[Senate Hearing 108-277]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-277
 
   KEEPING THE LIGHTS ON: THE FEDERAL ROLE IN MANAGING THE NATION'S 
                              ELECTRICITY


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

                                HEARING

                               before the

                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
    THE FEDERAL WORKFORCE AND THE DISTRICT OF COLUMBIA SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               ----------                              

                   SEPTEMBER 10 AND NOVEMBER 20, 2003

                               ----------                              

      Printed for the use of the Committee on Governmental Affairs




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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

           Michael D. Bopp, Staff Director and Chief Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                      Amy B. Newhouse, Chief Clerk

                                 ------                                

   OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE AND THE 
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                  GEORGE V. VOINOVICH, Ohio, Chairman
TED STEVENS, Alaska                  RICHARD J. DURBIN, Illinois
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        FRANK LAUTENBERG, New Jersey
JOHN E. SUNUNU, New Hampshire        MARK PRYOR, Arkansas

                   Andrew Richardson, Staff Director
   Marianne Clifford Upton, Minority Staff Director and Chief Counsel
                      Cynthia Simmons, Chief Clerk
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Voinovich............................................ 1, 37
    Senator Levin................................................     4
    Senator Lautenberg........................................... 7, 47

                               WITNESSES
                     Wednesday, September 10, 2003

Kyle E. McSlarrow, Deputy Secretary of Energy, Department of 
  Energy.........................................................     8
Pat Wood, III, Chairman, Federal Energy Regulatory Commission....    10
Alan R. Schriber, Chairman, Public Utility Commission of Ohio....    20
Craig A. Glazer, Vice President, PJM Interconnection, L.L.C......    22
James P. Torgerson, President and Chief Executive Officer, 
  Midwest Independent Transmission System Operator, Inc..........    24
William J. Museler, President and Chief Executive Officer; New 
  York Independent System Operator...............................    26
James Y. Kerr, II, Commissioner, North Carolina Utilities 
  Commission.....................................................    28
Mark N. Cooper, Director of Research, Consumer Federation of 
  America........................................................    30

                      Thursday, November 20, 2003

Pat Wood, III, Chairman, Federal Energy Regulatory Commission....    40
James W. Glotfelty, Director, Office of Electric Transmission and 
  Distribution, U.S. Department of Energy........................    43
Michael R. Gent, President and CEO, North American Electric 
  Realiability Council...........................................    45

                     Alphabetical List of Witnesses

Cooper, Mark N.:
    Testimony....................................................    30
    Prepared statement...........................................   187
Gent, Michael R.:
    Testimony....................................................    45
    Prepared statement with attachments..........................   200
Glazer, Craig A.:
    Testimony....................................................    22
    Prepared statement...........................................    98
Glotfelty, James W.:
    Testimony....................................................    43
    Prepared statement...........................................   196
Kerr, James Y. II:
    Testimony....................................................    28
    Prepared statement with attachments..........................   127
McSlarrow, Kyle E.:
    Testimony....................................................     8
    Prepared statement...........................................    61
Museler, William J.:
    Testimony....................................................    26
    Prepared statement...........................................   118
Schriber, Alan R.:
    Testimony....................................................    20
    Prepared statement...........................................    88
Torgerson, James P.:
    Testimony....................................................    24
    Prepared statement...........................................   111
Wood, Pat III:
    Testimony................................................... 10, 40
    Prepared statements........................................ 71, 193

                                Appendix

``Interim Report: Causes of the August 14th Blackout in the 
  United States and Canada,'' by the U.S.-Canada Power System 
  Outage Task Force, November 2003...............................   211
``Reviving the Electricity Sector,'' Findings of the National 
  Commission on Energy Poilicy, August 2003......................   333
``Contributing Factors to the Series of Outages on August 14, 
  2003,'' A White Paper, September 23, 2003, by Stephen T. Lee, 
  Ph.D., EPRI Project Manager....................................   345
``Michigan Public Service Commission Report on August 14th 
  Blackout,'' November 2003......................................   374
Letter to Senator Domenici and Representative Tauzin, dated 
  September 2, 2003..............................................   484
Responses to Questions for the Record for Pat Wood, III, from 
  Senator Lautenberg.............................................   486


