to be entered, and I know that you have had
    a busy day so I will keep my remarks short.
        I appreciate and applaud the work that you are doing on
    restructuring and completing the restructuring of the
    electricity sector as well as creating a vision and a policy
    for the future. So we will join you in working towards the hard
    work that you have to do.
        I particularly appreciate the bold thinking that has been
    shown on looking at regional markets and how we approach them
    because neither the Federal Power Act nor the State acts
    envisioned markets as they have evolved today.
        But I think it is important to be clear and concise in how
    we assign roles and responsibilities so we do not end up in
    many years of litigation as we have seen in some of the other
    restructured markets. I think that this market needs certainty.
    I think that this market needs accountability. I think we did,
    in fact, make great steps forward yesterday, and I hope that as
    we move forward with energy policy, we will be informed by what
    we are learning in the ongoing investigations at the FERC.
        But most importantly, I hope that we can bring this to
    conclusion so that we can begin to build for the future because
    this future I believe is in jeopardy by the uncertainty that
    has been created both by the mistakes that we have made--and
    there is plenty of blame to go around--and the need to build
    investment and infrastructure.
        I enjoy many of the proposals made today, particularly the
    ones that have been outlined, and I have articulated those in
    my statement. I would be happy to answer any questions about
    those or anything else.
        [The prepared statement of Ms. Brownell follows:]
    Prepared Statement of Nora Mead Brownell, Commissioner, Federal Energy
                             Regulatory Commission
                                    Summary
        I want to commend the Committee for pushing forward on the
    difficult issue of restructuring electricity markets. I believe that we
    are at a point where it is imperative for leadership to set the tone,
    the principles, and the framework for moving forward. We are at the
    point where, I believe, we need to make sound legislative and
    regulatory calls to restore confidence to customers and investors and
    bring the energy sector out of its battered and beleaguered state.
        The legislative proposals address a wide range of electricity
    restructuring issues and contain numerous reforms to the current laws,
    many of which I believe will go a long way toward helping to create and
    sustain a healthy energy sector. I appreciate the willingness to think
    innovatively about regional approaches. The current federal and state
    regulatory framework did not envision regional markets so we must
    address roles and responsibilities. I do, however, have questions about
    the Regional Energy Service Commission proposal and would welcome the
    opportunity to work further with the Committee on thinking through the
    appropriate structures to address regional issues.
                                   Statement
                                 i. background
        Thank you for inviting me and giving me the opportunity to share my
    views on the legislative proposals to restructure electricity markets.
    I want to commend the Committee for pushing forward on some very
    difficult issues. I believe that we are at a point where it is
    imperative for leadership to set the tone, the principles, and the
    framework for moving forward. We are at the point where, I believe, we
    need to make sound legislative and regulatory calls to restore
    confidence to customers and investors and to bring the energy sector
    out of its battered and beleaguered state. We are witnessing a silent
    and insidious deterioration of our infrastructure.
        The legislative proposals address a wide range of electricity
    restructuring issues and contain numerous reforms to the current laws,
    many of which I believe will go a long way toward helping to create and
    sustain a healthy energy sector. There are a few areas, as described
    below, where I believe further evaluation and discussion is warranted.
          ii. pending legislative proposals on electricity regulation
    A. Regional Energy Service Commissions
        As I understand it, Section 1211 of the Senate Staff Discussion
    Draft would authorize States to enter into agreements to establish
    Regional Energy Services Commissions (RESCs) that could then have
    jurisdiction over transmission planning and siting, rate design and
    revenue requirements for transmission and wholesale sales, market power
    review and market monitoring, formation and approval of ``Transmission
    Organizations,'' reliability standards and rules, and enforcement
    mechanisms. Public utilities in States in an RESC would not be subject
    to Commission authority under the Federal Power Act (FPA) Part II,
    except for section 204 and parts of 202 and 209.
        As the Commission has stated on numerous occasions and as the
    Discussion Draft reflects, energy markets are regional in nature. For
    more than 10 years now, from Regional Transmission Groups in the early
    1990s to recent proposals for Multi-State Entities, the Commission has
    supported and encouraged regional solutions to energy issues in the
    energy markets. Presently, I believe we have success stories where
    States have worked together on resources and planning. I also know that
    there are hurdles to overcome if we expect States by themselves to move
    beyond opening lines of communication to actual implementation of
    solutions for the more intractable regional problems. I believe that
    such difficult issues as infrastructure planning, identification of
    resource needs, market monitoring and independent operation of the grid
    are among those that should be considered on a regional basis. I also
    believe that regional transmission organizations (RTOs) that are
    independent from market participants both in perception and reality and
    are guided by a consistent set of regulatory principles are the best
    forum for addressing these issues. We have also emphasized the
    important role for states in leading these policy discussions through
    multi-state entities or some other structure. While I share what I
    believe to be your vision for allowing state input and regional
    flexibility and variation, I am concerned that the proposal largely
    eliminates any consistency in regulation as currently afforded to the
    industry under the FPA. I would suggest that we study the following:

       Presently all utilities enjoy a common set of rules and
            requirements provided for by the FPA. The Draft permits the
            creation of governor-appointed regulatory commissions, each of
            which could have different due process requirements (or decide
            to have none at all); different filing requirements for rates,
            terms and conditions of service; different rate policies and
            incentives and terms and conditions for interconnection to and
            access to the transmission grid. What are the practical effects
            of introducing regional variation in areas that have already
            been standardized nationally?
       RESCs only need to seek to ensure no undue discrimination;
            there does not appear to be any requirement to ensure just and
            reasonable rates, terms and conditions of transmission or
            wholesale sales of energy. Would the RESCs be charged with
            ensuring just and reasonable rates or would FERC retain
            jurisdiction to do so? If the RESCs are given such
            jurisdiction, what if just and reasonable rates are defined
            differently in each region? What if undue discrimination is
            defined differently in each region?
       It appears that the public utilities and market participants
            would have no ability to seek review of any decisions--either
            from the RESC or through appellate rights to the Commission or
            to a court. How will due process rights be protected?
       It is unclear from the Draft whether public utilities
            governed by RESCs would be exempt from the Commission's
            investigatory, enforcement, accounting and auditing
            requirements. Is that the Committee's intent? If not, will FERC
            have the information or tools necessary to perform these
            functions?
       Is it the responsibility of the appointees to be governed by
            state needs or regional needs?
       How does a multi-state utility whose territory covers
            multiple regions assure compliance to multiple sets of rules?
            How does it effectively participate in the stakeholder process?
            Will multiple rules require companies to restructure their
            companies by region? Will RESCs cause added personnel and
            regulatory and compliance costs? How will we measure the cost/
            benefit of the model? Could DOE provide a study? Could DOE
            provide an analysis of what regions should look like to
            maximize efficiency?
       The major criticism from investors, rating agencies, and
            bankers has been the lack of certainty caused by the failure to
            complete the restructuring started in 1992. Will the
            possibility of as many as 20 sets of regional rules on rates,
            terms and conditions of service, and cost recovery, among
            others, resolve those concerns?
       New technologies have been slow to be applied in this market
            place. Will regional variation on issues such as queuing,
            interconnection, transmission access, and technology
            application act as a barrier to entry? How will technology
            manufacturers adapt to variations? Will we lose manufacturing
            efficiencies?

        I agree that the time has come for change. I believe that regional
    variation has been acknowledged and implemented in RTO dockets.
    Further, I believe that FERC has acknowledged the need for state
    involvement in regional planning, siting and market monitoring. But, we
    must look to solutions that create regulatory certainty and clarity and
    that reflect what we have already learned about the highly integrated
    and interdependent nature of this nation's energy markets.
    B. Reliability Standards
        Each of the legislative proposals under consideration today provide
    for an electric reliability organization (ERO) to develop and enforce
    reliability standards applicable to all users, owners and operators of
    the bulk power system. The Commission would certify an organization as
    an ERO and the Commission would approve the security and reliability
    standards and enforcement provisions of the ERO. All users, owners and
    operators of the bulk power system would be required to comply with the
    reliability standards. The approach envisioned by the legislative
    proposals is precisely what is needed in the evolving competitive
    electricity markets. What has been missing in the past and what this
    legislation adds for the future is accountability. Under existing law,
    there are no legally enforceable reliability standards. Compliance with
    the reliability rules established by the North American Electric
    Reliability Council (NERC) is voluntary. Therefore, it is difficult to
    assess (and impossible to ensure) whether the best job is being done by
    NERC and the market participants to preserve reliability.
    C. Open Access (FERC-Lite)
        Section 31 of the Senate Staff Discussion Draft and Section 7021 of
    the House Subcommittee version would grant the FERC the authority to
    require all transmitting utilities (not just those that constitute
    ``public utilities'' under the Federal Power Act) to offer open access
    transmission service, with some exceptions, e.g., unless they sell no
    more than 4 million megawatt hours of electricity per year.
        I support the intent of these provisions to ensure a properly
    functioning and transparent transmission grid. At the same time, I
    understand the concerns of parties not now subject to open access, and
    I believe that we must work to ensure that their rights are protected.
    D. Transmission Siting
        Studies report that the nation's infrastructure is lacking.

       Transmission investment is not meeting the growing peak
            demand--the amount of new transmission added in the past 2
            decades has consistently lagged behind growth in peak demand.
       NERC reports that investment in new transmission facilities
            is lagging far behind in new generation and growth in
            electricity demand. Construction of high voltage transmission
            facilities is expected to increase by only 6 percent (in line-
            miles) during the next 10 years, in contrast to the expected 20
            percent increase in electricity demand and generation capacity.
            The cost of transmission accounts for less than 10 percent of
            the final delivered cost of electricity in what is today a $224
            billion industry.

        Several of the bills under consideration address the siting
    problem. Section 1222 of the Senate Staff Discussion Draft would give
    the Commission siting authority for transmission facilities in
    ``congestion zones'' determined by the Department of Energy if a State
    fails to start action on an application within 60 days of its filing
    and finish within 18 months. However, the Commission would have no
    authority if the State has vested its siting authority in a Regional
    Energy Services Commission. As discussed above, I have several
    questions regarding the workability and implementation of RESCs.
    Section 210 of the Senate Counter-Offer would allow two or more States
    to enter into a compact for regional transmission siting agencies.
    Section 7012 of the House Subcommittee bill includes many of these same
    points, but without the concept of a Regional Energy Services
    Commission.
        I believe that state-by-state siting of such transmission
    superhighways is an anachronism that impedes transmission investment
    and slows transmission construction. We should not allow this
    relatively small cost to prevent consumers from enjoying reliable
    service and the low cost of alternative supplies. It is past time that
    someone address this elephant in the living room. I am not wedded to
    any particular legislative approach, but I do believe that some
    Congressional action on this issue is needed to help ensure that enough
    transmission is built to provide customers with reliable and reasonably
    priced electricity. This is an area where a regional perspective is
    needed.
    E. Transmission Investment Incentives
        Several of the legislative proposals would require the Commission
    to adopt rules on transmission pricing to encourage the economically
    efficient enlargement of transmission networks, the deployment of
    transmission technologies to increase capacity and efficiency, and the
    reduction of transmission congestion. I support these proposals and
    note that the Commission has already issued a ``Proposed Pricing Policy
    for Efficient Operation and Expansion of Transmission Grid'' that is
    consistent with the proposed legislation.
        Some have expressed concern that incentives are extraordinary and
    unnecessary costs for consumers. They ignore three realities:
    transmission is 10% or less of the total bill, transmission enables
    access to lower cost generation which may well offset the costs of
    associated transmission, and the fragility of our nation's transmission
    system has serious security and economic repercussions which we cannot
    ignore.
    F. Transmission Cost Allocation (Participant Funding)
        Section 33 of the Senate Staff Discussion Draft would require the
    Commission to adopt rules on allocating the costs of
    ``interconnect[ing] new transmission facilities as well as the
    modification, expansion or upgrade of existing transmission facilities.
    . . .'' The rules must ensure that all users of a transmission
    expansion ``bear the appropriate share of its costs.'' The cost of
    transmission expansions not providing ``system-wide benefits'' and
    instead primarily benefitting only a subset of users or market
    participants must be recovered from that subset incrementally. System-
    wide benefits would include providing reliability and adequacy for
    regional needs; accommodating load growth on a regional level;
    increasing transmission capability into congested areas; and
    facilitating major regional and inter-regional power transfers.
        The House Subcommittee bill provides that ``upon the request of a
    regional transmission organization or other Commission-approved
    transmission organization, new transmission facilities that increase
    the transfer capability of the transmission system shall be participant
    funded.'' The Commission would be required to ``provide guidance as to
    what types of facilities may be participant funded.''
        I believe that the Commission needs to address issues surrounding
    cost allocation of new interconnections and grid expansions. This
    country desperately needs a strong transmission grid, which in turn
    necessitates a cost allocation mechanism that gets infrastructure built
    and encourages innovation and new technology. I believe that an
    independent transmission organization can ensure nondiscriminatory
    access and rate treatment.
    G. Transmission Organizations/RTOs
        Section 212 of the Senate Counteroffer and section 7022 of the
    House Subcommittee bill state the sense of the Congress that ``all
    transmitting utilities should voluntarily become members of
    independently administered regional transmission organizations [RTOs]
    that have operational control of interstate transmission facilities and
    do not own or control generation facilities used to supply electric
    energy for sale at wholesale.''
        I continue to believe that creation of RTOs is the single most
    effective way of achieving a vibrant, competitive electric market. RTOs
    that are fully independent of market participants can ensure non-
    discriminatory operation of the transmission facilities under their
    control. RTOs have FERC-approved market monitors, implement FERC-
    approved market mitigation plans, and conduct long-range planning all
    for the protection of customers. RTOs can perform economic dispatch
    over large geographic areas that will ensure the selection of least-
    cost generators. Finally, RTOs can offer organized markets and one-stop
    shopping that reduce transaction costs, provide transparent market
    rules and allow the opportunity for price discovery.
        Therefore, I strongly support Congressional encouragement of RTO
    formation.
    H. PUHCA
        I believe that these legislative proposals strike an appropriate
    balance by replacing PUHCA with increased access by the FERC and state
    regulators to certain books and records.
    I. PURPA
        I support the general approach to PURPA included in the draft
    bills. I support prospective elimination of the forced sale provision
    of PURPA provided that qualifying facilities have access to a
    competitive market and provided there are appropriate transitions rules
    to recognize the rights and obligations of parties.
    J. Market Transparency, Anti-Manipulation, Enforcement
        Some of the legislative proposals would require FERC to issue rules
    establishing an electronic information system, accessible by the
    public, specifying the availability and price of wholesale power and
    transmission services. While I support the goal of transparency in
    energy markets, I believe that there may be more efficient ways of
    reaching that goal than having the government take over collecting and
    reporting information on prices.
        The legislative proposals also would prohibit round trip trading
    and the filing of false information on wholesale power prices. Banning
    these practices will help ensure customers that power prices are not
    being manipulated.
        The legislative proposals also would significantly increase the
    penalties available under the FPA. The FERC must have an expanded role
    in monitoring for, and mitigating, market power abuse. The enabling
    statutes of the Securities and Exchange Commission and the Federal
    Communications Commission provide for a range of enforcement measures,
    such as civil penalties. I believe that providing FERC with similar
    authority would send a powerful message to electricity market
    participants that we take violations of the Federal Power Act just as
    seriously.
    K. Consumer Protections
        I support allowing refunds from the date a complaint is filed, as
    opposed to 60 days after the filing. This proposed change will better
    protect customers. I also support the proposals to extend refund
    liability under FPA section 206 to large non-public utilities for spot
    market sales violating Commission rules.
                                iii. conclusion
        Thank you again for the opportunity to offer my views on the
    legislative proposals to restructure electricity regulation pending
    before your Committee. While I have discussed the approaches in the
    bills generally, I would be happy to provide technical comments in the
    future if it would be helpful to the Committee.

        The Chairman. Thank you very much.
        We have a number of Senators who seem to have a particular
    interest in what you are doing of late that are here, and I am
    sure they are going to want to talk with you about that,
    although that is purely an accident. We did not invite you here
    for that. Nonetheless, Senators are Senators and you are here,
    and so there will be questions about it.
        I want to ask a few questions about some other things, not
    your decision yesterday, although I might get to that.
        First, when will the white paper be completed and could you
    clarify for the record what you are going to tell us about it,
    understanding, Mr. Chairman, and realizing that it was
    committed to us in an atmosphere of confusion about what you
    were going to be doing in the future on the one hand and maybe
    all the way over to anger about what people thought you might
    be contemplating under your concept and your talk about SMD.
    So, I would like you to tell us what do you think will be in
    generally and when will it be ready?
        Mr. Wood. Well, until about this time yesterday, we were up
    to here in the issues that I know we will be visiting about
    later. And we had worked certainly back in February on
    beginning the white paper, and it is being drafted in
    accordance with our directions today. So I expect that
    certainly by the end of the month of April and hopefully before
    then we will have it.
        What is it, which is your question, a good one. I think I
    could characterize it as really the Cliff Notes version of what
    we intend the final rule to be, the response to and hopefully a
    readable response--I know the rule, the original proposal was
    quite long because there were quite a few interested parties
    that had comments that needed to be incorporated, but to tell
    the story about why we are doing what we are doing, what we
    have learned from the parties since we put out a proposal last
    summer. We have had probably over 1,000 written comments from
    different parties filed in three rounds of comments. We have
    had probably over 350 face-to-face meetings, us or your senior
    staff, with people from across the spectrum, across the
    country. So we have learned a lot and I think it is very
    helpful to you all, to our staff, to the outside world to know
    really what adjustments we are making to what we put out there.
        So that is what I expect we will be able to do. Again, as I
    indicated to you, Senator Domenici, we would be glad to come
    back and visit with the committee either individually or en
    banc here.
        The Chairman. I only hope that you will expedite it. Yet I
    know it is difficult. If you try to make it brief, it is harder
    to write, but we do expect that. We do not expect another rule,
    at least like the last one, because we will all be more
    confused than we were to begin with.
        Let me move on. You understand that there is great concern
    about the SMD, and might you take a couple of minutes and tell
    the committee why you think the various Senators representing
    constituents and various of our constituents have lodged their
    serious complaints and concerns? What are the principal
    concerns, as you see them, about this proposal?
        Mr. Wood. I think certainly there are probably five
    categories.
        One is, is the cost of this, of getting a market platform
    in place across the country, greater than the benefits that we
    could reasonably expect to come from that? I know that, for
    example, the appropriation for our current budget that we are
    living under has directed the Department of Energy to do an
    assessment in that regard, as well as ones that we have done.
        I think the second probably, a big one, is a concern by our
    colleagues at the State level that we are encroaching on their
    jurisdiction, their jurisdiction over the retail sales of power
    that they have regulated.
        And a related issue is the protection of native load.
    Everybody is somebody's native load, but there are current
    expectations of uses of the grid that I think--at least
    certainly by what we published--appeared to be threatened, and
    I think we have got to address that and will. But as it stands
    now, there is a concern that the native uses, the current uses
    of the grid would somehow be relegated to a second tier status,
    and we want to clear up that misconception.
        Two other issues are ones that I actually think we did
    indicate in the proposed ruled generally the right direction,
    but I think probably nobody read it more than it once, because
    it was so long that people have kind of departed from what we
    actually said. There are two things that have to be done in a
    market. There are a lot, but there are two that have attracted
    some concern.
        The first is the need to have adequate resources, adequate
    supply. We call that resource adequacy. Basically we indicated
    that there is a need to make sure there is an insurance policy
    on the top of electric generation across the country, and if
    that role is not fulfilled by a State, then we proposed the
    solution. But we will clarify and make very clear that that is
    a State's role primarily. If they do not do it or want to defer
    to us, because of inter-regional needs, then certainly we need
    to play that role.
        And similarly, transmission planning and the related result
    of actually building a transmission line are State issues, and
    we need to make sure that we clarify what we think our role is
    and not to try to take on ourselves.
        I think those five issues, Senator, probably seemed to me
    to be why we have got a lot of, I think, angst about the
    Commission's rule, and we certainly intend to address each of
    those and others in the white paper this next month.
        The Chairman. Thank you very much.
        I am going to now move. Senator Bingaman is not here and he
    may not be able to make it. Let us follow the early bird rule.
    Is that all right with you all on your side? That means that
    Senator Craig, you are next. Senator Thomas, you are next. Then
    Senator Craig.

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

        Senator Craig. Well, Mr. Chairman, in this first round, let
    me make the opening statement that I did not make this morning
    and I will use that as my first round. There are several
    questions I want to ask the Commissioners.
        Let me say at the outset, I appreciate all three of you
    being here.
        Mr. Chairman, over a decade ago, Congress passed
    legislation that cautiously moved the electric industry away
    from its historically regulated framework toward a more
    competitive market approach for the sale and resale of
    wholesale electricity.
        Some believe it is time for Congress to take bolder action.
    Most of these advocates represent a class in the industry known
    as merchant traders and merchant generators that I understand
    is suffering substantial financial distress.
        It is instructive to me that most public power, co-ops, and
    investor-owned utilities are not clamoring for bold change.
        It is also instructive that the pressure for bold action is
    coming primarily from electrical system geographical corridors
    located in the Northeast and parts of the Midwest. Apparently,
    Mid-Atlantic, Southeast, and Western electric system entities
    are content with the pace of the electrical industry evolution.
        They obviously do not rely on merchant traders and merchant
    generators the way the Northeast region did, and it appears
    that those regions did not fall prey to the over-regulation
    experienced in the Northeast.
        It certainly explains the outrage expressed by the South
    and West regions about the Commission's proposed standard
    market design that we now refer to as the SMD rule.
        Chairman Domenici has aptly characterized the Commission's
    action on SMD as a serious overreach of its authority. And I
    and many others on this committee agree.
        But what is equally troubling to me is the confusion
    created by the Commission's action since 2001. For example, the
    Commission's Order 2000 set out a voluntary incentive-based
    approach to restructuring that is clearly in conflict with the
    prescriptive approach set out in its proposed SMD. The industry
    spent about $100 million to form regional transmission
    organizations under Order 2000 that now appears to be money not
    well spent in light of SMD, if we understand it correctly.
        Moreover, the Commission placed utility companies in
    settlement proceedings to form RTOs, only to disavow the
    results when the new Commission took over in 2001. It happened
    most dramatically in the Midwest where parties negotiated and
    the Commission approved two RTOs, one for-profit, one not-for-
    profit in May 2001.
        In December, the Commission ignored its previous final
    action. In fact, the Commission questioned whether for-profit
    companies could become RTOs.
        In the Northeast and the Southeast, the Commission opened
    marathon mediation efforts only to ignore the results. In the
    Northeast, the Commission originally required three RTOs to
    merge, then reduced the number to two, and acquiesced when the
    parties to the merger that would have established the two RTOs
    canceled their plans.
        It seems to me that the Commission's policy lacks
    direction. Since 2001, there has been too much lurching forward
    in provocative ways and then retraction once it becomes clear
    that the Commission went too far.
        It would be far better for the industry and consumers alike
    if the Commission would propose reasonable rules in the first
    place, in my opinion, rather than announcing ambitious programs
    that require later modification.
        I believe it is far more prudent for this committee to
    exercise much closer oversight for the Commission's
    administration of its current authority rather than
    contemplating the value of giving the Commission more
    authority, which in my opinion would only give the Commission
    more opportunity to create uncertainty in the marketplace.
        I have made no secret of my preference for Congress to go
    slow in determining whether electricity legislation is needed.
        During the last 6 years, Congress has struggled to find
    consensus on what to do on this issue. That consensus, to put
    it bluntly, has been elusive.
        We once again find ourselves on the eve of another effort
    to find that. The chairman is working hard to make that happen.
    I want to express my appreciation to the chairman for his
    effort to accommodate the many Western concerns that have been
    expressed by me and other colleagues on the committee. I am
    grateful for his willingness to think outside the box to ensure
    the traditional role of the States in this area is not
    compromised.
        However, the draft legislation distributed by the chairman
    introduces, I think, a rather novel idea for regional control
    of electric regulation. Although it raises many attractive
    concepts for regional and local control, it demands more
    thought and I think careful analysis. Put simply, it needs more
    time to mature. We will work hard to see if we can do that.
        Electricity regulation is, by nature, complex. In the short
    time I have had to review the proposal, I have developed many
    questions about the concepts of the chairman's proposal. We
    will be visiting with you, Mr. Chairman, about that to see if
    we can work those out. I would be much more comfortable about
    proceeding with the analysis if I was not confronted with the
    very short time line that we are dealing with in this energy
    bill.
        But now we are focused on the FERC and its authority and
    its responsibility, and I have already expressed my opinions
    there. I am pleased you Commissioners are before us. I will
    have questions to follow in the next round.
        Thank you, Mr. Chairman.
        The Chairman. Thank you very much.
        Senator Craig is next, Senator Alexander, and then we will
    move to your side.
        Senator Craig.
        Senator Craig. Craig Thomas.
        Senator Thomas. Craig Thomas. This is Craig over here.
        [Laughter.]
        Senator Thomas. Thank you all for being here. I appreciate
    it.
        I think we ought to get on with doing something. I disagree
    with my friend that we are not prepared to do something. I
    think we ought to be and we can be.
        So of the topics that we have covered in the committee and
    so on, what would you identify as essential, bare essentials
    that ought to go into an energy bill?
        The Chairman. You mean on this issue?
        Senator Thomas. Yes, on this issue. Sure, that is what we
    are talking about.
        Mr. Wood. I would broaden it a little bit because of the
    relatedness of gas and electricity, but the transparency type
    issues, ability to actually get information, quality
    information from the electric and gas markets, an enhancement
    of the Commission's ability to police that market through the
    penalties. I believe those were in your legislation as well,
    Senator Thomas.
        You and I visited about your legislation last week. I think
    that that is a pretty streamlined bill and hits, I guess,
    without exception, all the high spots, the reliability
    language, the PUHCA and PURPA issues, which are certainly
    fixtures on the scene, but in moving to a different market
    structure, those are clearly impediments.
        The FERC-lite language. The backstop language--I do not
    really advocate that FERC do that, but I think having an
    action-forcing item that allows inter-regional transmission to
    get a fair shake, which I do not know that it gets under the
    current way we do transmission siting, is important.
        Senator Thomas. So if the FERC's responsibility basically
    was limited in terms of operations to interstate movement, then
    that would be satisfactory with you, and the RTOs and so, the
    regional areas could do their own work within the regions.
        Mr. Wood. Are you talking about like the RESC concept here?
    Or just in general?
        Senator Thomas. No. I am just talking about setting up RTOs
    and with the necessary agreements among the States to be able
    to let the States go ahead and do their retail pricing
    intrastate and so on. Within the region, they could do their
    own.
        Mr. Wood. Absolutely. Again, just so you know, that is
    where we want to go. That is where we want the SMD to go. We do
    not want to go farther than that.
        Senator Thomas. Do you believe it is essential for WAPA and
    Bonneville and TVA to be active participants in developing
    RTOs?
        Mr. Wood. Yes, sir. They own significant mileage of
    transmission, and they are certainly, in the Western part of
    the country as TVA would be here in the east, a very critical
    part of the overall grid.
        Senator Thomas. In terms of PUHCA, with the Justice
    Department and the SEC, if there was transparency and we
    repealed PUHCA, is there not plenty of authority for the
    agencies to oversee trading and financial arrangements?
        Mr. Wood. I think there is as far as what PUHCA would
    otherwise have given us. Again on the gas issues, in
    particular, I have got a few concerns about our current--this
    is really new since I testified last session in light of what
    we have learned and released yesterday. But by and large, I
    think the PUHCA has a lot of reporting requirements, as I
    recall, from your bill. Is that correct, Senator Thomas? The
    reporting requirements are important to us and the States to
    allow those that are regulated in multiple States, for example,
    to have access to the books so you do not basically put a lot
    of costs in one State and then move them around. So to have the
    ability to look at what are increasingly becoming multistate
    utilities is a critical thing to preserve and really is the
    heart of what PUHCA is useful for to a regulator today.
        Senator Thomas. I said earlier--and I think I have visited
    with you about it--our role here really is to try and establish
    some policy. We are not into the detailed regulatory business
    here, but to decide, with the changes that have taken place and
    are taking place in the industry, to be able to deal with it in
    the future, for instance, to get more investment into
    transmission, to get more investment into generation, to be
    able to let the marketers move around for a market system. So
    that is I think our goal, and I hope we can pursue that and
    come up with some things.
        Thank you. Thank you, Mr. Chairman.
        Senator Craig [presiding]. Senator Alexander.
        Senator Alexander. Senator Smith was here before me.
        Senator Craig. I am trying to read the list here of order.
    Senator Smith, then.
        Senator Smith. Senator Wyden was here before I was.
        Senator Craig. Senator Wyden was here?
        [Laughter.]
        Senator Craig. See, you are such a tough bunch, they are
    deferring.
        [Laughter.]
        Senator Craig. Senator Wyden, the opportunity is yours.
        Senator Wyden. I thank my colleagues, and obviously we are
    going to work on all of these issues in a bipartisan way as
    Senator Smith and I have so often.
        Let me just say to the folks at FERC that yesterday's
    decision was more horrendous news for Western ratepayers. You
    look at what California and Washington and Oregon have been
    through. The three of us all have ratepayers who have just been
    hammered by overpriced contracts that resulted from market
    manipulation. The energy traders were caught on tape talking
    about deliberate market manipulation strategies, that
    manipulation caused long-term prices to go up and those higher
    prices were reflected in the contracts that Northwest
    utilities, that Western utilities were induced to sign.
        But somehow for some reason, the FERC cannot see the
    connection between those caught in the act, smoking gun memos
    and transcripts, and the higher energy prices that our
    constituents are now paying because of the market manipulation
    that has been detailed in these transcripts. And for Bonneville
    and Northwest utilities, we are talking about hundreds of
    millions of dollars, folks. We have the highest unemployment
    rate in the country. So this is of enormous importance.
        I just want to ask you about a couple of examples which, it
    seems to me, show clearly why we should get relief from these
    overpriced contracts.
        In one of the transcripts, a Reliant manager said, how did
    it work today. The Reliant trader said, 129 for the power
    exchange. The Reliant manager, yeah, I saw that. The Reliant
    trader, and then we trade up to 113 for the third quarter next
    year. Reliant manager, sweet. Reliant trader, we even had a
    senior manager down here. He just wanted to know he was--
    everybody thought it was really exciting that we were going to
    play some market power.
        So my question to the panel is, do the Reliant transcripts
    not demonstrate beyond any doubt at all that market
    manipulation directly impacted not just the spot market, but
    also the forward markets and the prices that were paid for
    power in the West under long-term contracts based on those
    forward markets?
        To me, that is the ball game, folks. That is as clear an
    example as you can get for why those Western ratepayers ought
    to get some relief from long-term contracts. What more do you
    all need? It is right there in the transcript. I would like to
    hear your response.
        Mr. Wood. Thank you. We announced yesterday the staff
    report of what we have got. We indicated that that is not the
    final action, Senator, on everything that we are doing. We do
    have some further work to do. It was important to make that
    public what we did know. Let the information--and you referred
    to one piece of it--be out so that the people know what
    happened or what we have got before us.
        But on the contract issues, we discussed some of those
    yesterday. We did take action on the spot market issues in
    California and reinstated an action that I have discussed with
    the committee a while back on the dysfunctional spot market in
    the Pacific Northwest and have allowed those items to go
    forward because there were strong dysfunctions there. That work
    tied back to a lot of the activity that was laid out in the
    overall report.
        Let me just say as a process matter what we are doing now
    is public, but what we are doing now is not complete. We have
    got some further investigation to do. We do think in the
    process of what we are supposed to do as a judicial agency to
    make sure that both sides get heard. We are going through that.
    And the analysis that comes out of that is something that again
    is a future event.
        But we understand the issues and we are committed to taking
    action on those as we go through the proper judicial process.
        Senator Wyden. Mr. Massey? Just again, when you look at
    these transcripts, this is an open-and-shut case. The example I
    gave--I do not know how you reach any other conclusion than
    overpriced contracts based on manipulated forward market prices
    were what happened there and they ought to be voided. Disagree?
        Mr. Massey. Senator, I do not want to get myself in the
    position of having prejudged this issue because we are still
    looking at it. But to me there is absolutely no question, based
    on what I have seen so far, but that manipulation of the
    market, which staff described as epidemic, had a huge impact on
    long-term contract prices. There is simply no question about it
    in my mind. We found that manipulation affected spot prices,
    both defined as daily, hourly. We found in the Pacific
    Northwest that the spot prices defined as a month or less were
    unjust and unreasonable and had been manipulated. To me it
    simply makes sense that the long-term contract prices were
    affected--and staff found that there was a correlation between
    the out-of-control spot prices and the long-term contract
    prices. So to me we have irrefutable evidence.
        So I am considering what the standard of review ought to
    be, whether it ought to be the just and reasonable standard,
    the public interest standard. But I am inclined to believe that
    some of these contracts are going to have to be reformed to
    meet our obligation under the Federal Power Act to ensure that
    only just and reasonable prices are charged in all contracts.
        Senator Wyden. My time is up, Mr. Chairman. But could Ms.
    Brownell respond to the same question?
        Ms. Brownell. Senator, with the many, many complex issues
    before us, this was perhaps the most difficult because the
    record is deep, it is mixed, and we looked at and will continue
    to look at it, and as the Chairman described yesterday,
    evidence that has been entered in the 100-day discovery
    process, evidence that was entered by the report and the
    rebuttal testimony to the 100-day evidence is something that we
    still need to look at. But the totality of circumstances
    involved in the long-term contracts would suggest that far more
    damage would be done to the public by abrogating those
    contracts in even the short and the longer term.
        Further, there are a variety of circumstances behind those
    contracts. There were, in most cases, choices. In one case the
    individual who entered the contracts is suggesting they are
    unreasonable and unjust was selling at prices at $1,100 a
    megawatt hour. There are complaints from people whose contracts
    were structural--where the risk was borne at the front end by
    the seller, and those prices were kind of below water in the
    early years, now that those early years are coming to an end,
    they want us to cancel those contracts.
        Further, I think that the risk to the customer of
    abrogating contracts and setting in place in the West a
    situation where no one can count on sophisticated players
    entering into contracts that would be upheld will cause a risk
    premium that will far outlast the length of these contracts.
        While we have an obligation and we will continue to look at
    the relationship between manipulation and shorter- and longer-
    term contracts, I think these were fully litigated proceedings.
    There is still one to go. The judges evaluated this evidence.
    There were studies that in fact did not agree that the evidence
    of manipulation and its effect on the short- and long-term
    contracts was conclusive. I think all of those were weighed,
    and the judges came to the conclusion that the Chairman and I
    did yesterday.
        I understand that we disagree. We looked at the totality of
    circumstances and concluded that the public was best served by
    upholding these contracts.
        Senator Wyden. My time is up, Mr. Chairman. I would only
    say, Ms. Brownell, you are trying to make a very clinical and
    antiseptic case for why contracts based on fraud ought to be
    upheld, and I just am staggered that you would try to make that
    argument. You have said that the record is mixed. The staff
    said there was an epidemic of market manipulation. I do not
    find in the dictionary that epidemic is sort of the same thing
    as a mixed record. So I just hope you all take another look at
    this.
        Thank you for the extra time, Mr. Chairman.
        The Chairman. You are welcome.
        Senator Cantwell, you are next, but I wonder if Senator
    Smith could go. He has to preside in a couple of minutes. Could
    he just take this time and you are next?
        Senator Cantwell. That is fine, Mr. Chairman.
        The Chairman. Thank you very much.
        Senator Smith. Thank you, Senator Cantwell. Thank you, Mr.
    Chairman, for your courtesy.
        The Chairman. You are welcome.
        Senator Smith. I would like to have included in the record
    my full statement, if I may.
        The Chairman. It will be.
        [The prepared statement of Senator Smith follows:]
       Prepared Statement of Hon. Gordon Smith, U.S. Senator From Oregon
        Mr. Chairman, I appreciate your willingness to schedule this
    hearing on electricity legislation currently pending before the
    Congress. There are a variety of approaches contained in these various
    bills, and I look forward to hearing from the witnesses today about
    these differing approaches.
        I remain concerned, however, about the wisdom of pursuing a
    comprehensive electricity title, particularly one that does not deal
    specifically with FERC's proposed rulemaking on Standard Market Design.
    I do not see that the retail customer, particularly on the west coast,
    is benefitting from the policies already approved by the FERC, or by
    the policies under consideration by the FERC and by some of these
    legislative proposals. Let's not forget, FERC actually approved the
    California restructuring before it was implemented.
        In the Pacific Northwest, we are still feeling the financial
    effects of the volatile electricity market of late 2000 and 2001. Most
    ratepayers in the Pacific Northwest have seen their power rates go up
    by at least 40 percent, and BPA has begun another rate case to raise
    rates again next October. Meanwhile, our energy intensive industries
    are shuttered, and Oregon continues to have the second highest
    unemployment rate in the country.
        This is the third Congress in which we have attempted to move
    energy legislation. I honestly believe there is no consensus on an
    electricity title because there is no consensus on what the industry
    itself should look like once we're done legislating.
        There is no question that certain sectors of the electric utility
    industry face a wide range of financial challenges, particularly those
    corporations with merchant plants or energy trading and marketing
    operations. These challenges include: excess generating capacity and
    thin profit margins in parts of the country; extensive credit
    downgrades since 2001; high levels of debt; the need to refinance tens
    of billions of dollars in short-term debt; reduced electricity demand;
    and continued regulatory uncertainty.
        What is clear to me, however, is that there is no ``silver bullet''
    that will cure the myriad of ills facing certain electricity providers,
    particularly those with unregulated generation. In fact, from a
    regulatory and legislative standpoint, we seem to be rushing to save
    the merchant plant sector of the industry by sacrificing traditional,
    vertically-integrated investor-owned utilities and public power
    providers. Yet it is the investor-owned utilities, and public power
    providers, that have a legal obligation to keep the lights on in their
    service areas. Traditional utilities with regulated rates of return
    also represent the financially healthiest sector of the for-profit
    providers.
        I, for one, cannot support a broad expansion of FERC's authority in
    any legislation. In fact, I agree with the Chairman's assessment that
    FERC has overreached its statutory authority in its proposed rulemaking
    on SMD. I think it is imperative that if we move any electricity
    legislation we clarify FERC's authority. Congress can make it perfectly
    clear that states, not FERC, have authority over the transmission
    component of bundled retail sales.
        Mr. Chairman, I appreciate your leadership in addressing the
    complex regulatory issues facing the electricity industry, and your
    innovative proposal for regional energy services commissions. I look
    forward to hearing from the witnesses on this concept, that recognizes
    the regional nature of wholesale electricity markets.
        However, I believe the Committee cannot act on an electricity title
    without directly addressing the proposed rulemaking on Standard Market
    Design. As you know, I have opposed this rulemaking, because I believe
    it is unnecessary and unworkable, particularly in the Pacific
    Northwest. If there are instances of undue discrimination on the
    transmission system, I believe that the Federal Energy Regulatory
    Commission (FERC) has the ability, under Order 888 or in the
    development of tariffs for regional transmission organizations, to
    remedy such discrimination.
        It is my understanding that, despite FERC's anecdotal evidence of
    the need for Standard Market Design, there are only four instances when
    the FERC has actually ruled that undue discrimination has occurred
    since Order 888 was issued. I intend to pursue this line of questioning
    when the FERC Commissioners appear before the Committee this afternoon.
        Our goal must be to ensure that the universal availability of
    reasonably priced, reliable power is not compromised. We must move away
    from, not facilitate, policies that will allow gaming and market
    manipulation such as we saw on the west coast in 2000 and 2001, and are
    now seeing evidence of in Texas as well.
        I appreciate the willingness of the witnesses to appear before the
    Committee today.

