[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
                                 ______

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                            WASHINGTON : 2003
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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

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

                       Alex Flint, Staff Director
                     James P. Beirne, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                         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.
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    * 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.
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    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.
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    \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.
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    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.)
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    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.