   KEEPING THE LIGHTS ON: THE FEDERAL ROLE IN MANAGING THE NATION'S 
                              ELECTRICITY

                              ----------                              


                     WEDNESDAY, SEPTEMBER 10, 2003

                                       U.S. Senate,
          Oversight of Government Management, the Federal  
            Workforce, and the District of Columbia Subcommittee,  
                          of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:02 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. George V. 
Voinovich, Chairman of the Subcommittee, presiding.
    Present: Senators Voinovich, Levin, and Lautenberg.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. The Subcommittee will please come to 
order. Because we have a very busy schedule and many witnesses, 
I want to begin this hearing on time. I am sure that my 
colleagues will be coming, as I expect several of them to be 
here today. They indicated that they will be here.
    Again, thank you for coming. We are here today to discuss 
the Federal role in ensuring the reliability of our electricity 
supply. In order to ensure that we have reliability, we need to 
have highly dependent systems to operate continuously and for 
them to generate and transmit electricity. It is axiomatic that 
adequate generation is meaningless without the transmission 
capacity to deliver electricity, and equally so to have an 
adequate or even robust transmission system without adequate 
generation to meet customer demand.
    There is no question that this Nation is currently served 
by a strained electricity system. Generation has failed to meet 
growing demand and facing ever-tightening restrictions that 
limit our ability to expand generation capacity, transmission 
capacity, and transmission capacity increases have lagged even 
behind generation increases, let alone demand increases. So, in 
effect, what we have had is a lot more generation, but we 
haven't had the transmission capacity to keep up with that 
generation capacity.
    Fortunately, the Senate, along with the House and President 
Bush, is moving forward in developing an energy policy to help 
alleviate these constraints. The energy bill will encourage 
increased production and supplies of natural gas and expansion 
of hydro-based nuclear and clean coal-fired generation.
    Further, I have introduced President Bush's Clear Skies 
Act, which will provide much needed relief to natural gas 
markets by protecting the long-term viability of coal-based 
generation and provide regulatory certainty for utilities, 
which is something that we need desperately in this country. 
There is so much uncertainty today out there among generators 
that it has never been like this in the country's history.
    The issue of electric reliability was brought front and 
center on August 14, when more than 50 million Americans and 
Canadians lost power in parts of the Northeast, the Midwest, 
and Ontario. In my home State of Ohio, at least two million--
two million people were affected, including yours truly. It was 
very nice that day when the lights came on about 12 hours 
exactly from the time that they went out. I landed at Hopkins 
Airport when the lights went out and it took us about 2 hours 
to go through the whole procedure. I give the bag handlers a 
lot of credit for doing everything by hand.
    First, I would like to commend the administration for its 
leadership. President Bush moved quickly to create the U.S.-
Canada Joint Task Force on the power outage. By initiating a 
thorough examination of the blackout and getting the Canadians 
involved quickly, the administration has put us on a path to 
discover what happened.
    The purpose of today's hearing is not to focus on who was 
responsible for the blackout. I want to emphasize that. I am 
confident that all of those questions will be answered by the 
investigation being conducted by the task force, and in the 
future, we will be holding hearings on these findings. Rather, 
today's purpose is to focus on how we prevent something similar 
from happening again.
    Many of us have known for several years that power 
transmission has not kept up with power generation, 
particularly in the era of deregulation, where the power grid 
takes on much greater priority. The point is, even if the power 
hadn't gone out, we would still be facing potential problems 
with our outdated and inadequate transmission system.
    What action must be taken by the Federal Government to 
ensure that our grid doesn't collapse again in the future? The 
August blackout was only the most recent example of why our 
country's electricity transmission system needs to be 
modernized. Like all of my colleagues on this Subcommittee and 
in this Senate, I am truly concerned about our Nation's energy 
situation.
    It may surprise many people in this room that Ohio is the 
third largest energy-consuming State in the United States of 
America, behind California and New York. Ohio, as well as other 
States, needs affordable, reliable energy to ensure a robust 
economy and future growth. Unfortunately, this blackout has had 
a costly effect on many of our business interests and sectors. 
The Ohio Manufacturers' Association estimates that the August 
blackout directly cost Ohio manufacturers over $1 billion--$1 
billion in an economy that is sputtering.
    For example, Republic Engineered Products, based in Ohio, 
experienced a fire and an explosion as a result of the blackout 
which seriously damaged one of their blast furnaces in 
Lorraine, Ohio. After this furnace went offline, the most 
effective solution for the company was to start a back-up 
furnace, which cost a significant amount of money. 
Additionally, there was molten steel in their process machinery 
which cooled when power was lost, causing additional damage to 
their equipment. The final price tag this company is facing 
because of the blackouts will be in the millions of dollars. I 
have heard similar stories from companies in other States 
affected by power outage, including New York, Pennsylvania, and 
Michigan.
    Over the last 40 years, our national electricity system has 
become congested and strained because growth in electricity 
demand has not been matched by corresponding investment in new 
generation and transmission. Further, our existing transmission 
infrastructure, which was created in a world where utilities 
operated as virtual monopolies within their geographic regions, 
was not designed to meet the demands of our modern electricity 
markets.
    The result is that generation shortages and transmission 
constraints have led to major blackouts in California--we have 
forgotten that so quickly, but it happened--the Midwest, and 
the Northeast, and the risks of further blackouts are growing 
daily. Many of us were concerned last summer that New York 
would experience blackouts because of the lack of transmission 
capacity in that great city.
    This is not acceptable. When my constituents flip on the 
lights, they expect that the lights come on.
    I am pleased that modernization of our transmission systems 
is finally a national priority and is being debated in the 
energy bill Conference Committee. The need for reliable 
transmission is universally recognized. However, things break 
down when policy makers argue about who pays for it. We went 
through that last year when we were trying to put the 
electricity title together for the energy bill. Who pays for 
it? Is it the utilities? Is it the customers? There is an 
argument. Somehow, that has got to be worked out so that it is 
a fair way of paying for that transmission capacity.
    The fact is that investing in power generation is a better 
investment than investing in transmission, and somehow, we have 
to recognize that. It is understandable that companies are 
hesitant to invest in transmission because they are facing 
obstacles, such as NIMBY, ``not in my backyard,'' and frankly, 
I have heard, and I am sure Senator Levin has heard from 
constituents that don't want transmission lines through their 
farm and through wherever they live.
    To make matters worse, it seems there is a new movement 
afoot. It is called the BANANA movement, ``build absolutely 
nothing anywhere near anything.'' Further, even companies that 
are willing to invest in transmission are reluctant because of 
burdensome and onerous environmental requirements.
    We have to harmonize our environmental and energy policies 
to keep this Nation competitive. For too long, our 
environmental concerns, our needs, and our energy concerns have 
been going in different directions. They haven't been speaking 
to each other. For the betterment of this country, we need to 
harmonize those environmental and energy needs or we are in 
deep, deep trouble.
    In an effort to increase transmission capacity, I sponsored 
legislation in the last Congress to amend the National 
Environmental Policy Act and streamline the siting process for 
transmission corridors. Further, I have recently sent a letter 
to the energy bill conferees encouraging them to include 
provisions to strengthen the reliability of our Nation's 
electricity supply in that energy bill.\1\
---------------------------------------------------------------------------
    \1\ The letter to Senator Domenici and Representative Tauzin, dated 
September 3, 2003, appears in the Appendix on page 484.
---------------------------------------------------------------------------
    What I would like to hear from each witness today is your 
thoughts on the best way to move forward to modernize the grid 
and what is the appropriate Federal role in managing and 
regulating the grid.
    I now would like to call on Senator Levin. Senator Levin, I 
am very happy that you are here today, and if you have an 
opening statement, we would like to hear it.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you, and I will ask that my entire 
statement be made part of the record. I will try to be brief 
because I know that we have a number of votes coming up, I 
believe a little later on this morning.
    I commend you, Mr. Chairman, for not only calling this 
hearing, for your initiative and for your leadership in this 
area, but also for trying to hold a hearing when we have a 
series of stacked votes going on later on this morning. It is 
going to be quite a challenge to do that and I thank you for 
that effort.
    Over the past few years, our country and our economy have 
been rocked by two major energy crises. The first, triggered by 
Enron's collapse, disclosed rampant energy price manipulation 
and fraud and billions of dollars in electricity overcharges in 
a number of States. The second, on August 14, was a sudden and 
massive power outage that disrupted broad sections of the 
Midwest, New York, and Canada.
    In my home State of Michigan alone, over six million 
residents lost power. Numerous Michigan businesses and schools 
closed, including over 70 manufacturing companies. The City of 
Detroit and much of Southeast Michigan lost the ability to 
operate water and sewer systems. Michigan State and local 
governments spent more than $20 million on emergency 
assistance. And ongoing assessments of losses associated with 
the power failure in Michigan are expected to reach $1 billion.
    The massive power failure of August 2003 on top of the 
massive price manipulation perpetrated by Enron and others 
provide additional proof, if more were needed, that the 
deregulated energy markets in this country are not functioning 
well. These energy markets are not self-policing. There is no 
invisible hand guaranteeing efficient power flows and fair 
prices. Instead, a philosophy that U.S. energy markets can 
function free of meaningful oversight has thrown our energy 
markets into turmoil and opened the door to power failures and 
price manipulation, punishing U.S. ratepayers and taxpayers 
with economic disruption and high energy costs.
    The result is not only unreliable power that threatens our 
economy and our security, but also a loss of investor 
confidence in U.S. energy markets, a dearth of new investment, 
and the bankruptcy of some energy companies once at the heart 
of our U.S. energy industry.
    Despite the growing complexity and difficulties associated 
with power transmission, it is also clear that currently no 
single agency or company can be held accountable for ensuring 
the reliability of the Nation's electric grid. Control of 
transmission lines varies across the Nation and includes a 
hodgepodge of Federal, regional, State, local, and private 
agencies and entities.
    One key player testifying today, the Midwest Independent 
System Operator, MISO, schedules wholesale use of lines to 
transmit electricity but claims to lack the authority to 
interrupt power transmissions traveling from energy generators 
to consumers. Instead, when lines go down, as they did on 
August 14, the MISO can issue instructions to utilities using 
the power lines, but must rely on voluntary compliance by the 
utilities to resolve fast-moving grid problems.
    The North American Electric Reliability Council, an 
industry group that designs and issues standards to ensure grid 
reliability, is dependent on voluntary compliance and cannot 
require transmission line users to meet its standards or 
penalize non-compliance.
    The Federal Energy Regulatory Commission (FERC) also says 
it lacks clear authority to ensure grid reliability, although 
in 1999 it issued rules which, in part, required regional 
transmission organizations to ensure reliability.
    The August power failure and the Enron price manipulation 
scandal provide clear mandates for Congressional action. 
Congress needs to pass legislation this year to increase grid 
reliability and to stop energy price manipulation.
    With respect to reliability, Congress needs to replace 
voluntary reliability standards with mandatory and enforceable 
reliability rules applicable to all users, owners, and 
operators of the transmission network. While industry-developed 
standards provide a starting point, the responsibility for 
writing the final rules to ensure grid reliability needs to be 
vested in FERC, a Federal agency that can be held accountable 
for problems.
    Now, while some in Congress want to include a reliability 
provision in the larger energy bill now in conference, using 
the urgency of that issue to propel enactment of the whole 
energy bill, this issue is too important to hold the 
reliability provision hostage to resolution of a myriad of 
other problems in the energy bill. We ought to act on the 
consensus that now exists to resolve the reliability problem. 
If we fail to act now, we are risking more blackouts.
    And just one word on this other legislation to eliminate 
the so-called Enron exemption, Mr. Chairman. I will not go into 
that in detail except to say that Senators Feinstein, Lugar, 
myself, and a number of other Senators have been working on 
anti-fraud and anti-manipulation laws. We have been guaranteed 
and assured that we will have an up-down vote on an amendment 
to the agriculture appropriations bill to address that issue. 
We will be releasing a copy of the amendment in the near future 
and I, again, would appreciate the entire statement on that 
subject and other parts be made part of the record.
    Senator Voinovich. Thank you, Senator Levin.
    Senator Levin. Thank you very much, Mr. Chairman.
    [The prepared opening statement of Senator Levin follows:]
              PREPARED OPENING STATEMENT BY SENATOR LEVIN
    Over the past few years, our country and our economy have been 
rocked by two major energy crises. The first, triggered by Enron's 
collapse, disclosed rampant energy price manipulation and fraud and 
billions of dollars in electricity overcharges in a number of states. 
The second, on August 14, was a sudden and massive power outage that 
disrupted broad sections of the Midwest, New York and Canada. In my 
home state, alone, over 6 million Michigan residents lost power. 
Numerous Michigan businesses and schools closed, including over 70 
manufacturing companies. The City of Detroit and much of southeast 
Michigan lost the ability to operate water and sewer systems. Michigan 
state and local governments spent more than $20 million on emergency 
assistance, and ongoing assessments of losses associated with the power 
failure in Michigan are expected to reach $1 billion.
    The massive power failure of August 2003, on top of the massive 
price manipulation perpetrated by Enron and others, provide additional 
proof, if more were needed, that the United States' deregulated energy 
markets are not functioning well. These energy markets are not self-
policing--there is no invisible hand guaranteeing efficient power flows 
and fair prices. Instead, an ill-advised philosophy that U.S. energy 
markets can function free of meaningful standards and oversight has 
opened the door to power failures and price manipulation, punishing 
U.S. ratepayers and taxpayers with economic disruption and high energy 
costs.
    The result is not only unreliable power that threatens our economy 
and security, but also a loss of investor confidence in U.S. energy 
markets, a dearth of new investment, and the bankruptcy of some energy 
companies once at the heart of the U.S. energy industry.
    Reforms can and must tackle these issues. While the precise causes 
of the August power failure have yet to be determined, and 
investigations by the Michigan Public Service Commission, U.S. 
Department of Energy in conjunction with Canada, and others are 
ongoing, some facts have already become clear. We know, for example 
that, during the 1990's, utilities in the Northeast and Midwest 
underwent extensive deregulation that separated electricity power 
generation from power transmission over the grid. Since this 
deregulation, according to a recent report by the North American 
Electric Reliability Council, the Midwest has become one of the great 
crossroads in the transmission of power across the nation. Power 
produced as far away as Denver flows through the Midwestern grid on its 
way to users in New York and elsewhere.
    At the same time, the complexities and difficulties involved in 
coordinating power flowing through Midwestern transmission lines have 
increased. A patchwork of companies and utilities generating power use 
these lines. These transmission line users apparently have no legal 
obligation to alert the transmission line operators to upcoming voltage 
fluctuations or the cause of these fluctuations, even though power 
surges can overwhelm transmission lines with little notice and 
devastating impact. Utilities have no legal obligation to warn 
neighboring utilities of transmission problems, even though warnings 
can play a crucial role in activating safeguards to minimize grid 
problems. Detroit Edison reported, for example, that on August 14, it 
had no idea there were problems on the grid until 2 minutes before the 
Michigan power loss, when power flowing from Michigan to Ohio jumped by 
2,000 megawatts in 10 second sand, 90 seconds later, power flowing from 
Ontario to Michigan jumped by 2,600 megawatts. Thirty-seconds after 
that, Detroit Edison's portion of the grid was dead.
    Despite the growing complexity and difficulties associated with 
power transmission, it is also clear that, currently, no single agency 
or company can be held accountable for ensuring the reliability of the 
nation's electrical grid. Control of transmission lines varies across 
the nation and includes a hodge-podge of federal, regional, state, 
local and private agencies and entities. One key player testifying 
today, the Midwest Independent System Operator (MISO), schedules 
wholesale use of liens to transmit electricity, but claims to lack the 
authority to interrupt power transmissions traveling from generators to 
consumers. Instead, when lines go down as they did on August 14, the 
MISO says that it can issue instructions to utilities using the power 
lines, but must rely on voluntary compliance by the utilities to 
resolve fast-moving grid problems. The North American Electric 
Reliability Council, an industry group that designs and issues 
standards to ensure grid reliability, is dependent on voluntary 
compliance and cannot require transmission line users to meet its 
standards or penalize noncompliance. The Federal Energy Regulatory 
Commission also says it lacks clear authority to ensure grid 
reliability although, in 1999, it issued rules which, in part, require 
Regional Transmission Organizations to maintain short-term reliability 
in their grid operations.
    The August power failure and the Enron price manipulation scandal 
provide clear mandates for Congressional action. Congress needs to pass 
legislation this year to increase grid reliability and stop energy 
price manipulation. With respect to reliability, Congress needs to 
replace voluntary reliability standards with mandatory and enforceable 
reliability rules applicable to all users, owners, and operators of the 
transmission network. While industry-developed standards provide a 
starting point, the responsibility for writing the final rules to 
ensure grid reliability needs to be vested in FERC, a federal agency 
that can be held accountable for problems. While some in Congress want 
to include reliability requirements in the larger energy bill now in 
conference, using the urgency of this issue to propel enactment of the 
whole bill, this issue is too important to hold resolving the 
reliability problem hostage to the resolution of a myriad of other 
problems in the energy bill. We ought to act now on the consensus that 
has apparently arisen on the need to strengthen grid reliability. If we 
fail to act now, we are risking more blackouts.
    Congress also needs to enact legislation to eliminate the so-called 
Enron exemption that, in 2000, exempted certain energy transactions 
from federal oversight and federal anti-fraud and anti-manipulation 
laws. Senators Feinstein, Lugar, and I, as well as a number of other 
Senators, have been working on this legislation. When the Senate simply 
adopted last year's energy bill without addressing this issue, the 
Senate Majority Leader promised us an up-or-down vote on an amendment 
to the Agriculture appropriations bill this fall, and we plan to 
circulate a bipartisan amendment addressing this issue in the near 
future. It is incomprehensible to me that some people are lobbying to 
maintain the Enron exemption and to stop efforts to strengthen federal 
anti-fraud and anti-manipulation laws. It is long past time for 
Congress to make it clear that fraud and price manipulation are 
unacceptable in any sector of the U.S. energy markets.
    I commend the Chairman for holding this hearing and look forward to 
the testimony.

    Senator Voinovich. Senator Lautenberg.

            OPENING STATEMENT OF SENATOR LAUTENBERG

    Senator Lautenberg. Thanks, Mr. Chairman. I am appreciative 
that you are calling today's hearing on the blackout. It is so 
fresh in our memory and so dark a spot on the horizon.
    The loss of power on August 14 brought a large swathe of 
the country to a standstill and reportedly cost New York City 
alone $1 billion. Now, in my opinion, this event dramatically 
demonstrates where we are headed if we fail to modernize the 
Nation's electrical transmission system, but other factors may 
also have been involved and we will need answers about exactly 
what happened and why it happened. If we fail to correct the 
flaws in these systems and soon, many believe more regions will 
be brought to their knees.
    Shutdowns come with a high price tag: Massive public 
inconvenience; increased dangers for Americans, especially for 
Americans like those who are in the air depending on air 
traffic controllers with their electric systems to safely land 
them.
    But reliable electricity is not a new issue. Since 1978, 
the country has been inching toward deregulation and some 
regions have made great progress while others locked in 
outmoded systems dating back to the beginning of electricity 
regulation in this country. I understand that some of my 
colleagues have concerns about electric industry deregulation. 
But in my State of New Jersey, we are part of the PJM 
interconnection. It is the country's first fully operating 
regional transmission organization, the world's largest 
competitive wholesale electricity market.
    The ratepayers in New Jersey have reaped enormous benefits 
from belonging to this RTO, including stable rates that have 
not risen in 11 years. Just as important, and more to the point 
of this hearing, during the blackout, only 7 percent of PJM's 
25 million customers lost their power. Now, 7 percent is not 
insignificant, but compared to 98 or 100 percent, it is pretty 
darn good.
    So I would like to hear from today's witnesses about their 
views on additional RTOs that centrally dispatch information, 
like PJM. Had more of these been operating on August 14, the 
question is, could the blackout have been better contained?
    The Wall Street Journal noted in an August 18 editorial 
that adequately addressing the issue of electricity reliability 
will take political will and regulatory common sense, and it is 
my hope that my fellow Senators and I will rise above the 
entrenched political positions that are not serving the 
public's needs for a modern, reliable electricity grid. Today, 
I am looking forward to hearing some regulatory common sense 
from these witnesses.
    I thank you, Mr. Chairman. I hope we will arrive at some 
direction to take to cure this problem.
    Senator Voinovich. Thank you, Senator.
    We have an impressive lineup of witnesses this morning and 
I look forward to an informative discussion. As Senator Levin 
said, we have stacked votes, so this is going to be interesting 
to see how this all works out.
    Our first witness today is Deputy Secretary of Energy Kyle 
McSlarrow. He is joined by Patrick Wood, the Chairman of the 
Federal Energy Regulatory Commission. I thank you both for 
testifying today. I would also like to note that Jimmy 
Glotfelty, the Director of the Office of Transmission and 
Distribution, is also attending this hearing.
    As is the custom here, I would like you to please rise and 
be sworn in.
    Do you swear the testimony that you are about to give 
before the Subcommittee is the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. McSlarrow. I do.
    Mr. Wood. I do.
    Senator Voinovich. The record will reflect that they 
answered in the affirmative.
    Mr. McSlarrow, we will start with you.