        Senator Smith. First of all, thank you all for being here.
    This is a very important hearing. I think our chairman is
    showing real leadership in trying to get an energy bill out
    that includes an electricity title.
        But I want to say without any reservation I think, Mr.
    Chairman, that it is imperative that if we move on an
    electricity title, that we clarify FERC's authority and make it
    perfectly clear that States, not the FERC, have authority over
    transmission components and bundled retail sales. I say this
    because I am very concerned about this moving forward.
        The whole idea of SMD I think is born out of good
    intentions, but is misapplied to the historic and regional
    development of energy transmission. I think it has worked in
    Texas because Texas, as I understand it, is a fairly holistic
    grid that serves all of Texas, part of Oklahoma. But it ignores
    the Tennessee Valley Authority and how that was developed or
    the Bonneville Power Administration.
        I think it is fair to say that people in the West in
    particular have particular alarm about FERC's having authority
    to manage these because the message that comes across is we
    need to make the world safe for a better Enron. It seems to me
    to be saying that marketers are more important than local
    utilities and their judgments as to how to keep the lights on.
        I want to be on record as highly opposed, deeply alarmed at
    this part of any proposal to have an electricity title. I think
    I speak, with few exceptions, for the publics, the privates,
    the utilities of all stripes in the State of Oregon, and I
    think Senator Wyden would agree with me.
        Perhaps I am making a speech here, Mr. Chairman, but I
    would love to get your response. Our alarm is born out of the
    fact that the FERC, before any of you were there, actually I
    understand approved the California deregulation. And our State
    suffers to this day, as Senator Wyden and Senator Cantwell are
    about to make clear. And frankly, we are highly alarmed about
    turning over our region's planning to a national program that
    can come up with these kinds of results.
        I would love to get your response to what I have said and
    help me understand why I should have any confidence in a
    proposal that to me says let us make the world safe for
    marketers without respect to local utilities.
        Mr. Wood. I would like to ask my colleague who actually was
    here before when these got set up--he made some pretty eloquent
    remarks yesterday on the California issue that I think are
    useful for the committee.
        But our point here is as it has been since I walked in the
    door, Senator. It is about the customer. It is not about the
    marketer. The marketer, if there is sufficient competition
    among them, and the rules are fair, which we did not see in the
    West, because they were not clear or there were not rules at
    all in a good part of the West, then the customer does not get
    the benefit of those people competing against each other. So
    please know that our goal here is not to benefit the marketer,
    a bankrupt one or otherwise, but to improve the lot as it has
    been seen in a good part of this part of the country that an
    organized and regional electricity grid has, in fact, created a
    much more efficient and well planned and well expanded network
    that benefits customers. So that is our goal.
        Bill, did you want to----
        Mr. Massey. Well, I was actually at the Commission when the
    California market design was approved. It was a homegrown
    market design that emanated from California, literally enacted
    by the legislature. The Governor supported it. It was proposed
    to us, and I regret the fact that we approved it but it was the
    interest of regional deference that we did so. And now we are
    cleaning up a huge mess that arose from that. It was a market
    that could be easily manipulated. It was a short-term market,
    which made no sense whatsoever.
        What we are trying to do is say to the Congress and to the
    world that we do not want bad markets. We want well-designed
    markets. We want markets that cannot be manipulated. We want
    markets that are primarily long-term contract markets, and that
    is what we are trying to achieve.
        We have to do a better job of respecting the interests that
    you raise, local interests, State interests. States want to be
    co-equal partners in this process, and I think my colleagues
    and want to be highly respectful of that and I think you will
    see some significant changes in this white paper.
        The goal is to ensure that consumers out West and other
    parts of the country never have to go through this again in a
    market-based environment.
        Senator Smith. Well, I meant no disrespect to you, but I do
    want to register again my skepticism, even my concern and
    alarm, because right now Northwest customers are paying double
    what they used to, and SMD is projected to raise the costs even
    more. So I must be counted as opposed.
        Thank you.
        The Chairman. Thank you.
        Senator Cantwell.
        Senator Cantwell. Thank you, Mr. Chairman. I would like to
    have a longer statement submitted for the record, if I could.
        The Chairman. It will be made a part of the record,
    Senator.
        [The prepared statement of Senator Cantwell follows:]
            Prepared Statement of Hon. Maria Cantwell, U.S. Senator
                                From Washington
        Thank you, Mr. Chairman, for holding this important hearing on
    legislative electricity proposals as well as FERC's action--and
    inaction--yesterday on western market manipulation.
        I hope the witnesses on the first few panels today will forgive me.
    I had every intention of coming to this hearing to discuss with them
    and with my colleagues the finer points of those issues that divide
    this Committee--primarily along regional rather than partisan lines--
    when it comes to the always-contentious issue of electricity
    legislation.
        Yesterday, however, I believe the Federal Energy Regulatory
    Commission made some important decisions-and some monumental mistakes--
    all of which speak to the Committee's broader concerns regarding the
    appropriate levels of authority and discretion Congress should vest in
    this agency.
        Unfortunately, if this Commission seriously intends to follow-
    through on the proposed treatment of the Northwest that a majority of
    its members outlined yesterday, FERC and its leadership will have
    earned a vote of absolutely, positively no confidence from the
    residents of my home state of Washington. This comes at a time when
    FERC is, in essence, telling the people of the Northwest to ``just
    trust us; we've learned our lessons about how your region works,'' when
    it comes to its mind-numbingly complex Standard Market Design proposal.
    Mr. Chairman, I am astounded by the insensitivity and arbitrary nature
    of the Commission's apparent decision to tell the people of my state
    that, while it has finally unearthed what it deems to be convincing
    evidence that manipulation of markets took place during the crisis of
    2000-2001 and our utilities could be on the hook to pay refunds to
    California, prospects for recovering any of the billions of dollars
    lost by entities in the rest of the West are exceedingly dim.
        As my colleagues are aware, the Commission yesterday released a
    staff report, which Chairman Wood commissioned at the request of
    myself, Senators Wyden and Feinstein at this Committee's January 2002
    hearing on Enron's collapse. This report substantiates what many of us
    have argued all along: that manipulation was pervasive in the western
    electricity markets during 2000 and 2001; that the Northwest and
    California markets are connected; and that spot market prices have an
    important--or in the words of the staff report, ``statistically
    significant''--impact on forward market prices.
        Despite these findings, a majority of FERC Commissioners also said
    yesterday that they do not envision granting any relief to utilities
    throughout the West which signed absurdly expensive long-term contracts
    during the height of the crisis.
        I should note that I appreciate the fact that the Commission seemed
    to signal that it would consider Northwest refunds for short-term
    transactions. However, FERC failed to actually take any action on that
    matter. Further, as the Commission well knows, the majority of
    Northwest utilities' money is tied up in long-term contracts, simply
    because of the way business is transacted in our region.
        Thus, my question is simple. How are residents of Washington
    supposed to understand that, while FERC has--after conducting a 13-
    month investigation--finally connected the dots so obvious to most, the
    Commission still believes residents of the Northwest and the utilities
    that serve them do not deserve the same treatment as their neighbors in
    California, simply because our markets are differently structured?
        In essence, FERC proposes to penalize us because our utilities
    rely--and have always relied--more heavily on long-term contracts to
    meet their statutory obligation to serve customers. As I understand it,
    FERC itself encouraged utilities to get out of the spot market and
    enter into such contracts during the height of the crisis to mitigate
    price volatility.
        Mr. Chairman, I know that many believe that the concept of
    ``contract sanctity'' is paramount. And I assure my colleagues, as a
    business woman, I clearly understand its importance. However, the
    western energy crisis of 2000-2001 was a market debacle of historically
    unprecedented magnitude. Do we really believe, as policymakers, that
    contracts resulting from manipulative business practices should be
    immune from reform? Do we really believe, after all we've learned about
    Enron, that millions of dollars of Northwest ratepayers' money should
    continue to flow--if not into the company's coffers, then into the
    pockets of either its creditors or bankruptcy lawyers? Do we really
    believe that FERC's proposal to revoke Enron's market-based rate
    authority more than a year after the company has filed for bankruptcy,
    after the company has admitted manipulating markets, and after some of
    its executives have plead guilty to felony charges, represents the
    actions of a ``tough cop on the beat''?
        As I said, the western energy crisis was a debacle unparalleled in
    the history of the industry--save, perhaps, for that infamous period in
    the 1920s and early 1930s that resulted in the Roosevelt
    Administration's passage of the Federal Power Act and Public Utility
    Holding Company Act of 1935. Still, the magnitude of the economic
    devastation caused by the latest crisis would take even Samuel Insull's
    breath away. According to a June 2002 study published in the journal
    Competition and Trade, the crisis has resulted in the West's loss of
    $35 billion in domestic economic product--in other words, a 1.5 percent
    decline in productivity and a total loss of 589,000 jobs.
        I ask my colleagues to consider this another way. Think about the
    extra money consumers and businesses are spending on utility bills in
    my state. Since the Bonneville Power Administration put in place a 46
    percent rate increase in October 2001, Washington state consumers and
    businesses have paid $895 million more for power than they would have
    previous to the crisis, and the Pacific Northwest as a whole has paid
    an excess of $1.3 billion. These are purely energy costs, and do not
    account for their multiplier effect on associated economic activities.
        Consider the fact that these costs essentially function as a tax on
    any economic activity that requires the use of power--for our purposes,
    we'll call it the Enron tax. Consider the fact that $700 million--the
    amount of Enron's contracts with BPA--is equivalent, in terms of
    Bonneville's revenue requirement, to between five to seven percentage
    points on its rates. Do any of my colleagues believe sound economic
    policy would be served if a similar five percent Enron tax were imposed
    on the rest of this nation, at a time when our economy continues to
    struggle to climb out of a recession? Do any of us believe this
    Administration would support such an initiative?
        In my state, we have, over the past two years, seen our electricity
    and unemployment rates rise in tandem. And I'm afraid that the
    electricity policies of FERC and this Administration have effectively
    tied a 1,000 pound weight around our neck at precisely the moment in
    time when our economy requires inflatable water wings if it is going to
    learn to swim again.
        Perhaps I'll hear something different from our FERC witnesses here
    today about the Commission's intentions toward the Pacific Northwest.
    Otherwise, I'm afraid this agency's response to the western market
    crisis can be portrayed as nothing less than pathetic, negligent and
    outrageously unfair.
        I thank the Chairman for holding this important hearing.

        Senator Cantwell. I think the interesting thing about this
    hearing today is that the issue is not really whether
    ratepayers in my State have now had a 50 percent rate increase
    and will have so for the next 5 years. I do not really think it
    is the issue that Oregon and California have also suffered
    gravely from their economies being impacted by these high
    rates. One analysis said $35 billion in domestic economic
    product loss and a 1.5 percent decline in productivity, and
    almost 600,000 jobs lost. My colleagues are going to talk, I am
    sure, more about that.
        But you know what? That is not even the issue today. The
    issue today is whether FERC is capable of doing their job.
        Mr. Wood, you once responded that you were the cop on the
    beat, and I can guarantee you after seeing this report that any
    policeman on this beat seeing this kind of corruption would be
    relieved of their duty if they did not respond.
        The issue today before this committee, certainly the issue
    as it relates to SMD is whether FERC is capable of doing this
    job. An entity that was created in 1935 and has had very little
    of the public spotlight ever shown on it, but now we are seeing
    possibly the inadequacy of the only Federal agency that is
    supposed to protect consumers from unjust and unreasonable
    price gouging. That is your duty. It is in the Power Act.
        I would like to ask you a question, Mr. Wood, because you
    came before this committee and I asked you about this issue. I
    asked you specifically, my quote, ``Do you think that market
    manipulation, if you found market manipulation, could it ever
    be just and reasonable or ever in the public interest?'' And
    your reply to this committee and to myself was, ``I cannot
    think of an instance when it would.''
        Do you stand by that testimony?
        Mr. Wood. I do.
        Senator Cantwell. What was your statement yesterday? What
    was your statement yesterday as it related to the report?
        Mr. Wood. That we were going to move forward on every one
    of the 31 recommendations in that report. We took action on
    some yesterday, some market-based rate authority revocations
    for, I believe, eight natural gas companies and five power
    marketers. We have got another 30 or so that we are continuing
    to review the record on because a number of pleadings came in
    last Thursday, a week ago today, from a number of parties in
    California and in the West that were subject to accusation, I
    suppose, from other parties that came in on March 3. So this is
    what we call the 100-day discovery evidence.
        Please know we are still looking at a number of items in
    the report. We have got the report this month. It was
    imperative I think for us and for you all to get this out in
    the public, to put the full record behind it in the public for
    everybody to see, for us to continue our review----
        Senator Cantwell. Mr. Wood, just because I am going to run
    out of time.
        Mr. Wood. Yes, I am sorry.
        Senator Cantwell. I just want to make this point. You have
    a whole chapter, chapter 5, dedicated to the relationship
    between the spot market and long-term contracts, and the
    conclusion by staff was, quote, for contracts that are subject
    to a just and reasonable standard of review in the ongoing
    complaint proceeding, that they should send this analysis to an
    administrative law judge. You spent a whole chapter saying that
    they are related.
        We want relief on those long-term contracts. We want the
    just and reasonable clause that you are empowered with under
    the Federal Power Act to stand. You have testified before this
    committee that you do not believe contracts that have been
    manipulated can either be just or reasonable or in the public
    interest. So I have a strong legal belief that you are going to
    have to use the just and reasonable clause, but it does not
    matter. You have testified before this committee saying neither
    of those kinds of market manipulations could be either in the
    public interest or just and reasonable. So I do not know why
    FERC is continuing to go so slow on what is known by the rest
    of this country and certainly felt by the ratepayers in
    Washington State.
        Mr. Wood. Well, certainly it is our intention to move
    forward as soon as we can. I would point out that the part you
    referred to in the staff analysis which did look at all the
    contracts that were entered into in this period made the direct
    correlation between the dysfunctional spot market and the
    shorter-term, the 1- to 2-year contracts. So there was a .33
    correlation, a one-third correlation, between a dysfunctional
    spot market and those contracts. And I think that that, as I
    mentioned yesterday, is a factor that I weigh in when I look at
    the public interest standard in looking at any contract.
        Senator Cantwell. Well, we will get back to the public
    interest standard. But my time is expired. Mr. Chairman, thank
    you.
        The Chairman. Thank you very much, Senator.
        Senator Feinstein, you are next.
        Senator Feinstein. Mr. Chairman, I just want to say that I
    really concur with my colleagues that have just spoken.
        I would like to enter my full statement. Plus, we have had
    an opportunity to analyze the California submitted documents
    and I would like to submit that brief analysis for the record,
    if I might.
        The Chairman. It will be done.
        [The prepared statement of Senator Feinstein and the
    analysis follow:]
           Prepared Statement of Hon. Dianne Feinstein, U.S. Senator
                                From California
        Mr. Chairman, thank you very much for holding this hearing. You
    have laid out an aggressive timetable to markup Comprehensive Energy
    Legislation this year in this Committee. While I am pleased we will be
    able to discuss these issues here in Committee before they come up on
    the Floor, I am worried that we are rushing to pass legislation without
    fully understanding how to properly fix our broken energy markets.
        I strongly believe we should not rush this process, we must make
    sure we do it right.
        Just yesterday, FERC released its ``Final Report on Price
    Manipulation in Western Markets'' which confirmed widespread and
    pervasive fraud and manipulation during the Western Energy Crisis and
    FERC announced that California would receive more than the $1.8 billion
    in refunds recommended by an administrative law judge in December. At
    the very least FERC is estimating refunds of around $3.5 billion.
        The regulatory hammer has finally begun to drop. The question now
    is how hard. In view of the inflated profits that energy companies
    reaped at the expense of California homeowners and businesses--FERC
    should right this wrong and honor California's claim for $9 billion in
    refunds.
        FERC must also re-examine the long term contracts signed by the
    State of California at the height of the Energy Crisis. Yesterday the
    FERC report acknowledged the significant linkage between spot prices
    and contracts. I strongly believe the evidence is clear that the
    contracts were entered into under extraordinary circumstances with
    rates inflated by market manipulation, and I believe failure to open up
    the contracts would be a big mistake.
        However, I will give credit to the Commission where credit is due.
    FERC is finally headed down the right path and I want to commend the
    Commission for lifting its ``Protective Order'' and releasing thousands
    of pages of new documents which demonstrate that energy companies
    deliberately manipulated electricity and natural gas markets during the
    Crisis.
        This abuse was pervasive and unlawful.
        These now-public documents were submitted to FERC earlier this
    month by the State of California, the California Attorney General and
    the State's largest utilities. They provide strong evidence that there
    was a concerted effort to boost company profits at the expense of
    consumers.
        Mr. Chairman, I would like to enter a summary of this documentation
    produced by my staff into the Record.
        First, the documents detail new incidents when energy companies
    intentionally held their plants offline to drive prices up.
        Second, the documents show energy traders were deliberately
    attempting to manipulate the Western market--frequently through
    strategies earlier Enron memos termed ``Death Star,'' ``Get Shorty,''
    ``Fat Boy,'' and ``Ricochet,'' among others.
        These strategies were implemented not just by Enron, but by energy
    companies across the board. For example:

       A conversation between a Mirant trader and a trader from
            Public Service of Colorado reveals an effort to engage in
            overscheduling energy--the ``Fat Boy'' strategy.

        The trader from Public Service of Colorado states, ``Why don't we
    just do something where we overschedule, overschedule load and share an
    upside, dude.'' The Mirant trader responds, ``That's fine.''
        These were not isolated incidents. They were widely implemented
    practices designed to fleece consumers in the West.
        Third, the documents lay out new evidence of possible anti-trust
    violations by energy companies. The filing shows the largest energy
    suppliers in California shared non-public information through a third-
    party company called Industrial Information Resources. Traders called
    this company ``The Mole.''
        Industrial Information Resources provided sellers detailed, non-
    public information on daily plant outages--essentially giving energy
    companies insider information on when an unplanned outage could
    transform an energy shortage into a Stage 3 energy emergency or
    blackout.
        Yesterday, I wrote the Attorney General to ask the Justice
    Department to look into possible anti-trust violations by energy firms
    who used Industrial Information Resources to share non public
    information on plant outages in California.
        Fourth, the documents provide new evidence of document destruction
    by energy companies to cover up details of their actions.
        In the documents, an ex-Mirant employee disclosed that:

       He was instructed to delete certain files relating to the
            California markets from hard drives; and
       Key Mirant executives were instructed to turn in their
            laptops so that Mirant could clear their hard drives.

        According to this employee, he was ordered to flagrantly destroy
    documents, which may have detailed market fraud. This means that we
    will never know the true scope of the gaming and manipulation.
        I strongly believe this type of fraud and manipulation occurred, in
    part, because strong federal oversight of the energy trading system was
    non-existent.
        For FERC to be an effective regulator, Congress must provide the
    Commission with more authority to punish violators with stiffer
    criminal and civil penalties under the Federal Power Act.
        Mr. Chairman, I am pleased to see that your draft legislation
    proposes to eliminate the 60-day waiting period after a complaint is
    filed at FERC for a party to become eligible to receive refunds. This
    unnecessary 60-day waiting period may cost California billion of
    dollars in refunds because thus far the Commission has refused to grant
    refunds prior to October 2, 2000 despite the overwhelming evidence of
    fraud and manipulation before that date.
        Mr. Chairman, I am also pleased to see provisions in your draft
    legislation that propose to increase criminal and civil penalties under
    the Federal Power Act. I would like to work with you to see these same
    penalties strengthened as part of the Natural Gas Act to punish abuse
    in the natural gas sector, not just the electricity sector. And refund
    authority should be part of the options FERC has at its disposal to
    punish those who manipulate the gas markets. As the FERC report on
    Price Manipulation in the Western Markets states, ``markets for natural
    gas and electricity in California are inextricably linked.''
        There are other remedies to market power that Senator Bingaman and
    Senator Daschle included in the Senate Energy Bill last year that I
    would like to see the Committee include in an Electricity Title. I
    believe specific prohibitions on market manipulation, authority for
    FERC to review all mergers and acquisitions in the energy industry, and
    more authority for FERC to remedy market abuse must be part of any
    energy bill this committee reports to the Floor.
        Mr. Chairman, I am interested to hear comments from our witnesses
    on the new idea you have proposed to create ``Regional Energy Services
    Commissions.'' I would like to commend you for bringing forward this
    idea, but I think this proposal should be studied carefully by this
    Committee before we act on any proposal that could further balkanize
    the already fractured energy markets and take power away from FERC--at
    a time we should be providing the Commission more authority, not less.
        Again, Mr. Chairman, I would like to thank you, the members of this
    Committee, and the Committee staff for holding this hearing and I look
    forward to the Committee's examination of these important issues. Thank
    you very much.
       New Evidence That Energy Companies Besides ENRON Manipulated the
                             Western Energy Market
            (unofficial report--office of senator dianne feinstein)
        After a 100-day discovery period that ended March 3, 2003, the
    State of California, the California Attorney General's Office, and the
    state's largest utilities filed over 3,000 pages of evidence at the
    Federal Energy Regulatory Commission to show how fraud and manipulation
    was pervasive throughout the Western Energy Crisis of 2000-2001. The
    market abuse was not limited to a few rogue traders at one firm, but
    was a widespread series of schemes perpetuated by many employees across
    most companies that supplied and traded in the West.
    Highlights of the Information Filed by the California Parties
    (This information was previously under a ``Protective Order'' at FERC)

       Details on new specific incidents when energy companies
            intentionally held their plants offline to drive prices up
            during 2000 and 2001.
       New transcripts of conversations between energy company
            employees revealing an intent to defraud and manipulate the
            California market.
       Reliant knew about transcripts proving their employees held
            power offline, but the company sat on the evidence for over a
            year before turning them over to FERC. (CA Parties brief, p122,
            footnote 375/Exhibit CA-218)
       New evidence of document destruction by energy companies to
            hide details of their behavior in the Western Energy Market.
       New evidence laying out possible anti-trust violations by
            energy companies.

        The filing by the California parties shows that there was a
    extensive and coordinated attempt by energy companies to game the
    Western market to drive prices up by engaging in the following:

    1. Withholding of Power--driving up prices by creating false shortages.

        New evidence of Withholding of Power according to the California
    parties: (CA Parties brief, p28-31/Exhibit CA-9)

       On August 15, 2000 Williams reported that its plant in Long
            Beach called Alamitos 7 was unavailable due to NOX
            limitations, but AES's real-time logs from that day show the
            plant was shut down because Williams directed it to be.
       Reliant failed to return its Etiwanda Unit 2 in Rancho
            Cucamonga to service for two days after repairs were completed
            on January 26, 2001, even though the ISO system was
            experiencing continuous Stage 3 emergencies in California.
       Redondo Beach Unit 6 power plant was shut down by Williams
            and AES April 3-April 6, 2000. Although the ISO was told the
            plant was offline due to a boiler tube leak, the plant records
            indicate this was a planned shutdown and the leak was an excuse
            concocted two days later.
       Dynegy shut down its El Segundo Unit 1 plant August 30-
            September 3, 2000 for repairs, but the repairs had been done
            and the plant was shut down to force prices up.
       Mirant held its Pittsburg Unit 1 plant offline until October
            22, 2000 even though an external tube leak ended October 20,
            2000.
       Duke delayed returning Oakland Unit 1 to service after
            repairs to a lube oil cooler and a cooling fan in November,
            2000 despite ISO-declared emergencies.
       During an ISO-declared emergency December 19 and 20, 2000,
            Williams declared Redondo Unit 5 a forced outage due to a
            boiler tube leak. However, the control operator logs
            uncharacteristically put quotation marks around the outage
            reason, ``Blr. Tube Leak'' and later, after tests were done,
            the logs indicate that no leaks were found.
       Reliant delayed reporting the end of an outage at its
            Ellwood Unit in Goleta for more than twelve hours during peak
            demand in early April 2001.
       Between November 19 and December 5, 2000 Dynegy reported
            that its El Segundo 1 and 2 units (with a capacity of about 350
            MW) were on ``forced outage,'' but these units were actually
            shutdown because Dynegy claimed its operating staff was on
            vacation. Forced outages should not include vacation days--
            especially during ISO emergencies, which occurred on November
            19 and 20.

    2. Bidding to Exercise Market Power--suppliers bid higher after the
    California ISO declared emergencies, knowing the State would need power
    and be willing to pay any price to get it.

        New evidence of Bidding to Exercise Market Power according to the
    California parties:

       A Mirant email to eleven traders in July of 2000 reveals
            this strategy:

              ``load is average above 40 thousand during peak. So, submit
            revised supp. Bids and `stick-it to `em!!'' (CA Parties brief,
            p42-43/Exhibit CA-141)

    3. Scheduling of Bogus Load (aka ``Fat Boy'' or ``Inc-ing'')--suppliers
    submitted false load schedules to increase prices.

        New evidence of Scheduling Bogus Load according to the California
    parties:

       A Dynegy trader confirms that Dynegy's load deviation in
            August 2000 is ``probably because [the traders] are just doing
            some dummy load scheduling.'' (CA Parties brief, p48/Exhibit
            CA-202)
       A conversation between a Mirant trader and a trader from
            Public Service of Colorado reveal a joint effort to engage in
            ``Fat Boy.''

        The trader from Public Service of Colorado states, ``Why don't we
    just do something where we overschedule, overschedule load and share an
    upside, dude.''
        The Mirant trader responds, ``That's fine.'' (CA Parties brief,
    p49/Exhibit CA-204)

       A Sempra trader states Sempra should submit ``fake load'' to
            the day ahead market. (CA Parties brief, p49/Exhibit CA-71)
       A Williams trading strategy is identified as ``scheduling
            bogus load.'' (CA Parties brief, p49/Exhibit CA-22)

        An internal Powerex memo documents that Powerex entered into a
    contract with the explicit purpose of ``overscheduling'' and
    ``underscheduling'' and for congestion manipulation. (CA Parties brief,
    p49)

    4. Export-Import Games (aka ``Ricochet or ``Megawatt Laundering'')--
    suppliers exported power out of California and imported it back into
    the State in an attempt to sell power at inflated prices

        New evidence of Export-Import Games according to the California
    parties:

       Powerex's head trader congratulated its daily traders on
            their successful use of strategies to buy-ahead and sell back
            real-time. (CA Parties brief, p53/Exhibit CA-40)
       Reliant had ``camouflage transactions'' where the company
            sold power out of California day-ahead to Arizona and New
            Mexico utilities, and bought it back for sale in the real-time
            market. (CA Parties brief, p55/Exhibit CA-56)

    5. Congestion Games (aka ``Death Star'')--suppliers created false
    congestion and were then paid for relieving congestion without moving
    any power.

        New evidence of Congestion Games according to the California
    parties:

        Other names like ``Death Star'' were given to these schemes: EPMI--
    Star, CISO--Death, Curious and George, Red and Green, Hungry and Hippo,
    James and Dean or Chinook and Atlantic and SCEM--Loopy. (CA Parties
    brief, p59/Exhibit CA-1)
       These congestion games were called ``free money.'' (CA
            Parties brief, p59/Exhibit CA-145)
       A Mirant trader summed up the scheme, ``I mean its just kind
            of loop-t-looping but it's making money . . . [laugh].'' (CA
            Parties brief, p48/Exhibit CA-204)

    6. Double-Selling--suppliers sold reserves, but then failed to keep
    those reserves available for the ISO.

    7. Selling of Non-Existent Ancillary Services (aka ``Get Shorty'')--
    suppliers sold resources that were either already committed to other
    sales or incapable of being provided.

    8. Sharing of Non-Public Generation Outage Information--the largest
    suppliers in California shared information from a company called
    Industrial Information Resources that provided sellers detailed, non-
    public information on daily plant outages. A one-year subscription to
    Industrial Information Resources cost $70,000. Providing multiple
    competitors the same, non-public, outage information signals all
    competitors to act in a parallel manner.

        New evidence of Sharing of Non-Public Information according to the
    California parties:

       Duke energy traders called Industrial Information Resources
            ``the mole.'' For example, Duke trader James Stebbins emailed:
            ``I just heard back from the mole. He is reporting that the PV3
            will be coming back on line 6 days earlier than expected. The
            new return date is March 3. Good luck and happy selling.'' (CA
            Parties brief, p70/Exhibit CA-95 and Exhibit CA-253)

    9. Collusion Among Sellers--sellers were jointly implementing or
    facilitating Enron-type trading strategies.

        New evidence of Collusion Among Sellers according to the California
    parties:

       Glendale traders learned manipulation from Enron and Coral
            traders. (CA Parties brief, p77/Exhibit CA-105 and Exhibit CA-
            1)
       Sempra provided Coral with advance information regarding the
            status of a plant. (CA Parties brief, p78/Exhibit CA-1)
       Transcripts of calls show traders from Public Service of
            Colorado and Mirant discussing ``sharing'' or ``splitting''
            ``the upside. (CA Parties brief, p79/Exhibit CA-204)

    10. Manipulation of NOX Emission Market--sellers manipulated
    the market for NOX emissions in the South Coast Air Quality
    Management District through a series of wash trades that created the
    appearance of a dramatic price increase that may have been fabricated.

        For example, Dynegy, together with AES and others, entered into a
    series of trades of NOX credits in July and August 2000 by
    which Dynegy would sell a large quality of credits and then
    simultaneously buy back a smaller quantity of credits at a higher per
    credit price. (CA Parties brief, p90-93/Exhibit CA-11)

    11. Wanton Document Destruction--sellers (not just Enron) flagrantly
    destroyed documents detailing behavior in the Western Energy Market.

        New evidence of Wanton Document Destruction according to the
    California parties:

       Mirant--an ex-Mirant employee disclosed that he was
            instructed to delete certain files relating to the California
            markets from hard drives and that key Mirant executives were
            instructed to turn in their laptops so that Mirant could clear
            their hard drives. (CA Parties brief, p129/Exhibit CA-178)
       City of Glendale, California--a Glendale employee, Jack
            Dolan, told an ex-Glendale employee, Carl Edginton, that Mr.
            Edginton could destroy one of the documents that contained
            information about Enron's gaming strategies. (CA Parties brief,
            p129-130/Exhibit CA-213)

    12. Negligent Document Destruction--sellers failed to retain documents
    detailing behavior in the Western Energy Market in accordance with FERC
    rules and the Federal Power Act.

        According to the California parties, new evidence of Negligent
    Document Destruction by:

       Powerex
       Portland General Electric
       Reliant
       Bonneville Power Administration
       City of Glendale
       Northern California Power Agency (CA Parties brief, p130-
            132)

    13. Traders Did Not Care How High Prices Went--sellers said that it did
    not matter how high prices went, as long as Californians paid and
    generators made money.

        New evidence Traders Did Not Care How High Prices Went in the
    filing:

       Conversation between two Reliant employees on May 22, 2000:

    Kevin: ``Hey, guys, you know when we might follow rules? If there's
            some sort of penalty.
    Walter: ``That's right.''
    Kevin: ``I would never suggest it, but it seems like the writing would
            be on the wall.''
    Walter: ``Well, I mean, there's--you know, our position is if it's a
            reliability issue, then the reliability comes over the
            economics.
    Kevin: ``Right.''
    Walter: ``So we don't have a problem with that. But it needs to be a
            reliability issue. If it's economics, and by God, that's what
            rules.''
    Kevin: ``You'll let the California rate payers pay.''
    Walter: ``That's right. I don't have a problem with that. I have no
            guilty conscience about that.''
    Kevin: ``All right, man.''

        (CA Parties brief, p110-111/Exhibit CA-239)

        Senator Feinstein. The bottom line, in an answer to Senator
    Smith's question, in 1996 it is true, California passed a
    broken energy law, lobbied for by the energy industry, headed
    in the lobbying effort by Enron, signed not by a Democratic
    Governor, by a Republican Governor, and the broken market was
    created.
        Since that time, a whole industry I believe has pervasively
    committed illegal acts, and we have an energy commission--and
    this is prior to both Mrs. Brownell and Mr. Wood--who did
    nothing, with exception of Mr. Massey who was a lone vote, who
    stood up, who knew something was wrong, and who tried to get at
    it. Those of us that sat down with the Commission got not to
    first base. There was a noblesse oblige. There was a ``we know
    it all.'' ``It is all California's fault.'' And guess what? Now
    it turns out that that is not correct.
        Where California I think made a big mistake was picking up
    billions of inflated energy costs because if those costs had
    been able to be onto the ratepayers, you would have had a yell
    and a scream that would have taken this place apart. But the
    State paid for it. It bankrupted one major investor-owned
    utility and nearly bankrupted the other.
        And I pick up this FERC report and the Commission has given
    show cause to 30 companies to come and tell them why they
    should not have to give their profits back. And they are all
    the star companies of America. I am absolutely disgusted.
        But you know what it shows? It shows that in a capitalist
    society, in a free market, you need regulation and you need
    people who are going to be courageous and who are not going to
    be bothered by the fact that their salaries are paid by the
    very industry they have to regulate but do their job: regulate
    that industry. And it has not been regulated.
        Consequently, you have literally billions--probably one of
    the greatest frauds ever perpetrated on the entire West Coast.
    And as you read these transcripts, and you see trader language
    like ``junkyard dogs,'' saying in essence, shove it to them--
    this is America's star energy companies. I am disgusted.
        I would like to ask some questions.
        The evidence makes clear that the type of fraud and
    manipulation was not confined just to Enron, Reliant, and BP
    Energy. The first question is, will the commission rescind
    market-based rate authority for other companies to ensure that
    this market abuse is properly punished?
        Mr. Wood. Yes, ma'am, we can. As I mentioned to one of your
    colleagues a moment ago, we are in the process of basically
    hearing the other side of the story, which was filed last
    Thursday, on each of these claims. One, for example, made a
    claim that the California ISO asked us to do this Enron
    strategy because they needed to keep the lights on.
        Well, I am going to follow that up. I think it is important
    to both the ISO's reputation and to the accused party to make
    sure that before we move forward with a show cause to disgorge
    or to revoke, which are basically the two options for us,
    revoke the certificate or disgorge the profits, if there is in
    fact a tariff hook to go back and say you violated a law that
    was on the books at the time. That is what we are putting
    together this month. Again, that evidence just came in last
    week.
        There were those companies that you referred to, Senator
    Feinstein mentioned, in the document----
        Senator Feinstein. Page 16 of your document.
        Mr. Wood. Yes, ma'am, in the footnote.
        Senator Feinstein. They are footnoted, but they are there.
        Mr. Wood. They are there.
        There were actually kind of three camps of groups. The
    Enron gaming strategies which I should add were pointed out by
    an ISO report in January. So we did find issues, but I will
    give the ISO credit. They did a lot of the scrubbing of all the
    records for the prior year for Senator Dunn's hearing and
    provided that record to us as well.
        Some other people that were engaged in the Enron business
    relationships, which the staff turned up in its discovery over
    the last year, were kind of the outside of California parties
    that potentially facilitated some of these transactions.
        And then the third category were about 10 companies that
    staff identified as having potentially performed economic
    withholding because their bidding strategies were anomalous to
    what the market rules were at the time.
        So those three categories are really what we had hoped to
    have yesterday, but I think when we saw the volume of evidence
    that came in last Thursday, it is incumbent on our agency to
    review that before we send it over to trial.
        Senator Feinstein. I notice my time has run out. Will there
    be a second round, Mr. Chairman?
        The Chairman. Yes. We will stay and do that, if you want.
    Thank you very much.
        Senator Burns.
        Senator Burns. No. I think it is Senator Alexander.
        Senator Alexander. Thank you, Conrad.
        I have one question. Thank you for coming.
        The staff draft of the energy bill has what we call a FERC-
    lite section that would put many parts of TVA's transmission
    system under FERC. As we look at that in the Tennessee Valley,
    Mr. Wood, maybe you could help us think about how to look at
    that in terms of what are the pros and cons to the ratepayers
    of the Tennessee Valley and even to TVA itself of putting parts
    of the transmission system under FERC?
        Mr. Wood. I would like to actually think a lot deeper about
    that and give you and the committee something in writing,
    Senator Alexander, because I have not given the FERC-lite
    language a lot of deep thought lately.
        But just in general, what this language really is and a lot
    of what we are talking about is integrating these grids into
    their neighboring grids more tightly so there is not, in
    effect, like a big wall around TVA--a ring fence I guess they
    have called it--but that there is more of an integrated
    approach toward more coal-fired power in the Midwest and
    natural gas-fired power in the South. Certainly depending on
    costs and time of year, those--TVA sits right in the middle of
    the grid, and I think from a national perspective, it is
    important to have TVA involved in the grid.
        From the TVA customers' perspective, it is a similar
    benefit to have access to not only the power that TVA would
    generate, but for those customers, particularly if they have
    the ability to buy from someone other than TVA, to actually be
    able to reach the adjacent utility or some powerplant along the
    Ohio River or down in Louisiana and actually buy power
    contractually from those places, as well as buy it from TVA, so
    that they have got more competitive choices for their own
    retail customers.
        So it is just, in effect, broadening the market and doing
    so through a form that allows for some uniformity of treatment
    of those by the TVA grid operator, the people at TVA that run
    the grid.
        Senator Alexander. I wonder if the other Commissioners have
    a comment on that.
        Mr. Massey. Senator, my own view is that the Commission, at
    least under existing law, ought to try to make these RTOs and
    these markets attractive enough so that non-jurisdictional
    companies will want to participate in them. They will want to
    participate in RTOs because they see value to it to their
    customers. They see that it is in the national interest. So
    that is step one. It seems to me we have to be working to make
    that happen.
        Senator Alexander. Would one aspect of making it attractive
    be a transition period? One of the things about public policy
    in general I have observed over time is that when you make big
    adjustments, that the law of unanticipated consequences can
    come into play, and the big adjustments are sometimes easier to
    make gradually. As you do your planning and your thinking about
    these changes, do you think about transition time?
        Mr. Massey. I think about transition time in lots of
    different ways. It seems to me the industry in general has been
    undergoing this transition to competitive markets for quite a
    while, and I think they are looking for some certainty. But new
    players who may want to participate in an RTO or who are
    jurisdictionally required to comply with FERC policies, yes, I
    think they need some time to get used to the idea. I am hoping
    that that is one of the issues that we can deal with in our
    white paper with respect to standard market design or RTO
    formation, what should be the sequence of events that will make
    this happen in an orderly fashion, respecting regional
    differences, respecting State commission rights. That is my
    hope.
        Senator Alexander. Ms. Brownell.
        Ms. Brownell. Senator, I think your caution is well placed
    certainly by what we have learned, but some of my lessons were
    learned in PJM where indeed we did undergo a transition. Where
    we introduced new markets over time, we introduced ancillary
    services over time. There was a lot of testing. So I surely
    think that that will be part of any transition.
        Indeed, that transition and period of evolution has already
    been laid out in many of the RTO dockets where people are on
    different tracks depending on where they are in terms of their
    own market design elements.
        I would also add that the length of the transition period I
    think has made us all vulnerable, and the lack of transparency
    in some of our marketplaces and the lack of clear and
    consistent rules has, in fact, made the marketplace vulnerable
    not only to market manipulation and games, but more
    importantly, to the lack of efficiency that would bring value
    to customers, to the inability to introduce new technology into
    the marketplace that would benefit customers both from an
    environmental and efficiency perspective, and indeed, from some
    assurance that we are operating that grid as efficiently as we
    can and using economic dispatch. So I think we have to balance
    what our goals are.
        Remember, this is not about throwing out what works. This
    is about building on it, which is what this country does when
    it restructures marketplaces.
        Senator Alexander. Thank you. Thank you, Mr. Chairman.
        The Chairman. Thank you.
        Senator Burns.
        Senator Burns. Thank you, Mr. Chairman.
        I just got a couple of questions, and they are kind of
    along same lines as--oh, by the way, Mr. Chairman, I would like
    my statement to be made a part of the record.
        The Chairman. It will be made a part of the record.
        [The prepared statement of Senator Burns follows:]
       Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
        Mr. Chairman, I thank you for holding this hearing today. I
    appreciate your efforts to move the energy bill forward on schedule. It
    is important that we let the committee process work, and that we all
    have a chance to work out a bill in this room. Starting next week you
    have set up an ambitious mark up schedule, and I commit to working with
    you to produce an energy bill this Congress.
        Electricity is never an easy subject, so this hearing is especially
    important. First of all, Mr. Chairman, I would like to say that the
    draft language your staff has distributed is a step in the right
    direction, since it focuses on a regionally based rather than a top-
    down approach.
        I do believe there are steps we can take to improve reliability and
    to improve confidence in the electricity markets without putting
    consumers at risk. Some people believe that responsibility lies with
    FERC, but I do not necessarily agree.
        SMD is a perfect example. The justification behind the Standard
    Market Design proposal is that we are in a desperate situation, and
    that FERC needs authority over every sector of electric markets to save
    the industry from itself.
        The ``We are the government and we are here to help'' philosophy
    does not sit well with me.
        I don't have great faith that FERC will wield its authority any
    more carefully with SMD than it has with the RTO's it ordered to be
    created just a few years back. In the Northwest, we have been trying to
    form RTO West at the order of FERC. This has been a long and painful
    process, not to mention an expensive one. The filing utilities, the
    State commissions, the cooperatives and BPA all spent thousands of
    hours, and literally millions of dollars negotiating the terms of the
    new RTO. They made real progress and then FERC swept in last year and
    announced SMD. Now this committee is advocating yet a different
    regional commission approach.
        I would like someone to explain to me how this creates stability in
    the electricity markets. It doesn't look that way from where I'm
    standing. Whether or not you like the RTO approach, and plenty of
    Montanans did not like it, they are willing to see it through rather
    than change horses mid-stream.
        I have been on this committee for a long time, and I have seen a
    lot of ideas come and go. One thing is for sure: every time Congress or
    the federal government acts to solve a problem in the electricity
    markets, we create a whole new one we didn't anticipate. I don't want
    to be part of a situation where the only job security we create is for
    lawyers.
        Montanans were hit hard in the summer of 2000. Water was short,
    power was expensive, California energy prices hit record highs, and
    those high prices echoed throughout the West. We know more about the
    causes of that situation now then we did then, but it was by all
    accounts a failure. Is that why we are here? I would maintain that
    situation was created by a flawed State electricity policy in
    California at the time, and a failure by FERC to use its authority to
    fix the problem. A few people were asleep at the switch. FERC would
    like us to believe the California crisis was caused by a mechanical
    failure of the entire electric market--I prefer to think of the
    California situation as pilot error.
        I bring up the California situation because I fear that good actors
    in the energy industry are being punished because of the actions of a
    few bad ones. Despite the horror stories, there are plenty of markets
    across this country that work pretty well. We shouldn't handcuff those
    that are doing a good job just to prop up the stock prices of the
    others.
        As we move forward, let's focus on the facts, rather than the
    emotion of this situation. If we get caught up in trying to create the
    perfect competitive market, we will all be disappointed with the
    results. Any electricity policy we consider should have one goal:
    reliable delivery of affordable power to consumers and businesses.