TESTIMONY OF KYLE E. McSLARROW,\1\ DEPUTY SECRETARY OF ENERGY, 
                      DEPARTMENT OF ENERGY

    Mr. McSlarrow. Mr. Chairman, thank you. Let me first say 
that we appreciate your leadership on such important issues as 
transmission reliability and a robust, competitive wholesale 
market that benefits consumers. I would like to note that you 
and Senator Levin were among the first to contact our 
Department to ensure that we were fully engaged when the 
blackout occurred on August 14. Since then, as you mentioned, 
we have made good progress in our effort to determine the 
causes.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. McSlarrow appears in the Appendix 
on page 61.
---------------------------------------------------------------------------
    As you know, within a few hours of last month's blackout, 
President Bush and Prime Minister Chretien ordered a 
cooperative, binational investigation into that incident. Top 
government officials from both countries and scores of 
technical and engineering experts have been hard at work ever 
since to determine exactly what caused this outage, how it was 
allowed to spread, and what can be done to reduce the chances 
of such an incident in the future.
    While Secretary Abraham has the lead on this task force, I 
do want to recognize the personal leadership exhibited by 
Chairman Wood and all of FERC staff, who put in long hours to 
ensure that we get the right answers as quickly as possible.
    Once we have determined the causes of the blackout, we will 
enter Phase II of the task force's two-part assignment, which 
is formulating recommendations to address the specific problems 
we uncover. Any recommendations the joint U.S.-Canada task 
force makes will likely focus on technical standards for 
operation and maintenance of the grid and on the management of 
performance of the grid in order to more quickly correct the 
problems we identify. We are determined to complete this 
inquiry in a timely manner. We hope to have conclusions and 
recommendations in a matter of weeks, not months. As Secretary 
Abraham has said, we will not compromise quality for speed.
    Beyond the investigation, there is also the broader focus 
on the Federal role in electricity reliability. The President's 
National Energy Policy noted that one of the greatest energy 
challenges was to improve our Nation's aging energy 
infrastructure and particularly the transmission 
infrastructure. The National Energy Policy also called for a 
transmission grid study, which our Department conducted and 
completed in May 2002. That study outlined the current 
condition of our grid and recommended ways to promote the 
expansion of overall transmission capacity, elimination of the 
bottlenecks on the grid, and enhancement of the grid's 
technical efficiency and improvement of the system's 
reliability.
    There are several measures before the House and Senate 
Conference on the energy bill right now that would codify some 
of the recommendations included in the President's National 
Energy Plan and our Department's grid study. Since the 
President's first days in office, the administration has 
strongly supported proposals to establish mandatory and 
enforceable reliability standards to reduce the risk of power 
outages. We were pleased that both the House and the Senate 
included provisions in the energy bill to establish those 
standards.
    We also support proposals that would expand investment in 
transmission and generation facilities by repealing the Public 
Utility Holding Company Act, which has limited the resources 
that can be invested in a transmission system.
    We strongly support measures to provide greater regulatory 
certainty for transmission expansion, including provisions 
providing for last resort Federal siting authority for high-
priority transmission lines and providing for the coordination 
and streamlining of transmission permitting activities across 
Federal lands.
    We support options that would allow for increased rates of 
return on new transmission investments, including clarifying 
FERC's authority to provide incentive-based rates to promote 
capital investment in new transmission.
    We support the goal of regional coordination and planning 
through the mechanism of voluntary regional transmission 
organizations that would provide certainty to the marketplace, 
prevent undue discrimination, and assist in eliminating 
transmission constraints. And we support changes in Federal tax 
law to allow the recognition of gain over 8 years for the sale 
or disposition of transmission assets as part of restructuring 
and to allow rural cooperatives to provide open access to their 
transmission systems without losing their tax-exempt status.
    Before I close, Mr. Chairman, let me just add that 
government research and development has an important role to 
play here, as well. That is why the President's 2004 budget 
request includes additional funding for high-capacity 
technologies, such as high temperature superconducting 
transmission lines and for real-time grid management tools to 
enhance reliability.
    Our electricity system is the backbone of the U.S. economy. 
We probably don't think about something so obvious until the 
lights go out, but we cannot afford to let such a vital 
component of our infrastructure fail and I am confident that 
Congress will send an energy bill to the President this fall 
that sets us on a course to successfully address those 
challenges.
    Mr. Chairman, that concludes my testimony.
    Senator Voinovich. Thank you very much. Chairman Wood.

    TESTIMONY OF PAT WOOD, III,\1\ CHAIRMAN, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Wood. Thank you, Mr. Chairman, Senator Levin, and 
Senator Lautenberg. As the Deputy Secretary just outlined, the 
FERC and its staff are participating as members of the joint 
U.S.-Canada Task Force to look at what actually happened, why 
it cascaded across such a broad territory. And while the 
analysis of this voltage collapse is ongoing, I will refrain 
from, as you indicate, for the purpose of this hearing, we are 
not going into that anyway, but will refrain from trying to 
analyze too deeply until we get the facts, because I think the 
facts should drive us wherever they lead.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Wood appears in the Appendix on 
page 71.
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    The Federal role in electricity grid management is the 
focus of your hearing today, and from the outset, let me be 
clear. As I believe Senator Levin just pointed out, our 
explicit authorities under the Federal Power Act and other 
statutes in the area of reliability are very limited. However, 
we do have some insight into regional grid management deriving 
from our role primarily as the economic regulator of the 
electricity industry and I think that can provide some insight, 
as you requested in your letter of invitation, Mr. Chairman.
    The blackout illustrates, as have many other events in the 
past couple of years, that the power grids are regional in 
nature. After each significant blackout, which were 1996, 1999, 
2000, 2001 in California, and this year 2003, the Nation has 
taken significant steps forward to recognize that we are, in 
fact, interconnected and regional and to develop new rules and 
institutions that recognize this fact.
    For example, after the 1965 blackout in the Northeast, the 
NERC was created to create regional and voluntary reliability 
standards. That is the subject of the legislation in conference 
today. That would actually make that mandatory.
    After the 1996 blackout across the West, the governors and 
institutions out there developed a regional transmission plan 
that led to significant investment in the grid. I do have to 
add that I think that needs to continue. I believe that this 
blackout, similarly, will warrant significant action toward 
better regional grid management, as well.
    Prior to my term on the Commission, the bipartisan 
commission back in the 1990's issued Order 2000, which 
encouraged, but did not require, the formation of regional 
transmission organizations, such as PJM that Mr. Lautenberg 
talked about. The expectation at the time was that these would 
form across the country by the end of 2001 and that they would 
be able to assume full control of the regional grids.
    The Midwest, however, is a good example of the fits and 
starts and the difficulties that the voluntary RTO program has 
had in achieving independent regional control in many areas. In 
such a voluntary arrangement, key principles like governance, 
independence, and even reliability are subject to negotiation 
and compromise.
    In Order 2000, the Commission stated that RTOs would have 
public accountability for reliability. RTOs would improve 
reliability because they have a broader, more regional 
perspective than individual local utilities, which number 
presently 130 independent control areas in the country that are 
actually the managers of the grid implementing the voluntary 
NERC standards.
    RTOs, as we have seen, have the ability to take action if 
they have the operational authority to do so. An RTO can end 
the balkanization within the region of the grid and assign it 
exclusive authority for short-term reliability. In fact, these 
characteristics are embedded in Order 2000 and they relate to 
the appropriate independence of the entity to run the grid, the 
appropriate scope and regional size of the grid configuration, 
full operational authority of the grid, and the exclusive 
authority to oversee short-term reliability, which are the NERC 
standards.
    RTOs also provide long-term transmission infrastructure 
development, a regional planning process, a regional rate 
recovery process through tariffs that are administered and are 
applied on a multi-state basis. These are developed through 
stakeholder processes and have been very successful in the 
regions where we have them. I think that regional investments 
are going to be almost impossible to make if you do not provide 
investors a very clear path for recovery of those new 
investments that I think, Mr. Chairman, you have pointed out. 
As a common sense matter, we know they need to be made, and we 
have been knowing this for a few years. But the problem is, an 
investor is not going to sink money if he or she doesn't know 
how the money is going to get back with a return.
    This spring, after a year and a half of hearings and 
workshops and road trips and written comments, we put out a 
vision for a wholesale power market platform. It is also known 
by its earlier name, standard market design. We recognize the 
regional nature of the power grid and the uncertainty that is 
created by having balkanized systems across the country. The 
platform would mandate participation in RTOs and require a 
transition process.
    Many other features are left to regions to design and for 
State officials to participate in, crafting the details. But as 
a practical matter, we do need platforms upon which regional 
grid management can happen so that the benefits that we all 
know can happen, that we have seen in parts of the country 
where this planning has gone forth, can move forward. Thank 
you.
    Senator Voinovich. Thank you. We will limit our questions 
to each of the Members of the Subcommittee to 5 minutes and 
rotate it.
    The two of you have had a chance to observe what has 
happened here in the last several years and most recently on 
August 14. The real question that I have is, what is the best 
way of ensuring that it doesn't happen again and that we have 
the reliability that is out there, and who should be in charge 
of the whole operation?
    In other words, we have had a kind of a mixed system out 
there. FERC has a role and the independent systems have a role, 
and you have the regional groups. How do we improve that system 
so that we don't have what happened on August 14?
    Mr. McSlarrow. Mr. Chairman, I think that there are several 
different answers, but the most obvious one is to pass the 
energy bill that includes the provisions that I outlined in my 
testimony.
    Senator Voinovich. You believe that the provisions that are 
in the energy bill now, which is in the Conference Committee, 
will get the job done?
    Mr. McSlarrow. They will get most of the job done. What I 
don't know and we won't know until we conclude our task force 
investigation is whether or not there is something specific to 
August 14 in addition to the recommendations that I have 
outlined that are included in the Conference.
    But the energy bill in Conference has a robust electricity 
title. It deals with siting. It deals with incentives for 
transmission. It deals for encouraging the development of 
regional transmission organizations. It deals with FERC's 
ability to clarify those roles and provide incentives. It does 
a lot, and most importantly, it includes mandatory enforceable 
standards that are implemented by the National Electric 
Reliability Council and enforced by FERC. So I can't say right 
now it will do 100 percent, but it will do----
    Senator Voinovich. Implemented by the Reliability Council, 
but they are enforced--FERC's role will be to enforce and make 
sure that they are carried out?
    Mr. McSlarrow. Yes, sir.
    Senator Voinovich. Which is not the case today?
    Mr. McSlarrow. Yes, sir, that is right. Today, it is a 
voluntary reliability regime and FERC has no authority to 
enforce that, nor does NERC, for that matter, and there is 
certainly no penalty for not playing by the rules.
    Senator Voinovich. Well, we are hoping you get an energy 
bill out before the end of the year. The joint U.S.-Canadian 
study, you said it is not going to be months, it is going to be 
weeks. How long do you think that it will take before we wrap 
that up to determine whether or not they come up with something 
that ought to be added to the provisions of the energy bill?
    Mr. McSlarrow. I would say we should do the energy bill as 
quickly as we can. We will get our task force completed as 
quickly as we can. If there are recommendations and it is still 
timely to add to the energy bill, we will, but the 
administration would urge that we not slow down the energy 
bill. It is important to get it done. If there are additional 
recommendations, we will come and make those to Congress. There 
are plenty of vehicles that we can add that I am sure will have 
widespread bipartisan support to ensure that the outage of 
August 14 doesn't occur again. But we would urge to move 
forward as quickly as possible on the energy bill.
    Senator Voinovich. Mr. Wood.
    Mr. Wood. On the more granular level, that being the legal 
framework that would be clarified----
    Senator Voinovich. Mr. Wood, I just want to say something. 
You are the Chairman of the FERC.
    Mr. Wood. Yes, sir.
    Senator Voinovich. You have, what, three members now?
    Mr. Wood. We are down to three, yes, sir.
    Senator Voinovich. OK. I understand that you are not even 
capable of doing things because you need two more members?
    Mr. Wood. Oh, no. We are doing fine.
    Senator Voinovich. Are you?
    Mr. Wood. We are down two, and----
    Senator Voinovich. You don't need another two members?
    Mr. Wood. We are look forward to them being here, yes, we 
do. [Laughter.]
    We definitely do.
    Senator Voinovich. Well, I think that we ought to move as 
quickly as we can so that you have those two new members.
    Mr. Wood. One of our three, however, his term would be up 
when Congress adjourns, so at that point, we do have trouble.
    Just to follow up on Mr. McSlarrow's comment, getting the 
legal clarifications of that world out there are certainly 
helpful. The uncertainty that is created by not knowing what 
the future looks like makes investment an almost non-event. So 
I do want to strongly urge from the Commission's perspective, 
that is kind of down a little bit more in the trench, that we 
really do need the Congress to say this is what the energy 
world is going to look like. Putting it off for yet another 
session just means 2 more years of investor uncertainty, and 
quite frankly, we have had that for quite a while and we need 
to move on.
    So I do want to recommend, as Mr. McSlarrow did, that we do 
get the energy legislation out. I think it has got potential to 
really clarify a lot of issues here. Our job is to take it to 
the doability point and to take the mandatory reliability rules 
that NERC and its experts would work up and go through a public 
vetting process. If, for example, we find that those conflict 
with some other Power Act obligation, we have an obligation 
under the proposed bill on both the House and the Senate side 
to kick it back and say, rethink this because of these issues.
    We have to delicately balance this oversight role because 
it is also going to be overseen by independent Canadian 
authorities, and so this, as we saw, it is an international 
power grid. We have to make sure that--and I think the law has 
been written in a way that is very respectful of that. So those 
are the kind of delicate things on reliability.
    The question is, OK, who is going to actually implement 
these standards on a day-to-day basis? Are we going to have it 
be the 130 independent utility control areas, some big, some 
small, across the country, or are we going to try to look at 
that on a more regional basis, as we were talking about earlier 
in our opening statements. I do think that the regional model 
is clearly the correct way to go and also the common sense way 
to go.
    Senator Voinovich. Thank you very much. My time is up. 
Senator Levin.
    Senator Levin. Thank you, Mr. Chairman.
    I would like to ask about the current authority that FERC 
has in this area of regulation. FERC indicates it is not a 
clear authority to assure reliability, but the regulations 
which have been issued, the orders which have been issued by 
FERC, suggest otherwise.
    In February of 2000, FERC issued the final rule, an order 
entitled, ``Regional Transmission Organizations,'' the RTO, 
which ``codifies minimum characteristics and functions that a 
transmission entity must satisfy in order to be considered an 
RTO.'' You grant RTO status to regional entities, such as MISO, 
that operate transmission lines in Michigan and Ohio.
    In the order, it says that it establishes required 
characteristics and functions for these RTOs for the purpose of 
promoting efficiency and reliability. Then the order goes on to 
state that an RTO ``must ensure the integration of reliability 
practices within an interconnection and market interface 
practices among regions.'' And it goes on to say that the RTO 
``must have exclusive authority for maintaining the short-term 
reliability of the grid that it operates.'' So it sounds like 
you have authority now and, indeed, will not certify or will 
not license an RTO unless it does those things.
    Mr. Wood. Correct.
    Senator Levin. What is lacking?
    Mr. Wood. Well, that whole program has requirements and 
obligations, but it is not--it is a program that utilities 
volunteer to be in. So the predicate for all those required 
characteristics is really set back in that rule, which our 
proposal of recent months would change and make mandatory for 
everybody. But that rule in 1999, which was finished up in 
2000, is at its heart an encouragement or voluntary. So the 
legal authority on that was, I don't think, a problem, but it 
was one that the Commission chose not to exercise at the time.
    Senator Levin. Can you refuse, then, to certify an RTO?
    Mr. Wood. We could, yes, sir.
    Senator Levin. And then what would be the penalty? Why 
would an RTO care if it were not certified? In other words, if 
you can insist that there be reliability standards that an RTO 
will adopt----
    Mr. Wood. Under current law----
    Senator Levin [continuing]. As part of the certification 
process, why isn't that enough power right now to achieve those 
reliability standards?
    Mr. Wood. Where you have utilities agreeing to get into an 
RTO, you are correct. There is no question there. Where you 
have got some that do and some that don't, or some that will 
and some that won't, then you do have some concerns, and that 
is actually one of the issues we have in the Midwest, is you 
have some utilities that have not joined up with an RTO and 
there are basically holes in the Swiss cheese.
    Senator Levin. The standards which are in the House and the 
Senate bill, I take it, are adequate as far as you are 
concerned in the energy bill to achieve the authority that you 
need to make mandatory these standards, reliability standards?
    Mr. Wood. Yes, sir.
    Senator Levin. OK. You, Mr. McSlarrow, the Energy 
Department supports those provisions, I understand.
    Mr. McSlarrow. We do, yes, sir.
    Senator Levin. Now why, if the energy bill--if, and I know 
it is a big if--it runs contrary to your hopes, perhaps your 
expectations, but at least your hopes--if the energy bill 
doesn't look like it is going to pass this year, why is it not 
essential that we pass these provisions to assure reliability 
and that there is not a repeat of the blackout? Why do we hold 
them hostage to the rest of the energy bill, which has all 
kinds of complicated provisions where people are in dispute 
over them? We have everything from the Alaska wilderness to 
things which are almost as complicated as that.
    Why should we say that we are not going to do what we need 
to do to prevent a future blackout and give FERC what it needs 
in terms of authority until and unless we get all these other 
energy issues resolved?
    Mr. McSlarrow. I don't think that it is just about NERC's 
reliability standards.
    Senator Levin. About----
    Mr. McSlarrow. About these mandatory reliability standards. 
And quite frankly, I have not met a utility official or an 
engineer who hasn't treated them as if they were mandatory. So, 
I mean, making them voluntary to mandatory does, yes, put the 
stick a lot bigger, because now you can do monetary penalties.
    But at its core, there is more in the energy bill than just 
this and it is that certainty that I was mentioning in my 
answer to Chairman Voinovich, is that we can make all the 
reliability standards in the world, but if you don't have 
anybody that wants to come and invest in upgrading the grid, 
not just big new power lines. We might need some of those, 
sure.
    But investing the kind of smart technologies that are out 
there that are dying to be implemented on the grid that 
utilities have zero incentive to employ right now if they don't 
understand what the regulatory and investment framework is 
going to be. And I will say, there are a number of provisions 
throughout both the House and Senate bills that do provide, I 
think, good contours for that investment certainty for the next 
10 years.
    Senator Levin. It would be less likely that they will 
invest?
    Mr. McSlarrow. Yes, sir, if we just have----
    Senator Levin. That is fine.
    Mr. McSlarrow. If we have no bill or just a stand-alone 
reliability bill, I think.
    Senator Levin. I understand there would be less incentives, 
but you still need these reliability standards. There may or 
may not be those kind of investments. Those are presumably 
positive features. But in the meantime--and you are not 
guaranteeing that investment with the energy bill, with those 
other provisions. You are just presumably facilitating.
    But on this, we know there is a consensus that we need to 
give for this power to force these regional entities, these 
regional councils to take the steps to make these mandatory, 
and if they don't or if they are not adequate, for FERC to 
substitute its own standards. So they will do some good by 
themselves. They will clarify your power by themselves. And so 
it seems to me that we are risking needlessly, we are risking 
that additional clout by linking it to all of these other 
provisions.
    I am talking about all the other provisions of the energy 
bill. I am not talking about the ones that you have just 
outlined. I am talking about drilling in Alaska and everything 
else that is in here.
    Mr. McSlarrow. Senator, if we are at the end of session and 
nothing has happened on the energy bill, I am certainly not 
prepared to say today that we are going to take off the table 
any options between the administration and the House and Senate 
leadership.
    I will say this. We have lurched from energy crisis to 
energy crisis, from California at the beginning of our 
administration to gasoline prices to oil prices to natural gas 
shortages, back to electricity, to home heating oil, and every 
time, there is something in the energy bill that could be taken 
out and passed right then. And our view is, we need to stop 
this and pass a comprehensive energy bill. So before we get to 
that point, I think we should do everything we can to get it 
done.
    Senator Levin. And if you get to that point, you are open 
minded?
    Mr. McSlarrow. I am open minded, yes, sir.
    Senator Levin. Thank you. My time is up.
    Senator Voinovich. Senator Lautenberg.
    Senator Lautenberg. Thank you, Mr. Chairman. I am curious 
as to whether or not there are mandates or requirements for RTO 
formulation or any indication of a preference by FERC that 
suggests that this is a good way to operate. I mean, there was 
a mention of it in the statement that Mr. Wood made, that PJM 
functioned very well because we had the capacity to control the 
switches and the supply, the connections that were necessary to 
keep our lights on with a relatively minimal effect.
    So is there anything in the regulation that says or in the 
rules that say if there must be an RTO, that there should be an 
RTO. Is that what you're thinking? Has any direction been 
given? Are we in our area just lucky that, by chance, we had 
formed this RTO?
    Mr. Wood. I would think one should never discount luck. I 
think the ability of the utilities actually started back in the 
1920's, Senator Lautenberg, in the Pennsylvania, New Jersey, 
Maryland, and Delaware areas, including the District. However, 
yes, in 1999, the question that Senator Levin was asking me 
about, the Commission that I chair now did put forth a detailed 
set of standards that should be met on a voluntary basis by the 
utilities under FERC jurisdiction throughout the country. I 
think the Commission at the time hoped that that would happen 
over an 18-month period. It did with a few utilities, but--and 
particularly throughout the West, with the exception of 
California, and in some Southeastern States--we have not seen a 
lot of forward progress on coming together on that.
    And then throughout the country, random utilities are not 
participating, either because they are not FERC jurisdictional 
or they just choose not to because it is not a requirement. So, 
actually, we have proposed, and have out there, a rule that 
would make that mandatory and that is what the subject of some 
debate is here in the Senate.
    Senator Levin. Mr. McSlarrow, last week's House hearing on 
the blackout, Secretary Abraham indicated that the initial 
investigation findings of the blackout task force will not be 
open to the public. But DOE has also publicly stated that it 
wants a transparent process. Now, what is going to happen here? 
Is it going to be transparent, open to the public, or is it 
going to be filtered, censored, or husbanded by the 
administration?
    Mr. McSlarrow. There are two different things going on. The 
first is the investigation. This is not like we are having a 
series of public policy meetings. These are actual 
investigators looking at data on computers and interviewing 
operators of the grid, operators of the ISOs. This is the same 
thing that was taking place all over America with any law 
enforcement agency. Normally, you don't have the public traipse 
along with you doing that.
    Once they get the findings, then we actually move to a 
policy phase where we are thinking about recommendations. 
Secretary Abraham did testify, and I know it is his intention, 
that we will have as open and transparent a process as 
possible.
    Senator Lautenberg. I hope so, because the public is a 
partner here. We hear grumblings. People say, well, it is going 
to cost more for the users, for the ratepayers to get this 
thing into shape. But then, in my view, we have to take a look 
back, see what the operating results were of these companies, 
what did they do with their reserves, did they build any 
reserves, and why didn't they move ahead on some of these 
things.
    Mr. Wood, you talk about state-of-the-art digital 
switchings, things that I think are dying to be used in the 
current system. Well, if that is the case and we have 
technology, we understand what it is that would keep things 
going, then why haven't we moved? Was there such an 
overwhelming profit motive for this commodity material that 
they just said, well, the heck with that. We are not going to 
do it until we are forced to do it. Where would the automobile 
business be if they didn't improve the design on a constant 
basis? Where would other industries be?
    So what happened here? Why weren't these investments made, 
do you think?
    Mr. Wood. From the FERC side, we do get all the financial 
data and we are looking from really tracking all the utilities 
involved in this blackout from 1990 forward to get an idea of 
what kind of investments were made. I don't have any data at 
this time to share, but we will be including that with the 
broader study going on here to just understand what sort of 
investment has been made in the transmission grid by the 
current people doing that and get a better understanding why 
that went up or down. But I don't have a specific answer to 
your question today.
    Senator Lautenberg. I can tell you that the ratepayers will 
not joyfully write checks and say, OK, well, we have to fix the 
systems. You said something. Investors want to know what is 
going to happen if they put money in there and they have a 
right to know that. There are opportunities for financing, 
especially in periods like this when the cost for money is 
relatively low, and I would hope that the target isn't the 
ratepayer who is going to be asked to pick up the load because 
the system was faulty.
    Do either of you think that if we had RTOs in place, more 
RTOs in place, that wouldn't it have been possible to prevent 
the blackout from occurring?
    Mr. McSlarrow. Go ahead.
    Mr. Wood. I want to resist the urge to just say yes and be 
quiet there, but----
    Senator Lautenberg. No, don't.
    Mr. Wood [continuing]. I do think some aspects of RTOs were 
very helpful. I mean, there is an understandable debate about 
what energy markets should do and what they should look like. 
Should they be like PJM or should they be something less than 
that? And that is a fair debate to have. We have it a lot.
    But at the core, the RTO is a transmission operator of a 
regional grid that recognizes what the laws of physics have 
told us long ago, that this product is going to flow where the 
path of least resistance lies, not where State boundaries or 
utility boundaries lie. So at its core, you have got that 
business plan going on there.
    And so to the extent an RTO does bring together and get 
investment and get the kind of real-time control systems where 
you can see, in fact, that that line is out, that line is on, 
this one is sagging, to have that information come in at one 
time over a broad area, not just for one small utility but for 
the entire area, yes, I think had we had some of the utilities 
in the Northern part of Ohio all part of the same 
interconnected and real-time communicated grid, that might have 
been a different outcome, sure.
    Senator Lautenberg. Yesterday, I was visited by several 
employees of First Energy and they reported to me that the 
company is using power transmission lines at well over capacity 
and has failed to replace sections of an old unreliable 
infrastructure. Can FERC play a role to address this kind of 
irresponsible part of behavior on the part of a utility?
    Mr. Wood. I think we can. As I mentioned, we are talking to 
folks of that nature. I am not sure if it is the same ones as 
part of the broad investigation with the task force. And if 
there are specific issues that relate to FERC's mandate as 
opposed to that of the Canadians or the other American 
agencies, we will pursue those independently.
    I do think this is probably an area where mandatory 
reliability standards as opposed to the voluntary ones makes a 
difference--and the main difference there is you can put a 
price tag on violating a mandatory standard. If a mandatory 
standard is, you can't exceed 105 percent of the capacity more 
than ten minutes out of a day, or whatever the standard would 
be, then that has a financial consequence attached to that.
    We do not have that today. Now, a State may have that 
authority. Some States do and some don't. But we clearly do 
not. That would change with the reliability legislation in both 
chambers.
    Senator Lautenberg. Mr. Chairman, I will conclude with 
that, but I would hope that we go further in developing 
information because it is very hard in this kind of a fairly 
short burst to get the data that are needed. I think that there 
is an opportunity--should be an opportunity for us to 
thoroughly review the past performance of these firms, to have 
it done and presented to us or to the Congress generally, about 
what took place when things were better and whether there was 
any preparation at all for the expansion that was inevitable as 
our population grew and demands were increasing.
    So I commend you for doing this, but I think that there is 
a lot more that we have to learn before we are satisfied that 
it is not going to be the ratepayers doing this.
    Senator Voinovich. One of the things that I have mentioned 
is that it is my intention that once the report is finished, to 
have hearings on that report. It is going to be public. We are 
going to have people in here and we are going to go over the 
report. I would rather wait until everybody has got all the 
information to do it rather than do it prematurely, as is so 
often the case around here. Sometimes, we never do get to the 
real cause of something because you have tackled it before 
people have had the facts before them.
    I would like to thank the panel very much for being here 
today. I just want to make one thing clear again. Both of you 
feel that to remedy some of the things that we have talked 
about here, particularly Senator Lautenberg about what people 
should do and shouldn't be doing. You believe that the language 
in the energy bill electricity title gets the job done.
    Mr. McSlarrow. We do.
    Senator Voinovich. That is what I am worried about. I want 
to make sure that since this new incident on August 14--that 
there isn't anything new that has come to the surface that 
ought to be reflected in that language so it is as 
comprehensive as possible.
    I would also like to mention that I happen to believe that 
this should stay in the energy bill. It is long overdue that 
this country have an energy policy. There is so much 
uncertainty out there, not only in this area, but also what 
utilities can do to reduce their NOx, 
SOx, and mercury emissions, and it is a chaotic 
situation of lawsuits. It is a maze, as a matter of fact. We 
need to clear that out and let everybody know where they stand, 
and if they get out of line, that they are going to pay a steep 
penalty for getting out of line.
    I hope that you keep staying with this and keep the 
administration on it, that we have to get an energy bill out 
and we have to get it out as soon as possible. Thank you very 
much for being here today.
    Mr. Wood. Thank you.
    Mr. McSlarrow. Thank you, Mr. Chairman.
    Senator Voinovich. We are going to recess for a few 
minutes. There is 4 minutes left in the vote. So we are going 
to go over and vote and then we will stick around for the vote 
on the next bill and then come back and we should have about 35 
or 40 minutes so that maybe we can get the testimony from our 
witnesses that are here today. Thank you.
    [Recess.]
    Senator Voinovich. The Subcommittee will come back into 
order. I want to apologize to the witnesses. We never know in 
the Senate what is going to happen and we had some stacked 
votes then. We are going to try and get as many of you in as we 
possibly can. I have to go back. I have about 20 minutes 
between now and then and I will try to have the next vote, 
which is very important because it is an amendment that I am 
cosponsoring, and then we will see how it works out.
    You all know who you are and I am glad that you are here. 
For the record, on our second panel we have Dr. Alan Schriber, 
who is Chairman of the Public Utility Commission of Ohio. Thank 
you for being here, Dr. Schriber.
    Next to Dr. Schriber, he has his predecessor, Craig Glazer, 
who was former Chairman of the PUCO of Ohio, and now is Vice 
President of PJM, and someone that has worked with me on energy 
issues since he was in the Water Department of the City of 
Cleveland and we rewrote the public utilities law of Ohio. And 
then when I became governor, I made him Chairman of the Public 
Utilities Commission, and Craig, I am glad that you are here.
    James Torgerson is the President and CEO of the Midwest 
Independent System Operator. William Museler is the President 
and CEO of the New York Independent System Operator.
    And rounding out the panel, James Kerr, a Commissioner of 
the North Carolina Utilities Commission, and Dr. Mark Cooper, 
the Director of Research at the Consumer Federation of America.
    I wish the witnesses would stand up and I would swear you 
in, as is the custom.
    Do you swear your testimony is the whole truth and nothing 
but the truth, so help you, God?
    Mr. Schriber. I do.
    Mr. Glazer. I do.
    Mr. Torgerson. I do.
    Mr. Museler. I do.
    Mr. Kerr. I do.
    Mr. Cooper. I do.
    Senator Voinovich. The record will show that they all 
answered in the affirmative. We will start out with Mr. 
Schriber.