        Senator Burns. As I look at this and not really being an
    expert on this particular subject, I have to look at it from
    the standpoint of the cooperatives. The committee staff draft
    includes provisions that would subject rural electric
    distribution cooperatives to the jurisdiction of FERC. Mr.
    English noted that some of these operations employ as few as
    five people, and I personally have a problem with the idea that
    we are going to subject these small mom and pop rural electric
    distribution cooperatives to FERC oversight.
        Do you believe that it is necessary to extend FERC
    jurisdiction over these small electric cooperatives in order to
    make the interconnected utility system work?
        Mr. Wood. No, sir. I am not sure. That was in the staff
    draft?
        Senator Burns. Mr. English testified to that.
        Mr. Wood. That it was in the FERC issue?
        Senator Burns. Yes.
        Mr. Wood. That issue they did raise with us and we clearly
    want to clear that up. They raised that back in November and I
    agree with that. We need to clarify that issue. That is not an
    issue we care at all about because distribution is local.
    Transmission is not and we need to keep focused on the
    transmission, not the distribution.
        Senator Burns. Do you agree with that, Mr. Massey?
        Mr. Massey. I do, Senator. I have read their pleadings and
    I think they make very persuasive arguments.
        Senator Burns. Well, that sort of answers my second
    question then.
        The Chairman. I believe Mr. English was speaking about
    being concerned about it but not saying it was covered
    someplace.
        Senator Burns. All right. I did not know about this. Well,
    that answers my second question. Those are the only two
    questions that I had other than the fact that I think the first
    thing I look for is stability and reliability as far as
    electricity is concerned. That is first.
        And second, if we are subjected to some rules and
    regulations, especially in a State like Montana, that would be
    harmful to ratepayers higher than we have now, how do I explain
    that to my co-op members and of course, trying to solve a
    problem that basically we do not have. That is where I am kind
    of coming from on this. We shall monitor this as we move along.
        But I think my main concern, though, is the cooperatives
    and whenever they fall under this jurisdiction. So you have
    answered that question and I appreciate that very much. And
    thank you for coming today. I appreciate your testimony. It is
    very interesting.
        The Chairman. Thank you very much, Senator.
        Senators Cantwell and Feinstein, did you want a second
    round, Senator Cantwell? Go ahead. Excuse me, Senator Craig,
    then Senator Cantwell. Go ahead, Larry.
        Senator Craig. Well, thank you very much, Mr. Chairman.
        Commissioner Massey, let me follow through with some
    questions in relation to California that always frustrate me.
    Obviously we are all frustrated by that. Senators from
    Washington are concerned and upset. Senators from Oregon,
    Senators from Idaho are upset and the reason is because our
    rates went up when California became so dysfunctional as power
    was pulled out of our system and the supply obviously was under
    high demand, and as a result of that, we are still paying. And
    it was very disruptive to the economy of my State.
        You said a few moments ago you were on the Commission when
    the FERC ruled in 1996-97 on the filings made to implement the
    California electric restructuring law. And I understand that
    you have now stated publicly just in the past year or so that
    the Commission's approval of the California plan was a mistake.
    Is that true?
        Mr. Massey. You know, hindsight is 20/20, but I do think it
    was a mistake, Senator.
        Senator Craig. That is the question or at least the line of
    questioning I want to pursue for the next moment about
    hindsight and also awareness of the time. I appreciate your
    acknowledgement. I think I agree that California's wounds were
    self-inflicted. They may have been signed by a Republican
    Governor. They were voted out by a Democrat legislature. So it
    is a bipartisan dysfunctionalism.
        It is not to suggest that any one group had authority other
    than there were an awful lot of people, though, Commissioner
    Massey, that were out there in the marketplace with great
    knowledge saying it was a bad idea. We had people who came
    before this committee during the height of the California
    crisis who had been before this committee prior to it saying,
    wrong idea, California, do not go there. But they did.
        And I guess my question is, was any attention brought to
    you as it related to the California plan before you signed off
    on it?
        Mr. Massey. It was certainly well debated before the
    Commission. The argument that weighed heavily on the Commission
    I think was this is what a major region of the country wanted.
    They were first movers. This was a plan that they had devised
    with extensive proceedings, and the Commission essentially, in
    the interest of regional deference, approved it. It clearly was
    a well-intentioned plan, but a plan that relied almost
    exclusively on short-term contracts, which I think we certainly
    understand now was a huge mistake. So I do not blame the people
    of California. There is plenty of blame to go around for all of
    this.
        Senator Craig. Did you have staff on the FERC provide you
    with arguments that would argue contrary to the plan?
        Mr. Massey. Yes. There were members of our staff that were
    concerned about it. There were members of our staff that liked
    it very much. There was a debate about whether there ought to
    be a separate ISO and power exchange created. That was one of
    the big arguments. There was a debate on whether a short-term
    contract market would function well. There was a debate on
    whether there were sufficient consumer protections.
        But I think the argument that persuaded the commission was
    that this was a market design that this major region of the
    Nation wanted, and the commission approved it. I think it was a
    unanimous vote.
        Senator Craig. Did you find any merit in any of the
    comments filed by the intervenors raising concern about the
    California plan before you voted?
        Mr. Massey. Yes, I did find merit to their concerns.
        Senator Craig. My frustration here, Mr. Massey, is not with
    just you. It is with all of you before us today. You looked at
    a plan and you signed off on it. It is probably going to go
    down in history as the greatest dysfunctional marketing plan in
    the history of this country for electrical energy. And now you
    are coming forth with a new idea and saying, buy this,
    Congress; buy this, consumer. We just got through signing off
    on something that did not work, so let us try this one.
        And now you are out finding that there were those who could
    abuse and did abuse. Most did not but some did. We are going to
    hear from California and Washington on those who did as if they
    were the whole, and they were not the whole. There was a great
    disparity in supply also. But the plan was dysfunctional.
        I guess my frustration is when do you know what is right,
    especially if you centralize that authority, as California did,
    and do so in a way that forced everybody to a short-term
    market, could not allow the flexibility that the market would
    have otherwise by a prudent investor demanded.
        Is it true, Commissioner, that before the--for the past 6
    years, there has been a constant chorus of concern raised by
    the FERC staff and the intervenors about the California market
    structure.
        The Chairman. Before you answer that, let me just say,
    Senator, could you be here?
        Senator Craig. Yes. My time is out. So let us do this and
    then we will move to the others.
        The Chairman. Will you get another round and I will be
    right back?
        Senator Craig [presiding]. Yes.
        Mr. Massey. There has been a constant chorus of concern,
    and arguments on the other side that it would work. It worked
    generally well until May 2000, and then it went totally out of
    control. I appreciate and respect your outrage about that.
        I simply say that we have learned from our mistakes I
    believe. I certainly have. I will never again vote for a market
    design that relies exclusively on short-term contracts. I will
    not vote for a market design that does not contain sufficient
    anti-manipulation provisions. I will not vote for a market
    design that can be easily gamed and manipulated, that does not
    have customer protections built in, and I will not vote for one
    that is not adequately monitored. And I do not think my
    colleagues will either.
        All I can say is from this very, very painful, outrageous
    experience, we have learned a lot. That may not provide much
    comfort, but I think we have learned a lot and I think we need
    to ensure that this never again happens.
        Senator Craig. Thank you.
        Let me turn to Senator Cantwell.
        Senator Cantwell. Thank you, Mr. Chairman.
        Mr. Wood, I am confused by apparently a statement you made
    yesterday that you did not believe that long-term contracts of
    Northwest utilities should be reformed because they did not
    meet the public interest test. Again referring to the chapter 5
    that is very explicit, in your conclusions from staff, it says,
    if as we maintain in earlier chapters, spot power prices were
    distorted, these results imply that price distortion flowed
    through to forward power prices, particularly those for
    contracts of 1- to 2-year time delivery. I think in your last
    statement you might have reaffirmed part of that.
        My question is I asked you at a previous hearing whether in
    market-based rate contracts where FERC had never reviewed the
    contract for its just and unreasonable--in the first place,
    that the Federal Power Act standard should apply, not the
    public interest standard. And you said on the record, ``In that
    case, you would have an unjust and unreasonable standard.''
        Do you stand by that testimony, Mr. Wood?
        Mr. Wood. I remember when you and I had that colloquy,
    ma'am, and I think the important issue that was not repeated
    just now was what the parties had actually negotiated for. I
    think that is where we have some different interpretations
    among the three of us. But if there is not a provision in there
    between the negotiating parties that indicates what standard
    ought to be applicable, then yes, I think the default would be
    a just and reasonable standard. Now, if the parties have
    provided otherwise, I think certainly that controls.
        Senator Cantwell. So a contract that did not say that it
    should be in the public interest, you should use the Federal
    Power Act of just and reasonable.
        Mr. Wood. A contract that did not have language that
    indicated how the parties agree changes to the contract ought
    to be handled should be handled as a just and reasonable type
    standard. Yes, I said that.
        Senator Cantwell. So what is the problem then moving
    forward? Why did not yesterday, given the conclusions of the
    report--your statement apparently was long-term contracts of
    Northwest utilities should be--you did not believe that they
    should be reformed because doing so would not meet the public
    interest test. What did yesterday's statement then mean?
        Mr. Wood. Yesterday--did we have any Northwest----
        Senator Cantwell. Those were your comments at yesterday's
    meeting----
        Mr. Wood. I do not think I limited that to a Northwestern
    contract. To a short-term contract, which there were a few
    yesterday before us. There were a few, but there were quite a
    few that were outside the 1- to 2-year window, and I take this
    evidence that the staff put out and it said basically this
    matters as to the shorter-term contracts, this linkage between
    the dysfunctional spot market and a long-term market. This
    matters on the 1- to 2-year contracts. There were a number of
    contracts before us yesterday that were quite a bit longer than
    that. So I did not take the recommendation here into
    consideration on those contracts. That was not the findings
    that we asked our staff to go do.
        Does manipulation matter as to a short-term contract? Yes.
    In fact, we----
        Senator Cantwell. I do not understand why it would even
    matter. You have the Federal Power Act before you as a body who
    is supposed to be upholding it. It says use the unjust and
    unreasonable standard, and you are playing hijinks by trying to
    say that the Sierra/Mobil case that is a totally different case
    and different standard--now all of a sudden, you are going to
    apply the public interest standard, a much higher legal
    standard, and say that these long-term contracts cannot meet
    that standard.
        Mr. Wood. Actually, that is not what I said yesterday and
    it is not what I have said today and not what I said last time.
    I think--and I think we are all a little different on this
    still--that if the parties agreed as to how their contract
    ought to be handled, that controls. If they are silent on that,
    then we use the just and reasonable standard.
        Now, a number of these contracts did have how the parties
    think that these--as we found. We asked our judges to go in and
    find what do these contracts really mean, how should we
    interpret those. Did the parties agree that a higher standard
    ought to apply or that a lower standard ought to apply?
        At the time we discussed that before, I did not know the
    correct answer to that. We sent that to a judge. The judges
    investigated the parties' intent when they formed the contract,
    and then we got a number of those back yesterday.
        Senator Cantwell. Mr. Massey, do you have a comment on
    this? Because I do not even know why we would have a Federal
    Energy Regulatory Commission and a Federal Power Act that said
    that your job and responsibility is to protect consumers
    against unjust and unreasonable rates if then in every contract
    that was negotiated, you could come up with some higher legal
    standard. Why would we even have FERC then if that was the
    case?
        Mr. Massey. Senator, I agree that the default standard for
    the Commission ought to be the standards set out in the Federal
    Power Act, which I was just looking at. ``All rates and charges
    made, demanded, or received by any public utility, all rules
    and regulations shall be just and reasonable, and any such rate
    or charge that is not just and reasonable is hereby declared to
    be unlawful.'' I think we ought to stay firmly tethered to
    that.
        There is case law indicating that under certain
    circumstances the public interest standard ought to apply, and
    that is what we are struggling with.
        Senator Cantwell. In that case, Mr. Massey, just to review,
    prior to the deregulation of market-based rates, when you were
    doing rate case approvals--and in this particular case, the
    Mobil/Sierra--Mobil/Sierra wanted to come back and charge
    higher rates. FERC had reviewed the contract to begin with and
    said it was just and reasonable. The court then came in and
    said, well, if the basic utility wants to charge a higher rate
    to consumers, they are going to have to show that it is in
    public interest because the FERC has already reviewed this as
    just and reasonable.
        Then taking that decision by the court and trying to white
    wash all that has happened, the abuse to ratepayers, by now
    trying to have the public interest standard, saying that we in
    the Northwest have to meet the public interest standard or we
    are not going to get any relief from this market corruption is
    just absurd.
        Mr. Massey. Senator, I think there is a good argument that
    the Mobil and Sierra standards do have their strongest
    applicability in a cost of service regime in which the contract
    has actually been approved by the Commission as just and
    reasonable. In that circumstance, it might make sense to change
    it, to say, well, we have to find that this contract----
        Senator Cantwell. That is not this circumstance.
        Mr. Massey. True. It is not. I am trying to agree with you
    on this. I think you raise a very good argument, a strong
    argument, and I think we ought to take that into account.
        Senator Cantwell. Well, count me as one legislator who is
    not going to be fooled by this hijinks of a higher legal
    standard. I do not care if we go all the way to the D.C. or the
    Supreme Court on this. We passed a law in this country to
    protect consumers. It was called the Federal Power Act. It set
    out your specific responsibilities. It said that those
    responsibilities were to determine whether rates were unjust
    and unreasonable. You, Mr. Wood, have agreed in testimony
    before this committee on two occasions that you believe that
    that is the standard. Please apply it.
        My time has expired, Mr. Chairman.
        Senator Cantwell. It has?
        Let me turn to Senator Feinstein.
        Senator Feinstein. Thank you very much.
        Mr. Chairman, I must say I agree with you about the fact
    that the 1996 California deregulation law was deeply flawed.
    However, that law did not provide for ``get shorty'' or ``death
    star'' or ``ricochet'' or ``megawatt laundering'' or ``fat
    boy'' or any of these schemes, schemes that were fraudulently
    devised by traders to game the marketplace. In the evidence put
    forward by California, there are new names: ``curious and
    George,'' ``red and green,'' ``hungry and hippo,'' ``James and
    Dean,'' ``Chinook and the Atlantic.'' All these games were
    called free money. Free money.
        A Mirant trader summed up the scheme: ``I mean, it's just
    kind of loop to looping, but it's making money.'' For shame.
        The evidence made public yesterday also shows that,
    according to the California parties, the largest energy
    suppliers in California shared non-public information through a
    third party company called Industrial Information Resources.
    Traders called this company ``The Mole.'' This company detailed
    non-public information on daily plant outages, essentially
    giving energy companies insider information on when an
    unplanned outage could transform an energy shortage in
    California into a stage 3 energy emergency, or a blackout.
        My question is, why did the Commission not immediately
    refer this to the Attorney General and ask them to look at
    possible antitrust violations?
        Mr. Wood. We addressed that particular claim in our refund
    order that we did put out yesterday, Senator. It turns out that
    that information was provided by the independent system
    operator to a public data clearinghouse which made that data
    available. For example, the data of the outages across the
    entire West, when they are scheduled to be back. That is
    actually published in trade publications that people can
    subscribe to. The Commission does that as well.
        We will certainly follow up on that, but the initial take
    was that information was being provided by the independent
    system operator not by the individual utilities. So there is
    not the collusion issue there.
        Senator Feinstein. I am not really concerned with who
    provided the data. Is there such a publication called ``The
    Mole,'' which is an insiders' publication, which alerts people
    when they can take advantage of certain market conditions? Yes
    or no. Either that publication exists----
        Mr. Wood. I do not know the answer to that, Senator.
        Senator Feinstein. You do not?
        Mr. Wood. I do not know that. What we looked into was the
    allegation that the--what was the company, Nora?
        Ms. Brownell. I cannot remember the name of it.
        Mr. Wood. Industrial Information.
        Ms. Brownell. The company that was referred to--and this is
    preliminary research because this information all just came in.
    I actually went to the Internet. It looks like a fairly major
    data provider that provides information in a number of
    industries, including the gas industry, the electric industry,
    about things like factory outages, generation outages. I think
    it does need further investigation, Senator.
        I could not find any suggestion of something called ``The
    Mole.'' It looked like kind of a casual reference. There may be
    more to it than that, but I can actually get you the Internet
    site.
        Senator Feinstein. All right.
        Let me ask another question. According to the California
    parties, the evidence made public yesterday suggests that
    energy companies may have intentionally destroyed documents to
    cover up fraud in the Western energy market. An ex-Mirant
    employee disclosed that he was instructed to delete certain
    files relating to these energy markets from hard drives, and
    key executives were instructed to turn in their laptops so
    Mirant could clear their hard drives.
        Could you tell me if FERC has referred this matter to the
    Justice Department?
        Mr. Wood. Not at this time. The reply evidence came in last
    week, and that is this host of issues that we are actually
    working on now and expect to move forward on in April. If it is
    appropriate for criminal issues, yes, ma'am, we would
    certainly, as I indicated yesterday to a reporter's question,
    refer those to the Department of Justice.
        Senator Feinstein. Does it, Mr. Wood, make sense to
    establish the same penalties and refund authority under section
    S of the Natural Gas Act to deter fraud and manipulation in the
    natural gas sector since FERC found yesterday that markets for
    natural gas and electricity are inextricably linked?
        Mr. Wood. Yes, ma'am, and for that reason I endorsed that
    approach in today's testimony even though it was supposed to be
    focused on electricity.
        Senator Feinstein. Just two quick questions, if I may, Mr.
    Chairman, on the proposed electricity title. These would be new
    regional regulators encompassing several contiguous States.
        My question is, will the creation of these regional energy
    service commissions further balkanize our energy markets? Can
    you comment on the difficulty of creating and organizing these
    new regional commissions?
        Mr. Wood. I think certainly the size would matter. If you
    had a large one that covered perhaps the whole West as, for
    example, our current market mitigation plan covers the entire
    West, if there was a regulatory body that was that big, I could
    see some good issues there. I think the restriction of being at
    just 5 percent would create a balkanization. I do think it has
    just got to be sufficiently broad to cover the necessary area.
    And when you need 13 States to agree on that, I do think it is,
    as a practical matter, going to be difficult to get there.
    There is balkanization potential certainly. I would not
    discount that.
        Senator Feinstein. See, I am not so sure that this is not a
    good idea. One of the things I have learned back here is that
    what happens inside the Beltway is very different from how
    people think in the Western part of the United States. There is
    a big tendency here to play inside baseball and not to really
    understand the rest of the country. The east coast is very
    different from the west coast. It may well be that a regional
    commission would be much more responsive to Western needs
    because--I think you all know this--it has been pulling teeth
    to get FERC to do its job.
        He is nodding.
        Mr. Massey. Senator, I respect your frustration that you
    have stated very eloquently. My own view is that the best
    solution here is for FERC to do its job well as an overseer of
    wholesale markets in interstate transmission, do our job in a
    way that westerners broadly respect and trust.
        Senator Feinstein. One last question, if I might.
        As I understand it, the regional service commissions would
    be created when States come together to forge a compact and
    draw up a charter. If we did proceed along those lines, do you
    believe that the Department of Energy should draw up the
    minimum standards that a compact has to meet before it is
    approved?
        Mr. Wood. I think that would be appropriate. I do think
    just a compact without maybe a little bit of structure there
    might be difficult. So I think that is appropriate. The
    Commission could do that as well.
        Senator Feinstein. Thank you very much.
        Mr. Chairman, I would like to submit my letter to the
    Attorney General asking for an investigation for the record.
        Senator Craig. Without objection.
        [The letter of Senator Feinstein follows:]

                                          United States Senate,
                                        Washington, DC, March 26, 2003.
    Hon. John Ashcroft,
    Attorney General of the United States, Department of Justice,
            Washington, DC.
        Dear Attorney General Ashcroft: Now that the Federal Energy
    Regulatory Commission (FERC) has lifted its ``Protective Order'' and
    has allowed the public to review evidence of market manipulation in the
    Western Energy Market, I am writing to ask the Department of Justice to
    fully investigate and prosecute possible violations of anti-trust and
    fraud statutes by energy companies.
        The State of California has filed thousands of pages of new
    evidence at FERC that further demonstrate how these incidents of fraud
    and manipulation were not isolated events attributable to a few rogue
    energy traders. Instead, the documents provide substantial evidence
    that energy companies engaged in well-established and coordinated
    strategies to deliberately withhold electric power and natural gas at
    critical moments during the Western Energy Crisis in a concerted effort
    to boost company profits.
        The filing at FERC shows that there was a coordinated attempt by
    energy companies to manipulate the Western market and to drive prices
    up by engaging in the following schemes:

              1. Withholding of Power--driving up prices by creating false
            shortages.
              2. Bidding to Exercise Market Power--suppliers bid higher
            after the California ISO declared emergencies, knowing the
            State would need power and be willing to pay any price to get
            it.
              3. Scheduling, of Bogus Load--suppliers submitted false load
            schedules to increase prices.
              4. Export-Import Games--suppliers exported power out of
            California and imported it back into the State in an attempt to
            sell power at inflated prices.
              5. Congestion Games--suppliers created false congestion and
            were then paid for relieving congestion without moving any
            power.
              6. Double-Selling--suppliers sold reserves, but then failed
            to keep those reserves available for the ISO.
              7. Selling of Non-Existent Ancillary Services--suppliers sold
            resources that were either already committed to other sales or
            incapable of being provided.
              8. Sharing of Non-Public Generation Outage Information--the
            largest suppliers in California shared information from a
            company called Industrial Information Resources that provided
            sellers detailed, non-public information on daily plant
            outages.
              9. Collusion Among Sellers--sellers were jointly implementing
            or facilitating Enron-type trading strategies.

        I strongly believe the Department of Justice must investigate
    possible anti-trust violations by energy companies as detailed by the
    California parties in their brief. Allowing competitors to share non-
    public information on plant outages through Industrial Information
    Resources that traders called ``the mole'' seems to be an anti-trust
    violation on its face. As the California parties state, ``even in the
    absence of a price fixing agreement, the exchange of price or output
    information can itself violate the Sherman Act as an unreasonable
    restraint of trade, if it causes anticompetitive effects.'' How can it
    be lawful for traders to obtain information from their competitors
    through an intermediary like Industrial Information Resources?
        Furthermore, I urge that your department vigorously investigate the
    new evidence of intentional document destruction cited in the filing at
    FERC. During the 100-day discovery process, an ex-Mirant employee
    disclosed that he was instructed to delete certain files relating to
    the California markets from hard drives and that key Mirant executives
    were instructed to turn in their laptops so that Mirant could clear
    their hard drives. Similarly, a City of Glendale employee told an ex-
    Glendale employee that he could destroy one of the documents that
    contained information about Enron's gaming strategies.
        I would like to ask the Department of Justice to use its
    investigative and subpoena powers to conduct a thorough review of the
    market abuse by energy generators, suppliers, and traders in the
    Western Energy Market. The mountain of evidence submitted to FERC
    requires a complete and thorough investigation to ensure families and
    businesses see an end to fraud and manipulation in our energy markets.
        Thank you for your consideration of this request.
                Sincerely,
                                                      Dianne Feinstein.

        Senator Feinstein. Thank you and I thank you all. Thank you
    very much.
        Senator Craig. Thank you very much, Senator Feinstein.
        I have a couple of more questions here and the chairman
    should be returning shortly to conclude this.
        Let me ask a question of all three of you. Senator Cantwell
    was discussing it some a few moments ago, and I wish she were
    still here.
        Part of your work yesterday addressed the issue of contract
    sanctity, but also without any final resolution. In my opinion,
    unless a contract provides otherwise, it should be overturned
    only upon the application of the highest standard of review,
    the public interest standard. And I say that because of an
    awful lot of court action over the years about the sanctity of
    contracts. To treat them otherwise, I think undermines the very
    sanctity.
        Do you agree or disagree with that statement, Ms. Brownell?
        Ms. Brownell. Senator, I agree. I think it is critical to
    the functioning of the economy in this country.
        Moreover, I would add that we need to look at the totality
    of circumstances in which each of the buyers was also a seller.
    Some of the complainants who are complaining about contracts
    were selling and they were selling into the marketplace, as I
    said, for $1,100 a megawatt hour. That is a non-jurisdictional
    entity. Two-thirds of the people in the marketplace perhaps are
    under our jurisdiction. So do we, whether it is J&R or public
    interest, abrogate contracts for some and not all, particularly
    those who were selling at the kind of elevated prices like
    that?
        I think that one must, when we talk about the totality of
    the circumstances, which is what the public interest standard
    tells us to do, look at those facts of the marketplace, more
    importantly, look at the real impact on that marketplace. The
    premium that the West would pay if we abrogated contracts today
    would be for the next 50 or 100 years and would far exceed even
    perhaps that $1,100 gouging price.
        Senator Craig. Mr. Chairman?
        Mr. Wood. I think under whichever standard you review, as
    we indicated when we sent these to hearing, whether it is the
    just and reasonable or public interest standard, it is a very
    high burden to overturn a contract entered into. I think I just
    would echo Nora's issue. As we talked yesterday, when those
    issues come before us, we do have to look at the totality of
    the circumstances, but I do think it is something that we have
    to really wander into very carefully, if at all, for the
    reasons she laid out.
        Senator Craig. Mr. Massey.
        Mr. Massey. Senator, in Order 888, which went to the D.C.
    Circuit and the Supreme Court, the Commission said--I just
    reread it before I came over here--that the standard that we
    should apply is, generally speaking, the just and reasonable
    standard unless the parties specify a higher standard. The
    court decisions I find to be really all over the lot on this
    question.
        In the proceeding before us, I am very concerned about the
    impact of manipulation on the long-term contracts. I also want
    to respect the sanctity of contracts, but I want to ensure that
    they are negotiated in an environment free from manipulation
    and market power.
        So I am struggling with this. It may be that at some point
    the just and reasonable standard and the public interest
    standard merge, and I am thinking about that concept. But I
    certainly respect your views on this issue.
        I am inclined to think that the Commission can reform some
    of these agreements and probably should, applying either the
    just and reasonable standard or the public interest standard,
    because it seems very clear to me that many of these contracts
    were infected with the taint of market manipulation. That
    greatly concerns me.
        Senator Craig. Thank you.
        Commissioner Brownell, a couple more questions I would like
    to ask of you. In discussing regional differences, do you view
    the exporting of electrical power from a low cost region and
    the resulting increase in the cost of electrical power to the
    low cost region as a meritorious basis for opposition to SMDs?
        Ms. Brownell. I believe if that were the outcome to
    consistent market rules, yes, I think that would be a very real
    reason, particularly if I were a State commission. We have
    talked at some length about how to preserve that low cost
    power. I wish we had had it in Pennsylvania, frankly, because
    we were among the highest in the country. So I certainly
    respect that as an economic opportunity for the State and the
    region as a whole. I think that there are many ways to protect
    that low cost power, including long-term contracts. We have
    talked today about native load and have been talking within the
    agency before the white paper how to ensure that that native
    load is protected. So if I thought that were the outcome, sir,
    I would not be a proponent of regional market designs that were
    consistent and transparent.
        Senator Craig. The reason I asked that question of you is
    because I see that as the ultimate test and the fear that many
    of us have by what you may be attempting to do--and I say
    ``may.'' I am willing to look at your final work product,
    obviously--is a nationalizing of the costs of generation and
    transmission. For those in Idaho who have worked mightily hard
    to keep energy costs down, blessed by resource, but also by I
    think reasonably wise decisions over an extended period of
    time, they are fearful of the idea that the FERC by design is
    going to do just that, nationalize the general cost of
    generation and transmission. The regional advantage is gone,
    obviously, by that. And it infers an indirect tax, if you will,
    levied by the FERC against those who are least-cost producers
    certainly by the outcome of design.
        I think that is the ultimate test that those of us in the
    Pacific Northwest and those in the South, Southeast, and a few
    others are going to put before you. And if you do not make that
    test, you fail.
        Ms. Brownell. Senator, I have said publicly, as this
    oversight committee has raised these issues, that you are doing
    your job to hold me to do my job, which is to do what is in the
    best interest of the customers without compromising the local
    advantages. I would be the first to say that that economic
    advantage and the behavior and the leadership that the Idaho
    commission has shown to give you and keep those low cost
    opportunities ought to be preserved.
        We have also talked a lot about cost causers, and to the
    extent that we allocate costs appropriately, we should not in
    any way jeopardize those who have done their jobs. That is not
    the intent, nor do I think that is the outcome.
        I respect, in fact, the job you are doing in kind of
    holding our feet to the fire in asking those questions, and if
    we cannot answer them, well, then you ought to say no.
        Senator Craig. Well, I thank you very much. The chairman is
    back and I will give my time back to him. But I want to say in
    his presence because he has been very helpful and helped lead
    in this, you have our attention. We simply hope we have yours
    because if we do not, there is more to come. We will ultimately
    get it if we do not have it now.
        Thank you all very much for being here today.
        Mr. Wood. Thank you, Senator Craig.
        The Chairman [presiding]. Thank you very much, Senator. I
    do not know what I missed, but it looks like it was a lot.
        [Laughter.]
        Senator Craig. Not really.
        The Chairman. The air is kind of stern.
        Senator Craig. No.
        The Chairman. In any event, I want to thank you again for
    being here.
        It is a tough issue. Just because I am smiling does not
    mean I do not think so. I think it will be very hard to put
    something together, but I do not think that means we are going
    to default out. We are going to do something to make sure that,
    as you go through this, you do some things that are the way we,
    the Congress, collectively think you ought to do them. You will
    not have all the liberty and freedom you have now to act. Let
    us hope that when we do that, what we force you to come up with
    that way is better for the people than what you would come up
    with otherwise.
        That is a bit presumptuous, but that is what we are for.
    After all, you do work for us in a sense, not the reverse. You
    work for the people, but you do not have any power if we do not
    give it to you.
        So having said that, just kind of a technical question. It
    had something to do with bundling and non-bundling. Where is
    the question?
        There are some who advocate, Mr. Chairman, legislating a
    jurisdictional delineation between bundled and unbundled
    transmission. What are the advantages and disadvantages?
    Quickly.
        Mr. Wood. I think some clarification of that might actually
    lift a big cloud over this whole debate, and on that and those
    other four issues I mentioned to you at the beginning, Senator
    Domenici. Certainly I think if the Congress, which has this
    fortuitous opportunity with the bill open to nail down the
    parameters--I think that will really elevate the debate among
    all the market participants to the solutions as opposed to the
    jockeying and kind of this stagnation that we have been in for
    the last 6 months. So we would be glad to provide any input to
    the committee or to you on that issue.
        The Chairman. I thank you very much. I was going to say
    there is not any question in my mind that the California
    situation cries out clearly for fixing. Certainly statutes were
    drawn wrong. Legislation was impropietious, and people did
    things wrong. I am hopeful that, whether you were there when
    they did it and you were not, you will use every bit of your
    discretion to see that it is corrected to the extent that what
    is past gets fixed, those who are responsible, if responsible,
    get so found, and justice is done to the extent that you all
    are involved. I assume that is what California wants and I join
    with that using my own way of describing it.
        Thank you very much. We will see you soon. As we draft
    things, we will be in touch with you and your staff.
        We stand adjourned.
        [Whereupon, at 4:43 p.m., the hearing was adjourned]
                                   APPENDIXES

                                  ----------

                                   Appendix I

                       Responses to Additional Questions

                                  ----------

                                    Public Utility Law Project,
                                            Albany, NY, April 14, 2003.
    Hon. Pete V. Domenici,
    Chairman, Senate Energy and Natural Resources Committee, Dirksen Senate
            Office Building, Washington, DC.

    Re: Follow-up Questions to Witnesses at March 27, 2003 FERC Oversight
    Hearings

        Dear Senator Domenici: I again wish to thank you and the Committee
    for providing the opportunity to testify for the National Association
    of State Utility Consumer Advocates (NASUCA) at the March 27, 2003
    oversight hearings regarding proposals to modify the Federal Power Act.
    Because the primary purpose of the Federal Power Act is to protect
    consumers, NASUCA particularly welcomed this opportunity to share its
    views. On matters where NASUCA had not taken positions, I also put
    forward my views for the Public Utility Law Project (PULP).
        Your letter dated April 3, 2003 invites witnesses to respond to
    follow-up questions from the Committee. As NASUCA has not taken a
    position on these issues, I will offer my comments for PULP.
                Very truly yours,
                                     Gerald A. Norlander, Esq.,
                                                      Chairman, NASUCA.
                  Responses to Questions From Senator Campbell
        Question. It seems that, in many ways, SMD actually undermines
    electricity deregulation efforts. Would you agree that current SMD
    regulations allow FERC to greatly increase its size and power; in
    effect making it the centralized planning agent for the entire
    electricity sector?
        Answer. NASUCA has not taken a position regarding the FERC SMD, and
    so I will state below my opinion.
        States that did not ``unbundle'' the generation and transmission
    aspects of electric service presently fix full service rates for retail
    electric consumers. These full service ``bundled'' rates necessarily
    include a transmission component. The proposed SMD regulations would
    require control of all transmission assets to be turned over to
    Regional Transmission Organizations (RTOs) or ``Independent
    Transmission Providers'' who would operate private spot markets to set
    rates for wholesale energy and for transmission, including the
    transmission component of bundled rates.
        NASUCA members from ``bundled'' states filed comments questioning
    the FERC's power to adopt the proposed SMD rules, raising concerns that
    rates for ``native load'' consumers will be increased or destabilized
    if the transmission portion of the rates, and short term energy
    transactions, is to be set in new private spot markets operating under
    FERC rules.
        NASUCA members from some ``unbundled'' states whose utilities
    joined voluntary RTOs filed comments on the proposed SMD regulations,
    also raising concerns. These concerns include, for example, market
    monitoring and resource adequacy planning by RTOs.
        Under the SMD, rates might be considered to be ``deregulated''
    because they would no longer be filed subject to FERC review for
    reasonableness, and instead will be set in the private markets designed
    and approved by the agency. Oversight of these newly proposed markets,
    however, would require additional market monitors at those markets and
    additional oversight by the FERC. Thus, what is being proposed by the
    FERC is not ``deregulation,'' but a system which relies on market
    results to set rates.
        Question. According to a private study conducted for a state task
    force, if Colorado's electricity market was opened to competition,
    electricity prices in Colorado would go up to more closely match rates
    in other Western states. Currently, Colorado ranks in the top quarter
    of least expensive states for electricity prices in the nation. Denver
    is one of the top five least expensive cities in the nation when it
    comes to electricity prices. However, SMD does not guarantee rate
    reductions for anybody. In fact, by changing regional rules to match
    those in the northeast, it might actually raise rates for some areas.
    How does SMD account for regional differences in electricity markets?
    How will this specifically affect western state utilities and their
    customers?
        Answer. NASUCA has not taken a position regarding whether the FERC
    SMD adequately addresses state and regional concerns. A ``white paper''
    to be issued by the FERC may contain revised interpretations of the SMD
    proposal, or may point the way to revision of specific SMD rules in
    response to state concerns.
        Question. Many statements have been made that California's recent
    electricity crisis was a regional crisis. I know that when California
    needed or wanted water they got water from Colorado, now when they need
    power are they going to take Colorado power? What impact will
    California's current problems likely have on Colorado and the other
    Rocky Mountain states?
        Answer. NASUCA has not taken a position on this issue. Events such
    as power plant outages occurring in one area of a synchronous regional
    electric power grid will affect other areas because, under the laws of
    physics, generation and load must be instantaneously maintained in
    balance. For this reason NASUCA has supported legislative proposals to
    reinforce the voluntary grid reliability standards established by NERC.
        It is my understanding that while the causes of the California
    price and reliability crisis in 2000 and 2001 remain under
    investigation, there is an emerging consensus that it was due in
    significant part to manipulation or gaming of short-term natural gas
    and electricity markets.
                                     ______

                    Response to Question From Senator Graham
        Question. Economic dispatch has been discussed as an approach to
    facilitate the procurement of least cost power in the wholesale
    marketplace. What is your opinion of this concept?
        Answer. NASUCA has not taken a position on this question.
        Economic dispatch--using the most efficient resource to meet the
    demand for electricity--advances the important societal goal of energy
    efficiency. For many years economic dispatch, tempered by environmental
    concerns, has been an operating principle of cooperative power pools.
        In some areas of the country, power plant output is now directed by
    RTOs. These entities dispatch power from electricity generating plants,
    based on physical conditions, contract commitments and a hierarchy of
    price ``bids'' by sellers established in a uniform price spot market
    auction. This auction system dispenses with filed rates based on costs.
    A theoretical assumption is that if there is no market power, bidders
    will offer the electricity produced at their plants at their marginal
    cost, to avoid running at a loss and to reap the margin when their
    costs are less than those of another seller who clears the market with
    a higher price paid to all.
        Mathematical game theory analysis, economics laboratory simulation
    of spot market bidding behavior, and actual experience in the ISO and
    RTO spot markets all indicate there may be significant deviation from
    the assumption of competitive behavior and marginal cost bidding.
        NASUCA has recommended that in those areas with RTOs there should
    be strong measures against the exercise of market power, vigilant
    market monitoring, and filing of cost data, so that sellers' spot
    market bids may be compared with their operating costs. In this way,
    the efficacy of the spot market auction mechanism in achieving economic
    dispatch could be more readily assessed.\1\
    ---------------------------------------------------------------------------
        \1\ ``The MMU [RTO Market Monitoring Unit] must have the authority
    to compel collection from all market participants, including those with
    bilateral contracts all relevant cost data, including, but not limited
    to, short-run cost, fuel cost, unit heat rate, start-up cost,
    environmental constraints, emissions allowances, evaluate the causes
    for outages, analyze cost of capital additions and capacity addition
    and upgrades, and fixed operation and maintenance cost. . . . The MMU
    should have the authority to immediately report to FERC and recommend
    refunds where prices depart substantially from marginal cost when in
    the judgment of the MMU the price is the result of market failure or
    market manipulation.'' Promoting Market Monitoring Functions Within
    Regional Transmission Organizations (RTOs) Whenever Such Regional
    Entities Are Created, NASUCA Resolution, June 19, 2002.
    ---------------------------------------------------------------------------
                                     ______

                Responses to Questions Prepared by Neil Naraine
        Question. Do you believe that Participant Funding combined with
    Tradable Transmission Right at the discretion of a Regional
    Transmission Organization (RTO), or a transmission entity authorized by
    FERC would increase the capacity of the transmission system? Clearly
    state your positions for or against this.
        Answer. NASUCA has taken no position on this issue.
        I believe the principle of participant funding is presently used to
    allocate the costs of transmission system improvements where
    investments are made primarily for economic reasons rather than for
    grid reliability. Potential investors in transmission facilities
    desiring assurance of cost recovery may prefer to connect generating
    plants with load serving entities with dedicated lines under long term
    contracts with stable rates.
        The existing transmission system was built, and new capacity can
    been increased, in areas without spot markets for tradable transmission
    rights. Short term spot market price signals for use of congested
    portions of the existing transmission system would not necessarily lead
    to construction of new transmission facilities. Raising the costs of
    using certain congested transmission links could lead to increased
    construction of generation facilities (or reduced demand by
    interrupting large users or their self-generation) on the deficit side
    of a congested link, rather than construction of new transmission
    system improvements. The possibility of generation solutions with
    relatively short investment payback periods could deter investment in
    transmission solutions that may have lengthier siting proceedings and
    longer investment payback periods.
        Question. There seems to be a widening rift between the States and
    FERC on the FERC's plans for energy markets. If we continue this path,
    we could be headed for years of litigation and no progress. What can be
    done now to avoid this continuing rift?
        Answer. NASUCA has not taken a position on this issue.
        I believe some states lack confidence that the SMD spot market
    models proposed by the FERC will work as intended to increase
    reliability and lower costs. In the absence of national consensus for
    changes in the Federal Power Act, the FERC will need to take
    incremental steps with less downside risk to consumers.
        Existing provisions of the Federal Power Act allow bilateral
    contracts for wholesale electricity and transmission, usually for long
    term service. Refinement of standard bilateral contract products and
    terms, and rapid electronic posting by the FERC of approved contract
    rates, may foster more transparent, supervised, bilateral markets at
    the FERC.
        In the spot markets, the FERC might ease concerns about market
    manipulation and advance its apparent policy of marginal cost pricing
    for short term wholesale energy sales by requiring generating utilities
    to file marginal cost rates and to demand no more than their filed
    rates in the spot markets.
        Thank you again for this opportunity to respond to Committee
    questions. Please feel free to contact NASUCA for its views on this
    important subject.
                                     ______

       Responses of John Anderson, Executive Director of the Electricity
       Consumers Resource Council (ELCON) to Questions From the Committee
        Question 1. Do you believe that Participant Funding combined with
    Tradable Transmission Right[s] at the discretion of a Regional
    Transmission Organization (RTO), or a transmission entity authorized by
    FERC, would increase the capacity of the transmission system?
        Answer. We are opposed to statutorily directing FERC to utilize
    Participant Funding as the standard for allocating costs associated
    with new transmission. We do not believe such legislation is necessary
    since FERC already has the authority to implement Participant Funding.
    In fact FERC, in its proposed Standard Market Design, stated that
    participant funding would be a standard (though not an inviolable
    standard) for funding new transmission. Decisions regarding funding of
    new transmission are by their nature regulatory, not legislative, in
    nature.
        To repeat my prepared statement, as a practical matter, it is
    nearly impossible to determine who will benefit from transmission
    upgrades, and it is inevitable that such beneficiaries will change over
    time. In addition, since nearly all stakeholders agree that new
    transmission is necessary in some areas, I question why Congress would
    adopt a plan such as Participant Funding that will likely retard the
    growth of new transmission. All consumer groups and all non-utility
    generators--the groups most likely to suffer if new transmission is not
    built-believe that mandating Participant Funding will hinder, rather
    than help, the construction of new transmission.
        We do not see how tradable transmission rights in anyway change
    this position (the issue of who should hold such rights, e.g.,
    generators or end users, and how they should be awarded, is a debate
    for another day). In fact if new transmission is built and congestion
    is relieved, such rights would be worth less. And it is hard to see how
    such rights could be traded, since generators would need to have such
    rights over specific parts of the transmission grid (presumably
    starting with their own point of generation). If anything, Tradable
    Transmission Rights make the issue of Participant Funding more
    difficult to implement and add nothing that this positive.
        It should be noted that too often incumbent utilities have called
    for Participant Funding as a means of protecting their own generation
    when challenged by generation from non-utility generators. Without new
    transmission, generation from other sources has often had a difficult
    time getting on to a constrained grid. Mandatory Participant Funding
    would exacerbate that situation.
        As an aside, Participant Funding requires that the user who
    ``causes'' the need for new transmission to pay for the new
    transmission. A valid follow-up question is whether the person who pays
    for the new transmission then owns it.
        Question 2. There seems to be a widening rift between the States
    and FERC on the FERC's plans for energy markets. If we continue this
    path, we could be headed for years of litigation and no progress. What
    can be done now to avoid this continuing rift?
        Answer. Years ago someone more clever than I said that the greatest
    problem in dealing with electricity restructuring was not the issue of
    ``stranded costs'' but the issue of ``stranded regulators.'' It is
    clear that the wholesale electricity market is interstate. The role
    that some state regulators had (wrongly) assumed was theirs should in
    fact be subsumed by federal regulators. Simply put, the transmission
    grid is interstate, it needs federal regulation as guaranteed by the
    ``Commerce Clause'' of the Constitution, and state arguments that such
    interstate commerce should still be subject to state regulation are
    both wrong and anti-competition.
        We believe Congress can--and should--pass legislation amending the
    Federal Power Act clearly stating that the interstate transmission grid
    is subject solely to federal regulation. Such a statement would end the
    ambiguity and would make any litigation on the part of the states very
    difficult to pursue.
        State regulatory commissions would of course retain jurisdiction
    over all retail issues, including intrastate lines (primarily utility
    distribution lines) as well as siting of generation and transmission
    pursuant to state law.
        For obvious reasons, jurisdictional issues within ERCOT are unique
    and my statement does not necessarily apply.
                                     ______

                                                        April 17, 2003.
    Hon. Pete V. Domenici,
    Chairman, Committee on Energy and Natural Resources, U.S. Senate,
            Washington, DC.
        Dear Mr. Chairman: Thank you for forwarding to me questions for the
    record of your Committee's March 27, 2003 hearing on various
    electricity proposals.
        Enclosed are my responses. If I can be of further assistance,
    please do not hesitate to let me know.
                Best Regards,
                                                 Pat Wood, III,
                                                        Chairman, FERC.
            Responses of Pat Wood to Questions From Senator Campbell
        Question 1. There seems to be a deep dilemma we are dealing with
    here: while we are trying to bring open competition to certain
    electricity markets, we are actively engaged in federal design of these
    same markets. It seems that, in many ways, SMD actually undermines
    electricity deregulation efforts. Would you agree that current SMD
    regulations allow FERC to greatly increase its size and power; in
    effect making it the centralized planning agent for the entire
    electricity sector?
        Answer. The Commission's goal in the SMD proposed rule is to lay
    out a regulatory framework that allows the wholesale power industry to
    transition from its heavily-regulated past to seamless, regional
    markets for wholesale electricity, so that sellers can transact
    throughout broad regions and customers can receive the benefits of less
    expensive and more reliable electricity. The Commission is proposing to
    establish common rules of the road for interstate transmission so as to
    have a stable and workable platform for competition in electric power.
    I believe that dependable, affordable, competitive wholesale energy
    markets require three key elements: adequate infrastructure, balanced
    market rules and vigilant oversight. The Commission is proposing a
    comprehensive plan that establishes these elements as well as includes
    regulatory backstop mechanisms to protect customers until truly
    competitive wholesale markets are in place. This would not greatly
    increase the size or the power of the Commission. Further, the
    Commission does not want to be, and will not be, the centralized
    electricity planning agent for the nation; however, markets are
    becoming more regional and the Commission is proposing methods for
    states and the Commission to collaborate on regulating regional
    interstate commerce in electric power. The Commission is encouraging
    the establishment of independent regional entities such as RTOs and
    ISOs that will be operating the transmission grid and administering the
    voluntary spot markets. This platform leaves plenty of room for
    regional variation with regard to a variety of functions, including
    transmission planning, resource adequacy, mitigation techniques and RTO
    governance.
        Question 2. Can you provide specific examples of any public power
    system denying access to surplus transmission capacity to a requestor?
    Please list the systems that have made such allegations and the systems
    against which allegations have been made.
        Answer. Because transmission owned by public power is not subject
    to the Commission's jurisdiction under sections 205 and 206 of the
    Federal Power Act, if a public power system with transmission did deny
    access to its surplus capacity, the party denied may simply not report
    this to the Commission. Consequently, the Commission is not in a
    position to have a comprehensive list of such denials.
        However, under section 211 of the Federal Power Act, which Congress
    added in 1992, someone denied access by any transmission owner may seek
    an order from the Commission to obtain access. The process is
    considered cumbersome and is rarely used; for example, if one wants
    access to a temporary power supply for the next few hours, days or
    weeks, there is little incentive to begin a process that takes up to a
    year or more to obtain access. Nevertheless, there have been a number
    of section 211 requests brought to us for transmission access on public
    power systems. These are:

       Docket No. TX94-3, Minnesota Municipal Power Agency v.
            Southern Minnesota Municipal Power Agency
       Docket No. TX94-7, AES Power, Inc. (request for transmission
            service from Tennessee Valley Authority)
       Docket No. TX96-2, City of College Station, Texas (request
            for transmission service from City of Bryan, Texas and Texas
            Municipal Power Agency)
       Docket No. TX96-6, Montana Power Company (request for
            transmission service from Basin Electric Power Cooperative)
       Docket No. TX97-6, Idaho Power Company (request for
            transmission service from Bonneville Power Administration)
       Docket No. TX97-7, Missouri Basin Municipal Power Agency
            (request for transmission service from Western Area Power
            Administration)
       Docket No. TX97-8, PECO Energy Company (request for
            transmission service from Oglethorpe Power Corporation and
            Georgia Transmission Corporation)
       Docket No. TX97-9, Cinergy Services, Inc. (request for
            transmission service from Tennessee Valley Authority)
       Docket No. TX98-2, Public Service Company of Colorado
            (request for transmission service from Missouri Basin Power
            Project, including its Project Manager, Basin Electric Power
            Cooperative; Tri-State Generation & Transmission Association,
            Inc.; Rocky Mountain Generation Cooperative; and Western Area
            Power Administration)
       Docket No. TX02-1, Pinnacle West Capital Corporation
            (request for transmission service from Electrical District No.
            Three of the County of Pinal and the State of Arizona)
       Docket No. TX03-1, Mirant Las Vegas et al. (request for an
            order directing Los Angeles Department of Water and Power,
            Nevada Power Company, Salt River Project Agricultural
            Improvement and Power District, and the United States
            Department of the Interior, Bureau of Reclamation to establish
            an interconnection between their transmission systems and the
            Applicants)
        Question 3. You participated in a symposium back in November 2002
    sponsored by the Progress & Freedom Foundation. In that symposium, you
    talked about capturing the victories of competition. I am concerned
    that your SMD rule is going to capture a lot more than you intended.
        You stated, ``there are parts of the country and parts of
    individual small area that are not really competitive because of
    natural geographic reasons or historic concentration of ownership. And
    we've got to acknowledge that.''
        How does the SMD, in your words, ``acknowledge that?''
        Answer. By having special market power mitigation provisions for
    what we call ``load pockets,'' the Commission's proposal acknowledges
    that some areas of the country are not competitive yet. This is not
    surprising, considering power competition was introduced in 1992 by the
    Energy Policy Act reforms. ``Load pockets'' are areas where ownership
    of generation is concentrated in the hands of a few sellers and where
    insufficient transmission or geographic features--for example, being on
    a peninsula--limit the ability to import power from outside the area.
    The market power mitigation part of our proposal calls for limitations
    on competitive bidding in loads pockets until the market power problem
    is resolved and competition can serve as an effective discipline on
    price.
        Question 4. How does the SMD address Colorado's differences and
    ensure that ratepayers are not going to be detrimentally affected?
        Answer. Colorado utilities are different from utilities in other
    states mainly by being part of larger organizations that traverse the
    Eastern and Western Interconnections in the U.S. Past Commission
    actions, as well as our proposed rule, would permit and encourage
    different treatment for entities in the East and the West. By
    accommodating Colorado's differences in this way, our proposal should
    benefit Colorado customers by providing for well functioning markets
    tailored to the needs of each region.
        The electric utilities of Colorado are predominantly associated
    with the Western Interconnection, where the Commission has already
    approved considerably more latitude for regional differences than in
    the SMD rule itself. By way of background, Public Service Company of
    Colorado (PSCo) and Southwestern Public Service Company are now public
    utility operating subsidiaries of Xcel Energy, which also includes NSP
    Wisconsin, NSP Minnesota, Cheyenne Light Fuel & Power and Black
    Mountain Gas Company. These utilities, together with other investor-
    owned utilities and public power participants, are part of TRANSLink,
    the independent transmission company operating under Midwest ISO. In
    the order approving the TRANSLink proposal, the Commission noted that
    facilities that TRANSLink would operate are located in the Eastern
    Interconnection and would be part of the Midwest ISO; however, the
    transmission facilities of PSCo are located in the Western
    Interconnection. As a result, the Commission authorized the requested
    transfer of operational control of PSCo's transmission assets to
    TRANSLink with the understanding that the PSCo facilities will
    participate in the western RTO formation process through TRANSLink.
        Three RTOs are forming in the West: RTO-West in the Pacific
    Northwest, the California ISO, and WestConnect in the Southwest. To
    date PSCo has not joined one of these, in part because it must connect
    to its western neighbors through the Western Area Power Administration
    (WAPA), which has not yet firmly committed to join. However, WAPA and
    PSCo are actively participating in WestConnect discussions of RTO
    features and of the costs and benefits of establishing WestConnect.
        For both the Midwest ISO and for the Western RTOs, the Commission
    has approved many aspects of their RTO designs and committed that
    specific approved design features that suit the unique characteristics
    of each region would not be made subject to conformance with the
    corresponding features of the SMD final rule. For the West in
    particular, we have authorized a pre-existing western group called the
    Seams Steering Group--Western Interconnection, known as SSG-WI, to work
    out the features of a western market design that would meet the goals
    of the SMD rulemaking. We committed that a satisfactory common western
    market design developed by westerners through this process would not be
    subject to the detailed market design provisions of the SMD final rule.
        The considerable latitude for regional variation, especially in the
    West, allows western stakeholders and state government representatives
    to develop market rules that suit the different characteristics of each
    region so that electric power customers in every region can buy
    electric power at the lowest possible price.
        Question 5. Your SMD assumes that competition benefits everyone.
    Yet, some states have opted against opening up to competition. How can
    SMD respect states' traditional authority while compelling them to do
    something they have been unwilling to do all along?
        Answer. The proposed rule only applies to matters affecting
    interstate transmission and wholesale, not retail, power markets. Some
    states have opened the retail service franchise to competition; others
    have chosen not to. That is a state choice, and nothing in the SMD
    proposal at all undermines the states' choices. Just as with wholesale
    natural gas competition, benefits under SMD can be achieved by
    customers in states with or without retail access. Utilities would be
    able to buy electric power more readily to lower costs, or to sell
    excess power for a profit and thus reduce rates for their own
    customers. The SMD proposal accommodates state decisions to allow or
    not allow retail competition.
                   Responses to Questions From Senator Craig
        Question 1. In your July 24th testimony, you called the gas
    pipeline system an example of a success story. Did the gas pipeline
    system have ISOs or RTOs? Did the gas pipelines have Standard Market
    Design? Rather, did not the gas pipeline system have better rates of
    return than you give electric utilities? Would you not say that pricing
    reform would make electric transmission a success story?
        Answer. Because of the different operational and structural
    characteristics of gas pipelines and electrical systems, RTOs and ISOs
    are used for electrical systems, but not for gas pipelines. The
    different operational characteristics include the much greater ability
    of pipelines to physically control deliveries to the system and thus
    the lack of loop flow considerations that affect electric utilities.
    Finally, the gas industry has far less vertical integration than the
    electric industry. RTOs and ISOs were designed, in part, to address the
    potential for discrimination against other sellers that results from
    the extensive vertical integration in the electric utility industry.
        Order No. 636, the restructuring rule that applied to gas
    pipelines, shares the same objectives as the Commission's proposal for
    Standard Market Design. Both were intended to eliminate remaining
    opportunities for discrimination against competing sellers and to
    ensure a platform of changes necessary for well-functioning wholesale
    markets.
        Since I have been Chairman, the Commission has set returns for four
    public utilities, and one natural gas company: Consumers Energy
    Company, 11.77% equity return; Midwest Independent System Operator,
    12.88% equity return; Northern Indiana Public Service Company, 10.39%
    equity return; International Transmission Company, 13.88% equity
    return; and Enbridge Pipeline, 11.83% equity return.
        Thus, the average return on equity for electric utilities has been
    slightly higher (12.23% versus 11.83%) than for the one gas pipeline
    which has come before us since my tenure as Chairman.
        Question 2. On January 29, 2002, you testified that the, ``Enron
    collapse had little perceptible impact on the nation's commodity
    markets (electric and gas) which are FERC's primary regulatory
    responsibility.'' Would you agree then that the FERC does not need any
    new authority over the commodity markets?
        Answer. Generally, yes. As I explained in my March 27 testimony
    before the Committee, however, I support some legislative proposals
    that would modify the Commission's existing authority, on issues such
    as civil and criminal penalties and refunds. In addition, some
    legislative proposals would require the Commission to issue rules
    establishing an information system, accessible by the public,
    specifying the availability and price of wholesale power and
    transmission services. I support such proposals because more
    transparency is needed in the energy markets and customers should have
    access to the broadest range of useful market information. I also
    support a similar approach under the Natural Gas Act.
        Question 3. On the March 26, 2001 broadcast of Frontline you said:
        ``I think the current regulated market reacts very well to
    political pressure by large industrial customers who put pressure on
    the utility and the regulator under the regulated environment to get
    sweetheart deals, such as low rates and subsidized rates and
    interruptibility rates that are low rates in disguise. So my general
    response has been that the big guy is at the trough. Let the little
    pigs get it, too. That's why I have been a strong advocate for getting
    out of the regulated environment so I can go out and get a taste of
    some of this low-cost power just like the big guys do.''
        Would you say with Standard Market Design you are ``getting out''
    of the regulated environment, when your SMD has 340 pages of preamble,
    10 pages of regulatory text, 185 pages of the interim and Standard
    Market Design tariffs and a proposed rule that takes over State rules
    on reserve margins, forces divestiture of control to an independent
    transmission provider (ITP) and describes the governance of an entity
    in such detail that you prescribe the number of directors and even ask
    whether the ITP CEO should have a vote on the board?
        Answer. I made the referenced comments while I served as Chairman
    of the Public Utility Commission of Texas, shortly after Governor Bush
    signed legislation opening up the retail electric franchise to
    competition for all customers.
        The FERC's goal in the SMD proposed rule is to provide regulatory
    clarity as the wholesale power industry evolves from its heavily-
    regulated past to seamless, regional markets for wholesale electricity,
    so that sellers can transact throughout broad regions and customers can
    receive the benefits of less expensive and more reliable electricity.
    In the current regulated environment, the regulator (whether state or
    federal) makes all the choices with regard to pricing and new
    infrastructure. In a market environment, the customers will have the
    opportunity to choose the options that are most favorable for them. The
    Commission is proposing to establish common rules of the road for
    interstate transmission so as to have a stable and workable platform
    for competition in electric power. To help get power sales at wholesale
    out of the old regulated environment requires better oversight of
    transmission in interstate commerce. Because power and transmission are
    so closely intertwined, new transmission regulations are needed to
    establish an appropriate platform for wholesale competition in the
    electric power business.
        As I have mentioned on several previous occasions, I believe that
    dependable, affordable, competitive wholesale energy markets require
    three key elements: adequate infrastructure, balanced market rules and
    vigilant oversight. The Commission is proposing a comprehensive plan
    that establishes these elements as well as includes regulatory backstop
    mechanisms to protect the customers until truly competitive markets are
    in place. As markets are becoming more regional, the Commission is
    proposing methods for states and the Commission to collaborate on
    regulating regional interstate commerce in electric power. The
    Commission is encouraging the establishment of independent regional
    entities such as RTOs and ISOs that will be operating the grid and
    administering the energy markets. This platform leaves plenty of room
    for regional variation with regard to a variety of functions, including
    transmission planning, resource adequacy, mitigation techniques and RTO
    governance.
        Question 4. I agree with the premise of your statement that
    regulation leads itself to political pressure and log rolling. Isn't
    your SMD the product of political maneuvering by the new entrants whom
    you seem to favor over the incumbent utilities on which you seem to
    place the costs and burdens of SMD?
        Answer. No. SMD is the product of the need to reform wholesale
    power markets to provide greater benefits to customers. It is informed
    by many months of open meetings and conferences with utilities,
    customers, ISOs, new entrants, financial experts, academics and experts
    from around the world about how best to support the movement toward
    improved competition. SMD welcomes new entrants to the electricity
    marketplace, but it does not favor them over incumbent utilities; in
    fact, SMD seeks to provide a level playing field for all entities. All
    costs are ultimately borne by customers, not utilities, so we must be
    sure that the costs of reforms are reasonable for the benefits we
    expect to achieve.
        Question 5. Last November 12, you testified on the Enron scandal
    that the FERC did not regulate the parent company, whose financial
    chicanery led to the corporation's bankruptcy and the suffering of many
    people, including hard-working employees who lost their pensions. Will
    the Standard Market Design prevent financial scandals such as the Enron
    debacle?
        Answer. Standard Market Design would not prevent the financial
    scandals that led to the collapse of Enron, which were due to
    accounting and other financial practices. These practices are for the
    Securities and Exchange Commission and other federal agencies to
    address.
        However, Standard Market Design would prevent the various trading
    strategies that were allegedly used for market manipulation by
    subsidiaries of Enron which operated in energy markets. The proposed
    market rules would eliminate the market design flaws that were the
    basis for these trading strategies. The strategies discussed in the
    Enron memoranda were mainly tailored to take advantage of flaws in the
    California market design, particularly its congestion management
    system. Standard Market Design uses a different congestion management
    system that would make most of these strategies infeasible. A few of
    the strategies in the Enron memoranda appear to depend on the marketer
    providing false information to the ISO. Thus, these strategies rely on
    evading or violating the market rules rather than on market design
    flaws. Standard Market Design addresses these types of strategies by
    requiring an active market monitoring program (independent transmission
    provider's Market Monitor and the Commission's Office of Market
    Oversight and Investigation) that will detect violations of market
    rules and take appropriate action against entities that violate the
    market rules. SMD also would require that each RTO have in place market
    power mitigation measures to prevent exercises of market power.
        I should add that the Commission has already developed and
    implemented rules outside the context of this proposal to increase the
    clarity and transparency of market transactions. These rules--including
    Order No. 2001, which directs quarterly public reports on all
    jurisdictional electricity sales--will help market participants and
    observers (including regulators) better understand and react to
    changing prices and conditions in the marketplace, and increase
    investor and participant confidence in the integrity of market
    transactions.
        Question 6. Is it not the case that when you arrived at the FERC,
    utilities had filed for approval of regional transmission organizations
    all over the country, but that since then, GridSouth and GridFlorida
    that had obtained at least conditional approval fell apart because of
    state opposition, the merger between Midwest ISO and Southwest Power
    pool fell apart, the merger between New England and New York ISO fell
    apart, long after PJM abandoned the Northeast market where it belongs?
    Isn't it also true that PJM announced delay in its development and that
    the Midwest ISO with whom you required PJM to merge may miss the
    deadline you set? Why doesn't the Commission embrace the policies of
    Order No. 2000 that seemed to work, over its efforts in SMD?
        Answer. From its beginning, the Commission's rulemaking has been
    intended to fill in the important details that Order No. 2000 did not
    address. The industry and its customers have learned much from the
    California experience and from the collapse of Enron. It is important
    to reflect that current understanding in our rules. Shortly after I
    joined the Commission in mid-2001, as we were processing a number of
    Order No. 2000 compliance filings, it became apparent that we were
    moving to approval of incompatible market design features, even in
    neighboring RTOs. If there was any clear lesson the agency should have
    learned from the Western Market crisis, it was the criticality of
    getting the right set of market rules. However, at that time, rather
    than moving forward to address critical market design issues head-on,
    the Commission decided to direct parties in the South and in the
    Northeast into mediation to form large single RTOs for those regions. I
    supported that proposal as a solution to the balkanization problem that
    was coming forth from the pending cases. Ultimately, however, for
    various reasons, the two mediations made insufficient progress to allow
    for healthy wholesale markets to develop. So, the SMD proposal, and the
    highly public process in 2001 and 2002 that led to its development is
    intended to get the Order No. 2000 RTO agenda, which is a good one,
    back on track, not simply by approving filings, but by making sure that
    they work well based on real world experience.
                    Response to Question From Senator Graham
        Question. Economic dispatch has been discussed as an approach to
    facilitate the procurement of least cost power in the wholesale
    marketplace. What is your opinion of this concept?
        Answer. I strongly support the concept of economic dispatch.
    Economic dispatch has been used by each electric utility since the
    beginning of the industry to provide the lowest cost power to its
    customers. The SMD proposal would extend the basic concept underlying
    economic dispatch from single utility scope to larger, regional scope.
        Economic dispatch is simply the process of using the lowest cost
    generator first, then the second lowest cost generator, and so on,
    until the total amount generated meets the total electric demand on the
    system at the time. Until recently, economic dispatch has been applied
    within only one utility's system, and only for network resources, which
    are primarily generators owned by that utility, aside from the three
    major power pools of the Northeast. A typical utility owns many
    generators dispersed throughout its service territory--and buys from
    neighboring utilities--and also has customers at diverse locations
    throughout its service territory. Because of this geographic
    dispersion, transmission constraints affect economic dispatch. At some
    point the next lowest cost generator cannot be used because
    transmission limitations keep power at that generator from reaching
    customers over lines that are already fully loaded by lower cost
    generators. As a result, economic dispatch means using the lowest cost
    generators that the transmission system will allow.
        The SMD proposal would extend opportunities for economic dispatch
    to a multi-utility region. Use of economic dispatch over a large region
    with many utilities might seem at first to require a central authority
    to decide how to use all the generators in a large region to meet the
    region's total demand at lowest cost. But this is not the case if a
    market is designed to simulate the results achieved by economic
    dispatch. Where traditional economic dispatch relies on knowledge of
    generator costs and transmission constraints, the market relies on
    voluntary price bids as well as knowledge of transmission constraints
    to reach about the same result.
        The SMD proposal would require the provider of transmission
    services to establish a spot market that collects bids from all willing
    sellers and buyers at all locations in its region and, taking into
    account transmission limitations, select the lowest priced generators
    to satisfy the spot market demand of the region.
        Let me emphasize that selling into and buying from this market is
    entirely voluntary under the proposed SMD rule. I would expect that
    most traditional utilities would continue to use their own economic
    dispatch process within their own service territories to match their
    own generation with their own load. However, under the SMD proposal
    they would, in addition, have the opportunity to buy and sell
    voluntarily across a larger region using a process very much like
    economic dispatch so as to take transmission limitations into account
    and lower costs for customers throughout the region. I would also
    emphasize that, because a utility may be required by state law to use
    its lowest cost generators first for its own customers, it can offer
    left-over generating capacity into the spot market so as to lower
    others' power costs without in any way taking the lowest cost power
    from its own customers.
                   Responses to Questions From Senator Smith
        Question 1. I realize you were not on the commission at the time,
    it is my understanding that the FERC approved California's electric
    restructuring before it was actually implemented. Given that, in
    hindsight, this was a terrible market structure that enabled market
    manipulation and is still harming the northwest economy, what makes you
    so certain that FERC and the FERC staff have gotten everything right in
    the standard market design proposed rulemaking?
        Answer. The SMD proposal is specifically designed to combat the
    well-known market rule flaws and structural shortcomings of the
    California market using tools that are being used successfully in other
    markets today. The following are a few specific examples:

       The California market faced severe shortages of generation
            capacity, largely due to obstacles to timely investment in
            needed generation to keep up with growing demand and hydropower
            shortages. The price signals produced under Standard Market
            Design will provide appropriate incentives for investors to
            develop electrical infrastructure (generation, transmission and
            demand response), so long as state laws and regulations on
            siting and resource adequacy, among other issues, will
            accommodate such development. Other successful markets in the
            U.S. and across the world have seen substantial new investment
            in generation due to constructive state and local policies, as
            well as clear market rules.
       The California market design relied on a less sophisticated
            method (a zonal method) for managing congestion that made it
            profitable for sellers to manipulate the system in a variety of
            well-documented ways. The SMD proposal uses locational price
            signals and Firm Transmission Rights to eliminate the
            profitability of these manipulation schemes. This method is
            working is U.S. power markets today.
       The SMD proposal recognizes that where sellers have market
            power, mitigation measures must be incorporated into the market
            design. Before-the-fact mitigation measures eliminate the need
            for the type of after-the-fact refund proceedings and
            litigation on contracts and market manipulation that followed
            the Western energy crisis. These sorts of mitigation measures
            are working in eastern markets today.
       Unlike the California design, which required that most power
            be procured through the California spot market, our proposal is
            built on the reality that in today's power markets, about 90%
            of energy is procured under bilateral contracts between
            customers and their suppliers--outside the spot markets. Spot
            markets under SMD are voluntary (unless you are long or short
            in real-time), and they are intended to facilitate congestion
            management on the transmission system and to provide a
            mechanism to buyers to secure lower-cost resources than those
            they own or have contracted for, when it is efficient to do so.
            Because only supplemental power is likely to be obtained
            through SMD markets, not the buyer's entire power supply needs,
            the consequences of any market design flaw will be
            significantly limited. This is a basic feature in all power
            markets today.
       The SMD proposal calls for each RTO to establish an
            independent market monitor that would, among other things,
            continuously monitor the market for design flaws and promptly
            report any need for market rule adjustments to the RTO Board
            and the Commission. To its credit, California had this feature
            in its market design from the early days.

        Finally, a critical difference between SMD and the California
    market design of the late 1990s is that from the outset, the SMD
    rulemaking process has been geared to adoption of the best practices
    that are already working in the world's and America's markets. We have
    found and incorporated what is working today in the wholesale markets
    of the Eastern United States, Texas, Canada, Great Britain, New Zealand
    and Europe, as well as features that make markets work better for
    commodities, financial instruments and consumer goods. Virtually all of
    the solutions we propose have been explored and recommended by groups
    and authors ranging from President Bush's National Energy Policy to the
    Western Governors Association and innumerable blue ribbon panels,
    academics and public interest groups. SMD endeavors to bring these best
    practices together in a comprehensive way that will benefit the
    nation's energy customers.
        Question 2. It seems to me that, in certain electricity market
    structures, there seems to be an enhanced ability to game or manipulate
    the market. Why would we want to pursue market structures that will
    facilitate gaming?
        Answer. It is true that some market structures create or enhance
    the ability to game or manipulate the market, but other market
    structures limit or eliminate such ability. Based on the lessons
    learned in California and elsewhere, the Commission proposed the SMD
    market design to reduce gaming opportunities to a minimum.
        I should point out that gaming probably cannot be entirely
    eliminated in any market design. Even under traditional cost of service
    regulation, regulators throughout the last century were constantly
    vigilant for attempts to improperly add assets to rate base, inflate
    expenses, manipulate accounting rules, and so on. A market approach can
    eliminate most of these gaming opportunities, but the need for
    vigilance against new gaming opportunities remains. The Commission is
    relying on strong market monitoring by the regional transmission
    provider's market monitor and the Commission's Office of Market
    Oversight and Investigations to ensure compliance with the market rules
    and to detect new market manipulation strategies.
        Question 3. Does the market oversight that would be required under
    SMD require an activist FERC that is willing to intervene quickly when
    market anomalies are suspected? How do we know that there will always
    be an activist, rather than a laissez-faire Commission?
        Answer. This Commission's commitment to prevent future market
    abuses, and to remedy past ones, is now a firmly established part of
    our agency's mission, and we will continue to strengthen our present
    coordination with other federal agencies to ensure that we effectively
    regulate energy industries so that customers and investors are fully
    protected. The Commission has institutionalized market oversight by
    creating the Office of Market Oversight and Investigations (OMOI),
    which should assure that the Commission remains active in market
    oversight. OMOI serves as an early warning system to alert the
    Commission when market problems develop, and allows the Commission to
    analyze and address any problems more quickly. We are also requiring
    the regional market monitors to provide timely data to relevant state
    regulatory officials so they can join with us in overseeing these
    markets.
        Question 4. Regarding ``Undue Discrimination'' Claims Underlying
    Standard Market Design:
        I want to focus on the FERC's legal basis for promulgating Standard
    Market Design. The preamble to the proposed rule lists the categories
    of alleged undue discrimination that the FERC wants to remedy through
    SMD. These include:
        Question (a). Native load--the FERC alleges that vertically
    integrated utilities that have legal or contractual obligations to
    serve retail customers discriminate when they use their transmission
    grid for the benefit of these customers ahead of everyone else. Since
    state laws require that utilities give priority to native load,
    including load growth, and the FERC itself in Order No. 888 recognized
    the validity of protecting captive customers, utilities obeying the law
    and doing what Order No. 888 allowed can hardly engage in unlawful
    discrimination. Is this correct?
        Answer. SMD does not propose to take transmission away from those
    who have existing rights to it or to interfere with the ability to
    obtain adequate transmission for native load growth; instead, it will
    preserve all the rights of existing transmission rights holders,
    including native load. When all these preexisting rights have been
    satisfied, any transmission capacity left over would be made available
    to all market participants on a non-discriminatory basis. This
    continues the Commission policy that has been in place without
    controversy since Order No. 888.
        The Commission explained in the NOPR its concern that vertically
    integrated utilities may improperly use their state obligation to serve
    native load as a cloak to engage in unduly discriminatory behavior that
    has nothing to do with protecting native load. For example, the current
    pro forma tariff requires transmission providers to allow existing
    transmission customers to roll over their service agreements into new
    contracts. A transmission provider is allowed to recall that customer's
    capacity at the end of the service agreement only if its reasonably
    forecasted native load growth needs would prevent it from extending the
    contract and it noted that restriction in its initial agreement with
    the transmission customer. Some transmission providers, however, have
    attempted to terminate expiring service contracts to accommodate
    alleged native load growth, even when they have not claimed in the
    initial service agreement that the transmission capacity in question
    may be needed in the future for native load growth. SMD seeks to
    provide adequate native load protection but, at the same time, to
    prevent abuses of the native load preference.
        Question (b). Studies for interconnecting generators--the FERC
    claims that integrated utilities discriminate when they delay complying
    with interconnection requests from competing generators, as by delaying
    studies. Do you agree that transmission owners need to study the effect
    on the grid before going ahead with interconnections? Is it not true
    that Order No. 888 recognized the varying complexity of studies and did
    not establish strict deadlines for conducting studies, by saying that
    if they take longer than 60 days, the utility must notify the
    generator? How many adjudicated cases of discrimination through delay
    in interconnection studies can you point to? Could you name them and
    give me citations?
        Answer. Yes, transmission owners need to study the effect on the
    grid before going ahead with interconnections. In the Order No. 888 pro
    forma tariff, the Commission stated that a transmission provider would
    use ``due diligence'' to complete the required studies within a sixty-
    day period, but if the transmission provider was unable to complete the
    required study within such a time period, it had to notify the customer
    and provide an estimated completion date with an explanation of the
    reasons why additional time was required to complete the studies. We
    also stated that the transmission provider was to use the same due
    diligence in completing the study for a customer as it used for
    completing studies for itself. While this provided some flexibility to
    transmission providers it was not an invitation to indefinitely delay
    customers' interconnection requests.
        As an example, Kinder Morgan Power Company complained to the
    Commission that Southern Company had allowed interconnection
    applications to sit unreviewed for up to six months, and delayed
    completion of the interconnection systems impact study for
    approximately nine months. Kinder Morgan argued that the time lag
    slowed commercial development of generation projects, added uncertainty
    to interconnection customers' plans for developing new generation
    plants, and prevented or delayed the entry of new generation plants
    into markets where Southern's generation companies operated. The
    Commission found that Southern's interconnection application procedures
    were unjust and unreasonable because they discriminated against
    generation customers' ability to develop new projects. The Commission
    ordered Southern to revise its interconnection application review
    process so that the review of interconnection applications is completed
    within 30 days from receipt of an application or rejected as deficient.
    Kinder Morgan Power Co. v. Southern Company Services, Inc., 97 FERC
    para. 61,240 (2001), reh'g denied, 98 FERC para. 61,044 (2002).
        We have heard from several commenters in the SMD proceeding and the
    Standardization of Generator Interconnection Agreements and Procedures
    proceeding in Docket No. RM02-1-000 that discriminatory application of
    interconnection procedures, including delays in performing studies,
    constitutes a barrier to entry for new generation.
        Question (c). Scheduling issues--the FERC claims that integrated
    utilities can favor themselves when reserving transmission capacity in
    order to gain access to generation in other regions for reliability
    purposes. The preamble mentions two cases in which the FERC found
    trouble. My research shows two others. The cases involve two utilities.
    Did any of them involve deliberate discrimination? How many
    reservations of such capacity have occurred since 1996 and Order No.
    888? What percentage does four cases represent out of that number? The
    FERC also claims that vertically integrated utilities can treat
    themselves more leniently for scheduling errors. What evidence do you
    have of that? How many cases did the FERC adjudicate.that came to that
    conclusion? Please name them and give me citations?
        Answer. No, we do not have additional examples at this time. As to
    whether discrimination was deliberate in the cases you cited, it is
    often difficult to determine intent; therefore, the Commission simply
    determines if its rules are complied with or violated. We do not have
    data regarding how many reservations of capacity were made since 1996,
    but the number is likely to be large. As discussed in the SMD proposal,
    a utility that is out of balance (fails to schedule exactly) may be
    able to avoid a payment for imbalance in a way that is not available to
    another transmission customer. However, the Commission has an
    affirmative obligation to prevent undue discrimination, including the
    obligation to prevent the conditions under which undue discrimination
    is likely to occur.
        The North American Electric Reliability Council (NERC) is
    developing new market rules to alleviate this problem. Compliance with
    NERC rules is voluntary, so two NERC reliability councils also have
    filed Inadvertent Settlement Tariffs to make their rules relating to
    balancing energy mandatory. Those rules mandated cash payments for
    imbalances and eliminated returns of power in kind. The Commission
    approved those tariffs. See Mid-Continent Area Power Pool, 96 FERC
    para. 61,150 (2001); East Central Area Reliability Council, 91 FERC
    para. 61,197 (2000).
        The SMD proposal responds not just to documented instances of undue
    discrimination, but also to flaws in existing market structures that
    present opportunities for undue discrimination. As discussed in recent
    court opinions, the Commission does not necessarily have to find
    specific instances of discrimination in order to have a duty to act to
    prevent it; in fact, ``the open access requirement of Order No. 888 is
    premised not on individualized findings of discrimination by specific
    transmission providers, but on FERC's identification of a fundamental
    systemic problem in the industry.'' Transmission Access Policy Study
    Group v. FERC, 225 F.3d 667, 683 (D.C. Cir. 2000). See also Associated
    Gas Distributors v. FERC, 824 F.2d 981, 998-99 (D.C. Cir. 1987);
    Wisconsin Gas Co. v. FERC, 770 F.2d 1144, 1166 (D.C. Cir. 1985). SMD,
    like Order No. 888, is a generic response to defects in electricity
    market design.
        Question (d). Information issues--the FERC claims that vertically
    integrated utilities can--and I emphasize can--post misleading
    information on their Web sites regarding how much transmission capacity
    they have to sell. While maybe they can do that, how many instances of
    deliberate misleading have you found in adjudicated cases? Could you
    name them and give me citations? Is it not a fact that one case you
    mention in the preamble comes from Enron's allegations and the case is
    still before FERC on rehearing?
        Answer. The Commission has encountered some instances in which
    incorrect information was published on utility OASIS sites:

       Morgan Stanley Capital Group v. Illinois Power Company, 83
            FERC para. 61,204, reh'g denied 83 FERC para. 61,299 (1998),
            order granting reh'g in part and clarifying prior order 93 FERC
            para. 61,081 (2000) (taking note of incorrect posting on
            utility OASIS site)
       The Washington Water Power Company, 83 FERC para. 61,097
            (1998), order on responses to show cause order 83 FERC para.
            61,282 (1998) (finding utility failed to indicate on its OASIS
            that it may have firm transmission capacity available)para.
            Madison Gas & Electric Company v. Wisconsin Power & Light
            Company, 80 FERC para. 61,331 (1997), reh'g denied 82 FERC
            para. 61,099 (1998) (explaining that Wisconsin Power & Light's
            steps to clarify terminology and procedures on the OASIS should
            reduce any confusion that may arise concerning future
            transactions under its open access transmission tariff)

        In addition, the Commission has adjudicated cases involving
    incorrect calculation of available transfer capability:

       Opinion No. 437, 87 FERC 61,202 (1999) (finding, among other
            things, that El Paso had incorrectly calculated its available
            transmission capacity)
       Wisconsin Public Power Inc. SYSTEM v. Wisconsin Public
            Service Corporation, 83 FERC para. 61,198 (1998), reh'g granted
            in part on other grounds 84 FERC para. 61,120 (1998) (finding
            Wisconsin Public Service took capacity benefit margin into
            consideration when it calculated available transfer capability,
            but did not include this information in its tariff)

        The above cases do not address the issue of intent, only whether
    the Commission's rules or the utility's tariff was violated. In
    addition, Commission staff is currently performing a staff audit of
    information on sites and turning up anomalies that companies are being
    asked to explain. This investigation is confidential under Commission
    regulations.
        The NOPR preamble discusses a Commission order that directed
    Entergy and Southern Companies to employ an independent third party to
    operate and administer their OASIS sites. This direction was in
    response to a number of parties, including Enron, who raised serious
    concerns about the integrity of the postings of ATC on the Entergy's
    and Southern Companies' OASIS. AEP Power Marketing, Inc., et al., 97
    FERC para. 61,219 at 61,973 (2001), reh'g pending, Docket No. ER96-
    2495-016 et al.
        Question (e). Transmission Loading Relief--the FERC claims that in
    the past few years, utilities have called more brownouts and blackouts.
    Even if true, what evidence do you have that this resulted from undue
    discrimination, rather than a lack of investment in new capacity, given
    the growth in demand for electricity? How many adjudicated cases of
    discrimination in transmission loading relief can you point to? Please
    name them and give me citation? Would you not agree that utilities that
    called blackouts unnecessarily would attract regulatory sanctions,
    lawsuits and great risks of exposing themselves to liability?
        Answer. For purposes of clarification, the Commission stated that
    instances of Transmission Loading Relief (TLR) are increasing, but
    these rarely if ever have resulted in blackouts or brownouts. The TLR
    was designed by the North American Electric Reliability Council (NERC)
    as an emergency management tool intended to protect the reliability of
    the grid in the event of a true emergency such a transmission facility
    outage. Although discrimination is a problem that must be addressed,
    these TLR events are the result primarily not of discrimination, but of
    routine use of TLRs for everyday congestion management. A better method
    for managing congestion is needed for transmission customers to have
    fairer and more reasonable conditions of transmission service. That
    said, the current situation leads power buyers to favor power from
    local sellers over power from distant sellers that may be subject to
    routine curtailment--a situation that can be exploited by those who own
    both transmission and generation who may be able to create congestion
    so as to help maintain their local dominance, despite our open access
    rules. However. such intent is extremely difficult to prove, and there
    have been no adjudicated cases that find discriminatory use of TLRs.
    Although unnecessary blackouts would seem to expose a utility to
    sanctions or lawsuits, use of TLRs does not. Both the FERC tariff and
    NERC rules require the use of TLRs to manage congestion on the grid
    when certain defined condition arise.
                                     ______

                                                        April 17, 2003.
    Hon. Pete V. Domenici,
    Chairman, Senate Energy and Natural Resources Committee, Hart Senate
            Office Building, Washington, DC.
        Dear Chairman Domenic: Thank you for including me in the March 27,
    2003 hearing before the Senate Energy and Natural Resources Committee
    and for giving me this opportunity to respond to certain of the
    questions that have been submitted for the record. As always, it is a
    pleasure to work with you on these important issues.
                Sincerely,
                                                 Glenn English,
                                        Chief Executive Officer, NRECA.
                  Responses to Questions From Senator Campbell
        Question. Allen Franklin says this has been a terrible time
    financially for investor-owned utilities. In fact, there have been over
    180 IOUs downgraded and pending bankruptcies of the merchant power
    sector. These are indeed tough times. How has public power fared during
    the same period? What has Wall Street said about public power? Are you
    building generation and transmission? What is your debt load?
        Answer. Cooperatives and public power are extremely strong today
    financially. Both Fitch and S&P have remarked that cooperatives have
    largely retained their strong investment grade ratings because they
    have stuck to their knitting. Cooperatives and public power have not
    engaged in risky financial speculation or constructed generation for
    the competitive market. They have instead continued their focus on
    building and acquiring generation and transmission capacity for their
    own consumer-owners.
        Question. Allen Franklin testified earlier that public power should
    be subject to ``full FERC jurisdiction'' so others can gain access to
    its transmission. Do you agree? JEA is directly connected to Southern.
    Do you get requests for transmission access from Southern? Have you
    granted such access? Are you aware of any complaint issued by Southern
    or any other requestor of access that you have failed to give access to
    your surplus transmission?
        Answer. There is no need for cooperatives or public power to be
    subject to ``full FERC jurisdiction.'' Such proposals are a solution in
    search of a problem.
        If Southern or another public utility believed that a cooperative
    were denying it transmission service it would have at least two options
    under current law. Its first option would be to file a complaint with
    the Federal Energy Regulatory Commission (FERC) under Sec. 211 of the
    Federal Power Act. Expanded by Congress in the Energy Policy Act of
    1992, Sec. 211 permits FERC to require any non-jurisdictional
    transmitting utility to provide transmission service to other utilities
    at just and reasonable rates.
        Southern's second option would be to take advantage of the
    ``reciprocity'' provisions of Order 888. Order 888 was FERC's primary
    open access order. In that order, FERC told all public utilities that
    they had to provide open access transmission service to everyone
    pursuant to a single standard contract, or ``pro forma'' tariff.
    Although FERC could not impose open access and the pro forma tariff
    directly on nonpublic utilities, FERC did so indirectly through
    ``reciprocity.'' FERC told non-public utilities that if they wanted
    transmission service on transmission lines regulated by FERC, they too
    would have to provide open access transmission service under a tariff
    comparable to the pro forma tariff. To enforce the reciprocity
    provision, FERC told the public utilities that they could deny
    transmission service to any non-public utility that failed to provide
    it with comparable transmission service.
        Were cooperatives denying Southern or other public utilities open
    access to their transmission systems, one would expect that there would
    have been a lot of Sec. 211 complaints filed at FERC, or that a lot of
    cooperatives would have been denied transmission service under Order
    888's reciprocity provisions. But the opposite has been the case. There
    have been no Sec. 211 complaints in the past few years against
    cooperatives and no instances that NRECA is aware of in which a
    cooperative has been denied transmission service pursuant to
    reciprocity. Even if cooperatives were inclined to deny third parties
    access to their transmission service, the threat of those remedies
    would have been enough to enforce fair access. Significantly, FERC
    listed in its SMD proposal numerous instances where investor-owned
    utilities were engaged in alleged discriminatory behavior yet not a
    single cooperative was referenced.
                 Response to Question Prepared by Neil Naraine
        Question. Do you believe that Participant Funding combined with
    Tradable Transmission Right at the discretion of a Regional
    Transmission Organization (RTO), or a transmission entity authorized by
    FERC would increase the capacity of the transmission system?
        Answer. NRECA does not believe that requiring the Commission to
    accept participant funding and tradable transmission rights would
    increase the capacity of the transmission system. In fact, NRECA
    believes that a strict participant funding approach would have opposite
    effect: it would dissuade investors from improving the transmission
    system and therefore undermine wholesale markets and increase the
    delivered cost of power to consumers.
        If all transmission facilities required to serve consumers in a
    region had to be ``participant funded'' very little transmission would
    be built. First, transmission improvements are like improvements to the
    highway: once a new lane is constructed all drivers can use it and all
    drivers benefit from the decrease in congestion. There is, therefore,
    no effective way within a region to allocate the benefit and thus the
    cost of system upgrades. Few investors would be willing to fund all of
    the cost of an upgrade if they do not get all of the benefits.
        Second, participant funding increases the risk to investors and
    therefore makes it less likely that they will invest in needed new
    transmission capacity. Under participant funding, transmission
    investors do not get paid by those who use the new transmission line or
    new transmission capacity. All investors get if they participant fund a
    line is the right to congestion payments. But, if investors properly
    design the line, there will be no congestion anymore, and thus no
    payments. The more effective the facility is at increasing transmission
    capacity, the greater the risk that investors will not recover their
    investment. Why, then, would they build transmission capacity?
        By dissuading investors from making improvements to the
    transmission system, a strict participant funding approach would lock
    in existing congestion points on the transmission system, undermine
    wholesale power markets, and thus raise costs to consumers.
        It would be better for Congress to leave issues of transmission
    pricing and cost allocation to the Commission. FERC has the authority
    today to adopt any policy, including participant funding, that it
    concludes is just and reasonable and not unduly discriminatory or
    preferential. The Commission is presently considering adopting a more
    nuanced approach to participant funding in its Standard Market Design
    rule.
        If Congress does act in this area, NRECA believes that transmission
    facilities required in a region to serve consumers more economically or
    more reliably should be rolled into regional transmission prices and
    recovered from all consumers in the region. We will never be able to
    develop an interstate highway system for transmission if every industry
    participant is required to build its own private roadways.
        On the other hand, NRECA does believe that transmission facilities
    that are not needed to serve load within a region, but are instead
    required by those selling power outside the region should be paid for
    by the power seller or the customers outside the region. Consumers
    within a region should not have to subsidize the poor siting decision
    of generators.
        As a general principle, the best way to get transmission
    infrastructure built and to reduce transmission congestion is to
    address risk and focus on regional planning. More transmission would be
    built if Congress were to make it easier for investors to build new
    transmission and more certain that investors would recover their costs.
    That is why NRECA has supported rolling in of transmission investment
    into regional transmission rates for those upgrades that a regional
    planning process has determined are required in a region to serve
    consumers more economically and more reliably. That is also why NRECA
    has supported limited federal siting authority for such facilities.
                                     ______

                                              Southern Company,
                                           Atlanta, GA, April 17, 2003.
    Hon. Pete V. Domenici,
    Chairman, Energy and Natural Resources Committee, U.S. Senate,
            Washington, DC.
        Dear Senator Domenici: Please find attached responses to the
    questions of members of the Energy and Natural Resources Committee that
    were provided to us in your letter of April 3. It was a pleasure to
    testify before your Committee on March 27, 2003 and I hope that these
    responses help to further the Committee's consideration of energy
    legislation in the current Congress.
        In addition to responding to the questions that were posed directly
    to me or my panel, I have also provided answers to questions that
    directly relate to my testimony or to Southern Company. As I was
    testifying on behalf of EEI, my responses will reflect EEI positions,
    except where specifically noted.
        Thank you for the opportunity to provide this response and further
    clarify the electric utility industry's perspectives on proposed
    legislation. We remain ready to help you in any way we can as the
    legislation progresses through your Committee and the Congress.
                Sincerely,
                                                Allen Franklin,
                                                     President and CEO.
                  Responses to Questions From Senator Campbell
        Question. It seems that, in many ways, SMD actually undermines
    electricity deregulation efforts. Would you agree that the current SMD
    regulations allow FERC to greatly increase its size and power; in
    effect making it the centralized planning agent for the entire
    electricity sector?
        Answer. While centralized planning may overstate the impact of the
    Commission's proposal, SMD certainly does not amount to deregulation.
    APPA supports RTOs that perform the functions articulated in the
    proposed SMD rule, but cautions that the cost effectiveness of a
    proposed RTO must be shown before proceeding in each region. Further,
    badly designed and organized spot markets can do great damage to
    consumers and to industry participants.
        Question. How does SMD account for regional differences in
    electricity markets? How will this specifically affect western state
    utilities and their customers?
        Answer. The Commission has stated that it will allow regional
    flexibility in the implementation of SMD, particularly in areas such as
    the Pacific Northwest, with its substantial reliance on the
    coordinated, regional operation of multi-use hydro-electric facilities
    to accomplish a variety of conflicting objectives, including delivery
    of electric energy and capacity when and where it is most needed. The
    Commission's proposal has in fact given preliminary approval to certain
    RTO design elements that are seemingly inconsistent with the proposed
    rule, such as the physical transmission rights model adopted by
    participants in the West Connect RTO.
        APPA has urged the Commission to proceed with RTOs and SMD
    cautiously, to allow regional consensus to be maintained and to provide
    sufficient time to conduct the cost-benefit studies that are required
    to give customers and the states confidence that the specific RTO
    design proposed in each region is workable and cost-effective.
        Question. Many statements have been made that California's recent
    electricity crisis was a regional crisis. I know that when California
    needed or wanted water they got water from Colorado, now when they need
    power are they going to take Colorado power? What impact will
    California's current problems likely have on Colorado and other Rocky
    Mountain states?
        Answer. The recent western energy crisis has reinforced the fact
    that wholesale electricity markets are interstate in nature and
    disturbances in the market cut across all industry segments. The
    failure of federal and state electricity deregulation in California has
    had, and continues to have, broad and far-reaching adverse effects
    throughout the Western States Coordinating Council region, including
    Colorado. Colorado was certainly not immune to the dramatic increases
    in the wholesale price of electricity that many consumers in the West
    were forced to assume.
        Beginning in late 2000, APPA repeatedly urged FERC to stabilize the
    western electricity markets by imposing price caps. It was not until
    June 2001, well into the crisis, that FERC acted to impose credible
    pricing discipline on the dysfunctional western markets. While FERC's
    actions have brought stability to the western wholesale electricity
    market, that relief came far too late for consumers.
        Until FERC acts more decisively to address market manipulation,
    including establishing clearer rules on the use and revocation of
    market-based rates, substantial price volatility may continue.
        There is no legal mechanism through which California, or any other
    state, can ``take'' power from Colorado. It is possible that renewed
    price volatility or other factors, such as downed transmission lines or
    broken generating units, could result in an increased demand for
    available power in Colorado. However, absent any statutory or
    contractual obligations, there would be no requirement for generators
    in Colorado to sell energy to utilities in California or in any other
    state.
        In rare circumstances, the Secretary of Energy may declare an
    electrical emergency that would direct all generators to make any
    surplus available to the capacity deficient system, but only after the
    generator had met all of its contract and native load service
    obligations.
        Question. Allen Franklin, CEO of Southern Co. testified that public
    power owns and operated 30% of the transmission system in the U.S. And
    that they need to be ``fully FERC jurisdictional'' to ensure a
    competitive wholesale market.
        Answer. The above question incorrectly states that public power
    owns and operates 30% of the nation's transmission system. Public power
    strictly defined (electric utilities owned by states or units of local
    government), in fact, owns approximately 8% of the transmission system.
    Mr. Franklin was perhaps referring to transmission facilities owned by
    the federal government as well as those owned by rural electric
    cooperatives in addition to those owned by public power. Under Section
    211 of the Federal Power Act, FERC already has the authority to ensure
    non-discriminatory access to all transmission lines, including those
    owned by public power. Bringing those lines under increased FERC
    jurisdiction will not solve the major problems of siting and technology
    development and will not result in a more robust competitive wholesale
    market. In addition, APPA agreed several years ago to the language
    known as FERC-lite which gives FERC an additional tool to ensure that
    public power systems provide comparable treatment to other entities
    that wish to access our transmission lines.
        Question. Allen Franklin says this has been a terrible time
    financially for investor-owned utilities. In fact, there have been over
    180 IOUs downgraded and pending bankruptcies of the merchant power
    sector. These are indeed tough times. How has public power fared during
    the same period?
        Answer. While some western public power utilities were hurt by the
    skyrocketing wholesale power prices during the energy crisis, they were
    able to minimize the effect on their consumers and remain fiscally
    responsible because of their flexibility and local control.
        In contrast to energy trading companies and investor-owned
    utilities the credit ratings of public power systems have remained
    stable. During 2002, out of 197 public power entities evaluated by
    Standard & Poor's, there were only 14 downgrades. Furthermore, these
    downgrades were balanced by 12 upgrades during the same period. More
    than 80% of the total public power entities rated by Standard & Poor's
    are rated A- and higher.
        Question. What has Wall Street said about public power?
        Answer. In its ``Outlook 2003: U.S. Power and Gas'', Fitch Ratings
    states ``Public power was by far the most stable utility sector in
    2002, and the outlook remains clear for the coming year.'' Standard and
    Poor's and Moody's Investors Service also project a strong outlook for
    public power in 2003.
        Credit rating agencies cite several reasons why public power has
    been able to weather the western energy crisis and maintain a stable
    outlook. The previously mentioned Fitch Ratings report ``Outlook 2003:
    U.S. Power and Gas'' states as an explanation of public power's
    success:

              ``Part of public power's success reflects a conscious
            decision by utility managers and board of directors to avoid
            the riskiest parts of electric deregulation, such as wholesale
            power marketing and merchant transactions. By nature public
            power agencies tend to be a more conservative group. They view
            their primary mission as serving native load customers on a
            mostly not-for-profit basis.''