  TESTIMONY OF ALAN R. SCHRIBER,\1\ CHAIRMAN, PUBLIC UTILITY 
                       COMMISSION OF OHIO

    Mr. Schriber. Thank you, Mr. Chairman, and thank you for 
the opportunity to be here. My testimony, I won't read. If it 
is submitted for the record, that would be great.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Schriber appears in the Appendix 
on page 88.
---------------------------------------------------------------------------
    Senator Voinovich. May I say something? You all heard the 
testimony before from the other two witnesses, I think, didn't 
you?
    Mr. Schriber. Yes.
    Senator Voinovich. And you also heard the questions from 
Senator Levin and you also heard the questions from Senator 
Lautenberg----
    Mr. Schriber. Yes, sir.
    Senator Voinovich [continuing]. And you heard some of my 
questions. If you want to sprinkle in some of your reactions to 
that, I would be very grateful.
    Mr. Schriber. OK, sir.
    Senator Voinovich. I am particularly interested in whether 
or not the language in the energy bill, which I am sure most of 
you are familiar with, is adequate to get the job done or if 
you have some problems with that language. I am going to be 
very much involved, and have been, with that bill, and I would 
sure like to hear from any of you if you think they have left 
out--there is a big hole, or there is something in it that we 
feel goes too far or whatever your opinion is.
    I want to fix the problem, and we will talk about this 
investigation after they get the job done. But we have this 
wonderful opportunity to make a difference and I want to make 
sure that we don't miss this opportunity.
    Mr. Schriber.
    Mr. Schriber. Thank you very much, and I will note that I 
am a member of that binational task force and I would look 
forward to delving into that and hopefully someday reporting 
back to you.
    Just to get to the point, which I know you want to do, we 
want to talk about reliability for a moment because I think 
everybody agrees that reliability is a critical issue. I think 
for clarity, we need to understand that reliability can take on 
different meanings. In the arcane world of electricity that we 
deal with, we talk about reliability in terms of security and 
resource adequacy. I think what we are talking about now, in 
light of the blackout of August 14, is the physical properties 
of the network, of the system, of the grid. How secure is it? 
Is it reliable? Is it going to break? I think that is really 
important.
    I don't think we have a third world system. I think what we 
do need is rules and we need standards. We need NERC and FERC 
to have the authority to promulgate and enforce those rules, 
and I think the States can play a very prominent role in 
enforcement.
    As you know, having been governor, Mr. Chairman, in Ohio, 
as in other States, we enforce--the State enforces rules that 
are promulgated by other Federal agencies, highway rules, rail 
rules, and so forth, and there is a good argument that can be 
made for having the ability to enforce rules that are for FERC, 
if you will. But I think, again, we all agree that is very 
necessary and I would say that the reliability provisions of 
that electricity title are absolutely essential.
    I also agree with Chairman Wood that optimum allocation of 
resources, of dollars toward the system, to the extent that it 
needs to be fixed, and again, I don't think it is a third world 
system. I think it is like a highway system. It is broken down 
in some places. It needs to be fixed in others, and in some 
cases, congestion needs to be taken care of. I think dollars 
need to flow where they need best be invested and I think this 
is done only if you have a control which takes place over a 
larger area than among 12 fragmented transmission systems, as 
we have in the Eastern Interconnect.
    So, therefore, I would urge you and your colleagues to give 
FERC the authority they need to move forward in establishing 
these large, centralized transmission systems that embrace not 
just one or two, but a very large section of the Eastern 
Interconnect. I think that gives FERC the ability to put these 
organizations in place, and within those organizations, I 
believe decisions can be better forthcoming.
    Senator Voinovich. Can FERC right now order a utility into 
an RTO?
    Mr. Schriber. No, but the States in some cases have, where 
mergers have taken place. As merger agreements or as 
provisions, like in Ohio's law, States--rather, utilities were 
ordered to join RTOs.
    Senator Voinovich. So that right now, the power is in the 
States to get utilities to join RTOs, and this legislation 
would give FERC the power to order them in?
    Mr. Schriber. That is correct.
    Senator Voinovich. OK.
    Mr. Schriber. We would hope. The States said, at least our 
State has ordered that, and it has been a provision some 
mergers. At any rate, I think FERC should be supported in their 
endeavors.
    And, I think those are the two main provisions. We could 
talk about the Public Utilities Holding Company Act. I would 
have no problems with that being suspended or rescinded. I 
think that we are likely to hear some arguments in opposition. 
They have to do with deregulation as being a problem. And I am 
prepared, although I won't go into it now, but upon 
questioning, I would be prepared to take issue with that. I 
don't think deregulation has much, if anything, to do with what 
is going on.
    I think with that, I know you want to move on and I know 
you want to hear what others have to say with respect to the 
questions that were raised here, so I will conclude with that.
    Senator Voinovich. Thank you. Those comments were 
wonderful.
    Mr. Schriber. Thank you.
    Senator Voinovich. Mr. Glazer.

     TESTIMONY OF CRAIG A. GLAZER,\1\ VICE PRESIDENT, PJM 
                    INTERCONNECTION, L.L.C.