        Question. Are you building generation and transmission?
        Answer. Public power utilities are continuing to build generation
    and transmission to meet their individual local needs. In fact, the
    recent market turmoil coupled with a lack of confidence in being able
    to obtain firm, reasonably-priced transmission service (without
    significant risk of curtailments or hefty congestion charges), has
    prompted some public power systems to build their own localized
    generation.
        While there are substantial obstacles involved in the siting and
    permitting processes for transmission, the investment in transmission
    continues to represent a safe and stable investment.
        Question. What is your debt load?
        Answer. Based on Energy Information Agency data for the largest
    public power systems (covering about one-fourth of all public power
    systems, but representing more than 70 percent of all sales to retail
    customers and all significant wholesale power systems) the total amount
    of bonds outstanding in 2000 was approximately $72 billion. In 2001,
    the total amount of outstanding bonds was $77.9 billion. The total long
    term debt, which includes bonds, advances from municipality and other
    long-term debt, and adjustments for unabortized premiums and discounts
    on long-term debt, was $81.3 billion in 2001.
                   Responses to Questions From the Committee
        Question. Do you believe that Participant Funding combined with
    Tradable Transmission Right at the discretion of a Regional
    Transmission Organization (RTO), or a transmission entity authorized by
    FERC would increase the capacity of the transmission system?
        Answer. FERC already has sufficient authority to permit or require
    participant funding where appropriate. Therefore, reiterating in
    legislation this ability is unnecessary and would in fact create a
    preference for participant funding. Furthermore, participant funding is
    an untested concept and, in most parts of the country, is likely to
    delay and limit transmission construction at a time when congestion and
    curtailments are increasing, to the detriment of consumers. APPA does
    not believe that participant funding would ultimately increase
    transmission capacity.
        Question. There seems to be a widening rift between the States and
    FERC on the FERC's plans for energy markets. If we continue this path,
    we could be headed for years of litigation and no progress. What can be
    done to avoid this continuing rift?
        Answer. The rift between the Commission and the States comes
    directly from the failure to address the California and Western market
    debacle immediately after the symptoms of dysfunction first emerged in
    Summer 2000. The causes for the debacle are complex and the reports are
    both voluminous and still emerging. FERC's credibility as the agency
    with primary jurisdiction over the natural gas and electric energy and
    transportation markets was severely damaged in the process. FERC needs
    to complete its Western investigations promptly, while ensuring due
    process for affected customers and industry participants and then
    initiate a public inquiry into how it should regulate and oversee
    energy markets going forward.
        Elements of this inquiry should include:

              1. Standards for prohibited behavior as a condition of market
            based rates;
              2. Transparency requirements, including industry reporting
            and disclosure of detailed market price and operating data on a
            close to real-time basis, subject to very limited commercial
            sensitivity limitations;
              3. New standards for market based rates that ensure that
            entities with market power do not have the opportunity to
            exploit that ability in the first place;
              4. Tangible steps to demonstrate the Commission and its
            oversight and investigations staff in fact has the capability
            and will to enforce these standards on a routine basis, not
            just when a crisis develops.

        With respect to RTOs and the Commission's proposed Standard Market
    Design, it seems apparent that many regions do not now have and will
    not have RTOs operating the organized electricity spot markets
    discussed in the proposed rule for some time. Further, the Commission's
    oversight of natural gas markets has also proved wanting, in that a
    number of jurisdictional companies have been alleged to have
    manipulated natural gas prices at major trading hubs, as well as the
    prices reported to trade publications. The commission needs to
    articulate how it will monitor these markets as well.
        In contrast, Chairman Pat Wood recently said that his agency
    intends to ``articulate more clearly'' how regional transmission
    planning and generation adequacy arc to be areas for state regulation,
    while independent transmission operators, locational pricing, firm
    tradable transmission rights, and predictable and balanced market
    mitigation are core elements of SMD. We will provide the Committee with
    our comments when the FERC SMD White Paper becomes available.
                                     ______

                                             Standard & Poor's,
                                          New York, NY, April 22, 2003.
    Senator Pete V. Domenici,
    Chairman, U.S. Senate Committee on Energy and Natural Resources,
            Washington, DC.
        Dear Mr. Chairman: As follow up to my testimony on March 4, 2003
    regarding the financial conditions of the electricity market, I am
    providing answers to some of the questions that were submitted for the
    record. As I mentioned in my testimony, Standard & Poor's, a division
    of The McGraw-Hill Companies, provides independent financial
    information, analytical services and credit ratings to the world's
    financial markets. Standard & Poor's Ratings Services (``Standard &
    Poor's'') does not advocate any specific industry structures or
    regulatory and energy policies and thus I am not offering answers to
    questions that would advocate specific policies.
        Thank you for the opportunity to respond to your questions.
                Sincerely,
                                              Suzanne G. Smith,
                                                              Director.
                   Responses to Questions From the Committee
        Question 1. Explain the primary factors that have led to the
    current financial situation in the electricity sector.
        Answer. The popular explanation for the industry's current decline
    in financial health has been to place the blame on the introduction of
    competition into the electricity market. Such a characterization would
    be an oversimplification of a complicated situation. A more accurate
    explanation of the industry's problems would be that the introduction
    of competition gave management the opportunity to make investments in
    areas, perhaps beyond their companies' expertise. A second cause of the
    industry's problems was that the rapid investments in generation
    capacity came on the heels of one of the largest economic expansions
    that the U.S. economy has experienced in decades. Since the bursting of
    that bubble, electricity demand growth did not materialize as many
    expected. For example, industrial demand for electricity has been
    contracting for the last few years. Another contributing problem was
    that debt was cheap and readily available. As a result many companies
    succumbed to the problems of over investment in risky assets or
    ventures.
        Low margins on electricity sales, trading losses and excess
    leverage have substantially driven down cash flow and profitability for
    the merchant energy (the uncontracted-for) segment of the electricity
    business. The weakened economy and incomplete or partial deregulation
    have to the overall surplus of electric generation capacity that now
    exists in most regions of the United States. This surplus, which will
    likely remain for the next several years, means that the market is
    largely only compensating power plant owners for their variable fuel
    costs and not for capital recovery.
        Last year, companies engaged in energy marketing and trading found
    themselves without sufficient capital at a time when they needed more
    liquidity to fund losses and to meet collateral calls. Loss of investor
    confidence caused industry stock prices to plummet and virtually shut
    many energy companies out of the equity markets.
        The presence of contingent liabilities in loan agreements and
    trading contracts made the situation worse by creating ``credit
    cliffs''. Contingent liabilities exist where the terms of borrowing
    change (or repayment is accelerated) if debt ratings or financial
    performance, or both, deteriorate below specified levels. In the
    electricity markets, ``ratings triggers'' are used extensively by
    counterparties as a way to determine collateral requirements. A common
    trigger is the loss of an investment grade rating, which required some
    companies to immediately post hundreds of millions of dollars of
    increased collateral.
        Lastly, another contributing factor to credit deterioration is
    financing practice. Many generation companies relied very heavily on
    the near-term debt markets, chiefly through the medium of short- and
    medium-term construction revolvers, acquisition bridge loans, and
    ``mini-perm'' loans to fund construction or acquisition of individual
    merchant energy plants and portfolios of merchant assets. This departs
    from the traditional way in which generating assets are traditionally
    funded, that is with more reliance on equity and long-term debt. Banks
    and borrowers as near-term lenders expected that their loans would be
    repaid within two to five years, mainly from proceeds from capital
    market ``take-out'' issues. Today, because of the uncertainties in the
    electricity sector, capital markets may not be a viable source of
    repayment for the banks. Making matters worse, some banks want to
    reduce their exposure to the electricity sector and are reluctant to
    roll over or refinance outstanding loans. Some companies are deeply
    exposed as the vast majority of their capitalization consists of short-
    or medium-term bank loans that mature this year or next.
        Question 2. To what extent do you think the challenges facing the
    electric industry are related to the general downturn in the economy?
        Answer. Some of the challenges facing the electric industry are
    related to the general downturn in the economy. Generally, electric
    demand is closely related to changes in overall economic output.
    However, the collision of business and financial risks currently being
    experienced by the competitive segment of the electric industry is not
    closely related to the general downturn in the economy. For example,
    the generation overcapacity situation is not a result of rapidly
    falling demand for electricity, but more a result of overbuilding.
        Question 3. The credit rating for many energy companies has been
    reduced, some to below investment grade. The credit rating agencies
    have been accused of reactionary downgrading and changing valuation
    criteria. How do you respond to those allegations?
        Answer. Standard & Poor's downgraded an unprecedented number of
    energy and power companies in the past year due to the many factors
    cited in my response to question #1. This is an acceleration of a trend
    that started at least three years ago. The downgrades are justified
    based upon the deteriorating creditworthiness of certain companies.
        Standard & Poor's continually seeks to enhance its process and
    procedures to ensure that its ratings meet investor needs and keep pace
    with new investment structures, accounting issues and market
    developments. These changes are made public and are widely distributed
    so that our ratings process is transparent to the marketplace. For
    example, last year, Standard & Poor's published an article (a copy of
    which is attached) * which describes Standard & Poor's' updated
    approach to rating U.S. energy trading and marketing firms. The article
    describes refinements to Standard & Poor's' methodology, which
    includes: enhanced liquidity analysis, fine-tuning assessments of two
    key components of capital at risk, and additional disclosure requests
    made to energy and marketing firms. However, Standard & Poor's has not
    made any material changes to its basic criteria for rating energy and
    power companies. Certainly the methodology refinements described above
    were not the sole cause for the downgrades.
    ---------------------------------------------------------------------------
        * The article has been retained in committee files.
    ---------------------------------------------------------------------------
        Question 4. Do you think that developers overestimated the demand?
        Answer. In part developers may have overestimated demand growth,
    particularly as the economy was rapidly expanding. There was much
    speculation that the dot.com revolution was going to need increasingly
    more electricity. In addition, some developers likely overestimated the
    demand for gas-fired generation on the premise that older coal-fired
    and nuclear power plants would retire as competition spread and under
    the assumption that natural gas prices would remain at levels well
    below today's prices. In many instances just the opposite occurred.
    Older plants, with little incremental investment, have greatly
    increased their availabilities and load factors since their variable
    costs are low. Hence, many companies are suffering losses from non-
    performing gas-fired power generation assets that are not being
    dispatched.
        Question 5. Are the problems now faced by competitive generators
    due to overbuilding?
        Answer. Excess generation capacity, or perhaps the wrong mix of
    generation, in most regions of the U.S. has contributed to the
    competitive generators' problems.
        Question 6. What is your response to this potential issue of
    insufficient natural gas supplies and increased dependence on LNG?
        Answer. The growing gap between U.S. gas production and demand
    suggests that the U.S. natural gas industry could be on the threshold
    of entering the ranks of major long-term LNG importers, such as South
    Korea and Japan. Indeed, since 1995, LNG imports have swelled from 5
    billion cubic feet (BCF) per year to almost 155 BCF in 2002, albeit a
    fraction in the 23 trillion cubic feet (TCF) per year U.S. market and a
    very small part of the total imported gas.
        To date Canada has filled the growing gap between U.S. natural gas
    supplies and natural gas consumption. But as reported in a recent study
    by Standard & Poor's, Western Canada, which has made up the U.S.
    production-demand deficit, may be hard pressed in the longer term to
    continue to do so as many have expected. According to a recent report
    in the Oil and Gas Journal, as well as other analyses, much like the
    Lower 48, higher development costs, smaller prospects, and rising
    depletion rates are challenging Canada's huge gas potential. Also, as
    in the U.S., Canadian demand is increasing because of gas-fired power
    generation and power needs associated with Alberta oil sands projects.
    The oil sands projects alone could potentially consume as much as 2 BCF
    per day of Arctic gas.
        The nature of U.S. gas demand is changing as electricity generation
    growth replaces industrial gas demand and becomes willing to pay more
    for gas than industrial users. This development combined with declining
    gas production may be moving sustainable normalized gas pricing into
    the $3-4 per MCF range. Higher natural gas prices combined with falling
    LNG liquefaction and transport costs could be the developments needed
    to sustain a long-term U.S. LNG market. New LNG projects will need
    about $2.0 to $3.0 per MCF to cover capital costs from wellhead to
    shipping to storage/regassification terminal. Shipping will add between
    30 cents and $1.25 per MCF depending upon distance. Therefore, if
    potential LNG developers expect gas prices to permanently move into the
    $3.00 to $4.00 range, U.S.-destined LNG projects may be feasible.
        There is no shortage of potential greenfield projects in the
    Atlantic and the Pacific basins that are looking to supply the U.S. LNG
    market. In the Pacific basin, stranded gas reserves in Australia,
    Alaska, Indonesia, Malaysia, and Peru could support new or expansion
    projects. Similarly, in the Atlantic basin, Algeria, Egypt, Nigeria,
    Trinidad & Tobago, Venezuela, and West Africa could also support new
    projects dedicated to the U.S. Finally, in the Persian Gulf region,
    Oman and gas giant Qatar with almost 900 TCF of proven reserves--the
    newest LNG exporters--are anxious to monetize their stranded gas
    reserves.
        Obviously, given the politically sensitive regions where some LNG
    projects might be located and the distances involved, a growing
    dependence on LNG could raise concerns about energy security and trade
    balance payments. But given the difficulties in siting LNG receiving
    terminals in the U.S. and the magnitude of LNG terminals needed to fill
    the growing production/supply gap, it seems unlikely that the U.S. will
    become as dependent on LNG as major importers in East Asia are, namely
    Japan and Korea.
        Question 7. Do you think that companies will successfully refinance
    their substantial debt? Or should we prepare ourselves to see a series
    of generating assets fall into the hands of banks?
        Answer. To date, companies have been refinancing their substantial
    debts. In most cases refinancings are better characterized as
    extensions or rollovers even though the companies have executed new
    load agreements. Most of the new facilities are short-term in nature--
    two to three years--and allow the companies to forestall bankruptcy by
    providing liquidity and time. It is fair to say that banks and
    borrowers are hoping that the market improves with time and that that
    will solve many financial problems. Few of the ``refinancings''
    actually solve the energy merchants' problems of too much debt and too
    much capacity. In fact the financial conditions of some of these
    companies are so weak that the banks cannot charge interest rates
    commensurate with default risk or else the companies' financial
    positions would only worsen. Over the near term, Standard & Poor's
    expects that some generating assets will be handed over to banks, but
    most assets will remain in the hands of the borrowers, with the lenders
    taking a first lien on the asset. Should borrowers be unable to repay
    the loans over the next several years through internal cash generation
    or access to the capital markets, some banks will again be faced with
    the decision of whether or not to accelerate their loans and seize
    their collateral security.
        Question 8. Given these constraints, will the merchant model
    survive?
        Answer. The overhang of #90 billion in short-term debt that must be
    refinanced, as Standard & Poor's first reported in an article in
    November 2002, will not be the determinate as to whether the merchant
    generator model will survive. How and whether that debt is refinanced,
    restructured or written-off may decide who continues to participate in
    the business. One thing is fairly certain, given the capital
    requirements of competitive power, it will be very difficult for a
    companies with debt ratings in the single-``B'' category to survive
    long. The challenges of the high cost of capital and the undermining of
    counterparty confidence will drive most out of the business, sooner or
    later unless balance sheets are substantially restructured.
        The answer to the sustainability of the merchant generation model
    may rest with the policy and lawmakers. As Standard & Poor's reported
    in an article in March 2002, the merchant energy model--and, more
    broadly, the competitive power industry--may indeed still be viable.
    The model was perhaps never applied in a context in which it could
    succeed. The business institutions and market framework did not fully
    develop across the country. But a collision of business and financial
    risks may soon close the door on the merchant energy business unless
    something changes. Refinancing short-term obligations is proving
    difficult and the ability to attract new capital to competitive power
    may be almost impossible.
        Through its Standardized Market Design (SMD) notice of proposed
    rulemaking (NOPR), the Federal Energy Regulatory Commission (FERC) has
    proposed bold reforms to promote a healthy, competitive electricity
    industry. But the complexity and the scope of the proposal threaten its
    implementation. In addition, the political opposition to SMD may be
    appreciable enough to raise doubts as to whether FERC can push its
    reforms through--and ultimately whether merchant energy can survive.
        Basic competitive industries, such as oil and gas, steel, pulp and
    paper, among others, need customer bases, or rather at least a fighting
    chance to reach customers. And therein lies electricity's rub. In the
    U.S., the institutions that merchant energy needs to support a
    competitive power market do not broadly exist. Transparency in pricing
    varies tremendously from market to market, as does access to
    transmission and electricity end-users. At times the price for power
    paid by consumers does not necessarily reflect its cost. Regulatory
    reform has not only progressed more slowly than many investments were
    predicated upon, but it has not spread widely. In theory,
    disaggregating vertically integrated utilities into their component
    parts of generation, transmission, distribution, and marketing and
    trading should foster efficiencies, innovation, and investor
    confidence. But the reality has been very different, particularly in
    generation and energy marketing and trading. In addition, California's
    experience dramatically illustrated the vulnerability of even the
    franchise service monopolies of distribution and supply if well-
    conceived, underlying institutions are not in place before introducing
    competition.
        Parts of the nation's grid in particular have been frustrating the
    development of competitive power markets. In some markets independent
    or merchant power cannot deliver their low cost power to retail users
    because of artificial barriers to market entry. Industry participants
    have alleged to FERC that vertically integrated utilities are
    discriminating against low cost providers by restricting access to
    their transmission lines so that they can sell their own, often times
    more costly, generation to their native loads. In addition, seams
    issues between adjacent markets, such as Pennsylvania-New Jersey-
    Maryland (PJM) and the New York Power Pool, restrict commerce between
    regions due to a host of reasons, including, different reliability
    standards, generation ramp-up procedures, and computer systems, amongst
    others. Finally, some transmission systems hide price signals, which
    raises concerns about whether needed investments in generation or
    transmission are made or whether they are made in the wrong locations.
        Given the various market problems, it is not a difficult case to
    make that business risk for the competitive electricity industry, which
    must rely upon open well-functioning markets, has become riskier than
    other basic industries and that the competitive generator model is at
    risk. Few other industries face the artificial barriers that have
    developed as a result of partial, or incomplete, restructuring of the
    industry. Moreover, the industry's problems come at a time that when it
    has seen the largest overbuild in capacity since its beginnings and at
    a time when load growth has fallen off. Merchant generation, at best,
    largely earns only marginal revenues with no little ability to cover
    fixed costs.
        In the current U.S. environment, merchant energy or competitive
    electricity will have a hard time surviving and credit quality could
    further deteriorate.
        Question 18. Competition in electricity brings volatility in
    prices, but does it also bring lower prices for consumers?
        Answer. Merchant energy has delivered some of the intended benefits
    of deregulation. Power plants formerly owned by utilities, especially
    the older nuclear and coal-fired facilities, are now operating at much
    higher availabilities and capacity factors under their new owners.
    Wholesale power costs have fallen, albeit they are more predisposed to
    volatility than before. And ratepayers are not paying for the
    tremendous overcapacity in generation that characterizes the industry,
    as they did in the past; lenders and equity investors are now
    shouldering those costs.
        Question 24. Standard Market Design (SMD) has been proposed by FERC
    to fix instability in the marketplace. Kentucky has the lowest
    residential electricity rates in the country. Do you believe that
    FERC's proposed SMD rule will work? Will the rule penalize states with
    low costs to benefit those with high costs? Do you believe that the
    proposed SMD rule takes into account unique regional differences and
    individual state interests?
        Answer. The scope of Standard Market Design is very broad, but by
    some arguments, necessary. As Massachusetts Institute of Technology
    economists Paul Joskow and Richard Schmalanzee pointed out in their
    1983 book on deregulation, ``Markets for Power'': ``Transmission plays
    the most fundamental role in achieving the economics of electric power
    supply. . . . The practice of ignoring the critical functions played by
    the transmission system in many discussions of deregulation almost
    certainly leads to incorrect conclusions about the optimal structure of
    an electric power system.''
        If the transmission system does not address the needs of a
    competitive energy market, then financial and business risks for the
    industry will likely remain high, which, in turn, does not bode well
    for the industry's credit ratings. That will translate to a higher cost
    of capital as investors and lenders move to protect themselves from
    uncertain credit risks. Markets will not fix a flawed market design,
    but financial markets will move to limit their exposure to a flawed
    market. Even if stronger demand works off the excess capacity and
    margins widen, the underlying structural problems will still exist.
                                     ______

                                                        April 28, 2003.
    Hon. Pete V. Domenici,
    Chairman, Committee on Energy and Natural Resources, U.S. Senate,
            Washington, DC.
        Dear Mr. Chairman: Attached are my answers to the questions
    submitted for the record of the Committee's March 27, 2003 hearing on
    various electricity proposals.
        Thank you for granting my request for an extension of time.
                Sincerely,
                                             William L. Massey,
                                                          Commissioner.
    [Attachment]
                   Response to Question From Senator Campbell
        Question. There seems to be a deep dilemma we are dealing with
    here: while we are trying to bring open competition to certain
    electricity markets, we are actively engaged in federal design of these
    same markets. It seems that, in many ways, SMD actually undermines
    electricity deregulation efforts. Would you agree that current SMD
    regulations allow FERC to greatly increase its size and power; in
    effect making it the centralized planning agent for the entire
    electricity sector?
        Answer. Respectfully, I do not agree. Under SMD, planning for the
    electricity sector would be carried out regionally, with the states
    primarily in charge. On the issue of market design, wholesale
    electricity markets do not automatically design themselves or provide a
    level playing field. Under existing law, wholesale markets are within
    the jurisdiction of the Commission and are shaped, or ``designed,''
    pursuant to Commission policy.
                   Responses to Questions From Senator Craig
        In light of the Commission's California refund actions on
    Wednesday, March 26, 2003, I think it is important for the Committee to
    fully understand the history of how the Commission got to this point.
        You are the only sitting Commissioner who participated in the
    review and approval of the California electric restructuring plan. I
    appreciate your acknowledgment during the Senate hearing on March 27th
    that the Commission's approval of California's plan was a mistake. What
    is needed now is a full accounting that can lead to a better
    understanding of how and why this mistake happened.
        In response to my questions during the March 27th hearing you
    stated that some on Commission staff thought the California plan to be
    flawed and that those concerns were brought to the Commission's
    attention prior to Commission action to approve the plan.
        Question 1. Please describe fully your discussions with staff that
    were critical of the plan prior to the Commission's approval of that
    plan. Please provide descriptions of any internal memoranda or
    analysis, written or oral, raising concerns about California's plan
    before your votes, and copies of the written documents described.
    Please include all written documents, including e-mails and all
    handwritten notes from you, your staff, and Commission staff that are
    in your possession.
        Answer. I agree with you that it is important for the Committee to
    fully understand the history of how the Commission got to this point.
        In a nutshell, the Commission, in deference to the wishes of a
    major region of the country, approved during 1996 and 1997 a market
    design approved by the California PUC, legislated by the California
    General Assembly and strongly endorsed by the Governor. The complex
    plan enjoyed broad support within most segments of the industry. The
    policy of the State of California was to separate transmission from
    generation, rely upon wholesale markets, and move toward retail
    competition. The State could not do so, however, without the
    Commission's approval.
        The Commission has a longstanding policy of working with states
    where possible to achieve common goals. This is an excellent policy. A
    rejection of the California plan at that time would no doubt have been
    viewed by California and other states, and perhaps even by Congress, as
    FERC insensitivity to state and local needs. I do not believe that any
    other state intervened to object to the plan.
        The Commission orders with respect to the California plan span more
    than 450 single-spaced pages and resolve literally scores of issues.
    Key features of the plan were required by California law. The
    separation of the ISO and Power Exchange, for example, was required by
    California law.
        I know now that approval of the California plan--primarily the ISO/
    Power Exchange separation and the over reliance on the spot markets--
    was a mistake. Hindsight has 20-20 vision. At the time, however, I
    believed the plan to be in the public interest, as did all of my fellow
    Commissioners. All Commission votes on the California plan were
    unanimous.
        The market opened in early 1998, and seemed to function reasonably
    well until May 2000 when prices began to spike wildly. The market was
    severely dysfunctional, manipulation occurred and market power was
    exercised, and the extraordinary prices were unlawful. Despite my early
    advocacy of full time price controls that would have ended the crisis,
    the Commission failed to intervene forcefully. This failure of
    intervene early was mistake number two. Fortunately, the Commission
    finally took forceful action to stop the economic carnage by imposing
    full-time price controls on June 25, 2001. Had the Commission
    intervened early in the crisis with effective price mitigation, this
    economic catastrophe could have been largely avoided. Opportunities for
    manipulation would have been substantially reduced early in the crisis,
    just and reasonable prices would have been largely ensured, and the
    need for refunds would have been sharply reduced or perhaps even
    eliminated. There would have been no or few long term contracts with
    unjust and unreasonable prices. These facts are also an important part
    of the history of how the Commission got to this point.
        As mentioned earlier, the Commission's original actions to approve
    the California market design were taken during 1996 and 1997. Various
    aspects of the California restructuring were under consideration by the
    Commission for well over a year. I am sure I had ongoing discussions
    and meetings with Commission staff on a number of issues. I do not,
    however, have specific recollections about any particular meetings and
    discussions that occurred. Our orders dealing with the California plan
    resolved scores of issues raised by the parties. There could have been
    internal staff memoranda or analysis of California's plan, but I have
    no specific recollection of the content of such memoranda or analysis.
    I do not have in my possession any written documents or notes that
    would be responsive to your question.
        I have a general recollection that staff raised issues about the
    separation of the ISO and Power Exchange, the reliance on short term
    markets, and market power mitigation. However, I do not recall a clear
    staff recommendation to reject these features of the plan. Our staff
    did, however, recommend a rejection of the state residency requirement
    for members of the ISO and Power Exchange boards, as well as the
    aggressive role of the state's Oversight Board over features that were
    jurisdictional to FERC. I agreed with staffs recommendation, as did my
    fellow Commissioners. I have a general recollection that FERC staff
    also expressed support for the structural unbundling of transmission
    and the transfer of operational control to the ISO. Staff supported the
    desire of California to rely on competitive wholesale markets.
    California's approach was consistent with the Commission's long-term
    policy goals. Overall, I have a general recollection that staff
    comments were much more supportive than critical of the plan.
        Question 2. Please fully discuss what you did in response to the
    concerns raised?
        You mentioned at the Senate's March 27th hearing that you found
    merit in the concerns expressed by staff and in those comments filed by
    intervenors raising concerns about California's plan before you voted.
        Answer. I read briefs submitted by the parties both supporting the
    California plan and raising concerns. I considered all of the views
    expressed along with any recommendations or opinions expressed by staff
    noting concerns or expressing support for the plan. I discussed these
    matters with my fellow Commissioners, and listened to their views.
    There was little or no interest among my fellow Commissioners in making
    major changes to the plan, although we did vote to eliminate the state
    residency requirement for the ISO and Power Exchange boards, and we
    limited the role of the Oversight Board. I satisfied myself that my
    vote would be in the public interest. I dealt with these issues the
    same way I deal with all matters to come before the Commission.
        Question 3. Please describe the concerns that you found had merit
    and how you resolved those concerns to justify voting in favor of the
    plan. Describe changes to the plan that you recommended, if any, before
    voting.
        Answer. I had some concern about the separation of the ISO and
    Power Exchange, the reliance upon short term markets, and the adequacy
    of market power mitigation and monitoring. At that time, there was a
    vigorous debate within the industry about the wisdom of ISO/Power
    Exchange separation. There was certainly no consensus, however, that
    separation was a flawed concept. The ISO/Power Exchange separation was
    mandated by state law, and the California PUC insisted that load
    serving entities purchase all of their needs through the spot markets.
    This latter feature was a key part of California's stranded cost
    recovery plan for the utilities. Our Commission Chair did not recommend
    rejection of these features, and my fellow commissioners had little or
    no interest in modifying them. On balance, I voted for the plan because
    despite some concerns it seemed reasonable, and the Commission's policy
    at the time with respect to market structure was based upon a theory of
    regional deference. It was much earlier in the restructuring debate,
    and Commission policy was that a variety of wholesale market designs
    could be appropriate and in the public interest.
        During our internal debates, I believe I made proposals to
    strengthen the plan's market power mitigation and monitoring features.
    I believe my proposals were accepted at least in part by our orders,
    but I have no written records and am relying upon memory. Hence, I am
    unable to provide details on the proposals I made.
        Question 4. After you voted to approve this flawed plan, and
    California implemented the flawed new market structure, what changed
    your mind about having voted for the California experiment? Was that
    something that the Commission staff had predicted before you voted for
    the California Plan?
        Answer. My mind was changed when the California market spun out of
    control in the summer of 2000 and the Commission failed to intervene
    effectively to ensure just and reasonable prices. I began to champion a
    more standardized market design that relied upon existing long term
    contracts, and strong up front market power mitigation and monitoring
    measures. This became the basis for our proposed Standard Market Design
    (SMD). I do not recall any specific predictions by our staff.
        Question 5. Did you understand at the time you voted for the
    California Plan the bad impact retail rate caps would have if demand
    rose more than supply? If not, please explain why you thought they
    would not cause harm. If so, since the rate caps remained in place
    throughout the California debacle, please explain what made you realize
    the flaw in retail rate caps? Did you ever urge cap removal? If so,
    please document. If not, why not?
        You said at the March 27th hearing that you will ``never make that
    mistake again'' of approving a flawed market and one that can be
    ``gamed,'' as you put it. Recall that the California design emerged
    from very lengthy stakeholder meetings with the great experts of the
    time, similar to what you describe you are undertaking with respect to
    Standard Market Design.
        Answer. Whether to have retail rate caps is solely a matter of
    state law or policy and is not for federal regulators to deternline
    under existing federal law. I did not urge retail rate cap removal. Had
    the Commission insisted through effective price mitigation that
    wholesale prices remain just and reasonable, retail rate caps would
    probably have worked fine. I did urge forceful wholesale price
    mitigation.
        Question 6. Can you assure me that you would not make the
    ``mistake'' again of approving a flawed market that cannot be gamed? Do
    you think it ever possible to design a market that cannot be ``gamed''?
    Please cite to me an actual electricity market that could not be
    ``gamed''? I understand that even PJM, which the Commission likes to
    cite as the exemplar, has had problems with gaming. Please cite to me
    the Commission orders describing the incidents. Explain why you think
    you can do it when no one else yet has.
        Answer. My testimony was that I would not again vote for a market
    design that can be easily gamed. I believe that policymakers can design
    an electricity market that cannot be easily gamed. Clear bidding rules,
    tough penalties, up front mitigation measures and effective market
    monitoring can make gaming a much less successful strategy.
        I can recall three cases involving manipulation in PJM markets. In
    all cases, however, the problem was detected early by PJM or its market
    monitor, and corrections were proposed that effectively stopped the
    abuse well before there was a significant impact on consumers.
        PJM Interconnection, L.L.C., 95 FERC 61,175 (Redistribution Order),
    reh. denied, 95 FERC para. 61,477 (2001). Docket No. ER01-1440.
        PJM Interconnection, L.L.C., 95 FERC para. 61,330 (Seasonal Order),
    reh. denied, 96 FERC para. 61,206 (Seasonal Rehearing Order) (2001).
    Docket No. ELO1-63.
        PJM Interconnection, L.L.C., 92 FERC para. 61,013 (Docket Nos.
    EROO-2445-000 and EL00-74-000) (2000), reh. denied, 93 FERC para.
    61,157 (2000) (Minimum Run Time Order).
        PJM Interconnection, L.L.C., 97 FERC para. 61,319 (Docket No. ELO1-
    122-000) (2001), reh. denied (PECO Order).
                    Response to Question From Senator Graham
        Question. Economic dispatch has been discussed as an approach to
    facilitate the procurement of least cost power in the wholesale
    marketplace. What is your opinion of this concept?
        Answer. Economic dispatch is the industry standard and should
    continue to be utilized. It enjoys broad support at the Commission. In
    fact, the Commission's Standard Market Design proposal is for each RTO
    to establish a spot market that operates pursuant to a bid-based
    security-constrained dispatch in which the generators that bid the
    lowest are dispatched instead of more expensive generators.
                   Responses to Questions From Senator Smith
        Question 1. The proposed rulemaking has a series of financial tools
    that are supposed to address transmission congestion. It is my
    understanding that this financial instruments may be auctioned off. How
    do these tools benefit the retail customer--the mom and pop grocery
    store B in a transmission constrained area? What happens once these
    tools are no longer available, if new transmission has yet to be
    constructed?
        Answer. I believe that the SMD Final Rule should simply assign
    these congestion rights (relying upon state recommendations) to
    wholesale customers who need them to meet their obligations to retail
    consumers. We must ensure that customers have protection from
    congestion costs equal to or superior to the pre-existing congestion
    rules. Certainly the protection from congestion costs provided by these
    instruments should be available during all periods of present or future
    congestion.
        Question 2. What is the longest transmission contract that any new
    market entrant could get under Standard Market Design? Will that allow
    for lending for new investments, and for the recovery of capital
    investments on non-utility generation?
        Answer. The SMD NOPR places no limits on the length of contracts.
        Question 3. You provide financial incentives for utilities that
    relinquish control over their transmission assets. Have you calculated
    how much that will cost the retail customers nationwide?
        Answer. The financial incentives are intended to ensure that the
    transmission grid is operated independently, and new transmission
    investments are made. These improvements in transmission will allow the
    cheapest generation to reach customers. Generation is more than half of
    the consumer's bill, while transmission is about 7 percent in most
    areas. Thus, our incentive policy should reduce costs to retail
    consumers nationwide.
        Question 4. There is no question that certain sectors of the
    electric utility industry face a wide range of financial challenges,
    particularly those corporations with merchant plants or energy trading
    and marketing operations. These challenges include: excess generating
    capacity and thin profit margins in parts of the country; extensive
    credit downgrades since 2001; high levels of debt; the need to
    refinance tens of billions of dollars in short-term debt; reduced
    electricity demand; and continued regulatory uncertainty.
        (a) Will SMD solve the problem of excess generating capacity in
    certain regions of the country?
        (b) Will SMD solve the problem of thin profit margins in certain
    regions of the country?
        Answer to 4(a) and 4(b). SMD will certainly help. By enlarging
    regional markets and eliminating trading seams among regions, SMD will
    provide greater market opportunities for cheaper generation to reach
    distant customers. This will provide profit opportunities for
    generators that can compete. This will benefit the customers as well,
    which is the primary purpose of SMD.

        (c) Will SMD solve the problem that there is $90 billion worth of
    industry debt that needs to be refinanced in the next 3 years?
        Answer. Again, SMD will help. Wall Street representatives who
    testified before the Commission at a day-long hearing in January 2003
    were virtually unanimous in strongly endorsing SMD. They said that
    successful refinancing would be facilitated by an industry defined by
    reliable, stable, and enduring markets, clear behavioral rules, and
    effective monitoring and oversight. These are the hallmarks of SMD.
    Industry leaders and investors agreed that SMD would help to promote
    necessary capital formation, both debt and equity, in the energy
    industry.

        (d) Will SMD solve the problem that, nationwide, demand for
    electricity is down about 4 percent from 2000?
        Answer. The decline in electricity demand is primarily a function
    of a poor national economy. SMD will not solve this problem, but will
    ensure that customer-friendly electricity markets are in place when the
    economy revives.
                                     ______

         Responses of Jim Torgerson to Questions From Senator Campbell
        Question. Why does it take so long to set up a voluntary RTO?
        Answer. The amount of time it takes to set up a voluntary RTO is a
    function of many factors, prominent in the Midwest were:

              1. Lack of a pre-existing tight power pool;
              2. Establishing certainty as to structure and functions;
              3. Establishing certainty as to geographic scope;
              4. The interrelation of State and Federal regulatory
            approvals; and
              5. Variations in motivations of transmission owners,
            regulators and other stakeholders.

        My conclusion is that enough entities, their regulators and enough
    of their customers that represent a coherent geographic region have to
    agree to a core mission for the organization. Establishing that
    agreement on the core mission takes time. Everyone does not have to
    agree with every aspect of an RTO, but it has to be of value and be
    perceived to be of value to its key stakeholders in order for
    transmission owners to be willing to turn over functional control of
    their systems to an independent entity. The States whose customers will
    be impacted by these decisions must similarly recognize the value of
    the new arrangement. They must trust the structure set up for the RTO,
    often in advance of knowing who the people are who actually will lead
    it, its independent Board of Directors and Officers. The economic
    outcomes perceived to be likely from the transfer have to be regarded
    as fair for asset owners and customers. In different regions of the
    country the background circumstances facing the organizers of an RTO
    (retail rates, pace of retail choice or divestiture, presence of
    Federal Power Marketing agencies, difficulty of access to sources of
    power by TDUs, presence of a power pool or regional tariff, etc.) often
    differ. They also differ within a region over time. As stakeholders
    face the decisions necessary to move forward in the steps to create an
    RTO, they also need some degree of certainty as to the regulatory
    framework they will be operating under.
        The timeline for creation of the Midwest ISO first as an ISO and
    then to transform it to become an RTO was as follows:

       Regional efforts at solutions to the contract path dilemma--
            1993 forward
       FERC Order No. 888--May 1996
       Initial negotiations--two years starting in 1996
       Initial application to the FERC--January 1998
       First FERC order approving the Midwest ISO--September 1998
       Independent Board elected--January 1999
       FERC Order 2000--December 1999
       Midwest ISO independent financing closed June 2000 ($100
            million)
       RTO status sought January and August 2001
       RTO status granted December 2001
       Start of Midwest ISO transmission service February 2002

        Question. Allen Franklin, CEO of Southern Co. testifies that public
    power owns and operates 30% of the transmission system in the U.S. And
    that they need to be ``fully FERC jurisdictional'' to ensure a
    competitive wholesale market.
        Please give us specific examples of occasions when access to
    surplus transmission was requested and refused by public power systems.
    Can you name the public systems you haven't gotten access to?
        Answer. Because the Midwest ISO operates the systems over which it
    has been given control and is not a participant in the transmission
    markets itself--that is the Midwest ISO has not and does not request
    transmission service over other systems--it has never been refused a
    transmission service request by any party. The Midwest ISO administers
    its transmission tariff over a system that includes some municipal or
    cooperative owned systems. For instance, the City of Springfield,
    Illinois Light and Water Department, Indiana Municipal Power Agency,
    Hoosier Electric Cooperative, Inc. and Wabash Valley Power Association
    are all Midwest ISO transmission owner members.
        Question. Do you believe that Participant Funding combined with
    tradable Transmission Rights at the discretion of a Regional
    Transmission Organization (RTO), or a transmission entity authorized by
    FERC would increase the capacity of the transmission system?
        Answer. The Midwest ISO supports cost allocation principles that
    recognize that the entity seeking to interconnect with the transmission
    grid should pay the cost for that transaction. Also, where the addition
    to the grid can be shown to provide benefits to existing load, those
    consumers with their state's concurrence, should pay a portion of these
    transaction's costs. Under all circumstances, the identification of
    these costs and benefits must be made by an independent transmission
    organization. The addition of assigning tradable transmission rights to
    the parties that pay for upgrades is an important factor. The
    combination of the two principles should allow the construction of
    those facilities that would increase the capacity of the transmission
    system to deliver the capacity of new sources of electrical generation
    into the grid for the benefit of the local area and the wholesale
    market.
        Question. There seems to be a widening rift between the States and
    the FERC on the FERC's plans for energy market. If we continue this
    path, we could be headed for years of litigation and no progress. What
    can be done now to avoid this continuing rift?
        Answer. In the Midwest region, while there is some disagreement
    between the states and the FERC on some issues, generally, the states
    support a broad market scope, with minimal and rational economic seams
    for the region. The formation of the Midwest Multistate Committee for
    interaction with the Midwest ISO on various matters is an example of
    how, in our region at least, the rift can be bridged.
                                     ______

       Responses of Allen Franklin, Chairman and CEO, Southern Company,
                       to Questions From Senator Campbell
        Question. It seems in many ways, SMD actually undermines
    electricity deregulation efforts. Would you agree that current SMD
    regulations allow FERC to greatly increase its size and power; in
    effect making it the centralized planning agent for the entire
    electricity sector?
        Answer. EEI members differ as to whether or not SMD will further or
    undermine electricity deregulation efforts. All EEI members support
    some parts of the proposed SMD rule, but none support all of its
    aspects. The association believes that regional differences must be
    accounted for in developing rules governing market design and
    institutions, and that the current proposal does not adequately account
    for such differences.
        Southern Company, in particular, believes that the SMD proposal
    would greatly broaden FERC's size and power, and would unnecessarily
    place the Commission in the role of a centralized planner for regions
    and the nation. In our view, the proposal usurps many traditional state
    roles with respect to electric service, reliability and planning. In
    certain regions of the country, including the Southeast, the FERC's SMD
    proposal has been counter-productive to the formation of regional
    transmission organizations (RTOs) and the furtherance of wholesale
    competition in the region. The Commission's decision to assert
    authority over the transmission component of bundled retail sales, and
    its proposals that would remove the ability of utilities to give
    priority to their own customers has created a firestorm of protest and
    concern among the states. The Commission has proceeded with this rule
    in spite of the fact that we were already well along in the formation
    of an independent RTO for the region that would have met most of the
    objectives that the Commission seeks in its SMD proposal.
        The SMD proposal is not the best way to proceed to achieve the
    Commission's goals for efficient and reliable wholesale markets that
    benefit end-use consumers. Market rules and institutions, in our view,
    must be tailored to regional needs and circumstances. The Commission
    must take regional differences into account in considering these
    significant changes to the regulatory framework for the electric
    utility industry.
        Question. How does SMD account for regional differences in
    electricity markets?
        Answer. Under its current formulation, the SMD proposal does not
    account for regional differences. It basically establishes a single set
    of rules and a single market design that all regions would have to
    follow. We believe that much more regional flexibility is required. The
    best way for FERC to proceed in this regard would be for the Commission
    to sit down work jointly with state regulators to implement market
    designs and institutions that are appropriate for each region.
        Question. Why does it take so long to set up a voluntary RTO?
        Answer. Insetting up a regional transmission organization, there
    are literally thousands of details that must be worked out and
    negotiated among the stakeholders. A new organization basically has to
    be started from the ground up, including the selection of a Board of
    Directors, the hiring of employees, the development of all the internal
    systems, etc. There are new software systems that must be developed to
    manage the transmission system, and telecommunications links have to be
    developed. Agreements must be reached between the transmission owners
    and the new organization on the details of transferring control over
    transmission, and a new tariff and operating protocols must be
    developed for the new organization. New markets must be established,
    and the rules of those markets must be negotiated. Software and
    hardware must be tested. And all of this must be done in a way that
    ensures that reliability is not harmed in the transition from utility
    operation to RTO operation.
        Regulatory approvals are also required, both from the FERC and from
    all of the state commissions that have jurisdictional facilities that
    would be utilized. In most cases, this requires hearings and
    evidentiary proceedings. And all changes have to go back through a
    regulatory approval process. We are talking about a major change in the
    way that utility system are operated, and any such major change must be
    undertaken with caution and care, so that consumers are not affected.
    It is more surprising to me that we have been able to make such
    significant progress with RTOs in just a few short years since the
    concept was introduced with FERC Order 2000. Those who are impatient
    with the process probably don't fully understand the complexity of
    forming such organizations and getting them up and operating
    successfully.
        Question. Please give us specific examples of occasions when access
    to surplus transmission was requested and refused by public power
    systems. Can you name the public systems you haven't gotten access to?
        Answer. While we cannot speak to other investor-owned utilities,
    Southern Company has not been specifically refused access to public
    power systems in our region. In fact, we are working with other public
    power entities in our region to form the SeTrans RTO to continue to
    ensure that all utilities in the region will have fair and non-
    discriminatory access to transmission systems. We do believe it is
    important that all transmission owners, be they private, public, or
    cooperatively-owned, participate in competitive wholesale markets and
    play by the same rules. Since these non-private utilities control about
    one-third of the transmission system in our region, their participation
    is vitally important.
                                     ______

         Response of Bud Para of JEA to Question From Senator Campbell
        Question. Are you aware of any complaint issued by Southern or any
    other requestor of access that you have failed to give access to your
    surplus transmission?
        Answer. Southern Company is not aware of any situations in which
    JEA has failed to provide access to their surplus transmission.
                                     ______

         Response of Pat Wood, FERC, to Question From Senator Campbell
        Question. Your SMD assumes that competition benefits everyone. Yet
    some states have opted against opening up to competition. How can the
    SMD respect states' traditional authority while compelling them to do
    something they have been unwilling to do all along?
        Answer. Southern Company believes that even those states that have
    decided not to move to retail competition and customer choice do
    recognize the value to consumers of competition in wholesale electric
    markets. In fact, almost all of these non-retail access states were
    moving towards the development of RTOs and the formulation of new
    wholesale market designs before FERC issued its SMD NOPR, mostly with
    the guidance of FERC Order 2000. We do not believe that FERC should
    compel states to implement SMD if the states do not believe it is in
    the best interest of their own consumers. Wholesale competition will
    have greater benefits in those regions that have retail competition. It
    is appropriate that other regions take a more measured approach and
    develop institutions and markets appropriate to their own circumstances
    over time. Such an approach is more likely to avoid years of litigation
    and will be more successful in achieving the goals that we all seek--
    reliable supplies of electric power at the lowest possible cost to
    consumers.
                                     ______

           Responses of FERC Chairman and Commissioners to Questions
                              From Senator Graham
        Question. Economic Dispatch has been discussed as an approach to
    facilitate the procurement of least cost power in the wholesale
    marketplace? What is your opinion of this concept?
        Answer. Southern Company believes that utilizing economic dispatch
    as a means ``to facilitate the procurement of least cost power in the
    wholesale marketplace'' would have major impacts on current state
    regulation of electric service to retail consumers, particularly in
    those states that have decided to continue to have that service
    provided by vertically-integrated, regulated utilities. It has the
    potential to cause significant cost increases to retail customers by
    requiring states to move from cost-based economic dispatch to bid-
    based, competitive economic dispatch. While the idea is admirable--that
    utilities should look at lower cost alternatives available in the
    wholesale marketplace in determining what plants to run on an hourly
    basis, attempting to actually include wholesale alternatives in
    economic dispatch would create major disruptions to utility operations
    and create significant additional costs.
        Utilities already base the dispatch of their generators not only on
    an economic dispatch of resources we own, but by also considering
    generation resources available from the market. Since the passage of
    FERC Order 888, we have willingly accepted, solicited, and provided
    voluntary market-based bids/offers from/to the wholesale market. We
    have a regulatory obligation to evaluate opportunities available in the
    wholesale market not only on an economic basis but on the wholesale
    supplier's ability to deliver, as well. A few of the issues we must
    evaluate include generation operational issues, commitment costs of
    generators, transmission limitations, or as we have seen in the recent
    past, creditworthiness. Likewise, we have an obligation to serve our
    native load today and will have this obligation in the future, as well.
    Therefore, we must evaluate our market bids/offers with a longer term
    outlook than many other market participants. Furthermore, our PSC
    mandate to provide long-term reliable service forces us to evaluate the
    long-term effects of any short-term opportunity. Our evaluations must
    focus on providing a balance between providing energy at the lowest
    cost possible while maintaining the reliability levels our customers
    have come to expect and the type of service they expect in the future.
        Southern Company is actively participating in the formation of
    SeTrans which proposes to utilize a market design that includes a spot
    market. All generators that are not committed under bilateral contracts
    will have an opportunity to bid into the spot market, and load-serving
    entities will be watching the spot market for opportunities to buy
    lower cost power to replace their own resources. This is a much more
    logical mechanism for ensuring the use of the lowest cost resources.
    Including wholesale supplies in economic dispatch would thus be an
    interim solution only, and a solution to a problem that doesn't exist.
                                     ______

           Responses of FERC Chairman and Commissioners to Questions
                             From Senator Landrieu
        Question. Do you believe that Participant Funding combined with
    Tradable Transmission Rights at the discretion of a Regional
    Transmission Organization (RTO), or a transmission entity authorized by
    the FERC would increase the capacity of the transmission system?
    Clearly state your positions for or against this.
        Answer. EEI does not have a position on participant funding, but
    does believe that costs of transmission improvements should be paid for
    by those who create the need for and benefit from the improvements.
    Participant funding is but one way that this principle can be
    satisfied.
        Southern Company does believe that participant funding with
    tradable transmission rights is the best way to ensure that both
    generation and transmission owners have the right price signals to
    build new generation and transmission where it is needed and where it
    will save consumers the most. And if those who fund transmission
    improvements can capture the economic value of their investments via
    tradable transmission rights, then capacity that reduces congestion is
    much more likely to be built than in a pricing regime where someone has
    to pay for transmission but can not reap the benefits of the
    investment. We believe that in a market design that relies on
    congestion pricing and tradable transmission rights to hedge
    congestion, participant funding is critically important to ensure the
    development of efficient markets.
        Question. There seems to be a widening rift between the States and
    the FERC on the FERC's plans for energy markets. If we continue this
    path, we could be headed for years of litigation and no progress. What
    can be done now to avoid this continuing rift?
        Answer. Southern Company agrees that if we continue down the
    current path planned by FERC for energy markets, we will be in for
    years of litigation and increased uncertainty. The best way to avoid
    this continuing rift is for the FERC to work directly with states to
    tailor market design and institutions to meet the needs of individual
    regions, rather than relying on a cookie-cutter approach to a national
    standardized market design. In particular, FERC must work with states
    to ensure that the needs of retail and other native load customers are
    addressed, that planning and reserve margins are tailored to regional
    needs, and that transmission pricing and interconnection costs are paid
    for by those who create and benefit from the incursion of those costs.
    Furthermore, Congress should settle the jurisdictional fight over
    bundled retail transmission by clarifying that states that continue to
    regulate bundles retail sales will continue to have jurisdiction over
    all aspects of those sales.
                                     ______

        Responses of Phil Tollefson's to Questions From Senator Campbell
        Question. It seems that, in many ways, SMD actually undermines
    electricity deregulation efforts. Would you agree that current SMD
    regulations allow FERC to greatly increase its size and power; in
    effect making it the centralized planning agent for the entire electric
    sector?
        Answer. This question goes to the heart of one of our central
    concerns with the SMD proposal. The Federal Power Act establishes the
    FERC as a regulatory body. The SMD proposal clearly demonstrates that
    the FERC is not satisfied with its role as regulator, but rather wants
    the opportunity to redesign the electric industry in a fashion of its
    liking; it is assuming a planning function and neglecting the
    regulatory role Congress has delegated to it.
        At a time of traumatic market dislocation, the market participants
    in the West--thankfully with the help of members of Congress--have had
    to goad the FERC to address the pervasive market manipulation that
    resulted from the failed California experiment in industry
    restructuring. When the FERC should have been acting aggressively as a
    regulator to address the unjust and unreasonable prices existing in the
    West, instead it chose to ``one-up'' the California market planners by
    creating the FERC's own ``better mousetrap'' for industry restructuring
    in the guise of SMD. The electric industry and its consumers would all
    be better off if the FERC devoted its attention to its role as
    regulator, the role assigned to it by Congress, and left arcane aspects
    of theoretical market efficiencies to college professors.
        Question. How does SMD account for regional differences in
    electricity markets? How will this specifically affect western state
    utilities and their customers?
        Answer. As proposed, the SMD rule makes virtually no account for
    regional differences. Regional differences are significant and, as this
    has been pointed out, the FERC has made statements, often vague and
    contradictory, about its willingness to recognize and accommodate these
    regional differences. Colorado Springs Utilities has not taken any
    great comfort from these statements.
        As is recited in the comments submitted by Colorado Springs
    Utilities in the SMD docket, the West differs from the PJM region in
    numerous significant respects. The Western Interconnect is
    geographically expansive and sparsely populated; PJM is geographically
    compact and densely populated. The topographic and meteorologic
    features of these two regions are vastly different and have resulted in
    different utility system designs and constraints. The Western
    Interconnect is heavily reliant on hydropower resources, PJM is not. An
    additional and often overlooked difference is the regulatory nature of
    the utilities in the Western Interconnect. Many of the utilities in the
    West are not FERC-jurisdictional. In fact, geographically a majority of
    the West is served by municipal utilities, cooperatives and tribal
    authorities and much of the regional transmission backbone is owned and
    operated by federal power marketing authorities.
        The FERC is trying to pound square pegs into round holes. Given the
    recent refusal of the FERC to recognize and effectively address the
    market dislocations resulting from the failed California restructuring
    experiment, we are very concerned about the willingness of the FERC to
    acknowledge and deal with the market dislocations of its own creation
    if SMD is implemented in its present form.
        Question. Many statements have been made that California's recent
    electricity crisis was a regional crisis. I know that when California
    needed or wanted water they got water from Colorado, now when they need
    power are they going to take Colorado power? What impacts will
    California's current problems have on Colorado and the other Rocky
    Mountain States?
        Answer. This is a good question, and the answer is complicated.
    During the California blackouts, when it appeared that California was
    in desperate need of power, Colorado Springs Utilities as well as many
    other systems throughout the Western Interconnect did their level best
    to provide any excess power to assist the residents of California. We
    did this for two reasons: First, we function in a market economy and it
    was beneficial for Colorado Springs Utilities to provide excess power
    to California. Second, and every bit as important, the people who work
    within the traditional ``natural monopoly'' utility industry are
    thoroughly imbibed with the belief that reliability is ``job one''. If
    another utility is facing an operational threat, we will do everything
    within our power to assist.
        Practically our ability to assist California was hindered by
    transmission constraints. But this gets back to the point of the
    regional nature of the California crisis; even though Colorado
    utilities could provide little power into California due to
    transmission constraints, prices for power increased dramatically
    throughout the West. When Colorado Springs Utilities encountered unit
    outages, and unfortunately we did during this period, the prices we had
    to pay for replacement power were quite high. What is particularly
    disturbing is that it is now clear that many of the California power
    ``shortages'' were the cynical creations of market manipulation. The
    electric industry and its customers throughout the West suffered great
    economic harm, and the FERC has still not effectively addressed the
    underlying issues of market manipulation.
        As the chief executive officer of a utility that takes its
    obligations to provide reliable service to the public seriously, we are
    concerned about the lingering impacts of the California restructuring
    experiment and fear the repercussions of the SMD experiment, if it
    moves forward. That is why we favor provisions that recognize native
    load responsibilities and afford protections for native load service.
        Question. Have you been asked to provide open access transmission?
    How many times? By who? Did you grant the request?
        Answer. Colorado Springs Utilities was one of the first non-
    jurisdictional utilities to file an open access transmission tariff
    with the FERC. Until recently we had no requests for service under this
    tariff. The Front Range Power Company is about to go into commercial
    operation with a generation facility south of the Colorado Springs
    metropolitan area. Colorado Springs Utilities will provide transmission
    service to Front Range under its open access tariff. We also anticipate
    a request for transmission service from the City of Fountain for the
    delivery of wholesale power through our system, and we believe we will
    be able to accommodate this request.
        Before we filed our open access transmission tariff with the FERC
    in 1997, Colorado Springs Utilities received only one request to wheel
    through our system. In 1994 through 1996 WestPlains was allowed to
    wheel through our system to accommodate them until they completed
    building their tie. Colorado Springs Utilities has never declined a
    transmission request.
        Question. Allen Franklin says this has been a terrible time
    financially for investor-owned utilities. In fact, there have been over
    180 IOUs downgraded and pending bankruptcies of the merchant power
    sector. These are indeed tough times. How has public power fared during
    the same period? What has Wall Street said about public power? Are you
    building generation and transmission?What is your debt load?
        Answer. Standard & Poor's recently issued a credit analysis report
    on the public power sector that noted that the credit rating stability
    of public power ``is a testament to the sector's ability to withstand
    periodic shocks as well as respond to new challenges.'' More than 80%
    of the public power sector has an ``A'' rating or better at this time
    and public power systems are functioning well in competitive wholesale
    markets. A strength of public power systems is our focus on providing
    the lowest-cost power to our customers.
        Many LPPC members have built transmission systems to accommodate
    load growth. It is in our members' best interest to both build for load
    growth and to make excess transmission capacity available to the market
    place. Load serving entities and their customers who prudently built
    transmission to accommodate future load growth should not be deprived
    of the benefit of that investment by having their future right to use
    that transmission taken away. There are mechanisms in place by which
    entities can assure that transmission upgrades are made when
    transmission customers are willing to bear the cost of those upgrades.
    We believe that the building of new transmission should be encouraged
    and believe that properly structured incentive rates might be able to
    encourage such investment.
        As of December 31, 2002 Colorado Springs Utilities total asset
    value is $2.07 billion with $1.04 billion in long-term debt.
                    Response to Question From Senator Graham
        Question. There seems to be a widening rift between the States and
    FERC on the FERC's plans for energy markets. If we continue this path,
    we could be headed for years of litigation and no progress. What can be
    done to avoid this continuing rift?
        Answer. The litigation to which you refer has a schizophrenic
    nature. Much of this litigation is a reaction to the efforts of the
    FERC to extend its jurisdiction into areas traditionally reserved to
    the States, while at the same time victims of the Western energy
    markets are going to court to force the FERC to perform the regulatory
    functions delegated to it. Congressional action can help on both
    fronts. Legislation that clearly delineates the bounds of FERC
    authority would be helpful. It would also be helpful for the Congress
    to remind the FERC that its first responsibility is that of a regulator
    ensuring that wholesale electric rates are just and reasonable.
                                  Appendix II

                  Additional Material Submitted for the Record

                                  ----------

                                   Western Business Roundtable,
                                            Golden, CO, March 27, 2003.
    Hon. Pete Domenici,
    U.S. Senate, Washington, DC.
        Dear Mr. Chairman: I am writing on behalf of the Western Business
    Roundtable. Our members represent a broad base of industry sectors
    across the West, including construction, manufacturing, retail sales,
    refining, iron and steel, mining, electric power generation and oil and
    gas exploration and development.
        The Roundtable wishes to provide comment on the March 20, 2003
    Senate Energy and Natural Resources staff discussion draft of a
    proposed electricity title to comprehensive energy legislation.
    Specifically, we would like to express concern regarding the language
    that would create so-called Regional Energy Service Commissions
    (RESCs).
        We applaud staff for attempting to move along the discussion
    regarding clarification of federal vs. state authority in the
    development and governance of the wholesale electricity market. We
    agree that, ultimately, the only way out of the long-time
    jurisdictional quagmire that has hampered development of robust
    regional electricity markets is through a model that allows
    stakeholders within regions an adequate role in the development and
    operation of those markets.
        However, we believe that the model articulated in the staff draft
    will not prove effective in expediting solutions to the significant
    electricity infrastructure challenges facing the West. In fact, as
    currently structured, the model will likely add further regulatory
    uncertainty and delay into an already unsettled market environment.
        The Roundtable has developed a model for ``Regional Market Design''
    that we believe strikes a more appropriate balance of power between the
    states and the Federal Energy Regulatory Commission, and which can be
    instituted without upsetting long-standing authorities granted to FERC
    under the Federal Power Act.
        We respectfully request that our proposal, which is attached, be
    entered into the record. Thank you very much.
                Sincerely,
                                                 James T. Sims,
                                                    Executive Director.
                             Regional Market Design
     a proposed model to encourage greater investment in western and other
                     regional wholesale electricity markets
                   i. background: storm clouds on the horizon
        Over the past decade, unprecedented changes in the electricity
    industry have uncoupled the historic link between new electric
    generation and transmission construction. While competitive wholesale
    electricity markets depend on a strong transmission system to flourish,
    uncertainty has arisen about the roles and responsibilities for
    developing infrastructure.
        While electric utilities in the West have done an excellent job of
    ensuring the reliability of the transmission systems serving their
    native load, few new Western regional transmission improvements have
    been made in the last 20 years.\1\ Worse yet, little is on the drawing
    board for the next 10 years. This inertia has occurred while the West's
    electric load has grown explosively--60 percent between 1982 and 2002
    and another 20+ percent expected over the next decade. While thousands
    of megawatts of new natural gas generation capacity located near load
    has been added to meet much of this growth, the lack of significant
    transmission expansion has created a situation where the West is
    increasingly exposed to the fuel price volatility of natural gas.
    ---------------------------------------------------------------------------
        \1\ The grid (the so-called ``Western Interconnect'') is composed
    of the geographical area containing the synchronously operated grid in
    the Western part of North America, including parts of Montana,
    Nebraska, New Mexico, South Dakota, Texas and Wyoming and all of
    Arizona, California, Colorado, Idaho, Nevada, Oregon, Utah, Washington
    and the Canadian providences of British Columbia and Alberta.
    ---------------------------------------------------------------------------
        A major lesson learned during the 2000-2001 Western electricity
    crisis was that transmission grid deficiencies exacerbated a cascade of
    problems. Supply scarcity, market manipulation and input fuel price
    volatility all led to dramatic electricity price spikes that heavily
    burdened all consumers and drove a number of important Western
    industries to the edge of extinction.
    Western Consumers Facing New Price Pain
        Now, consumers in some parts of the West are being threatened with
    rising electricity and natural gas utility bills--just as they were in
    the energy crisis of 2000-2001. Spot market prices for natural gas are
    over 300 percent higher than they were a year ago. Further,
    hydroelectric output for the coming year is expected to be not just
    below normal, but below last year's level, likely causing a further
    draw on an already tight natural gas market. Many natural gas market
    analysts are projecting that natural gas prices could reach a permanent
    plateau of $4.00--$5.00/mmbtu. These fuel price spikes, coupled with a
    lack of transmission to provide alternative electricity supply, puts
    consumers in many parts of the West in a position to take it on the
    chin again unless decisive action is taken now to address transmission
    grid deficiencies.
    Transmission Infrastructure Key To Insulating Consumers
        The Western Business Roundtable (Roundtable) participated with the
    Western Governors' Association (WGA) in the development of the 2001 WGA
    report entitled ``Conceptual Plans for Electricity Transmission in the
    West.'' That report concluded that increased transmission
    infrastructure is an important tool to insulate the West from
    electricity price volatility due to hydro availability and fuel price
    volatility, while at the same time enabling remote low-cost coal and
    renewable resources to be expanded and integrated into the Western fuel
    mix.
        The report went on to note that increased transmission
    infrastructure will help mitigate market power issues, where one or a
    few generators can dictate market prices in an area because there is
    not enough transmission in place to get competing generation into the
    market area.
                           ii. current state of play
        Though there is wide recognition that the Western region needs
    significant new investment in regional transmission in order to sustain
    future growth, little progress has been made toward that goal. With the
    exception of joint siting protocols developed by the WGA and their
    federal counterparts, few other concrete steps have been taken towards
    answering two critical questions:

              1. What facilities are needed in the West?
              2. How can an environment be created that will allow such
            projects to be financed and built?

        There are many reasons for this, but most boil down to the lack of
    clarity regarding federal versus state regulatory authority. The
    political battles surrounding those ambiguities have paralyzed
    legitimate efforts to make progress on these two questions.
    Exasperating the political tensions are some operational and
    institutional characteristics unique to the Western region:

       In many parts of the region, there are long distances
            between the low cost hydroelectric and coal generating
            facilities and major load centers. This characteristic promotes
            unscheduled flows among various loads and generating points,
            resulting in adverse effects on transmission users.
       Hydropower plays a major role in the region's wholesale
            electricity market.\2\ Most of this generation is provided by
            federally constituted agencies (Bonneville Power Administration
            and the Western Area Power Administration) that have other
            objectives to take into consideration in addition to
            electricity power production. Many such facilities are linked,
            with multiple dams utilizing the same water to produce
            electricity. In addition, there are many non-energy constraints
            on how and when the water may be used, including irrigation,
            species habitat preservation and recreation.
    ---------------------------------------------------------------------------
        \2\ For example, in the Northwest Power Pool Area 62 percent of the
    capacity is supplied by hydropower. In the WECC, as a whole, 39 percent
    of its generation comes from hydro.
    ---------------------------------------------------------------------------
       Multiple parties jointly own many large nuclear, coal and
            hydro generating facilities and appurtenant transmission lines
            and switchyards. Such multi-party ownership presents unique
            operating and contractual challenges to market participants.
       There is a high concentration of non-jurisdictional
            utilities, including federal power marketing agencies,
            municipalities, rural cooperatives and generation and
            transmission providers. In some cases, such non-jurisdictional
            utilities completely surround jurisdictional utilities.
            Imposition of any changes to the Western electricity grid and
            its operations must include these entities.

        There are currently two proposed Regional Transmission
    Organizations (RTOs) in the West--RTO West, comprised of utilities in
    the Pacific Northwest, and WestConnect, an RTO located in the
    Southwest. California's existing Independent System Operator (ISO) also
    provides independent transmission service to electricity users. Each of
    these entities has proposed and received conditional Federal Energy
    Regulatory Commission (FERC) approval for market designs that have
    critical and fundamental differences. These differences are proposed to
    be resolved through establishment of the Seams Steering Group-Western
    Interconnection (SSG-WI).
        SSG-WI is intended to serve as the discussion forum for: 1)
    facilitating creation of a seamless Western market; 2) proposing
    resolution of issues associated with differences in RTO practices and
    procedures; and (3) identifying the benefits of important multi-state/
    regional transmission projects that need to be constructed to support a
    regional market. However, the SSG-WI process has been painfully slow in
    developing. There are a number of reasons for this lack of progress.
    First, the group is a voluntary collaboration by RTO participants.
    There is no formal staff or budget for this effort and no concrete
    deadline for delivery of a Westwide plan. Further, the group lacks
    legal standing and accountability to resolve numerous intractable
    issues. Finally, several key Western market participants are not
    currently signatory to any of the RTOs, thus creating gaps that make it
    very difficult for SSG-WI to achieve its stated goals.
        From an infrastructure perspective, this leaves the region in a
    very bleak position. The SSG-WI process does not have the authority or
    the tools to develop and implement a sound region-wide transmission
    plan to adequately strengthen the grid on the timeline that is
    necessary to protect consumers. Further, no progress has been made in
    improving the investment climate for the financing of major
    transmission projects.
        Clearly, a regional planning mechanism is needed so that investors
    can see a path to a reasonable return on investment. The most likely
    method for doing so would be establishment of a regional tariff
    mechanism whereby the customers who benefit from these new multi-state/
    regional projects share in the cost of them. No such multi-state/
    regional transmission revenue authority for new facilities exists in
    the West.
                   iii. the roundtable's vision for the west
        The Western Business Roundtable's vision for the West is one in
    which:

       Consumers across the West have greater access to a balanced
            and reliable portfolio of low-cost wholesale power sources and
            are thus better protected from costly and dangerous price
            spikes attributable to the volatility of a single fuel source;
       Effective incentives successfully encourage the investment
            necessary to build the thousands of miles of new transmission
            lines that are needed to ensure the West benefits from a
            diverse range of affordable generation sources;
       A robust regional transmission system is capable of
            efficiently moving adequate and affordable power supplies
            throughout the grid for all users under various the hydro
            conditions, fuel prices scenarios or system configurations; and
       Fair and balanced market rules prevent market participants
            from exercising market power and gaming the wholesale
            electricity system to the detriment of consumers.

        To accomplish this vision, we believe that the jurisdictional
    ambiguities and market distortions that currently plague the wholesale
    electricity markets must be resolved and resolved quickly. The West's
    long-term economic viability depends on it.
              iv. the roundtable's proposal: western market design
    A. The Framework
        The Roundtable \3\ urges state and federal policymakers to consider
    a Western regional market concept structured around a ``delegation of
    authority'' model. Under this approach, Congress would statutorily
    authorize a Western regional entity with authority to establish and
    govern a number of critical elements of market design and function,
    including, at a minimum: 1) regional planning; 2) regional transmission
    tariff development and administration, and; 3) siting of critical
    interstate transmission facilities.
    ---------------------------------------------------------------------------
        \3\ The Edison Electric Institute, a member of the Roundtable, was
    not able to endorse all of the elements of this proposal.
    ---------------------------------------------------------------------------
        Governors of the Western states would take the lead in proposing
    the specific structure and composition of such a regional entity. The
    Federal Government would provide sufficient funding to establish the
    Western regional entity. Once established and functioning, funding for
    its operations would be provided through a fee on electricity
    consumption.
        We believe this approach could provide a win-win opportunity for
    both Western States and the Federal Government.
        From the States' perspective:

       It would enhance the power of states. Rather than simply
            being relegated to an advisory role in a FERC-run process, the
            states, through the regional body, would enjoy real authority
            to shape and monitor the interstate wholesale electricity
            market in the region;
       It would provide a framework to achieve what policymakers
            seek--a regional planning approach developed and carried out by
            regional stakeholders;
       It would provide an efficient mechanism to truly deal with
            the range of issues that currently plague the regional market,
            but which no one state has authority to resolve;
       It would assure that the proper legal and administrative
            remedies will be available to assure that any state-versus-
            state conflicts that may emerge can be resolved;
       It would allow a mechanism to adequately fund the planning
            process, thus solving one of the impediments which currently is
            hampering progress of the SSG-WI process; and
       It would leave the decision of how and where critical
            infrastructure projects will be sited and paid for with those
            policymakers who directly represent impacted consumers.

        From the Feds' perspective:

       It would provide an efficient, streamlined mechanism for
            dealing with unique regional attributes and challenges;
       Because it would require accountability by state and
            regional entities, it should reduce the amount of needless
            friction and delay that currently plagues federal officials as
            they try to work through these jurisdictional issues; and
       Under a delegation regime, Congress and the Federal
            government would retain overarching authority to make sure that
            the regional approach being developed by the regional entity
            does not violate the overall objectives of the Federal Power
            Act.
    B. Critical Organizing Principles
        1. All transmission entities within the region--including FERC non-
    jurisdictional entities, WAPA and BPA--must be involved and treated
    equitably. In the West particularly, a significant portion of the
    transmission system is owned by federal power agencies, municipal
    utilities and rural electric cooperatives. It is critically important
    that all such entities play by the same rules and be treated equitably.
    Otherwise, the goal of ending balkanization of the system will be
    frustrated and regional bottlenecks will continue to exist.
        2. The regional planning involved must include the entire West. The
    regional body should be tasked with identifying: 1) coordination issues
    needed to be resolved between functioning RTOs; 2) what facilities are
    needed; 3) when those facilities need to come on-line; 4) cost
    justifications for each; and 5) what is required to ensure that
    reliable and affordable service is provided to all consumers in the
    West.
        3. When such projects identified are multi-state in nature, the
    regional body must have tariff authority and use it to assure that
    costs are properly allocated among all regional beneficiaries of the
    project. The costs of multi-state transmission projects should be
    spread across regional beneficiaries via regional transmission tariffs,
    thereby eliminating the pancaking of rates that now occurs. Absent this
    approach, transmission for low-cost, remote projects will not be built,
    thereby causing a continued reliance on price-volatile sources built
    close to load centers.
        4. The regional entity needs to be vested with adequate authority
    for planning, siting and issuance of Certificates of Need. The grant of
    such authorities is important to assure that critical multi-state
    facilities can be constructed on the timeline dictated by the regional
    planning process. It is important to recognize that, in the case of
    most transmission upgrade projects, only the widening of existing
    transmission corridors are involved.
        5. State regulatory commissions must be assured meaningful roles in
    governance and operation of the process. This approach should enhance
    the power of states and state commissions by giving them real
    authority, via a regional mechanism, to shape and monitor the
    interstate wholesale electricity market in the region;
        6. A clear mechanism to govern operation of the entire interstate
    grid must be established. We believe that independent entities must be
    a key component of that system and will go far in mitigating the
    conflicts of interest that currently occur where wholesale market
    participants also control transmission planning, rights availability
    and allocations.
        7. Full and open transmission access is critically important. Open
    and non-discriminatory access is the key to eliminating market power
    abuses that result from exploitation of imperfections and bottlenecks
    in the regional transmission grid.

        The Roundtable believes that consumers across the West deserve and
    will demand a transmission system that delivers low-cost and reliable
    power when and where it is needed. We look forward to rolling up our
    sleeves and continuing to work with Western Governors, State Public
    Utility Commissions, Congress, FERC and other stakeholders to achieve
    this and other important goals.
                                     ______

                 National Electrical Manufacturers Association,
                                           Rosslyn, VA, March 27, 2003.
    Hon. Pete Domenici,
    Chairman, Energy and Natural Resources Committee, U.S. Senate,
            Washington, DC.
    Hon. Jeff Bingaman,
    Ranking Member, Energy and Natural Resources Committee, U.S. Senate,
            Washington, DC.
        Dear Senators Domenici and Bingaman: We understand that the matter
    of reliable electrical energy has many stakeholders and regret that
    NEMA was unable to testify at today's hearing on electricity provisions
    of the draft Senate electricity bill (S. 475). We believe that the 400
    manufacturers of electrical equipment that NEMA represents are
    important players in the electricity enterprise as we make the
    electricity infrastructure that needs to be improved for the demands of
    today and the future.
        We note that several witnesses pointed out the essential nature of
    transmission, without which the generation cannot be connected to the
    customer. We also note that transmission reliability is defined as
    including adequacy and security. While we support the efforts underway
    to move to mandatory and enforceable standards under a self-regulated
    regime, at the same time we note that this helps principally with the
    security aspect, while investments in infrastructure are needed for
    adequacy. The decreasing annual investment in transmission
    infrastructure shows that inadequate incentives exist.
        We have attached our written testimony for your consideration. In
    it we propose the incentives in rates and taxes that we believe are
    needed for transmission infrastructure improvements to occur. We have
    made specific comments keyed to the draft bill.
        We look forward to working with you and your staff on the
    legislation needed for all of us to enjoy the economic prosperity that
    is so dependent on reliable electricity.
                Sincerely yours,
                                                   Edward Gray,
                                               Director, Energy Policy.
                                     ______

    Statement of Dr. Gregory Reed, Vice President, Marketing and Technology
     Mitsubishi Electric Power Products, Inc., for the National Electrical
                           Manufacturers Association
                                  introduction
        Good morning, Senator Domenici, Senator Bingaman, and members of
    the Committee on Energy and Natural Resources. I am Dr. Gregory Reed of
    Mitsubishi Electric Power Products, a U.S. based manufacturer of
    electric power industry products and systems, and today I am
    representing the National Electrical Manufacturers Association (NEMA).
    These remarks are the result of a consensus of a number of NEMA
    members. The remarks are presented in the format requested in the
    template for witness testimony.
        NEMA is the leading trade association in the United States
    representing the interests of electro-industry manufacturers. Founded
    in 1926 and headquartered near Washington, D.C., its 400 member
    companies manufacture products used in the generation, transmission and
    distribution, control, and end-use of electricity. Domestic shipments
    of electrical products within the NEMA scope exceed $100 billion.
        NEMA's members have unparalleled expertise in the manufacture of
    generation, transmission and distribution equipment and systems. As
    such, NEMA brings important expertise and unique policy perspectives to
    the issues involved in the ongoing restructuring of the electric
    utility industry.
        My testimony today will address NEMA's perspective regarding issues
    related to improving electrical transmission system reliability.
    Specifically, we will comment on the applicable provisions in the draft
    Electric Transmission and Reliability Enhancement Act of 2003. We also
    have commented on the March 20, 2003 ``STAFF DISCUSSION DRAFT'' where
    an issue in the template is not addressed in the draft Electric
    Transmission and Reliability Enhancement Act (S. 475).
        We applaud the development of a draft electricity bill, and
    encourage the Committee to assure that electricity provisions are part
    of any comprehensive energy measure ultimately sent to the Senate
    floor. Even before the recent meltdown of energy markets, electric
    transmission system investments were decreasing at 15% per year. With
    the situation now, with credit ratings and stock values of industry
    participants far lower than they have been traditionally, it is more
    difficult than ever for them to make the needed transmission
    investments and Congressional action is essential.
                             reliability standards
        Section 215 of the draft Electric Transmission and Reliability
    Enhancement Act would establish mandatory and enforceable transmission
    reliability standards. We support this provision.
        NEMA supports policies that create enforceable and mandatory
    reliability standards to ensure that the interstate transmission grid
    is not operated in a manner that adversely affects system reliability.
    Currently, the utility industry operates under voluntary standards
    established by the National Electric Reliability Council (NERC) with
    regard to the planning, engineering, and operation of electric systems.
    Utilities have generally adhered to NERC's guidelines based on a
    collective concern for the reliable operation of the interstate
    transmission grid. NERC has no enforcement capability, however, and
    their guidelines have sometimes been ignored by some market
    participants.
        The term transmission reliability of the interconnected bulk
    electric system represents both the adequacy and security of the
    electric system. NEMA is concerned with ensuring reliability through
    more adequate transmission infrastructure. To date, the operational
    action typically taken to ensure security has been to reduce load.
    Improving the infrastructure will decrease the frequency of load
    reductions.
                              transmission siting
        Section 1221 of the staff discussion draft legislation calls for
    studies of transmission congestion and designation of ``Congestion
    Zones''. These areas would be eligible for special treatment in
    transmission facility siting. We prefer the approach in the draft House
    Energy Policy Act of 2003.
        A major impediment to the construction of new transmission
    facilities, especially in the form of new transmission lines, remains
    the siting and permitting process. In the past, transmission lines were
    built primarily to meet state requirements to serve a utility's native
    loads. However, new transmission facilities, in some locations, are no
    longer likely to be used to provide service to a particular utility's
    customers or a regulator's constituents, but for other purposes (such
    as the support of regional, multi-state, power markets).
        Some state commissions and local authorities may be less likely to
    authorize the development and construction of new transmission
    facilities if they are used for purposes that do not directly benefit a
    particular utility's customers or regulator's constituents. Therefore,
    we support the provision in the draft House Energy Policy Act of 2003
    to provide Federal backstop transmission line siting authority for
    lines vital to wholesale interstate electricity commerce where states
    have failed to act.
        It is clear that additional transmission capacity is required to
    meet growing electricity demand. However, the current infrastructure
    can and should be enhanced as well. Deploying the technologies to do so
    creates fewer siting issues. There are technologies available today
    that can increase power flow capacity and enhance the controllability
    of the existing transmission infrastructure. These technologies will
    assist operators of the transmission system in meeting consumer demand
    in the most efficient way.
        Transmission voltage, capacity, and control enhancements require
    significant investment in new equipment, but do not necessarily require
    new rights-of-way. Addition of multiple conductors per phase and
    transmission of power at a higher voltage (i.e., 765kV) may be options
    under the right circumstances. In addition, other low environmental-
    impact technologies are proven alternatives to the protracted process
    of power line construction and avoid many of the contentious issues
    associated with siting. These technologies can be implemented rapidly
    and efficiently and include the following:

       Increasing the transmission and distribution line capacity
            through the use of higher voltages and/or larger conductor
            size.
       Utilizing high voltage direct current (HVDC) transmission to
            nearly double capacity, better control of power transfer, and
            improve overall system stability. Such technology is already in
            use in the northwest, southwest and northeast.
       Adding peaking power units at substations, where power goes
            from sub-transmission to primary distribution, can enhance
            system efficiency and reliability.
       Improving power factor through the use of, for example,
            capacitors or synchronous condensers. This has been
            successfully done throughout many areas of the nation.
       Undergrounding of transmission and distribution cables is an
            alternative in places where the right of way is not available.
       Building intelligence into the grid through the installation
            of Flexible AC Transmission System (FACTS) technologies and
            wide area controls capable of increasing the power on
            stability-limited lines by as much as 40%, as well as enhancing
            system reliability, ensuring higher levels of security, and
            dynamically improving system controllability.
       Using real-time dynamic rating systems of transmission lines
            based on actual weather conditions and line currents, which can
            increase the power of thermally limited lines by up to 15%.
       Applying new analytical software models to better calculate
            stability and thermal limits in real-time, which can provide
            increased power transfers by up to 10%.

        Our national transmission policy should encourage investments in
    and deployment of these low environmental impact technologies.
                       transmission investment incentives
        Section ____32 of the staff discussion draft legislation calls for
    a Federal Energy Regulatory Commission (``FERC'' or ``the Commission'')
    rulemaking on transmission infrastructure improvement. We support this
    provision.
        The draft calls for FERC to provide a rate of return that attracts
    new investment. The allowed rate of return for regulated transmission
    system assets investment is typically 3-4 points over prime. The rate
    of return for a deregulated market would need to be approximately 6-8
    points over prime. We are pleased to see that the Federal Energy
    Regulatory Commission has awarded higher rates of return for
    transmission for entities that join Regional Transmission Organizations
    (RTOs) and has asked for public comment on this matter.
        The proposal calls for FERC to consider performance and incentive
    based rates. Incentive or performance-based rates should be used to
    encourage transmission investments. Performance based rates have
    reduced congestion costs where implemented and resulted in lower rates
    for consumers. These incentives should encourage technology investments
    to: improve reliability; increase availability; enhance controlability;
    reduce congestion; improve power factors; increase energy efficiency;
    and improve customer service.
                        transmission organizations/rtos
        Section 407 of the staff discussion draft addresses Regional
    Transmission Organizations (RTOs). We prefer the approach in the draft
    House Energy Policy Act of 2003.
        In part to encourage the efficient expansion of the transmission
    system, and to ensure regulatory certainty, FERC issued a series of
    regulations designed to facilitate the development of Regional
    Transmission Organizations (``RTOs''). Under FERC Order 2000, RTOs
    would be responsible for, among other things, transmission planning and
    expansion consistent with applicable state and local siting
    regulations. This is particularly important to bring regional
    perspectives to transmission planning and siting decisions. The
    Commission requires RTOs to accommodate state efforts to create
    multistate agreements to review and approve new transmission
    facilities. The regulations also include transmission rate incentives
    designed to facilitate the development of new transmission facilities.
    FERC has been implementing such rates on a case-by-case basis. FERC-
    approved RTOs also should focus on the deployment of new transmission
    technologies.
                       net metering and real-time pricing
        Section ____72 of the staff discussion draft addresses net metering
    and Section ____73 of the staff discussion draft addresses real-time
    pricing and time of use metering. We support these provisions.
        NEMA supports net metering to encourage small distributed
    generation including renewables.
        Real time pricing and the associated time of use meters are needed
    to increase demand responsiveness. A market cannot function well
    without demand response. Current electricity markets behave with a
    ``hockey stick'' shaped curve of price versus demand, where the costs
    increase modestly for most demand ranges, but rapidly for the highest
    demands as less efficient generation is brought online. Studies show
    that modest demand reductions would result in significant cost
    reductions that could be shared broadly across customers.
                                   conclusion
        Congress must take decisive action to ensure that the interstate
    transmission grid will continue to reliably serve consumers of electric
    energy, and that adequate capacity is ensured. To achieve this goal,
    the nation should adopt a holistic approach to transmission policy that
    not only facilitates the development of new transmission facilities,
    but also recognizes and encourages the role of technology in expanding
    transmission capacity from existing facilities. Accordingly, NEMA
    recommends that the foundation of any new transmission policy should
    rest upon the creation of a regulatory structure that: (1) promotes the
    use of technology to protect and enhance the integrity and reliability
    of the existing interstate transmission grid in the near-term; (2)
    removes siting and permitting impediments that currently serve as a
    barrier to the construction of new facilities; and (3) ensures, through
    the use of rate incentives and tax policy that investments in new
    transmission facilities generate a competitive return for the
    investment made.
                                     ______

                              Utility Workers Union of America,
                                        Washington, DC, April 15, 2003.
    Hon. Pete V. Domenici,
    U.S. Senate, Washington, DC.