    Mr. Glazer. Thank you, Mr. Chairman. It is always tough to, 
first off, follow your successor. As bad as August 14 was for 
me that night, I actually felt good that after 10 years, I 
said, somebody else is in charge of the PUCO, not me for a 
change. So I am glad I didn't have his job that night.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Glazer appears in the Appendix on 
page 98.
---------------------------------------------------------------------------
    I also, Mr. Chairman, I have to tell you, I sleep better at 
night knowing that we have a member of the U.S. Senate that 
actually ran an electric system, and not only ran an electric 
system, but ran it and made it competitive and made the model 
of competition work. I mean, competition worked in the City of 
Cleveland. It brought savings to the residential customers and 
it was used by you as an economic development tool.
    I think those lessons are really important, so I just 
wanted to say thank you for your leadership over the years. It 
is important that we have somebody in the Senate that actually 
had hands-on experience, and I think that means a lot as we 
move forward with this and I appreciate your involvement in 
this energy bill because it is so important to a State like 
Ohio.
    Let me cut quickly to the chase. I remember one day back in 
1996 in the dusty halls of the Ohio legislature talking with 
the then-chairman of the State Committee, Senator Richard 
Finan, about this electric restructuring. I remember discussing 
with him electric restructuring and saying, ``If this is about 
instant gratification, forget it. It is not going to happen. If 
it is about cutting rates, you don't need to restructure the 
industry. I have got enough authority at the PUCO to do that 
right now. If it is about command and control from the 
government and telling people what to build, we have the 
authority to do that.''
    But if we needed to attract investment, when investment is 
critical to this industry, we need, and I firmly believe we 
still need, to reform and continue to reform the structure of 
this industry. The electric industry is the most capital 
intensive industry other than the military, other than the 
military, the most capital intensive industry in the world. And 
right now, we are teetering in a very dangerous place.
    And you asked about the provisions of the energy bill. 
There are good provisions, but there is some language floating 
around that we think would actually might set this industry 
back if we are not careful. I think we are in kind of a 
difficult place and the investors are watching the fact that we 
are in a difficult place. Let me come to that just in a minute.
    I know Dr. Cooper, who I know very well and respect, is on 
this panel and he is going to say restructuring doesn't work. 
We should just go back to the old way. Well, as I said, Mr. 
Chairman, at the beginning, you ran a competitive electric 
system. You did make it work. By the same token, in PJM, we 
have actually been able to make the system work on the 
wholesale level. We have seen greater efficiency in generation. 
People are better maintaining their equipment than they did 
under the old regulated system. We have been able to attract 
new investment. We have been able to keep prices stable.
    And what is important for Ohio, in particular, but also for 
Michigan in this, we have been working with our counterparts in 
the Midwest ISO on a joint operating agreement and reliability 
plan. I am not here to say that would have been the total 
panacea, but it addressed a number of things that went afoul 
the day of August 14. Had that been in effect, I think we would 
have certainly reduced the number of people involved. We would 
have had clearer rules in place.
    I think it is important as First Energy moves into the 
Midwest ISO, which it has chosen to do, as AEP moves into PJM, 
as it has chosen to do, that we have that agreement in place. I 
hope we can move forward with the Federal Energy Regulatory 
Commission, the NERC, the National Electric Reliability 
Council. It will help Ohio and it will provide a new level of 
reliability in the Midwest. To the credit of Midwest ISO, we 
have been working together on that, really had signed that, had 
that in place, at least conceptually, and we are going through 
the stakeholder review process.
    You had correctly asked, what can Congress do? The first 
thing I would say is do no harm. There are provisions floating 
around, because this country is very split on the very issues 
you are talking about, do we mandate RTOs? Commissioner Kerr 
will say, my region doesn't need RTOs, and I respect him for 
saying that. But we run into the law of unintended 
consequences. There is language floating around in the Senate 
Committee draft that would really tie FERC at the knees, would 
ban its efforts on--delay its efforts on standard market 
design.
    Mr. Chairman, I would rather almost kill something than 
delay something. Delay, frankly, is an easy cop-out, but delay 
is really the death knell to investment and I am very worried 
about that.
    Also, we heard a lot about investing. You mentioned in your 
opening statement, invest in transmission. We should do that, 
but let us do it wisely.
    One of the things which we do at PJM, one of the things 
which, frankly, we did at the PUCO and Dr. Schriber continues 
to do is regional planning. We ought to not just throw money at 
transmission. We ought to integrate it with regional planning. 
Back at the time, we had a big issue, you may recall, about 
scrubbers.
    Senator Voinovich. Mr. Glazer, do you want to wrap it up?
    Mr. Glazer. Let me wrap it up by saying, at the end of the 
day, we need to pause and study what has happened, but we do 
need to move forward. We need to respect and go at different 
paces for different regions. But let us not cut the Federal 
Energy Regulatory Commission at the knees. Let us give it the 
continued ability to get the job done, and that is in play 
right now in the energy bill.
    Senator Voinovich. Both you and Mr. Schriber feel that the 
legislation, the electricity title, gets the job done, but you 
are worried about some stuff floating around that would delay 
it?
    Mr. Glazer. Yes.
    Senator Voinovich. That is what you are--the language is 
OK, but you are worried about what is going on inside the 
Committee?
    Mr. Glazer. Yes, exactly.
    Senator Voinovich. OK. I have got it. Mr. Torgerson.

    TESTIMONY OF JAMES P. TORGERSON,\1\ PRESIDENT AND CHIEF 
  EXECUTIVE OFFICER, MIDWEST INDEPENDENT TRANSMISSION SYSTEM 
                         OPERATOR, INC

    Mr. Torgerson. Good morning, Mr. Chairman. Thank you for 
inviting me to this hearing. I am Jim Torgerson, President and 
CEO of the Midwest ISO. I want to provide some insights today 
on what I saw concerning the circumstance surrounding the power 
outages of August 14 and offer suggestions as to what might be 
done in the future.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Torgerson appears in the Appendix 
on page 111.
---------------------------------------------------------------------------
    The Midwest ISO was formed in 1998. It is the Nation's 
first voluntary regional transmission organization that did not 
originate from a legislative mandate or against the backdrop of 
a tight power pool. The Midwest ISO is also the first entity 
found by the Federal Energy Regulatory Commission to be a 
regional transmission organization.
    The Midwest ISO's region covers portions of 15 States and 
the province of Manitoba, and our current role is that of a 
NERC-certified reliability coordinator. As a reliability 
coordinator, the Midwest ISO monitors flows on key transmission 
facilities, develops day-ahead plans, conducts next-hour 
analyses regarding the high-voltage grid, and communicates with 
the control areas in our regions who have the primary control 
capabilities to open and close transmission circuits and to 
redispatch generation.
    Three of the more than 30 companies within our reliability 
territory suffered outages in the blackout, Consumers Power 
Company, Detroit Edison, and First Energy. The cause of the 
blackout and why it cascaded will be forthcoming from the work 
being done by the international task force formed by President 
Bush and Prime Minister Chretien of Canada. The Midwest ISO 
only has a part of the data needed to reconstruct those events, 
and in addition to appearing at today's hearing, the Midwest 
ISO is cooperating with the international task force and the 
General Accounting Office in determining what occurred on 
August 14.
    Likewise, the reason for the cascading effect of the outage 
is unknown at this time. The analysis that has been done to 
date in the Midwest seems to indicate there were a number of 
events in the Eastern Interconnection on August 14. Some are 
surely related to separations and the substantial losses of 
load that occurred and others are likely unrelated.
    At approximately 4:10 Eastern Daylight Time, portions of 
the Eastern Interconnection were separating from one another--
--
    Senator Voinovich. Mr. Torgerson, I know that and I 
appreciate it.
    Mr. Torgerson. OK.
    Senator Voinovich. I would really like you to--you have the 
Midwest. You have seen the language in that energy electric 
title. Do you like it or don't like it? Do you think they are 
stepping on your toes? Do you think that utilities should be 
able to be mandated join? That is what I am interested in.
    Mr. Torgerson. Yes, Mr. Chairman. We find that we need 
strong reliability standards, and they should be mandatory. We 
are comfortable with the language in the energy bill. I think 
it does provide what we need for us to go forward. I think the 
energy bill, overall, will be satisfactory. I agree with my 
colleagues here about the energy bill as it stands.
    The other thing I wanted to point out is the Midwest ISO 
has formed an organization, the Organization of MISO States. 
The Organization is composed of all the State commissions 
within the Midwest ISO that have gotten together to work 
cooperatively with the Federal Government on siting of 
transmission facilities. We believe that approach holds great 
promise in allowing the siting of needed transmission 
facilities and protecting the regional efforts to address 
issues associated with the wholesale electric market.
    Senator Voinovich. So in terms of the siting of 
transmission lines, you would be involved in doing that, in 
other words, setting priorities as to where the transmission 
lines might be, looking at your grid and how it all works out?
    Mr. Torgerson. In our overall approach, we provide a long-
term transmission expansion plan that covers the entire 
footprint. We just had it approved by our board. We work with 
all the State commissions in getting this built up. Then we do 
a review of it to make certain that what is in the plan will 
relieve congestion. It is not overstepping things, it is making 
sure there are no duplicative investments, and it looks at how 
we are solving problems in the Midwest. That is then worked 
with all the States and the State commissions and then 
ultimately approved by our board, and our board approved $1.8 
billion in investments that needed to be made for reliability 
in the Midwest over the next 5 years. So those are the things 
we have been focused on.
    Senator Voinovich. Do you think that the provisions of the 
electricity title in terms of siting, dealing with the NIMBY 
problem and the NEPA problem, are taken care of, or do you 
still think more is needed. I mean, one of the problems is, how 
do you pay for it, and two, how can you get it done, and do you 
think that the language is adequate enough so that if you 
decide these transmission links have to be sited, that it can 
be done?
    Mr. Torgerson. We think it is adequate. I think the 
approach we are taking with the Organization of Midwest ISO 
States is they are looking at it regionally, but they are also 
breaking it down. If a project is going to affect two or three 
States, those two or three States will then work with us on 
getting the siting done, and that is the game plan behind it. 
So we think it can be effective.
    Senator Voinovich. Thank you. I want to make clear also to 
you, and I again apologize to you, because of this vote 
schedule, your full testimony will be entered into the record.
    Mr. Torgerson. Thank you, sir.
    Senator Voinovich. Mr. Museler.

    TESTIMONY OF WILLIAM J. MUSELER,\1\ PRESIDENT AND CHIEF 
    EXECUTIVE OFFICER, NEW YORK INDEPENDENT SYSTEM OPERATOR

    Mr. Museler. Thank you, Mr. Chairman. I will skip most of 
my prepared remarks and go to the subjects that you wanted us 
to concentrate on here.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Museler appears in the Appendix 
on page 118.
---------------------------------------------------------------------------
    Just a brief background. The New York ISO began operation 
in 1999. We are responsible for operating the grid, assuring 
open access, and operating New York's electricity markets.
    With respect to the policy----
    Senator Voinovich. May I ask you something? Are you part of 
PJM?
    Mr. Museler. No, sir.
    Senator Voinovich. You are a separate operation? OK. I have 
got it.
    Mr. Museler. That is correct. The Northeast consists of--
and we all operate approximately the same way. PJM, which is 
the largest RTO. There are three ISOs, New York, New England, 
and Ontario. So when we talk about the Northeast, we typically 
talk about those four ISOs and RTOs which all operate more or 
less the same way and the markets are--at least the New York, 
PJM and New England markets are very similar to one another.
    With respect to the policy recommendations, it is certainly 
strikingly clear that we need mandatory reliability rules. Our 
view is that NERC should be the standard setting authority 
under FERC jurisdiction.
    You asked, however, whether or not there were--whether or 
not provisions in the pending legislation are adequate. As you 
know better than I do, there are differences between the House 
and Senate versions. For example, with respect to reliability, 
one of them allows for a region or a sub-region to have more 
stringent reliability rules if they so desire. We think that is 
critical. New York City currently has more stringent 
reliability rules than the NERC rules and we think that if the 
areas, the States, and the operating authorities believe that 
more stringent rules are required in certain areas, that we 
should be permitted to do that.
    It would not, in my view, be acceptable to have an area 
like New York City be held to the floor of reliability when the 
importance of maintaining power in New York City has effects 
nationally and even internationally. So we certainly think the 
legislation deals with mandatory reliability rules very well, 
but there is a difference between the bills and we think that 
needs to be taken into consideration.
    With respect to siting, again, I think the legislation is 
very good in that regard. But with respect to backstop 
authority for siting of transmission lines, there is a 
difference. So it depends on what the Conference Committee 
comes up with there. The States have the primary responsibility 
for siting transmission lines. I don't think anybody disagrees 
with that and State compacts, State agreements--and PJM is a 
good example of that in terms of the agreements they have with 
their States to move on their transmission plans and actually 
build things--is a good example of that.
    However, should the States fail, there, in our judgment, 
needs to be some backstop to ensure that the public interest is 
taken into consideration.
    Senator Voinovich. Mr. Museler, I am going to have to 
excuse myself because I have got 2 minutes left on the vote, 
but the point you are making is that if the States don't do the 
siting and the siting is needed then the backstop should be, 
what, FERC?
    Mr. Museler. Yes, sir.
    Senator Voinovich. FERC should be able to say, these lines 
have to be sited. We are looking at the big picture. It has to 
be done.
    Mr. Museler. Well, they should have the authority to make 
that judgment.
    Senator Voinovich. To make the judgment.
    Mr. Museler. They may affirm the States.
    Senator Voinovich. OK. I think I will try and be back in 
about 10 minutes and we will finish up, and then maybe give you 
all an opportunity to share some more with me. Thank you.
    [Recess.]
    Senator Voinovich. The Committee will come to order.
    Mr. Museler, you had some time left. Do you want to make 
any last one or two comments?
    Mr. Museler. I would just make one additional point, Mr. 
Chairman, and that is with respect to the cost recovery, 
transmission cost recovery provisions in the legislation. It 
does provide FERC authority for certain cost recovery measures. 
I would note that I would not suggest anything additional 
except that even with that authority in States and 
jurisdictions that have bundled transmission rates and rate 
caps, the fact that FERC can set a higher transmission rate 
does not translate into the actual entities--in all cases, it 
does not translate into the entities actually being able to get 
that as an incremental amount of revenue recovery.
    So FERC needs the authority, in my judgment, to be able to 
ensure that its incentive rate of returns or its regular cost-
base rate of returns actually are able to flow through to the 
transmission builder-owner within a reasonable amount of time. 
If there is a 5- or 10-year rate cap that prevents that--that 
will chill investment if investors know they can't even begin 
to recover for 5 or 10 years.
    That is all I would like to add, sir.
    Senator Voinovich. Thank you.
    Senator Voinovich. Mr. Kerr.