    Re: Senate Energy Bill

        Dear Senator Domenici: The Senate Energy and Natural Resources
    Committee is considering major energy legislation that will revise the
    very structure of electricity markets. The Utility Workers Union of
    America (UWUA) is very worried that the Electricity title (Title XII,
    in the initial draft) presents grave risks for consumers. Should this
    legislation pass, there is the real likelihood that rates will rise
    higher than they otherwise would, especially for residential and small
    business customers. The reliability of supply may also be in jeopardy.
        For close to 100 years, investor-owned distribution companies that
    directly serve customers have primarily been under state jurisdiction.
    State commissions not only set rates, but they (or companion state
    agencies) insure that there is adequate generation supply and oversee
    siting of transmission facilities. The system has worked remarkably
    well. Throughout the 20th century, the United States enjoyed some of
    the lowest-priced and most reliable electricity in the world. This was
    true not only in comparison with other industrial countries, but even
    less-developed countries with very low labor costs and cheap
    hydroelectric supplies.
        At the state level, restructuring efforts reached a high-water mark
    about two years ago. The meltdown of the California market caused a
    number of states to repeal or back track on their restructuring plans.
    Restructuring has also not succeeded in other states that haven't had
    such spectacular failures and press coverage as California. In most
    restructured states, small consumers have been unable to find
    competitive suppliers willing to sell to them. Rates have jumped
    significantly in Texas; in Massachusetts (where one company just
    received a 410% increase in its default service rates); and other
    states where markets are open to competition. Consumers are not gaining
    anything but confusion and uncertainty. Prices have also become far
    more volatile.
        Restructuring places supply at the risk of unregulated players who
    respond solely to the interests of stockholders, not to regulatory
    mandates or the needs of consumers.
        In this context, UWUA urges the Senate not to pass the Electricity
    title. In particular:

       Repeal of PUHCA will eliminate essential public protection:
            The Public Utilities Holding Company Act was adopted in the
            1930's, the last time this country experienced the types of
            accounting tricks and market manipulations recently seen with
            the Enron crisis. This is not the time to remove existing
            restrictions that limit the ability of holding companies to use
            the assets of regulated distribution companies to launch risky
            new ventures. As recent experience proves, unregulated power
            marketers and brokers can cost consumers billions, as well as
            putting the livelihoods and pension plans of their own
            employees at great risk.
       FERC should not be given enhanced jurisdiction, particularly
            not at the expense of state regulatory authority: Provisions of
            the energy act that would give FERC any additional authority
            over entities not currently regulated at the federal level
            (municipally owned utilities, power marketing authorities,
            federal entities, etc.); that would force open access to
            transmission lines and assets currently reserved for native
            load; or that would allow FERC to grant ``incentive'' rates of
            return to transmission owners are ill-advised. The latter
            ``incentive'' proposal would simply shift billions of dollars
            from consumers to owners of transmission. Given FERC's
            extraordinary failure to protect California consumers from
            flagrant market manipulation, despite the pleas of a broad
            range of elected and appointed officials, expanding FERC's
            jurisdiction puts consumers at needless risk. States have
            proved to be far more effective in insuring just and reasonable
            rates, and insuring reliable supply.

        FERC strongly believes that the market is the best protector of
    consumer interests. But one hundred years of state regulation proves
    that states do a better job of protecting consumer. FERC's policies of
    the past few years prove it is more interested in vindicating its
    procompetition views than actually keeping rates down.
        On behalf of the 50,000 men and women of UWUA who fully understand
    the value of inexpensive and reliable electric supply, I urge you not
    to adopt the Electricity title.
                Sincerely,
                                            Donald E. Wightman,
                                                    National President.
                                     ______

                             American Public Power Association,
                               American Public Gas Association,
                                                        April 16, 2003.
    Hon. Pete Domenici,
    Chairman, Committee on Energy and Natural Resources, U.S. Senate,
            Washington, DC.
        Dear Mr. Chairman: Our associations represent the locally-owned gas
    and electric distribution utilities that serve more than 80 million
    residential and commercial customers. We recognize and appreciate your
    leadership and strongly support your committee colleagues as you move
    forward to pass energy legislation that is vital for our nation's
    economic success. We have every confidence that the Senate's final
    product will be a balanced one that treats consumers of both natural
    gas and electricity in a fair and equitable manner.
        Given the ongoing revelations of manipulation and abuse that have
    taken place in electricity markets, we believe it is essential to
    provide natural gas consumers with protections from similar abuses.
    Specifically, we urge you to support limited amendments to the Natural
    Gas Act that would extend and strengthen consumer protections in these
    areas: penalties, manipulative trading practices, market transparency,
    and refunds. While the reasons are obvious why APGA strongly supports
    this change, it is also becoming more important for NRECA and APPA
    members who increasingly rely on natural gas to generate electricity.
    As pipeline customers, all of our members should be entitled to
    consumer protections under the NGA that are similar to those afforded
    consumers under the FPA.
        We understand that some interests have already weighed-in against
    such consumer protection provisions, arguing that the fundamental
    structure of the NGA should remain unchanged. We agree about the need
    to keep the fundamental provisions of the NGA intact. Making the four
    above-referenced changes to the NGA to bring about parity and
    consistency between the two acts, however, does not constitute a
    ``fundamental'' change of the NGA structure. Rather such changes simply
    further the overriding purpose of the NGA to protect natural gas
    consumers from paying excessive rates.
        Absent the same upgrades for the NGA that the Senate now proposes
    for the FPA, the Federal Energy Regulatory Commission (FERC) will
    continue to be handicapped in its ability to protect natural gas
    consumers. This fact was recognized by FERC Chairman Pat Wood in
    testimony before your committee last month when he specifically
    supported these changes to the NGA. FERC Commissioner Bill Massey
    reinforced this support at that same hearing.
        After all is said on the matter, the primary purpose for both acts
    is still to protect consumers. On behalf of more than 3,400 cities and
    towns and the many communities served by consumer- and municipally-
    owned utilities, we request that you support these common sense and
    much-needed protections for the customers of both natural gas and
    electricity.
                Sincerely,
                                       Alan Richardson, President.

                                       Glenn English, Chief Executive
                                           Officer,
                                               National Rural Electric
                                                   Cooperative Association.

                                       Bob Cave, President,
                                               American Public Gas
                                                   Association.
                                     ______

          Statement of Hon. Bill Richardson, Governor of New Mexico,
                on Behalf of the Western Governors' Association
        Thank you, Mr. Chairman and Senator Thomas, for your thoughtful
    proposals to amend federal law governing electric power regulation.
        This is an issue of intense interest to Western governors. The
    region is still recovering from the 2000-2001 Western electricity
    crisis and there is significant concern about the intended and
    unintended consequences of the Standard Market Design proposed by the
    Federal Energy Regulatory Commission (FERC).
        In our testimony to this Committee in 2001, we related three areas
    of agreement among Western governors on federal electricity
    legislation.

              1. Federal electric system reliability legislation needs to
            be enacted to ensure that present voluntary regional
            reliability standards can be enforced. Such legislation should
            recognize and defer to standards developed and enforced in the
            Western Interconnection. States should have a primary role in
            overseeing the standards setting and enforcement processes.
              2. FERC should not be granted the power of eminent domain for
            electric transmission line siting, even in a backstop mode.
            There is no evidence in the West that states have ever blocked
            the permitting of an interstate transmission project. There is
            no evidence nationwide that states have systematically abused
            their responsibilities to balance transmission needs with other
            public needs in decisions on the siting of transmission
            facilities.
              3. The federal government should not intrude into the retail
            electric decisions of states. In our testimony to you in June
            2001, Western governors opposed federal legislation that would
            expand FERC's authority into retail electricity decisions. With
            FERC's release of its proposed Standard Market Design rule in
            July, our concerns about FERC intrusion into retail electricity
            decisions have been greatly amplified.

        We continue to maintain these positions.
        In the following testimony, we provide important background on the
    unique elements of the Western Interconnection and then offer
    observations on the 13 topics on which you requested comment.
                 undue elements of the western interconnection
        In crafting legislation, the Committee should keep in mind that
    North America is served by three essentially electrically-separate
    power grids. Within the Western Interconnection, the western states,
    western Canadian provinces and northwest Mexico are fully integrated.
    However, there are few ties between the Western Interconnection and the
    other interconnections. Generators are synchronized within
    interconnections but not between interconnections.
        The geography of the system is important, because it defines the
    practical maximum extent of power markets and impacts of power outages.
    An event in British Columbia can cause blackouts in Arizona, but an
    outage in Arizona cannot impact states in the Eastern Interconnection.
        The Eastern and Western grids have developed different features.
    The Western grid is defined by long distances between generators and
    customers (load centers). The Eastern grid more resembles a tight-knit
    network of transmission. As a result, the maintenance of stable system
    voltage is often the constraining factor in the operation of the
    Western grid, while the thermal limits of lines is typically the
    constraining factor in the Eastern grid.
        Another reality differentiating the East and the West is the vast
    ownership of land in the West by federal agencies. This land ownership
    pattern often creates different transmission facility siting challenges
    than in the East.
        As a result of these differences, institutions and practices \1\ to
    address electric power issues have evolved differently in the West than
    in the East.
    ---------------------------------------------------------------------------
        \1\ For example, the Western industry has relied on rating the
    capacity of transmission paths under different system conditions and
    limiting the use of paths to their rated capacities. Because paths are
    not similarly rated in the Eastern Interconnection, the industry relies
    on Transmission Loading Relief (TLRs) in the East to force users to cut
    back power transfers when reliability is threatened.
    ---------------------------------------------------------------------------
        We recommend that federal legislation recognize these electrical,
    geographic and institutional differences and resist the temptation to
    adopt federal government-centric, one-size-fits-all solutions. We
    believe the experience in Western power markets over the past several
    years has illustrated the limitations of policy made in Washington,
    D.C. for the West.
                      regional energy services commissions
        The Staff Discussion Draft includes a Subtitle B--``State
    Coordination'' and proposes that states be provided authority to ``. .
    . enter into agreements to establish Regional Energy Services
    Commissions (RESC)''. This provision would potentially confer upon
    RESCs: 1) authority currently held by states, like transmission siting;
    and 2) Federal Energy Regulatory Commission authority related to
    regulation of the wholesale trade of electricity. FERC would have
    jurisdiction for resolving disputes among RESCs and participating and
    non-participating states, as well as between RESCs.
        The Western Governors commend the Committee for moving from the top
    down, centralized model proposed by FERC in its Standard Market Design
    NOPR, to a more regional model. While the Western states have just
    begun to analyze the pros and cons of the RESC provisions, this change
    of direction from Washington, D.C., is welcome.
        To fully understand the implications of the RESC concept, it would
    be desirable for Congress to first clarify state and FERC jurisdiction
    over such issues as the transmission component of bundled retail sales
    and transmission to serve native load. Such clarification is critical
    to understanding the scope of Section 404(b) which allows the
    Commission to ``affirm, modify, or set aside such State regulatory
    order or ruling in whole or in part if the Commission finds that the
    State regulatory authority's order or ruling would result in undue
    discrimination in the provision of the transmission of electric energy
    and/or sale of such energy at wholesale . . . or results in unjust or
    unreasonable rates, charges or classifications . . .''
        Our initial review of the Staff Discussion Draft raises numerous
    questions that need to be addressed before proceeding. For example:

       Why is five percent of U.S. electricity load the minimum
            threshold for establishing a RESC?
       Can there be one-state RESCs?
       Will multiple RESCs be allowed in the Western
            Interconnection?
       How are the RESCs to be funded?
       Why would states, which have territory in two regions, be
            prohibited from participating in RESCs in both regions?
       What are the specific grounds for the Secretary of Energy to
            disapprove an RESC?
       In Section 403(a), what does ``primary jurisdiction'' mean?
       Market power review and monitoring functions could reside
            with the RESC. Where does the responsibility for market
            mitigation actions reside?
       Section 403(b) provides for the RESC to develop enforcement
            mechanisms. Where does the authority to implement such
            enforcement mechanisms reside?
       Is the intent of the Staff Discussion Draft to leave FERC
            with authority over electricity decisions whenever any state
            objects to a decision of a RESC or does not agree to join an
            RESC?
       If an RESC does not address any of the items listed in
            Section 402(a), would FERC assert jurisdiction under Section
            406 regardless of whether or not such functions would otherwise
            be under FERC jurisdiction? For example, if an RESC elects not
            to take one type of action (e.g., recommend preemption of state
            jurisdiction over bundled transmission service), does Section
            406 grant FERC the authority to preempt state law? Or, if an
            RESC finds that the costs of an RTO exceeds the benefits, can
            it disapprove an RTO under Section 407? If it disapproves an
            RTO that is not cost-effective, can FERC assert jurisdiction
            over the RTO proposal under Section 406?
       What is the role of the RESC in overseeing the operation of
            an RTO after it has been approved?

        Certain features of the RESC proposal, when combined with other
    provisions in the Staff Discussion Draft, are clearly not acceptable.
    For example, granting FERC the power to preempt state siting laws
    unless the RESC assumes the power to preempt state siting laws is a
    non-starter.
        As noted previously, the Western Governors are encouraged by the
    shift in policy direction represented by the discussion draft. In fact,
    WGA's existing policy calls on Congress to ``allow states to create
    regional mechanisms to decide regional power issues, including but not
    limited to, the creation and operation of regional transmission
    organizations, reliability of the western power grid, transmission
    system planning and expansion, maintenance requirements and market
    monitoring''. Before proceeding with any provision on regional
    governance, however, it is important for the Committee to understand
    how Western states interact today on electricity issues and what steps
    they have taken to address future regional issues since the 2000-01
    electricity crisis.
        Interstate cooperation on electricity issues occurs in the West at
    three levels: among the governors; among the state commissions
    established to regulate the electricity industry; and among the state
    energy siting agencies and programs. At the level of the governors, the
    Western Governors' Association and its energy arm, the Western
    Interstate Energy Board, address policy issues as directed. This
    interaction and analysis has included extensive public and private
    participation and led to a series of policy resolutions and reports on
    the Western Electricity Interconnection (see ``Conceptual Plains for
    Electricity Transmission in the West'' and ``Financing Electricity
    Transmission Expansion in the West: A Report to the Western
    Governors'').
        In 1983, the Committee on Regional Electricity Cooperation (CREPC)
    was formed to facilitate voluntary cooperation among Western state and
    Western Canadian provincial utility regulatory commissions and energy
    agencies on issues of common interest. This group has met regularly
    since that time to address issues and interact with the Federal Energy
    Regulatory Commission. CREPC has kept the region's commissions and
    energy agencies abreast of policy, regulatory and technical issues and
    serves as the primary forum for interstate cooperation on electricity
    policy issues in the West.
        In 2002, the Western Governors and concerned federal agencies
    entered into a ``Protocol Governing the Siting of lnterstate
    Transmission Lines in the West''. Under the Protocol, the states and
    federal agencies agree to collaborate in the review of siting proposals
    and permit requests from the time of their submission in order to
    identify and resolve siting issues as quickly as possible. To date, no
    new transmission proposals have been offered so we have not yet had an
    occasion to use the process. We are confident that the West's long
    record of cooperation will help ensure that any future use of the
    process provided in the Protocol will be successful. It has been the
    West's experience that federal agency delays are the most significant
    impediment to siting of transmission lines in the West. The governors
    believe the Protocol will result in a marked improvement in future
    siting activities.
        Western governors have recognized that additional regional
    cooperation may be necessary to address increasing demand for
    electricity, prevent recurrences of the 2000-2001 crisis, and
    capitalize on the region's vast fossil and renewable energy resources.
    The governors submitted a proposal for a regional information and
    planning mechanism with the U.S. Department of Energy in May 2002.
    Secretary of Energy Spencer Abraham responded positively to the
    proposal in June 2002 and indicated his willingness to fund the
    development of such a system, appropriations permitting, in FY 2003.
    The purpose of this initiative is to ensure that public and private
    decisionmakers are fully informed about the Western electricity market
    in order to enhance public interest monitoring and regulation of market
    activities and to help producers and consumers deal with market
    fluctuations more effectively than they were able to in the Western
    electricity crisis.
        Furthermore, in December 2002, the governors asked WGA (WIEB) and
    CREPC to explore and propose a regional decision-making mechanism for
    their consideration. The Department of Energy has agreed to support
    this project as well. The purpose of this initiative is to explore how
    the states might address future interstate policy issues that affect
    the operation of the Western Interconnection in a more formal manner
    than the informal, voluntary collaboration provided by CREPC. This
    initiative is just getting underway.
        The Western Governors commend the Committee for recognizing the
    regional and state nature of the nation's electricity markets. We hope
    to work closely with you, Chairman Domenici, Senator Bingaman, Senator
    Thomas and others to reach consensus about this proposal. Given the
    complexity of the proposal, and the unique aspects of different regions
    of the nation we find it difficult to express optimism that this
    proposal could be fully vetted in the apparently very short timeframe
    before your Committee must act on energy legislation. In the interim,
    we suggest that Congress should clarify state and FERC jurisdiction
    over such issues as the transmission component of bundled retail sales
    and transmission to serve native load, and the Committee should
    instruct the U.S. Department of Energy and FERC to cooperate with
    states within the nation's regional electricity markets on the
    development of appropriate regional governance models, which may vary
    according to the needs of each region. Through such a program of
    cooperation and assistance, reliable and economical regional governance
    mechanisms are much more likely to emerge. As noted, the Western
    Governors have already directed that a Western model be explored.
                             reliability standards
        We are pleased that Senator Thomas' bill includes reliability
    provisions that will meet the needs of the West and the nation. On
    behalf of the Western Governors, I would like to thank Senator Thomas,
    and his staff, again for their leadership and support on this issue. If
    the Congress takes no other action this year on electricity issues, we
    urge you to enact these reliability provisions. The proposal in the
    Staff Discussion Draft to make a Regional Energy Services Commission
    the regional reliability organization, as opposed to playing an
    oversight role in the setting and enforcement of reliability standards,
    is particularly problematic.
        Since 1997, Western Governors have urged the enactment of federal
    reliability legislation to provide a legal underpinning for enforcing
    reliability standards. As a stop-gap measure, the West has implemented
    a system of contracts to make standards enforceable. Most control areas
    in the West have executed the contracts, a few have not. However, such
    a contract enforcement system is not a long-term substitute for federal
    legislation.
        In 1997, 2001, and again last year, Western Governors called for a
    new approach to setting and enforcing reliability standards that
    includes a public process for setting standards, review of standards by
    states, application of standards to all users of the grid, enforcement
    of sanctions for non-compliance with the standards, mandatory
    membership by operators of the grid in regional reliability councils,
    and joint state/federal oversight of establishing and enforcing
    reliability standards. In 2000, the governors urged the ``organization
    of regional advisory bodies of affected states and Canadian provinces
    to advise regional and North American organizations and the Federal
    Energy Regulatory Commission and appropriate Canadian and Mexican
    regulatory authorities . . . FERC should defer to the advice of such
    regional advisory bodies when advisory bodies cover an entire
    interconnection.''
        Through extensive on-going collaborative efforts between the
    Western states/provinces and the Western electric power industry, three
    principles have been developed that guide our views of federal
    reliability legislation.

              (1) Deference must be given to standards adopted within and
            for the Western Interconnection.
              (2) The implementation and enforcement of standards must be
            delegated to the West.
              (3) States must have a role in the process.

        Over a three-year period, Western states, provinces and industry
    worked to streamline and consolidate existing industry grid management
    institutions into one new entity, the Western Electricity Coordinating
    Council. Western Governors called for the expeditious establishment of
    the new institution. Last April, the new institution was formed. WECC
    was designed to rapidly implement the provisions of federal reliability
    legislation and is prepared to do so as soon as such legislation is
    enacted.
        Through extensive work with the North American Electric Reliability
    Council (NERC), the central elements of what the West needs are
    included in the NERC consensus legislation that the Senate passed last
    year, thanks to Senator Thomas' leadership. The NERC language provides
    for deference to standards that cover an entire interconnection. It
    provides for delegation of implementation and enforcement functions to
    a regional entity, such as the WECC, that is much closer to the issues
    than a North American body or FERC. It provides for a state advisory
    role and enables FERC to defer to such advice when given on an
    interconnection-wide basis. This approach builds on existing technical
    expertise in the industry and states and does not require the
    establishment of a large new federal bureaucracy.
        The reliability provisions of the Thomas bill meet the needs of the
    West and we urge their adoption. Given the uncertain future of the
    Regional Energy Services Commission concept, we recommend that the
    Committee keep the language in the Thomas bill related to the creation
    of Regional Advisory Bodies.
                                  open access
        Western governors believe that all segments of the Western
    industry, including investor-owned utilities, public power, federal
    power marketing administrations, power marketers and brokers, and
    independent power producers, should participate in the competitive
    wholesale electricity market. Congress should ensure that federal
    institutions, such as the power marketing administrations, participate
    in regional efforts to promote wholesale competition. This may include
    participation in cost-effective Regional Transmission Organizations.
             transmission siting and preemption of state siting law
        We are disappointed that the staff draft proposes to take the
    Committee down the unproductive path of federal preemption of state
    electric transmission siting laws. The proposed transfer of these
    powers from states to RESC's is likewise problematic unless it is truly
    voluntary and not compelled by threat of federal preemption. The
    continued emphasis on preempting state siting authority is particularly
    discouraging given the fact that no evidence has been presented in any
    forum that we are aware of that justifies granting FERC such preemptive
    powers, even in a backstop role. Senator Thomas' approach, which
    focuses on getting the federal government's house in order on
    transmission permitting, is much more appropriate.
        Western governors have a long record of proactively addressing the
    transmission needs in the Western Interconnection. We recognize that an
    adequate transmission system is necessary to maintain the reliability
    of the grid and enable competitive wholesale electricity markets.
        The record in the West provides no evidence supporting the need for
    new centralization of land use decisions that are more properly made in
    the West based on intelligent tradeoffs of needs and values. We urge
    the Committee to keep in mind that no western state has ever denied a
    permit for an interstate transmission line. The idea of federal eminent
    domain for electric transmission is a solution looking for a problem.
        The major challenge to siting of transmission in the West rests
    with federal land management agencies. The federal government owns vast
    tracts of land in the West (e.g., approximately 83% of the land in
    Nevada, 65% of Utah, 63% of Idaho, 53% of Oregon, 50% of Wyoming, 46%
    of Arizona, 45% of California, 36% of Colorado, 34% of New Mexico, 29%
    of Washington, and 28% of Montana.) If it accomplishes its goals, the
    preemption language, in fact, may provide a perverse incentive to site
    more transmission on private lands, further exacerbating the decrease
    in private lands in the West.
        Few new transmission lines have been proposed in the West over the
    past decade due to increased reliance on natural gas fired generation
    near load centers and uncertainty created by FERC policies. The
    President's Executive Order 13212 directing federal agencies to
    expedite energy-related projects provides needed direction. However,
    agencies need adequate resources to execute their responsibilities.
    States also recognize that timely action is essential in the modern
    competitive electricity market.
        The 2001 WGA ``Conceptual Transmission Plan'' recommended that all
    siting review processes be streamlined and coordinated to enable timely
    construction of transmission lines. State review processes should
    address both local and Western Interconnection needs, and federal
    agency review processes should be coordinated internally as well as
    with State and Tribal authorities. The 2002 report, ``Financing
    Electricity Transmission Expansion in the West'', reinforced the need
    for pro-active transmission planning and collaborative action on
    transmission permitting as important ingredients for project financing.
        We have acted on these recommendations. Last summer, 12 Western
    governors, including all governors in the Western Interconnection,
    signed the Protocol Governing the Siting of Interstate Transmission
    Lines in the West to coordinate and collaborate on the review of
    proposed interstate transmission lines. We are pleased to report that
    the Secretaries of the Interior, Agriculture, and Energy and the
    Chairman of the White House Council on Environmental Quality also
    signed the protocol.
        The protocol is a constructive step in recognizing the regional
    impacts of major transmission additions. When coupled with appropriate
    direction and funding of federal land management agencies, we believe
    the Protocol will get the job done. Unlike the approach in the Staff
    Discussion Draft, our approach does not create new centralized
    bureaucracy at DOE or FERC. Our approach is to make existing government
    agencies work, not add new layers of government review. We would be
    pleased to report to you in a year on the progress made under the
    protocol.
        We urge the Committee to not include eminent domain provisions in
    its energy bill.
            transmission investment and transmission cost allocation
        Western Governors have not adopted a collective position on
    transmission investment incentives or transmission cost allocation.
    However, we would caution that such incentives are not free. The costs
    of such incentives will be borne by our citizens and businesses.
        Western Governors have worked on transmission financing for several
    years. Beginning with the WGA Transmission Roundtable in May 2001,
    Western governors have been concerned about the issue of financing new
    transmission. At our request, in February 2002, Western stakeholders
    delivered a report to governors on transmission financing titled
    Financing Electricity Transmission Expansion in the West. The report
    reached consensus on several points, including:

       Confidence in cost recovery, including a reasonable return
            on investment, is the key to financing transmission expansion.
       Uncertainty over the future structure of the industry and
            recovery of transmission investment costs have contributed to a
            lack of investment in recent years.
       Due to the long lead-time required for transmission
            construction, further investment to expand the transmission
            infrastructure in the western states may be needed now to bring
            economic and strategic benefits to customers in the future.
       There are two distinct models for identifying transmission
            expansion projects, securing the necessary capital investment
            and providing for the recovery of the investment costs. These
            are the market-driven model and the total system cost model.
       The two models could co-exist and transmission projects
            could be financed through a combination of both models. The
            approach used should be determined on a project-specific basis.

        Since the report, each of the nascent RTOs in the West has
    developed transmission financing approaches. These efforts continue to
    be refined.
                                     puhca
        Western governors have not taken a collective position on
    amendments or repeal of the Public Utilities Holding Company Act.
                                     purpa
        Western governors have not taken a collective position on
    amendments to the Public Utility Regulatory Policies Act. However, we
    do note that it seems inappropriate to condition the elimination of the
    ``must purchase'' provisions of PURPA on the existence of ``competitive
    wholesale markets'' or the existence of retail competition. The
    existence of competitive wholesale markets remains an issue of much
    dispute and few states in the West have or are likely to endorse retail
    competition in the near term.
                       net metering and real-time pricing
        Net metering is an appropriate electricity policy. Every state in
    the West already has some form of net metering. If the Committee
    retains the provision, it should allow each state PUC to decide the
    nature of such policy in the context of state law.
        Western governors have identified demand response as a critical
    element for well-functioning electricity markets. During the 2000-2001
    Western electricity crisis, many novel demand response programs were
    put in place. The evaluation of the efficacy of specific programs
    continues. If the Committee retains the provision, it should allow each
    state PUC to decide the appropriateness of such policy in the context
    of state law.
                                renewable energy
        Significant progress is being made in the West to expand the
    generation of electricity from renewable resources. Several states have
    adopted aggressive Renewable Portfolio Standards. Other states have
    additional programs in place to increase renewable energy generation
    like financial incentives and generation disclosure requirements.
        Western governors agree on the need to extend and expand the
    existing renewable energy production tax credit. The credit has been
    particularly helpful in expanding the development of wind resources in
    the West. As additional wind generation is deployed, the cost of wind
    generation decreases. Similar improvements can be expected if the
    deployment of solar, geothermal and biomass generation technologies
    accelerates. Although not within the purview of this Committee, we
    would urge you to work with the Senate Finance Committee to include a
    production tax credit in final energy legislation.
        Although not part of the electricity provisions of pending bills,
    the governors also support the development of new advanced clean coal
    technologies.
              market transparency, anti-manipulation, enforcement
        Much has been learned from the Western electricity crisis of 2000-
    2001. The Committee is to be complimented for focusing on the core FERC
    functions of market monitoring and enforcement. FERC's performance in
    these critical areas needs to be improved and should be a higher
    priority than seeking to expand jurisdiction into areas of state
    responsibility.
        In addition to the reforms proposed thus far, Western governors
    believe that a robust information and planning system is necessary to
    ensure that adequate infrastructure is in place to avoid future crises.
    Comprehensive and up-to-date data are critical to assure resource
    adequacy. We would encourage the Committee to direct the Department of
    Energy and FERC to assist the West in developing such an information
    and planning system.
                                     ______

     Statement of Michehl R. Gent, President and Chief Executive Officer,
                  North American Electric Reliability Council
        My name is Michehl Gent and I am president and chief executive
    officer of the North American Electric Reliability Council (NERC).
        NERC is a not-for-profit organization formed after the Northeast
    blackout in 1965. NERC's mission is to ensure that the bulk electric
    system in North America is reliable, adequate, and secure. NERC works
    with all segments of the electric industry as well as customers and
    regulators to ``keep the lights on'' by developing and encouraging
    compliance with rules for the reliable operation and planning of these
    systems. NERC comprises ten Regional Reliability Councils that account
    for virtually all the electricity supplied in the United States,
    Canada, and a portion of Baja California Norte, Mexico.
        NERC supports the reliability provisions (Section 104) of S. 475,
    the ``Electric Transmission and Reliability Enhancement Act of 2003,''
    with minor technical changes. The reliability provisions of S. 475 are
    similar to the reliability provisions that the Senate adopted last year
    as part of H.R. 4. They are also largely the same as the reliability
    provisions included in Subtitle C of the legislation approved last week
    by the House Energy and Air Quality Subcommittee, the ``Energy Policy
    Act of 2003.''
        With or without Congressional guidance, the electricity industry is
    changing in fundamental ways. These changes are disrupting the
    mechanisms, relationships and incentives that have long ensured the
    reliability of the North American electricity grid. To ensure that
    these changes do not jeopardize the reliability of our interconnected
    electric transmission system, we must shift from a system of voluntary
    compliance with reliability standards to a system of mandatory
    compliance. NERC and a substantial majority of other industry
    participants believe that the best way to do this is through an
    independent, industry self-regulatory organization to set and enforce
    mandatory reliability rules, subject to oversight within the United
    States by the Federal Energy Regulatory Commission.
        Section 104 of S. 475 embraces this concept and contains largely
    the same language that we understand the House and Senate conferees
    agreed to during the conference on H.R. 4 in the last Congress. NERC
    requests that you make minor changes to the language in Section 104, to
    track the language on governance of regional entities that is contained
    in Section 7031 of the bill the House Subcommittee approved last week.
    I have attached specific suggested language for the revision to this
    testimony (Attachment 1).* NERC will be pleased to work with Committee
    members and Committee staff on the language.
    ---------------------------------------------------------------------------
        * Attachments 1 and 2 have been retained in committee files.
    ---------------------------------------------------------------------------
        NERC has appeared before Committee on a number of occasions,
    testifying in support of reliability legislation. The Senate adopted
    NERC-supported reliability language in 2000 (S. 2071) and again in 2002
    (as part of H.R. 4). Today I will focus on two questions: (1) why
    reliability legislation is needed now; and (2) how Section 104 of S.
    475 meets this need. I will also provide NERC's views on the
    reliability provisions (Title XII, Subtitle D) contained in the staff
    draft dated March 25, 2003.
                   why is reliability legislation needed now?
        NERC sets the reliability standards by which the grid is operated
    from moment to moment, as well as the standards for what must be taken
    into account by those that plan, design, and construct an integrated
    system that is capable of being operated reliably. The NERC standards
    do not specify how many generators or transmission lines to build, or
    where to build them. They do indicate what planned and unplanned
    contingencies the system must be able to meet to ensure that it can
    retain its integrity under a broad range of actual supply, demand and
    equipment outage conditions. We attribute the reliability of the
    present system to these standards, which have been in practice for
    decades.
        The interconnected bulk electric system is subject to any number of
    unexpected and uncontrollable events, as a matter of course. Severe
    weather may knock down transmission lines, lightning strikes may cause
    short circuits, mechanical equipment may fail due to fatigue or
    overloading, generating plants may suffer breakdowns, fuel supplies can
    be disrupted, human error can lead to the outage of equipment, or we
    may inadvertently operate in an unstudied state. To that list of
    everyday occurrences, we now have added the threat of terrorist
    activity directed at the bulk electric system. The bulk electric system
    is designed and operated generally in what we refer to as a ``first
    contingency'' status, that is, the system must be able to withstand the
    loss of the single largest element (generator, transmission line,
    transformer, etc.) and still remain stable and secure. Otherwise,
    because of the instantaneous nature of electricity, we would risk
    cascading outages with severe economic and public safety consequences
    that could occur in a matter of seconds.
        I have attached to my testimony a table describing five notable
    occasions when we did have such a cascading outage: November 9, 1965 in
    the Northeastern United States and Eastern Canada; July 13, 1977 in New
    York City; July 2, 1996 in the West; August 10, 1996 in the West; and
    June 25, 1998 in the Upper Mid-West and western Ontario (Attachment 2).
    The scope and duration of these outages underscore why we must take all
    reasonable steps to prevent such widespread cascading outages where
    possible, and why we must have solid restoration plans when outages do
    occur. Mandatory reliability rules and an effective means to monitor
    and enforce compliance with them are the major component of those
    reasonable steps.
        NERC's rules, which are not now enforceable, have generally been
    followed by participants in the electricity industry, but that is
    starting to change. As competitive, economic and political pressures on
    electricity suppliers increase and as the traditional mechanisms,
    relationships, and incentives for ensuring reliability are altered,
    NERC is seeing an increase in the number and severity of rules
    violations. Moreover, new issues are arising that demand an institution
    focused on reliability that can act fairly, but decisively, and in a
    timely manner.
        Let me give you an example. Traditionally, integrated utilities
    operated their generators to supply both the ``real'' (MW) and
    ``reactive'' (MVar) power necessary to maintain reliable operation of
    the transmission system, and charged for these services as part of the
    regulated cost of service. (It's worth noting here that control of
    flows and voltages on an electric system is not accomplished by valves
    and switches, as in gas or telecommunications systems, but by
    controlling the real and reactive power outputs of generators.) These
    ``services'' provided by generators included such things as spinning
    and non-spinning reserves and system voltage support. Now, with the
    generation function separated from the transmission function in many
    cases, these ``services'' are no longer provided by a single,
    integrated entity, but must be arranged and paid for separately through
    tariffs and contracts with generators. To assure that this is done, we
    need enforceable standards that require transmission operators
    (including RTOs) to make adequate provision in their tariffs and
    contracts for these essential reliability services. How these
    arrangements are made can be the subject of filings with FERC or other
    regulators, but they must be made. Absent such enforceable standards,
    the reliability of our interconnected grids will be at serious risk.
        To accommodate the changes taking place in the industry, NERC is
    rewriting all of its reliability standards according to a new
    ``functional'' reliability model that sets out measurable and, under
    Section 104 of S. 475, enforceable requirements for entities that are
    responsible for performing critical reliability functions. These new
    standards will place uniform requirements on those that have the
    responsibility for maintaining the minute-to-minute balance between
    supply and demand, for seeing that power flows remain within the
    physical limits of the system, and that grid voltages stay within
    tolerance.
        Let me give you another, very different example of why this
    legislation is needed. NERC plays a critical role in protecting our
    industry's critical infrastructure from both physical and cyber
    attacks. Since the early 1980s, NERC has been involved with the
    electromagnetic pulse phenomenon, vulnerability of electric systems to
    state-sponsored, multi-site sabotage and terrorism, Year 2000 rollover
    impacts, and most recently the threat of cyber terrorism. At the heart
    of NERC's efforts has been its ability to marshal] the industry's best
    experts on the design and operation of electricity systems in North
    America, and serve as the industry's point of contact with various
    federal government agencies, including the National Security Council,
    the Department of Energy, the Nuclear Regulatory Commission, the
    Federal Bureau of Investigation, and now the new Department of Homeland
    Security, to reduce the vulnerability of interconnected electric
    systems to such threats.
        I know that this Committee understands how vitally important this
    function is. Yet, NERC's continuing ability to serve this function
    cannot be taken for granted. NERC traditionally has been funded by
    contributions from its member Regional Councils, which are in turn
    funded by their member organizations. New entrants and the pressure of
    competitive markets have made this funding mechanism increasingly
    unsatisfactory. A new funding mechanism is needed that properly and
    fairly supports NERC's activities, including its activities related to
    critical infrastructure protection. Section 104 of S. 475 would address
    this issue by authorizing FERC to certify an electric reliability
    organization that, among other things, has established rules that
    ``allocate equitably reasonable dues, fees and other charges among end
    users for all activities under this section.'' See proposed new Federal
    Power Act section 215(c)(2)(B).
      section 104 of s. 475 would provide for an organization capable of
       protecting the reliability and the security of the north american
                                electricity grid
        We need legislation to change from a system of voluntary
    transmission system reliability rules to one that has an industry-led
    organization promulgating and enforcing mandatory rules, backed by FERC
    in the United States and by the appropriate regulators in Canada and
    Mexico. Section 104 of S. 475 would do this. Under its provisions:

       Reliability rules would be mandatory and enforceable.
       Rules would apply to all owners, operators and users of the
            bulk power system.
       Rules would be fairly developed and fairly applied by an
            independent, industry self-regulatory organization drawing on
            the technical expertise of industry stakeholders.
       FERC would oversee that process within the United States.
       This approach would respect the international character of
            the interconnected North American electric transmission system.
       Regional entities would have a significant role in
            implementing and enforcing compliance with these reliability
            standards, with delegated authority to propose appropriate
            regional reliability standards.

        A broad coalition joins NERC in supporting this approach to
    legislation, including the Western Governors Association, the National
    Association of Regulatory Utility Commissioners, the National
    Association of State Utility Consumer Advocates, the American Public
    Power Association, the Canadian Electricity Association, the Edison
    Electric Institute, the National Rural Electric Cooperative
    Association, the Institute of Electrical and Electronics Engineers, and
    the Western Electricity Coordinating Council.
        Right now a hole exists in the Federal Power Act, because FERC does
    not have direct authority over reliability matters and does not have
    jurisdiction over the entities that own almost one-third of the bulk
    power system. Having an industry self-regulatory organization develop
    and enforce reliability rules applicable to all owners, operators and
    users of the bulk power system under government oversight, as Section
    104 of S. 475 would do, takes advantage of the huge pool of technical
    expertise that the industry has been able to bring to bear on this
    subject over the last 35 years. Having FERC itself set the reliability
    standards through its rulemaking proceedings, even if based on advice
    from outside organizations, would require FERC to develop or acquire
    technical expertise and experience that it does not now have, and would
    dramatically expand FERC's workload at perhaps the worst possible time.
        The electric industry is in a great state of flux, as regional
    transmission organizations are forming and reforming, and vertically
    integrated companies are separating and selling off various portions of
    their business. Change is happening at different paces in different
    places. With all the uncertainty as to who will ultimately operate and
    plan the interconnected transmission system, it is more important than
    ever that an industry-led self-regulatory organization be created to
    establish and enforce reliability standards applicable to the entire
    North American grid, regardless of who owns or manages which portions
    of the grid, and regardless of whether the grid is being used for the
    new markets that are emerging or in more traditional ways. Both market
    models are likely to exist side by side for a considerable period of
    time. The self-regulatory reliability system authorized in Section 104
    of S. 475 is indifferent to industry structure and can help ensure that
    grid reliability is maintained, even while new market structures and
    new RTOs are being formed. Because FERC will provide oversight of the
    electric reliability organization in the U.S., FERC can ensure that the
    organization's actions are fair and balanced and closely coordinated
    with FERC's evolving market policies.
        The industry self-regulatory organization authorized in Section 104
    of S. 475 also addresses the international character of the
    interconnected grid. There is strong Canadian participation within NERC
    now. Having reliability rules developed and enforced by a private
    organization in which varied interests from both countries participate,
    with oversight in the United States by FERC and with equivalent
    activity by provincial regulators in Canada, is a practical and
    effective way to develop the common set of rules needed for the
    reliability of the international grid. Otherwise, U.S. regulators would
    be dictating the rules that Canadian interests must follow--a prospect
    that would be unacceptable to Canadian industry and government alike.
    Or, regulators on either side of the border might decide to set their
    own rules, which would be a recipe for chaos. Efforts are also under
    way to interconnect more fully the electric systems in Mexico with
    those in the United States, primarily to expand electricity trade
    between the two countries. With that increased trade, the international
    nature of the North American electricity market will take on even more
    importance, further underscoring the necessity of having an industry
    self-regulatory organization, rather than FERC itself, set and enforce
    compliance with grid reliability standards.
         the reliability provisions in the staff draft are not adequate
        NERC does not support the reliability provisions contained in the
    staff discussion draft dated March 25, 2003. Although much of the
    reliability language in the staff draft is the same as that in S. 475,
    the staff draft's introduction of the concept of regional energy
    services commissions (RESCs) substantially changes and muddles the
    reliability provisions. Assigning reliability enforcement authority to
    RESCs, as the March 25 draft does, substitutes a brand new governmental
    entity, with no technical competence or experience whatsoever, for the
    industry-led enforcement, subject to government oversight, that is the
    essence of the S. 475 reliability provisions. The RESCs apparently
    would not need to meet any of the requirements for receiving delegated
    enforcement authority that other regional entities would need to meet.
    Introducing RESCs into the reliability context also raises a host of
    unanswered questions concerning the intended relationships among FERC,
    the electric reliability organization, and the RESCs. It appears that
    public utilities in States with RESCs are exempted from the coverage of
    the reliability provisions (which will be in Part II of the Federal
    Power Act). It is not clear whether the ERO would need to submit its
    funding requirements to the RESCs, since the RESCs are intended to have
    rate responsibility within their regions. The staff draft also
    eliminates the regional advisory body, putting in its place the RESC.
        NERC urges that the necessary exploration and development of the
    RESC concept for use in other areas to which it may be more suited not
    delay prompt approval by Congress of urgently-needed reliability
    legislation..
                                   conclusion
        NERC commends Senator Thomas for the leadership he continues to
    provide on attending to the critical issue of ensuring the reliability
    of the interconnected bulk power system as the electric industry
    undergoes restructuring. A new electric reliability oversight system is
    needed now. The continued reliability of North America's high voltage
    electricity grid and the security of the consumers whose electricity
    supplies depend on that grid are at stake. An industry self-regulatory
    system is superior to a system of direct government regulation for
    setting and enforcing compliance with grid reliability rules. The
    language of Section 104 of S. 475, with the clarification of the
    regional governance issue, presents a sound approach for ensuring the
    continued reliability of the North American electricity grid. It is
    also an approach that has widespread support among industry, state, and
    consumer interests. The reliability of North America's interconnected
    transmission grid need not be compromised by changes taking place in
    the industry, provided reliability legislation is enacted now.
                                     ______

            Statement on Behalf of the Utility Coalition Advocating
                                Renewable Energy
        The Utility Coalition Advocating Renewable Energy (UCARE) \1\
    submits this testimony supporting the inclusion of a national renewable
    energy portfolio standard (RPS) in any energy legislation to be passed
    by the Senate. A RPS will help diversify America's energy sources while
    creating jobs, promoting economic development, enhancing the
    development of domestic energy sources and reducing air pollution
    emissions. Because renewable energy can help meet many of our critical
    national needs, we believe a meaningful RPS should be part of our
    national energy policy and adopted by the 108th Congress. During the
    107th Congress, the Senate passed an energy bill that included a RPS,
    however, Congress adjourned without resolving the differences between
    the House and Senate. We encourage the Senate to again include a RPS in
    its comprehensive energy legislation.
    ---------------------------------------------------------------------------
        \1\ UCARE is a coalition of utilities consisting of PacifiCorp, WE
    Energies, Minnesota Power and PG&E Corp. that supports the enactment of
    a federal renewable portfolio standard.
    ---------------------------------------------------------------------------
        Thirteen states have enacted some form of minimum renewable energy
    requirements. The Department of Energy's Energy Information
    Administration (EIA) projects in their Annual Energy Outlook 2003 that
    5.2 gigawatts of new renewable electric generating capacity through
    2025 will be added as a result of these State mandates. According to
    EIA, a number of States with renewable energy portfolio standards in
    place are projected to add significant amounts of renewable capacity,
    including Massachusetts (1,112 megawatts), Texas (1,001 megawatts),
    Nevada (778 megawatts), California (623 megawatts), Minnesota (399
    megawatts), New Jersey (340 megawatts), and New York (335 megawatts).
    Other States with smaller mandate requirements include Arizona, Hawaii,
    Iowa, Illinois, Montana, Oregon, West Virginia, and Wisconsin. Most of
    the new capacity is expected to be constructed in the near term--47
    percent by 2003 and more than 60 percent by 2005.
        A federal program is needed to build on these State efforts to
    assist in mitigating a number of our national energy problems including
    energy supply shortages, fossil fuel price increases and price
    volatility, air pollution and climate change. While states are
    demonstrating that renewable energy standards can work, a patchwork of
    state programs with different requirements can create inefficiencies
    and will not provide the benefits associated with a national program.
    For example: utilities operating in more than one state will be subject
    to different renewable energy targets, different enforcement mechanisms
    and trading systems. It would be much more efficient and less costly to
    implement if national rules with common trading market mechanisms were
    in place.
        A RPS will help stabilize electricity prices, reduce natural gas
    prices, reduce emissions of carbon dioxide and other harmful
    pollutants, create jobs and promote economic development.