TESTIMONY OF JAMES Y. KERR, II,\1\ COMMISSIONER, NORTH CAROLINA 
                      UTILITIES COMMISSION

    Mr. Kerr. Thank you, Mr. Chairman. My name, again, is Jim 
Kerr. I am with the North Carolina Utilities Commission, and to 
my knowledge, I am the first State official from outside the 
directly affected region and I appreciate your Committee, 
Subcommittee's interest in hearing to some extent from those of 
us beyond the directly affected area.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Kerr appears in the Appendix on 
page 127.
---------------------------------------------------------------------------
    I have filed written testimony which is part of the record, 
and given the time constraints will also dispense with my 
prepared statement this morning. What we have tried to do in 
our testimony is to describe that we have a very different 
electric industry structure in the Southeastern United States 
that is dependent on vertically integrated utilities and a 
cost-based State regulatory system.
    With respect to reliability, I have also illustrated how 
that electric industry system on a regional level is 
coordinated through the Southeastern Reliability Council and 
sub-regions within the Southeast and how we deal directly with 
accountability, planning, coordination, and operational 
control.
    With respect to the broader issues that are being discussed 
as possible reactions to August 14, in my testimony, I express 
the significant concern that regulators in my region have had 
with mandatory RTOs and standard market design initiatives at 
the FERC and then try to comment briefly on the discrete issues 
in the bill which we think, or which I think, as a personal 
opinion, are pretty good ideas.
    You have asked this morning for our thoughts on the 
specific language that is before the Congress in the Conference 
Committee, and for the sake of time, I will run through very 
quickly that it is my opinion that the Federal enforcement 
authority over reliability standards is certainly an 
appropriate step that this Congress could take. I believe that 
appropriate backstop siting authority, similarly, is an 
appropriate step that this Congress could take.
    I want to point out here that on that point, I differ with 
the position of the National Association of Regulatory Utility 
Commissioners. They are opposed, and I feel obligated to point 
that out. It is my personal opinion, however, that the language 
on this issue in the bill is, in fact, appropriate.
    I think that appropriate incentives for transmission 
investment at the Federal level, as they are contemplated in 
the bill, seem to be appropriate. I am concerned that in 
January of this year, the FERC issued an incentive rate 
provision that seemed to me to apply incentives to the moving 
around of existing transmission as opposed to applying simply 
to new investment. I think if you apply incentive rates to 
rearranging the control or ownership of existing transmission 
as a way to incent folks to join regional transmission 
organizations, you are creating no new transmission and, in 
fact, are creating additional costs that will ultimately be 
borne by the ratepayers.
    Finally, with respect to what role the FERC should have 
with respect to regional markets and RTOs, I think it is 
imperative that Congress not allow FERC to move forward with 
mandatory RTOs. I believe that the administration said this 
morning they were in favor of voluntary RTOs and we believe 
that should be codified in the energy bill. Market design 
concepts, market oversight, we believe all of that should be--
the various regions of the country should go forward in a 
voluntary nature so that they can craft those types of 
solutions to the industry structure that may exist, whether it 
be in the Midwest, the Northeast, or in our area.
    When you ask, am I supportive of the energy bill itself, 
with the more discrete provisions on siting, reliability 
standards, investment incentives, that language, as I 
understand it in the two versions of the bill, seems fine to 
me.
    With respect to standard market design, I am not quite sure 
what the Senate version is right now. I will tell you that the 
provision in the Senate, the Domenici substitute, appears to me 
to be appropriate.
    I want to just take a very brief time to respond to some of 
the concerns raised by the representatives of PJM as well as my 
colleague, Dr. Schriber, as to whether or not that language--I 
think that is the language that they were saying would somehow 
cut FERC off at the knees. As I read Section 1122 of the 
Domenici substitute, it speaks to no final rule of general 
applicability within the scope of the proposed SNB rulemaking 
could go into effect until a certain period of time.
    I believe this, and I believe it would be--I read that to 
mean that if in PJM or if in MISO, that organization, the 
stakeholders in that organization and the Federal regulators 
can reach agreement on market design, FERC can certainly 
approve such a proposal. So I don't believe that language was 
intended or, in fact, does constrict the ability of my 
colleagues from other regions of the country to move forward. 
That is not my intention, and to the extent it might do that, I 
think that we--and we, in fact, have offered our colleagues 
from the Northeast and the Midwest to help craft better 
language, if you will.
    So if that was the piece that was referred to as 
handcuffing FERC's ability to move forward, as I read the 
actual language, and this is the only language I have seen, I 
don't believe it does that. I believe it says a rule of general 
applicability, which I would think would mean a notice of 
proposed rulemaking that would be applicable across the 
country.
    So with that, my time is up and I thank you for the 
opportunity.
    Senator Voinovich. Thank you, Mr. Kerr. Thank you for your 
perspective. Dr. Cooper.