       Improve energy diversity: According to the EIA, over 70
            percent of our electricity was generated from fossil fuels
            (coal, gas and petroleum) in 2000 with only 2 percent from non-
            hydro-electric renewable energy sources (7 percent currently is
            provided from hydro-electric generation). A federal RPS, by
            adding to the percentage electricity that all states would
            receive from renewable energy sources, will diversify our fuel
            mix for the future enhancing the reliability of energy supplies
            for our nation.
       Reduce price volatility: By encouraging a greater share of
            the nation's electricity to come from renewable energy sources,
            a nationally-implemented RPS will create competition with other
            energy sources keeping prices down. Most new electricity
            generation in the future is expected to be fueled by natural
            gas. By 2020 EIA projects natural gas to increase to 32%
            (double its current level) of total electricity generation. The
            uncertainties surrounding our country's ability to meet this
            demand can lead to shortages and price volatility.
       Improve our environment: A federal RPS would significantly
            reduce the emissions of carbon dioxide, nitrogen oxides, and
            sulfur dioxide. Electricity generation is a leading source of
            U.S. carbon emissions, accounting for over 40% of the total
            emitted in the United States. According to the Union of
            Concerned Scientists (UCS), a federal RPS could reduce 27
            million metric tons of carbon emissions a year by 2020.
       Promote economic development: A RPS would have significant
            economic benefits by creating a local market for renewable
            energy technologies adding to new capital investment and
            creating jobs.

        The Senate should adopt a market-based renewable energy portfolio
    standard (RPS) requiring all retail utilities to gradually increase the
    portion of electricity produced from renewable energy resources such as
    wind, biomass, geothermal, and solar energy by a certain percentage
    over a period of time. Utilities should meet the RPS requirement either
    by generating sufficient renewable energy electricity to meet the ratio
    or by purchasing tradable renewable electricity credits that would be
    created and tracked. The RPS should employ market prices through credit
    trading and spread the cost of supporting renewable generation more
    evenly across the retail electricity market.
        There are a number of principles that should be addressed in a RPS:

       The requirements of a RPS need to apply across the board to
            all electricity providers. The standard should apply to all
            retail electricity suppliers, including all public and
            cooperatively owned utilities;
       The RPS should include tradable renewable credits with a
            mechanism that limits the cost of a credit;
       There must be an enforcement mechanism;
       The RPS has to be meaningful, the ``requirements'' need to
            be high enough to trigger market growth;
       Renewable energy resources should at the very least include
            solar, wind, ocean, geothermal, biomass, landfill gas and
            incremental hydro.

        In conclusion, a national RPS would make the U.S. energy supply
    more reliable and more secure. The Senate last year took a good first
    step and we encourage you to expand on our efforts and enact a RPS in
    energy legislation in the 108th Congress.
                                     ______

              Statement of the American Forest & Paper Association
         summary of the american forest & paper association's statement
       The Administration's National Energy Policy calls for
            doubling energy output from Combined Heat and Power (CHP) units
            by 2010.
       Existing and future CHP facilities will be in jeopardy if
            the Public Utilities Regulatory Policy Act (PURPA) is repealed
            prior to the development of open markets where an independent
            party determines access to the grid.
       Currently, CHP represents 7 percent of total electricity
            capacity and 9 percent of generation. Almost 60 percent of CHP
            generation in the forest products industry is from biomass and,
            thus, is climate friendly. CHP power is also highly efficient
            power and helps expand the supply of affordable electricity in
            an environmentally-friendly way.
       On-site CHP power generation is critical to the
            profitability and competitiveness of manufacturing facilities.
            The increased efficiency that occurs to the manufacturing
            process as a result of on-site generation frequently means the
            difference between profitability or not.
       To maintain existing CHP, and expand it in the future,
            facilities must have access to the grid and the ability to
            purchase back-up power at non-discriminatory rates. Since many
            states continue to have monopoly electric utilities that own
            and control both the transmission and generation of
            electricity, CHP power would not get access and purchase
            opportunities without PURPA.
       We strongly recommend inclusion of the Carper-Collins/CHP
            amendment language that passed the Senate on a voice vote in
            the 107th Congress. The language establishes market conditions
            by which utility obligations under PURPA would end and provides
            certainty for both utilities and CHP operators.
       In addition, the House Energy and Commerce Subcommittee on
            Energy and Air Quality approved PURPA language that refines the
            Carper-Collins amendment and accommodates the concerns of CHP
            producers, and we urge the Senate Committee to consider this
            language as an appropriate balance between the needs of
            utilities and industrial generators of electricity.
       Finally, we support removing those restrictions in PUHCA
            that limit needed investment by American companies, but believe
            that reporting and other requirements in PUHCA that protect
            consumers and investors should remain in place to prevent
            market abuse and manipulation.

        The American Forest & Paper Association (AF&PA) appreciates the
    opportunity to provide comments on the proposed electricity legislation
    under consideration by the Senate Committee on Energy and Natural
    Resources. AF&PA is the national trade association of the forest and
    paper industry and represents more than 240 member companies and
    related associations that engage in or represent the manufacturers of
    pulp, paper, paperboard and wood products. America's forest and paper
    industry ranges from state-of-the-art paper mills to small, family-
    owned sawmills and some 9 million individual woodlot owners.
        The U.S. forest products industry is vital to the nation's economy.
    We employ 1.5 million people and rank among the top ten manufacturing
    employers in 42 states with an estimated payroll of $50 billion. We are
    the world's largest producer of forest products. Sales of the paper and
    forest products industry top $230 billion annually in the U.S. and
    export markets.
        Energy is the third largest cost for the forest products industry,
    making up more than 8 percent of total operating costs. Recent energy
    price increases are severely impacting our competitiveness. One of the
    ways we address this huge cost issue is to produce as much of our
    electricity as possible through on-site cogeneration or Combined Heat
    and Power (CHP). Although the industry is nearly 60 percent self-
    sufficient using biomass, natural gas, coal, fuel oil and purchased
    electricity to balance our energy needs. Forest products companies
    spent over $2.1 billion on purchased electricity in 2000. Importantly,
    the industry also sells more than 12 million megawatt-hours annually of
    electricity to the transmission grid--the equivalent of a mid-sized
    utility.
        Since 1997, employment at U.S. paper and paperboard mills has gone
    from 222,400 to 178,000--a decrease of almost 20 percent. While these
    losses have been caused by a variety of factors, the additional
    pressure of the current energy crisis could result in further mill
    closures and job losses. This situation would be far worse, had it not
    been for the forest product industry's commitment to fuel efficiency
    and independence over the past three decades. Since 1972, this industry
    has reduced its average total energy usage by 17 percent, reduced its
    fossil fuel and purchased energy consumption by 38 percent, and
    increased its energy self-sufficiency by 46 percent.
             energy policy legislation and combined heat and power
        Any change in energy policy clearly must take into account the
    needs of consumers and producers. It also needs to address the needs of
    those who have already taken positive steps to make energy consumption
    more efficient. The President's National Energy Plan calls for a
    doubling of energy output from CHP units by 2010. CHP is the
    cornerstone of the Administration's plan to improve energy efficiency
    and expand sources of electricity generation in an environmentally-
    friendly way. This goal of expanded CHP power, increased efficiency and
    environmentally-friendly power will not be met without the assured
    access to the grid that is afforded by the Public Utility Regulatory
    Policies Act of 1978 (PURPA).
        The primary function of a CHP unit is to support manufacturing
    operations that require both electric power and steam or other useful
    thermal energy. Nonetheless, this electricity represents a critical
    component of the nation's electricity supply portfolio. Currently, CHP
    represents 9 percent of total electricity generated nationwide. Almost
    60 percent of CHP generation in the forest products industry is from
    biomass and, thus, is climate friendly. CHP power is also highly
    efficient power, reaching efficiency levels of 80 percent, which is at
    least twice as efficient as conventional power generation. This high
    level of efficiency occurs because our manufacturing processes use both
    the heat and the steam, while traditional generation units vent steam
    into the atmosphere. These efficiencies have also led to significant
    reductions in air emissions.
        Successful development and full implementation of black liquor and
    biomass gasification programs would make the forest products industry a
    net exporter of renewable electricity--removing some 18 million tons of
    carbon emissions from the air and generating nearly 30 gigawatts of
    CHP-based electricity. This represents enough energy to power two-
    thirds of California's summertime peak. These initiatives entail
    substantial risk for an already capital-intensive industry. Much R&D
    remains to be done to prove the technologies can work without adversely
    impacting mill operations. Continued cooperation with the federal
    government is crucial to reducing risk to a level that will allow
    significant industry participation.
                             why purpa is important
        PURPA was enacted to help reduce U.S. dependence on foreign oil and
    encourage fuel diversity. It is one of the most successful federal
    policies in promoting energy efficient generation and renewable energy.
    CHP technologies make use of diverse fuel resources, including
    renewables, thus lessening the nation's dependence on foreign oil.
    Additionally, CHP units typically are diverse in size and
    geographically dispersed. Their dispersal throughout the grid means
    greater efficiency through reduced line losses, and improved system
    reliability through less dependence upon central generation units.
    Their smaller size also allows for continual adaptation to, and
    adoption of, improving technologies. For these reasons, CHP has been a
    successful addition to the nation's power supply portfolio.
        In order to maintain existing CHP, and expand it in the future,
    facilities must have a market to sell the power they cannot use in
    their operations. Since many states continue to have monopoly electric
    utilities that own and control both the transmission and generation of
    electricity, CHP power would not get meaningful access to the grid
    without the federal requirement under PURPA. In addition, CHP units
    must be able to purchase back-up power at non-discriminatory rates.
    Many industries responded to PURPA by investing billions of dollars in
    new on-site CHP generation to provide electricity primarily for their
    manufacturing processes and, occasionally, to the electrical grid.
        Under PURPA, electric utilities are required to interconnect and
    purchase power from ``Qualifying Facilities,'' or QFs, and they are
    obligated to sell standby, back-up and maintenance power to such
    facilities on a non-discriminatory basis. This dual guarantee of a
    place to sell excess power and to purchase backup power has made it
    possible for more industries to install the necessary equipment and
    develop the ability to generate electricity for their own needs, in
    spite of monopoly utility markets.
        The power production facilities of a manufacturing operation are
    generally sized to meet the optimal demand. When the facility
    experiences a technical problem it must either divert the excess energy
    to the grid or shut down the power plant. When the manufacturing
    production process requires more energy than can be produced on site,
    then electricity is purchased from the local utility. The seamless
    integration of these QFs benefits not only the manufacturer, but also
    the local utility by giving them access to additional power to meet
    unusually high demand for power. If Congress restricts the current
    access to the grid that PURPA provides, many of these facilities will
    be economically harmed.
                     purpa's role in a transitioning market
        While some regions of the country have moved to a more competitive
    environment, many have not. Even in those regions where competition has
    been introduced, it is often limited to a few players that dominate the
    market, thus depriving small generators of meaningful access to willing
    buyers and sellers. In the face of monopoly and transitioning markets,
    there must be an assurance of access to the grid. Without such a
    requirement, utilities could simply refuse to provide access or make
    the cost of access either so expensive or so difficult that connection
    to the grid would be impossible. Thus, the opportunity to fully utilize
    CHP assets would disappear, and the monopoly utility will dominate the
    market.
        Even with PURPA in place, many QFs, including CHP plants, are still
    having problems selling power into the electric grid. For example, in
    the Northwest and California, utilities have put up roadblocks to power
    being sold to the grid or to power transmission to third parties. In
    the Southeast, where monopolies control vast transmission and
    distribution systems stretching over several states, utilities
    regularly exercise their market power through unreasonable surcharges,
    interconnection standards and fees, and ``shell game'' pricing for
    backup power sales. QFs frequently face obstacles, such as overly
    burdensome requirements for interconnection studies and long delays,
    resulting in projects being cancelled or abandoned because the cost of
    access is too high.
                  obligation for purchase and sale of qf power
        FERC has correctly recognized that even in a state that is
    scheduled to be open to retail competition, there is no guarantee that
    a fully functioning competitive market for QFs to sell power into will
    develop. Congressional energy policy legislation should approach PURPA
    from a similar perspective. Care must be taken to ensure that CHP power
    is not blocked from the grid as an unintended consequence of reforms to
    PURPA. The PURPA obligation to purchase is the critical factor that
    allows manufacturers to contribute to a more diverse energy supply for
    this nation. If the purchase requirement is eliminated in advance of a
    truly competitive market place, then many existing CHP assets will
    become uneconomic, and future CHP development will stall because
    financing for CHP units is highly dependent on access to the grid.
        Similarly, the importance of a federal guarantee for back-up power
    at just and reasonable rates cannot be over-emphasized in states that
    remain dominated by monopoly utilities. Without it, QFs would be
    captive to unregulated monopolies that could charge what they wish.
    Even in states that have implemented some form of electric
    restructuring, tariffs and regulations often continue to favor
    incumbent utilities, and viable options for back-up power often are not
    offered by competitive suppliers. The QF must be assured of receiving
    back-up power on a nondiscriminatory basis and at just and reasonable
    rates, especially if the utility is the ``provider of last resort''
    serving retail load. To the extent that utilities have an obligation to
    serve retail loads, they also should continue to have the obligation to
    provide back-up power to QFs on a nondiscriminatory basis. Once there
    is a truly competitive retail market, and QFs can buy back-up power in
    the open market, then, and only then, will the back-up power guarantee
    no longer be essential to existing and future CHP power generators.
                   assessment of senate legislative proposals
        The purchase and sale requirements of PURPA should not be repealed
    without consideration of the conditions in the market where the QF is
    located. The draft Senate Committee language and S. 475 both reflect
    major changes from the Senate passed energy bill in the 107th Congress,
    which contained the language offered by Senators Carper and Collins.
    The Carper-Collins amendment ensured that CHP technology would remain
    viable in transitioning electricity markets. Specifically, the language
    established an appropriate transition from current laws protecting CHP
    and other small generation plants from abuses of monopoly market power
    by utilities. PURPA has been critical in allowing CHP plants that serve
    industrial and commercial facilities to exist in an otherwise monopoly
    market. As retail and wholesale electricity markets become open to
    competition these provisions become unnecessary.
        The Carper-Collins/CHP amendment passed the Senate on a voice-vote
    after a motion to table was rejected by a 60-37 vote. It recognized
    that not all of the nation's electricity markets are the same and
    rejected draconian, one-size-fits-all approaches to ending PURPA's
    obligations that run be counter-productive to maintaining and
    increasing CHP usage. By establishing market conditions under which
    PURPA obligations would end, the amendment provided certainty for both
    utilities and CHP operators.
        Further, we have significant concerns about the newly proposed
    Regional Energy Services Commission (RESC). While we understand that
    the genesis of this proposal emerges from frustrations with recent
    actions of the FERC, we believe the approach will be counter productive
    to the creation of competitive electricity markets and will make
    interconnection between different regions of the country more rather
    than less difficult. It threatens to increase the energy costs of
    American manufacturers and make them less competitive. More
    specifically, giving a new untested regional authority the ability to
    terminate the Federal obligation to purchase and sell electricity under
    PURPA is completely counter to the intent of the Carper-Collins
    amendment that was overwhelmingly support by the Senate last year.
        We strongly recommend inclusion of the Carper-Collins/CHP amendment
    in this legislation to guarantee that CHP plants will have meaningful
    and continuing access to willing buyers and sellers of power before
    current PURPA provisions are eliminated. In addition, the House Energy
    and Commerce Subcommittee has adopted refinements to the Carper-Collins
    language to the legislation it approved on March 19th. Industrial users
    and generators of electricity support the House subcommittee passed
    provisions relating to PURPA and urge the Senate Committee to consider
    this language as an appropriate balance between the needs of utilities
    and industrial generators of electricity.
                                  other issues
        A transmission grid operated in a fair and non-discriminatory
    manner is essential to industrial consumers whether they produce their
    own power, or whether they are simply a purchaser of electricity. Our
    goal is a transmission system that allows buyers of electricity as much
    access to sellers of electricity as possible. Industrial customers
    recognize that until we achieve the open transmission system, the
    utilities who own monopoly transmission and distribution facilities
    will still possess and exercise market power. These utilities have
    often used their government-granted monopoly power to the detriment of
    industrial users by favoring their own power generation over other--
    often lower priced power--produced by others.
        Generally speaking, AF&PA supports the idea that new transmission
    capacity is needed in some, but not all, areas of the country, and
    there needs to be a reasonable and timely approach for siting and
    building of new transmission lines. The House Subcommittee bill has a
    modest approach for transmission siting and should be considered going
    forward to ensure that consumers' capacity needs are met as quickly as
    possible. However, we oppose efforts to require transmission investment
    incentives. We believe FERC currently has the authority to use
    incentives where they are needed. We are concerned that efforts that
    essentially require incentives for new transmission will unnecessarily
    increase prices to consumers.
        Finally, we find almost daily stories in the press about utilities
    allegedly manipulating energy markets. There have been countless
    instances where utilities have shifted debt from unregulated affiliates
    to those affiliates subject to state regulations, thus forcing costs to
    be borne by consumers. While we support removing those restrictions in
    PUHCA that limit needed investment by American companies, we also
    believe that reporting and other requirements in PUHCA that protect
    consumers and investors should remain in place to prevent market abuse
    and manipulation. Rules are needed to address the operational
    unbundling of generation, transmission, system control, marketing, and
    local distribution functions. The need for federal authority to address
    market power and anti-competitive activities is as essential today for
    avoiding such abuses as it was 70 years ago.
                                   conclusion
        Industrial users and congenerators recognize and fully support the
    need for more electricity generation and transmission. PURPA has been--
    and will continue to--be an essential law. It encourages the adoption
    of new technologies. It has produced a broader, more efficient, more
    environmentally favorable base of electricity generation. Because of
    PURPA, electricity has been added in smaller increments, thus not
    burdening users with paying for generation that proved to be much
    larger than necessary. And the cost of building that generation was
    funded by private capital. The National Energy Plan, including the goal
    of doubling CHP units by 2010, will be seriously undermined by efforts
    to repeal PURPA where open markets are not in force and no independent
    party determines access to the grid.
        Any changes to PURPA must be made with a full recognition of their
    potential impact on existing CHP assets as well as plans for future
    expansion of CHP. The access to the grid afforded by PURPA and the
    rights for back-up and standby power, are essential in markets and
    regions of the country where competitive markets are not yet
    functioning effectively. In the spirit of moving toward more
    competitive markets in the future, the Congress should, at a minimum,
    ensure that this power generation is not disadvantaged by monopolistic
    markets by making the changes we have suggested.
                                     ______

    Summary of Testimony of Alden Meyer, Director of Government Relations,
                         Union of Concerned Scientists
        Investments in domestic renewable energy sources, together with
    continued efficiency improvements, can:

       reduce the vulnerability of our energy system to disruption
            of supplies and price shocks;
       create skilled jobs for American workers, and export
            opportunities for U.S. companies;
       reduce emissions of harmful air pollutants;
       provide fuel diversity and price stability benefits for
            electricity consumers.

        In spite of these compelling environmental, economic, and security
    benefits, renewable energy technologies continue to face many market
    barriers, which unnecessarily keep them from reaching their full
    potential. A national Renewable Electricity Standard for electricity
    that requires utilities to gradually increase the portion of
    electricity produced from renewable resources such as wind, biomass,
    geothermal, and solar energy is needed to overcome these barriers.
        Recent analyses by UCS and the Energy Information Administration
    demonstrate that the United States could affordably generate at least
    20 percent of our electricity from non-hydro renewable energy by 2020.
    Even using very conservative assumptions on renewable energy costs, EIA
    found that a 10 percent RPS would result in net savings for consumers
    on their electricity and natural gas bills throughout the 2002-2020
    period. Increasing the renewable energy standard to 20 percent by 2020
    would result in greater fuel diversity and environmental benefits
    compared to the 10 percent standard, and would still provide savings to
    energy consumers.
        The public overwhelmingly supports this policy. A survey conducted
    last year by Mellman Associates found that when presented with
    arguments for and against a 20 percent renewable energy standard, 70
    percent of voters support it, while only 21 percent oppose it.
        With appropriate policies, renewable energy technologies can
    provide Americans with the clean and reliable electricity they desire,
    while also saving them money, contributing to our nation's energy
    security and achieving significant reductions in harmful emissions.
        The net metering and renewable energy production incentive
    provisions included in the current draft bill before the committee are
    laudable and deserving of support. But by themselves, these provisions
    will not get the job done. A strong, market-friendly renewable
    electricity standard is required to realize the full potential of
    America's renewable energy resources. Such a standard should be
    included in any bill this committee reports to the full Senate.
          Statement of Alden Meyer, Director of Government Relations,
                         Union of Concerned Scientists
                                i. introduction
        The Union of Concerned Scientists (UCS) is a nonprofit organization
    of more than 60,000 citizens and scientists working for practical
    environmental solutions. For more than two decades, UCS has combined
    rigorous analysis with committed advocacy to reduce the environmental
    impacts and risks of energy production and use. Our clean energy
    program focuses on encouraging the development of clean and renewable
    energy resources, such as solar, wind, geothermal and biomass energy,
    and on improving energy efficiency.
        We favor the adoption of policies to increase; the use of renewable
    energy resources in our nation's electricity generation mix. Such
    policies are needed to meet our future electricity needs, diversify our
    electricity supply, reduce the vulnerability of our energy system,
    stabilize electricity prices, and protect the environment.
    Specifically, we endorse a renewable electricity standard, sometimes
    also known as a renewable portfolio standard--a market-based mechanism
    that requires utilities to gradually increase: the portion of
    electricity produced from renewable resources.
        The electricity industry penetrates every sector of the economy and
    our lives. It keeps our food fresh. It lights up the darkness. It
    powers the manufacturing process. It runs life-giving medical systems
    and mind-enriching information systems. It helps warm us in the winter
    and cools us in the summer.
        As important as electricity is to the economy, the tragic events of
    September 11 have brought renewed attention to how vital and connected
    our energy system is to national security. The vulnerability of the
    energy infrastructure to attack has been increasingly recognized as a
    significant issue, with terrorist threats reported to nuclear power
    plants and natural gas pipelines, and heightened security implemented
    at dams, power plants, refineries, liquefied natural gas tankers and
    terminals, and the electrical grid.
        Electricity use also has a significant impact on the environment.
    Electricity accounts for less than three percent of U.S. economic
    activity. Yet, it accounts for more than 26 percent of smog producing
    nitrogen oxide emissions, one-third of toxic mercury emissions, some 40
    percent of climate-changing carbon dioxide emissions, and 64 percent of
    acid rain-causing sulfur-dioxide emissions.
        Unfortunately, there are no quick fixes to make the United States
    energy independent, ensure price stability, or clean up the air we
    breathe. However, investments in domestic renewable energy sources,
    together with continued efficiency improvements, can gradually reduce
    our dependence on imports and reduce the vulnerability of the U.S.
    energy system to disruption of supplies or to attack. Investments that
    increase fuel diversity strengthen the ability of our economy to
    withstand supply interruptions or price shocks from any one fuel
    source. Investments in indigenous renewable energy sources keep money
    circulating and creating jobs in regional economies, and create export
    opportunities. And of course, investments in clean air benefit everyone
    that breathes the air.
        By investing in renewable energy, our nation promotes a host of
    important public goods: national security, fuel diversity, price
    stability, universal and reliable electric service, economic
    development, and a healthier environment. Most importantly, investing
    in renewable energy can provide all these benefits and reduce
    electricity costs.
        In this testimony, we review the potential for renewable energy and
    how it can help promote these public goods. We then present the
    renewable energy standard for electricity as the best policy mechanism
    for reducing market barriers and stimulating the development of
    renewable energy resources. Finally, we review three recent studies
    that show we can significantly improve our efficiency and increase the
    contribution of renewable energy to our electricity mix, while lowering
    consumer energy bills.
             ii. renewable energy potential, benefits, and barriers
        The United States is blessed by an abundance of renewable energy
    resources from the sun, wind, and earth. The technical potential of
    good wind areas, covering only 6 percent of the lower 48 state land
    area, could theoretically supply more than one and a third times the
    total current national demand for electricity. An area just over one
    hundred miles by one hundreds miles in Nevada could produce enough
    electricity from the sun to meet annual national demand. We have large
    untapped geothermal and biomass (energy crops and plant waste)
    resources. Of course, there are limits to how much of this potential
    can be used economically, because of competing lard uses, competing
    costs from other energy sources, and limits to the transmission system.
    The important question is how much it would cost to supply a specific
    percentage of our electricity from non-hydroelectric renewable energy
    sources. As this testimony will later show, recent analyses demonstrate
    we could affordably generate at least 20 percent of our electricity
    from non-hydro renewable energy by 2020.
        The benefits of renewable energy are as plentiful as the resource
    itself--environmental improvement, economic development, and increased
    fuel diversity and national security.
        Harnessing renewable energy conserves natural resources for future
    generations, and reduces the environmental and public health impacts of
    mining, refining, transporting. burning, and disposing of wastes from
    fossil fuels, as well as reducing air emissions. Renewable resources
    also provide insurance against increased costs from stricter
    environmental regulations in the future.
        Renewable energy provides new economic development opportunities,
    especially in rural areas that are rich in wind and biomass resources.
    According to the U.S. Department of Energy, generating 5 percent of the
    country's electricity with wind power by 2020 would add $60 billion in
    capital investment in rural America, and create 80,000 new jobs.
    Renewable energy technologies also offer the potential for a very large
    export market, as many countries around the world are increasing their
    use of renewable resources.
        Renewable energy technologies diversify our energy resource
    portfolio, reducing exposure to energy supply interruptions and price
    volatility, which can affect the entire economy. Indeed, Stephen Brown,
    director of energy economics at the Dallas Federal Reserve Bank, notes
    that ``nine of the 10 last recessions have been preceded by sharply
    higher energy prices.'' Two years ago, soaring natural gas prices was
    one key factor in the California energy crisis that caused rolling
    blackouts and cost energy consumers billions of dollars. There are now
    significant indications that the natural gas price volatility
    experienced during 2001 was not an isolated event. Just last week, as
    the composite price of March natural gas on the New York Mercantile
    Exchange,jumped 65 percent in one clay, the Wall Street Journal
    reported industry observers as saying that ``the U.S. is entering a
    prolonged period of higher natural gas prices, and the days of $3
    natural gas, which lasted from the mid-1980s until about 2000, may be
    gone.''
        There is also a growing recognition that renewable energy and
    efficiency can enhance energy security. An official banner at the
    Administration's Renewable Energy Summit in the fall of 2001 read:
    ``Expand Renewable Energy For National Security.'' James Woolsey,
    former head of the Central Intelligence Agency, Robert McFarlane,
    President Reagan's former national security advisor, and Admiral Thomas
    Moorer. former chair of the Joint Chiefs of Staff, together wrote
    Congressional leader September 2001 urging enactment of minimum
    standards for renewable fuels and electricity, along with an increase
    in energy efficiency funding, in order to increase national security.
        In spite of these compelling environmental, economic, and security
    benefits, renewable energy technologies continue to face many market
    barriers, which unnecessarily keep them from reaching their full
    potential.
        Renewable energy has made great strides in reducing costs, thanks
    to research and development and growth in domestic and global capacity.
    The cost for wind and solar electricity has come down by 80-90 percent
    over the past two decades. However, like all emerging technologies,
    renewable resources face commercialization barriers. They must compete
    at a disadvantage against the entrenched industries. They lack
    infrastructure, and their costs are high because of a lack of economies
    of scale.
        Renewable energy technologies face distortions in tax and spending
    policy. Studies have established that federal and state tax and
    spending policies tend to favor fossil-fuel technologies over renewable
    energy. A recent study by the Renewable Energy Policy Project showed
    that between 1943 and 1999, the nuclear industry received over $145
    billion in federal subsidies vs. $4.4 billion for solar energy and $1.3
    billion for wind energy. Another study by the non-partisan
    Congressional Joint Committee on Taxation projected that the oil and
    gas industries would receive an estimated $11 billion in tax incentives
    for exploration and production activities between 1999 and 2003. In
    addition to these subsidies, conventional generating technologies enjoy
    a lower tax burden. Fuel expenditures can be deducted from taxable
    income, but few renewable technologies benefit from this deduction,
    since most do not use market-supplied fuels. Income and property taxes
    are higher for renewable energy, which require large capital
    investments but have low fuel and operating expenses.
        Many of the benefits of renewable resources, such as reduced
    pollution and greater energy diversity, are not reflected in market
    prices, thus eliminating much of the incentive for consumers to switch
    to these technologies. Other important market barriers to renewable
    resources include: lack of information by customers, institutional
    barriers, the small size and high transaction costs of many renewable
    technologies, high financing costs, split incentives among those who
    make energy decisions and those who bear the costs, and high
    transmission costs.
        Some have called for future support of renewable energy through
    ``green marketing,'' selling portfolios with a higher renewable energy
    content (and lower emissions) to customers who are willing to pay more
    for them. We strongly support green marketing as a means to increase
    the use of renewable energy and reduce the environmental impacts of
    energy use. Surveys show that many customers are willing to pay more
    for renewable energy, and pilot programs have shown promising, but not
    overwhelming results.
        Green marketing is not a substitute for sound public policy,
    however. There are many barriers to customers switching to green power,
    not the least of which is inertia. More than fifteen years after
    deregulation of long-distance telephone service, half of telephone
    customers still had not switched suppliers, even though they could get
    much lower prices by doing so. A recent study by the National Renewable
    Energy Laboratory projects that in an optimistic scenario, green
    marketing could increase the percentage of renewable energy in our
    electricity mix from about 2 percent today to only about 3 percent in
    ten years.
        With green electricity, the benefits of any individual customer's
    choice accrue to everyone, not the individual customer. Green customers
    gets the same undifferentiated electrons and breathe the same air as
    their neighbors choosing to buy power from cheap, dirty coal plants,
    creating a strong incentive for people to be ``free riders'' rather
    than pay higher costs for renewable resources. People recognize this
    public benefits aspect of green power. While they consistently say they
    are willing to pay more for electricity that is cleaner and includes
    more renewable energy, they overwhelmingly prefer that everyone pay for
    these benefits to relying on volunteers. A deliberative poll by Texas
    utilities found that 79 percent of participants favored everyone paying
    a small amount to support renewable energy, versus 17 percent favoring
    relying only on green marketing.
                       iii. the renewable energy standard
        A number of complementary policies should be enacted to reduce
    market barriers to renewable energy development:

       Extending production tax credits of 1.7 cents per kWh and
            expanding them to cover all clean, renewable resources
            (excluding hydropower);
       Enacting a federal public benefit fund to match state
            programs for energy efficiency, renewable energy, research and
            development, and protecting low-income customers;
       Adopting national net metering standards, allowing consumers
            who generate their own electricity with renewable energy
            systems to feed surplus electricity back to the grid and spin
            their meters backward, thus receiving retail prices for their
            surplus power production;
       Increasing spending on renewable energy research and
            development.

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

       Providing a revenue stream that will enable manufacturers
            and developers to obtain project financing at a reasonable cost
            and make investments in expanding capacity to meet an expanding
            renewable energy market.
       Allowing economies of scale in manufacturing, installation,
            operation and maintenance of renewable energy facilities.
       Promoting vigorous competition among renewable energy
            developers and technologies to meet the standard at the lowest
            cost.
       Inducing development of renewables in the regions of the
            country where they are the most cost-effective, while avoiding
            expensive long-distance transmission, by allowing national
            renewable energy credit trading.
       Reducing transaction costs, by enabling suppliers to buy
            credits and avoid having to negotiate many small contracts with
            individual renewable energy projects.

        Some people have asked why hydropower is not eligible to earn
    renewable energy credits in most RPS proposals. The primary reason for
    not including hydro is that it is a mature resource and technology. In
    most cases, it is already highly competitive. It will not benefit
    appreciably from the cost-reduction mechanisms outlined above, and an
    RPS that included hydro would produce negligible, if any, increases in
    hydro generation.
        Some people have also expressed concerns about the variable output
    of renewable sources like solar and wind, and believe that an RPS would
    affect the reliability of our energy system. However, the electric
    system is designed to handle unexpected swings in energy supply and
    demand, such as significant changes in consumer demand or even the
    failure of a large power plant or transmission line. Solar energy is
    also generally most plentiful when it is most needed-when air-
    conditioners are causing high electricity demand. There are several
    areas in Europe, including parts of Spain, Germany, and Denmark, where
    wind power already supplies over 20 percent of the electricity with no
    adverse effects on the reliability of the system. In addition, several
    important renewable energy sources, such as geothermal, biomass, and
    landfill gas systems can operate around the clock. Studies by the EIA
    and the Union of Concerned Scientists show these nonintermittent,
    dispatchable renewable plants would generate about half of the nation's
    non-hydro renewable energy under a 10 percent RPS in 2020. Renewable
    energy can increase the reliability of the overall system, by
    diversifying our resource base and using supplies that are not
    vulnerable to periodic shortages or other supply interruptions.
                 iv. benefits of a renewable portfolio standard
        Three recent studies, one by the U.S. Energy Information
    Administration (EIA) and two by the Union of Concerned Scientists, show
    that a 10 percent RPS by 2020 is easily achievable and can stimulate
    economic development and increase energy security, while reducing
    consumer energy bills as well as local and global environmental
    hazards. Increasing the RPS to 20 percent by 2025 would result in
    greater diversity, environmental, and economic development benefits
    compared to the 10 percent standard, and would still provide savings to
    energy consumers. When combined with energy efficiency measures and
    additional renewable energy policies, the RPS can significantly lower
    consumer energy bills.
        EIA Analysis: The EIA study was conducted at the request of Senator
    Frank Murkowski, as the Senate considered inclusion of the RPS as part
    of comprehensive national energy legislation (S. 1766). As part of
    their analysis, the EIA examined the costs of using the RPS to achieve
    levels of 10 percent (both with and without the sunset provision in S.
    1766) and 20 percent renewable electricity supplies by the year 2020.
        The EIA scenarios found benefits to consumers from increasing
    renewable energy use despite including a number of assumptions that are
    extremely unfavorable to renewable energy. Many of these assumptions
    were examined and rejected by the Interlaboratory Working Group--made
    up of experts from the National Renewable Energy Lab, Oak Ridge
    National Lab, Pacific Northwest Lab, Battelle Memorial Institute, and
    Lawrence Berkeley National Lab--in their Scenarios for a Clean Energy
    Future (IWG, 2000). In some of the most important such assumptions, EIA

       Used higher cost and worse performance assumptions for most
            renewable technologies than recent experience or projections by
            the Electric Power Research Institute and DOE;
       Arbitrarily increased the capital cost of wind, biomass, and
            geothermal technologies by up to 200 percent in a given region
            after a fairly small amount of the regional potential is met;
            more than 90 percent of the highest value wind resources in the
            US, for example, are assigned a capital cost multiplier of 200
            percent; and
       Limited the penetration of variable output resources like
            wind and solar power to 15 percent of a region's electricity
            generation; in parts of Germany, Denmark and Spain, wind power
            is already providing more than 20 percent of total electricity
            generation.

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

       $17 billion in new capital investment;
       S1.2 billion in new property tax revenues for local
            communities;
       $410 million in lease payments to farmers and rural
            landowners from wind power.

        UCS also found that the increased use of renewable energy in the
    United States would reduce air pollution from power plants, Nationally,
    the renewable energy standard will reduce about 27 million metric tons
    of carbon emissions a year by 2020. The renewable standard will also
    reduce harmful water and land impacts from extracting, transporting,
    and using fossil fuels.
        In the future, natural gas is projected to fuel much of the new
    electricity generation built in the United States without additional
    policies for renewable energy. This increase in demand for natural gas
    may lead to natural gas prices that are higher and more volatile than
    those used in our base case analysis. Based on these assumptions, UCS
    also examined the effects of a 10 percent RPS on an alternative
    scenario where wholesale natural gas prices are 35 percent higher by
    2020.
        UCS found that the more expensive natural gas is, the greater the
    savings will be from reducing natural gas use through a renewable
    energy standard. In the scenario that we analyzed, total consumer
    energy bill savings through 2020 from the renewable standard would more
    than double to $17.6 billion. Renewable energy generation and related
    economic development benefits would also increase significantly if gas
    prices were higher.
        In Clean Energy Blueprint: A Smarter National Energy Policy for
    Today and the Future, the Union of Concerned Scientists investigated
    the costs and benefits of two energy efficiency and renewable energy
    scenarios, compared to business as usual. We did not examine RPS-only
    scenarios, as in Renewing Where We Live or as EIA did, but looked at a
    20 percent RPS in combination with other renewable energy and energy
    efficiency policies.
        We examined a scenario consisting primarily of the policies in the
    Renewable Energy and Energy Efficiency Investment Act of 2001 (S.
    1333), sponsored by Senator Jeffords. 1n addition to a 20 percent RPS,
    S. 1333 would have established a federal public benefit fund and net
    metering. We also assumed that research and development spending on
    renewable energy and efficiency would increase 60 percent over three
    years to levels recommended by the President's Committee of Advisors on
    Science and Technology.
        We also investigated the costs and benefits of the RPS with an
    expanded suite of renewable energy and energy efficiency policies. In
    addition to the above policies, these included:

       Production tax credits of 1.7 cents per kWh for renewable
            energy would be extended and expanded to cover all clean, non-
            hydro renewable resources, helping to level the playing field
            with fossil fuel and nuclear generation subsidies.
       Combined heat and power: Incentives would be provided and
            regulatory barriers removed for power plants that produce both
            electricity and useful heat at high efficiencies.
       Improved efficiency standards: National minimum efficiency
            standards would be established for a dozen products; generally
            to the level of good practices today. In addition, existing
            national standards would be revised to levels that are
            technically feasible and economically justified.
       Enhanced building codes: States would adopt model building
            codes established in 1999/2000, as well as new more advanced
            codes established by 2010.
       Tax incentives would promote efficiency improvements for
            buildings and equipment beyond minimum standards.
       Industrial energy efficiency measures. Industry would
            improve its efficiency by 1 to 2 percent per year through
            voluntary agreements, incentives, or national standards.

        Like Renewing Where We Live, this analysis used the U.S. Energy
    Information Administration's HEMS computer model, with scenarios run
    for UCS by the Tellus Institute. For this report, we based our
    business-as-usual scenario on Annual Energy Outlook 2001 (EIA, 2000).
    The year 1999 is the last year of history in the model, which makes
    projections through 2020. The efficiency policies were developed by and
    modeled by the American Council for an Energy Efficient Economy. The
    calculated energy savings were used to adjust the AEO forecasts. The
    energy efficiency costs were annualized and added to the results. Once
    again, we modified several NEVIS assumptions for renewable energy,
    generally in line with the IWG Clean Energy Future analysis, in order
    to model these technologies more accurately and applied these
    modifications to both the business-as-usual scenario and the Clean
    Energy Blueprint.
        Combined with increased research and development, S. 1333 would
    save consumers a total of $70 billion between 2002 and 2020, with
    savings reaching $35 billion per year by 2020. Under a higher-gas-price
    scenario, cumulative savings would reach $130 billion between 2002 and
    2020. In 2020, monthly bills for a typical household would be $34 per
    month under S. 1333, compared to $38 per month under business as usual
    and $25 per month under the Clean Energy Blueprint,
        Carbon dioxide emissions from power plants would be nearly one-
    third lower than under business as usual by 2020, while sulfur dioxide
    emission levels would be 8 percent lower and nitrogen oxide emissions
    15 percent lower.
        When combined with the energy efficiency and additional renewable
    energy policies included in the Clean Energy Blueprint, the economic
    and environmental benefits of the RPS are even greater. Under the
    Blueprint, total energy use would be 19 percent lower than business as
    usual by 2020 and only 5 percent higher than 2000 levels, due to
    increased energy efficiency in homes, offices, and factories. Natural
    gas use would grow by 8 percent from today's level, but be 31 percent
    less than business as usually 2020. Coal-tired electricity generation
    is 61 percent below business as usual in 2020 and 53 percent lower than
    today's levels.
        Oil use would be reduced by 5 percent, saving over 400 million
    barrels per year by 2020. More oil Would be saved over the next 18
    years than is projected to be economically recoverable from the Arctic
    National Wildlife Refuge over 60 years. The Clean Energy Blueprint did
    not include oil savings from increased energy efficiency and renewable
    energy use in the transportation sector. Another recent UCS study,
    Drilling in Detroit: Tapping Automaker Ingenuity to Build Safe and
    Efficient Automobiles, has shown that fuel economy improvements in cars
    and light trucks would provide significant oil savings (UCS, 2001). If
    these savings were combined with the savings from the Clean Energy
    Blueprint, the United States would save more than 15 times the oil
    available in the Arctic Refuge at 2001 oil prices (Figure 5) and total
    oil use would be 9 percent lower in 2010 and 23 percent lower in 2020
    than under business as usual. The combined net savings to consumers
    would increase to over $150 billion per year by 2020 and $645 billion
    between 2002 and 2020.
        Non-hydro renewable energy sources (wind, biomass, geothermal, and
    solar) would produce 20 percent of the nation's electricity by 2020.
    Energy efficiency measures would offset projected growth in electricity
    use. Combined heat and power plants would meet 39 percent of commercial
    and industrial electricity needs. Thus, the Clean Energy Blueprint
    would eliminate the need for 975 of the 1,300 new power plants the
    administration's National Energy Policy says we need by 2020, and
    retire 180 existing coal plants and 14 nuclear plants, reducing the
    number of vulnerable energy facilities.
        By 2020, because of lower electricity demand and because natural
    gas is used both to generate electricity and to produce useful heat,
    overall natural gas generation is 33 percent lower than business as
    usual in 2020. The Blueprint's efficiency and renewable energy policies
    reduce natural ;as prices by 27 percent by 2020, saving businesses and
    homes that use natural gas nearly $30 billion per year.
        Under the Clean Energy Blueprint, net energy savings would grow to
    $105 billion per year by 2020, totaling $440 billion between 2002 and
    2020 (total savings between 2002 and 2020 are in 1999 dollars using a 5
    percent real discount rate.) A typical family would save $350 per year
    in lower energy bills by 2020 (Figure 6).
        The Clean Energy Blueprint would reduce power plant carbon
    emissions two-thirds by 2020 compared to business-as-usual projections
    (Figure 7). Sulfur dioxide emissions, which are the primary cause of
    acid rain, and nitrogen oxide emissions, a major cause of smog, would
    both be reduced more than 55 percent.
        The Clean Energy Blueprint would reduce the need to drill for
    natural gas and to build some significant portion of the over 300,000
    miles of new pipelines called for in the administration's National
    Energy Policy. It would also reduce the need to mine, transport, and
    burn 750 million tons of coal per year by 2020 compared to business-as-
    usual projections. Moreover, energy efficiency measures and renewable
    energy facilities can be deployed faster than new fossil and nuclear
    energy supplies could be developed.
                                 vi. conclusion
        Survey after survey has shown that Americans want cleaner and
    renewable energy sources, and that they are willing to pay more for
    them. A survey conducted last year by Melhrnan Associates found that
    when presented with arguments for and against a 20 percent RPS
    requirement, 70 percent of voters support an RPS, while only 21 percent
    oppose it.
        The combination of EIA and UCS studies demonstrate that with
    appropriate policies, renewable energy technologies can provide
    Americans with the clean and reliable electricity they desire, while
    also saving them money, contributing to our nation's energy security
    and achieving significant reductions in harmful emissions.
        The net metering and renewable energy production incentive
    provisions included in the current drag bill before the committee are
    laudable and deserving of support. But by themselves, these provisions
    will not get the job done. A strong, market-friendly renewable energy
    standard is required to realize the full potential of America's
    renewable energy resources.
        For all of these reasons, we respectfully urge that as the
    Committee moves forward with its development of national energy
    legislation, you support inclusion of a renewable portfolio standard.
    Thank you.