TESTIMONY OF MARK N. COOPER,\1\ DIRECTOR OF RESEARCH, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Cooper. Thank you, Mr. Chairman. You have asked us to 
get to the point and I have got that reputation. [Laughter.]
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Cooper appears in the Appendix on 
page 187.
---------------------------------------------------------------------------
    In my opinion, the deregulation provisions of the 
legislation go too far and the reliability provisions do not go 
far enough. Let me first lay out the conditions why and then I 
will go to the specifics.
    Electricity is unique. It is not just a commodity, and we 
must never forget that. It has no substitutes. It is not 
storable. It is essential to public health and safety, to daily 
activities. It is delivered under incredibly demanding 
conditions that are extremely capital intensive.
    And deregulation and restructuring have increased the 
stress on the grid--so you have to recognize that--by causing a 
dramatic increase in the number and complexity of transactions 
for which this system was never built. It creates difficulties 
in coordination and planning as competition and contracts 
replace centralized decision making.
    PJM was a tight power pool for 50 years or so before it 
became an RTO. The RTO had nothing to do with its ability to 
control its area.
    Deregulation certainly short-circuited utility incentives 
to invest in transmission because the private interests of 
facility owners come into conflict with the shared public 
nature of the transmission system. It is a highway, not a 
market, and especially when you are asking them to make 
investments that they--for a system they share with their 
competitors. It is very difficult.
    And moreover, deregulation undermines the ability to 
account for social and environmental questions and constraints. 
The social cost of transmission is much higher than its mere 
economic cost. The fundamental problem with transmission is not 
inadequate incentives to invest. Utilities were willing to do 
so before deregulation. The problem is public resistance to 
building additional transmission facilities for environmental, 
health, and safety reasons.
    For these social reasons, scarcity of transmission in an 
economic sense is likely to be a permanent part of this 
industry's landscape. That is what our people tell us.
    The benefits of the shared transmission facilities are 
difficult to allocate. This is a network that is shared. The 
problem is geographic and intergenerational. Today's 
investments deserve a long-term, long-distance transaction, 
maybe tomorrow's core for serving native load.
    Now, I understand the pressure to do something in the wake 
of the blackout, but when it comes to electricity, doing just 
anything will not help. You have to do the right thing or you 
will make matters worse.
    Right now, you do not need to repeal the Public Utility 
Holding Company Act to improve the reliability of the system. I 
don't need utilities going into non-utility businesses and 
creative massive multi-state holding companies that escape 
regulation in order to improve reliability. We do not need to 
impose the standard market design. And the regional 
transmission organizations that are embodied in it are the 
wrong ones to create. They are dominated by industry, they 
preempt local accountability, and they have forced utilities 
into markets for allocating transmission resources with no 
assurances that the capacity is adequate today, additional 
capacity will be built or maintained.
    We must not rely on industry self-regulation. The proposal 
to move from voluntary self-regulation to mandatory self-
regulation misses the point. The difficulty is not the 
voluntary versus the mandatory. It is the ``self'' part. We 
need clear accountability to public authorities.
    Do not create private transmission monopolies. Transmission 
is a natural monopoly, part of a shared network. Transferring 
control to unregulated companies will simply allow them to 
increase their profit and exploit their market power.
    So that is what you shouldn't do. What should you do? I 
personally believe we need transmission organizations, but they 
have to be organized on a very different model than has been 
contemplated and proposed. Any transmission organization must 
be based on fairness and public accountability. Fairness 
requires a process for representation of all interests affected 
by transmission projects. The way to overcome social resistance 
to transmission projects is to give people a fair chance to 
present their case, defend their interest. That is what 
federalism is all about. It is an ugly, tough process, but it 
works because it empowers the people.
    Accountability demands that the local officials who get the 
phone calls when the lights go out are the people who are 
making the decisions, who have the ultimate authority. They 
didn't call the FERC when the lights went out in Ohio. They 
called the Ohio PUC. The Ohio PUC must have a fair 
representation in this process.
    Accountability also requires transparency. We cannot have 
this conflict between the FERC and the DOE and the private 
companies and the NERC over who has got the data and who is 
responsible for the analysis.
    Finally, even if economic incentives were a problem, and I 
don't think they are, the solution is not to increase the rate 
of return but to lower the risk, and that is what the utility 
model used to do. It established a long-term commitment. It 
established a stable environment. And frankly, all of the 
people who say we can't raise money in the industry are living 
in the dot-com 1990's, not the post-bust market. Give me a 
stock that offers a stable dividend, a slow and long-term 
growth rate, the widow and orphan stocks that the utilities 
used to be. They will have no trouble raising capital. But it 
is public policy that must create that environment that will 
promote the investment. Thank you.
    Senator Voinovich. Thank you. You have all had a chance to 
hear each other today. One of the things I like to do is to 
give witnesses an opportunity to comment on what other folks 
have had to say at the table. If there are any volunteers--Mr. 
Glazer.
    Mr. Glazer. Thank you, Mr. Chairman. You correctly focused 
in on the Senate, the legislation, and I think that is clearly 
the issue. Commissioner Kerr mentioned that there are 
provisions in the legislation, or being talked about--they are 
not actually in the legislation--to delay FERC's standard 
market design initiative. The Commissioner is right. I mean, 
you can read the language lots of different ways----
    Senator Voinovich. Standard market----
    Mr. Glazer [continuing]. Design----
    Senator Voinovich [continuing]. Basically is the overall 
plan that looks at the entire transmission grid, looks it over 
and comes back with recommendations on how it can be improved 
and then tries to determine how individual companies, RTOs, 
States get----
    Mr. Glazer. It is a plan to actually sort of set forth some 
standards around the country. One of the big issues was we have 
seams around the country, and Ohio is a good place, a good 
example of that. And the idea behind what FERC was trying to do 
was saying, well, let us have some basic rules of the road. Let 
the markets look like this. This commodity doesn't respect 
State lines. Let us have some basic rules with regard to 
markets, with regard to planning, reliability, etc. So it was a 
broad brush approach.
    Some may argue it was too much, too little. Personally, I 
am very concerned about a provision that would come down that 
would just delay things, because as I mentioned, delay is the 
kiss of death on Wall Street.
    Senator Voinovich. I think some people were saying delay 3 
years or something like that, and my personal feeling is that 
we have waited too long.
    Mr. Glazer. Exactly.
    Senator Voinovich. We are so long overdue on this that it 
is not time for us to delay and look and try to figure out 
where we are going. What people don't understand is that this 
is a capital-intensive industry and people are not going to 
invest in something if there is uncertainty about what the 
future looks like. They are just not going to invest. It is the 
same thing with nuclear energy. One of the problems in terms of 
building new nuclear energy plants is what to do with the 
waste? That is why Yucca Mountain is very important. We finally 
decided we are going to go forward with this. So you are going 
to probably see some new nuclear plants in this country because 
investors know that that issue is taken care of long term.
    Mr. Glazer. And that is the problem with delay. I would 
rather, if the Federal Energy Commission comes out with 
something that the Congress of the United States thinks is 
inappropriate, you have the tools to change it. When I was on 
the PUCO, if the legislature didn't like something PUCO did or 
you didn't like something PUCO did or the Supreme Court, there 
were lots of checks and balances. But delay is just the kiss of 
death to investment. I would rather let the FERC move forward. 
If the Congress doesn't like this provision or that provision, 
it certainly can weigh in. But delay is the kiss of death for 
the reasons you stated.
    Senator Voinovich. Mr. Schriber.
    Mr. Schriber. Mr. Chairman, just to underscore what Craig 
has told you, the one thing that Dr. Cooper said, and maybe the 
only thing that I really agreed with, is that Ohio should have 
a voice in the outcome of all this and you are our voice. As 
Craig has suggested, and I wholeheartedly agree, delay is not 
the way to go. If there are any provisions that would handcuff 
the FERC from moving forward, I think it would be very 
unfortunate.
    Senator Voinovich. Any further comments?
    Mr. Cooper. Mr. Voinovich, I am not sure you want to be 
responsible when the lights go out and have them call you. Let 
us be clear. The Chairman of the IO Commission hears about it. 
The fundamental question here on the SMD was not a question 
of--there is very little in the SMD that had to do with 
reliability. The SMD sort of punted on that question. What the 
SMD has is an economic model for transacting transmission 
rights and electrons, right, and if the FERC hadn't bothered 
with the transmission rights, it might have gotten away with 
its wholesale markets.
    But this was a model that two-thirds of the country--let us 
be clear. You have got Ohio. You have got New York. They have 
been here. But two-thirds of the States have not chosen their 
deregulatory model, and in our view, the SMD was coercing the 
other States in the country through its market design 
requirements to pursue this path.
    So you need to decouple the deregulation issues from the 
reliability and the transmission issues. If you do that, you 
will have a lot more support for expanding and devoting more 
attention to the national highway system for electrons.
    Senator Voinovich. What you are basically saying is that 
there are some people that haven't yet decided what they want 
to do and they shouldn't be forced in it. Your opinion is that 
the standard Market Design would force them into it. Does 
anyone want to comment on that? Mr. Kerr.
    Mr. Kerr. It would absolutely, Mr. Chairman, as Chairman 
Wood said today, that in this rule, they have moved beyond 
Order 2000 and said that you would mandatorily be required to 
join a regional transmission organization as part of the SMD. 
And again, I think we need to parse words here. Being a lawyer 
in my former life, I am guilty of that. Delay, I think a lot of 
mistakes are avoided by taking your time. So, I mean, we can 
comment generally about whether delay is good or bad.
    But as I read the language that came in Senator Domenici's 
substitute, it says only that FERC shall not issue a rule with 
general applicability related to the standard market design. 
What I have not heard, people have said, well, this could delay 
what we want to do in Ohio. I don't see how that is possible, 
because that would not be a rule of general applicability if it 
were confined to a particular RTO or ISO.
    If that is true, I think that language could be very 
carefully improved upon. You could put a ``however'' clause 
afterwards. You could say, however, nothing in this section is 
intended to stop Mr. Torgerson or Mr. Glazer or Dr. Schriber 
from moving forward in cooperation with the Federal regulators 
to adopt the market rules that they want to apply within their 
region.
    So again, when I look at the language, I do not see the 
basis for this agreement, ``don't handcuff FERC.'' In contrast, 
I know that if FERC goes forward with this rule, its position 
will be that the entire Southeast and the West and other 
regions of the country that are in different structures, that 
have very serious--who have studied these proposals and have 
continued to have very serious concerns about whether this is 
correct for us would, in fact, be forced to go forward.
    So I don't think it is that our region wants to stop Dr. 
Schriber's region. We certainly don't. In fact, we would help 
in any way we could. But I think the question ought to be 
asked, should your State, should Ohio force upon us what it 
needs to solve its problems. I think clearly it should not be, 
and this language allows that because it says you can't put a 
national plan out, but it doesn't prohibit you from going 
forward and working maybe with instead of a hammer, a surgical 
scalpel to work on the various regions to improve upon the 
systems.
    They are doing a lot of good things in the Midwest. They 
are doing a lot of good things in the Northeast. And what we 
ought to do is take what is good and improve upon it in every 
region of the country, but certainly not go backwards in our 
regions of the country. So with that, I----
    Senator Voinovich. I would like to get one more comment in 
regard to what Mr. Kerr said, and I think that what I am going 
to do is wrap it up with one last comment on what you made 
reference to, Mr. Kerr, and then we are going to adjourn the 
hearing.
    Mr. Museler.
    Mr. Museler. Thank you, Mr. Chairman. Just a few comments 
on that. The first is that there is some regionality from the 
standpoint of market design. I think that is factored into the 
SMD rules that FERC wants to promulgate.
    Senator Voinovich. So you don't think the SMD rules are 
going to force people, as Mr. Kerr has suggested--or, no, Mr. 
Kerr. You believe the language is broad enough so that it 
doesn't force you into----
    Mr. Kerr. The language in the SMD would, in fact, make our 
participation in an RTO mandatory. The language--the point I 
was making is that the language in Senator Domenici's 
substitute would allow all the regions to proceed as they chose 
to. So two different documents.
    Mr. Museler. The point I would like to make is that the 
standard in standard market design matters. The design of the 
markets matter. California is an example of what happens when 
you don't get it right. I am not saying they all need to be the 
same, but they do need to be consistent and they do need to 
make economic sense, because whatever the region is, whatever 
regions choose to say they are the region, there are seams, as 
Mr. Glazer pointed out, and there needs to be consistency in 
those rules, both for reliability and for market operation. You 
cannot have too much diversity in those market rules or you 
will not have interstate commerce occurring the way it should.
    Senator Voinovich. Any other comments before I run?
    Mr. Glazer. Just a quick one. I think FERC, we should give 
them some credit. They really did back down from sort of the 
more mandatory parts of their standard market design. The rule 
as it presently is being proposed has that regional 
flexibility. So I think that they have tried to make the 
balance between what Mr. Museler said and what Commissioner 
Kerr would say, so I----
    Senator Voinovich. Is there anything that FERC can or 
should do with market design that has enough flexibility to 
work for all of you?
    Mr. Glazer. I think the white paper that--they just issued 
what is called a white paper. I think it provides that 
flexibility in there. They really did hear the message from the 
Congress. So I think that flexibility is in there. There is 
this issue about whether you mandate RTOs or not.
    The problem there isn't, what if one region, what happens. 
What happens if one utility doesn't want to play but all the 
utilities around it want to play? Then you have got a problem. 
You have got an electrical problem again.
    Senator Voinovich. There has got to be some provision that 
says if that kind of thing happens, that somebody is going to 
step in and make it happen.
    Mr. Glazer. Somebody has got to, right.
    Senator Voinovich. Absolutely. And I think the other thing 
that you need to look at is that we are today, tomorrow, 5 
years from now, 10 years from now, and God only knows just how 
this thing is all going to work out, but more and more, we have 
electricity moving around and I am sure somebody smarter than I 
am can get into what happened in California. But it really 
appeared to me that somebody was not doing what they were 
supposed to be doing in terms of developing a grid so that that 
situation would not have occurred.
    Mr. Cooper. Mr. Chairman, let me offer one point about the 
seams question, and that gets to the fundamental proposition 
that--the desire to have a Federal backstop. You have heard it 
said that the States don't do their job. I want you to do more 
than that, and here is what I want you to do. I want a formal 
process, and the Congress ought to take the responsibility for 
establishing a formal process of State compacts or some other 
mechanism so that it is not simply a question of whether one 
State disagreed or not, but a process has to be set up by which 
the States can sit together and reconcile their differences.
    If you look at what has happened in the Midwest, people 
have jumped in and out. The industry members have jumped in and 
out. I think the State officials, if they were sitting together 
with the authority to make that decision, would have done a 
much better job than the industry has jumping in and out.
    So it is a governmental responsibility to make interstate 
commerce flow effectively, and that is not in anything before 
the Congress.
    Senator Voinovich. This has been an interesting panel. I 
apologize for the interruptions that we have had. Thank you 
very much.
    Again, thank you for your attention and your courtesy in 
being here, and this hearing is adjourned.
    [Whereupon, at 11:32 a.m., the Committee was adjourned.]


   KEEPING THE LIGHTS ON: THE FEDERAL ROLE IN MANAGING THE NATION'S 
                              ELECTRICITY

                              ----------                              


                      THURSDAY, NOVEMBER 20, 2003

                                       U.S. Senate,
          Oversight of Government Management, the Federal  
            Workforce, and the District of Columbia Subcommittee,  
                          of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:07 a.m., in 
room SD-342 Dirksen Senate Office Building, Hon. George V. 
Voinovich, Chairman of the Subcommittee, presiding.
    Present: Senators Voinovich, Carper, and Lautenberg.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Good morning. As one who has hearing 
aids, I can understand your problem.
    First of all, I would like to say that I am glad that I am 
Chairman of the Subcommittee on the Oversight of Government 
Management, the Federal Workforce and the District of Columbia, 
because this hearing could probably be held in the Environment 
and Public Works Committee, of which I am also a member. But 
having the chairmanship of this Subcommittee gives me some 
authority to oversee different areas of government, and I 
thought it was very important that we deal with this subject 
before this Subcommittee on Oversight of Government Management 
for its significance in terms of the issue as to the public's 
relying on electricity and also because it is an important 
issue in the State of Ohio, where a lot of this occurred.
    This is the second hearing that we have held on the 
blackout that hit the Midwest and the Northeast on August 14, 
and the proper Federal role on managing our electricity system. 
It is now well-documented that the August 14 blackout was the 
largest blackout in our Nation's history. Over 50 million 
people lost power that day, including over 2 million people in 
Ohio.
    What has been lost in the shuffle here in Washington, 
however, is the impact that the event had on the economies of 
the Midwest and the Northeast. The Ohio Manufacturing 
Association estimates that this blackout directly cost Ohio 
manufacturers over $1 billion, a huge hit that could not have 
come at a worse time, given that millions of American 
manufacturing jobs are already at risk.
    It is absolutely imperative that we do all we can to 
prevent such events from happening in the future. As I 
mentioned at our first hearing on this topic, our Nation is 
currently served by an overburdened and heavily strained 
electricity system that was not designed for the widespread 
wholesale transactions that currently take up a large part of 
its capacity.
    Over the last several decades, our transmission capacity 
has lagged behind both generation and demand increases. We must 
take concrete steps now to strengthen our grid by establishing 
reliability standards that are mandatory and enforceable. We 
need new investment in transmission capacity, and we need to 
strengthen existing Regional Transmission Organizations so that 
we can effectively manage the grid to prevent future blackouts.
    A lot has happened since we held the first hearing back in 
September. First, the U.S.-Canada Power System Outage Task 
Force that was established to investigate the blackout has 
issued an interim report entitled, ``Causes of the August 14 
Blackout in the United States and Canada.'' Second, a House-
Senate conference has reported a comprehensive energy bill that 
contains electricity provisions which will significantly affect 
the management of our national electricity system. It is now 
pending business here in the U.S. Senate, and I am prayerful 
that it is not filibustered so that we cannot move forward and 
get it done before we go home.
    I want to commend the administration for its leadership on 
electricity transmission issues and the August 14 blackout. 
President Bush has moved quickly to create the U.S.-Canada 
Joint Task Force on the Power Outage, and I appreciate the fact 
that the Canadians have cooperated and strongly pushed for a 
more reliable electricity grid in order to prevent future 
blackouts.
    Secretary Abraham has overseen significant changes in the 
utility sector over the last 3 years--I had an opportunity to 
talk to him about that yesterday when I saw him--during which 
time there were two major blackouts. He issued an important 
study on the transmission grid and created a new Office of 
Electricity Transmission and Distribution at the Department of 
Energy. Simply put, the administration has made our national 
electricity system a national priority--as it should be.
    I would also like to comment on the electricity title in 
the conference report on H.R. 6. Following the August 14 
blackout, I, along with several of my colleagues, called on the 
energy bill conferees to include provisions that would help 
prevent future blackouts in the conference report. I also asked 
the witnesses at our first hearing, which was on September 10; 
Mr. Wood, you were here for that; what they thought we needed 
to do legislatively in order to prevent future blackouts. 
Chairman Wood, you probably remember me asking you that 
question. The response from the witnesses, including Chairman 
Wood, was that the best legislative fix would be to enact 
electricity provisions in the comprehensive energy bill 
including mandatory reliability provisions, provisions to 
increase investment in the transmission grid, and provisions to 
grant Federal siting authority to FERC.
    The energy bill conferees obviously listened. The 
electricity title to the conference report will, when enacted, 
establish mandatory reliability standards that will be 
implemented and enforced by FERC. It will encourage new 
investment in the transmission grid. There is a lot of money in 
there to do that. It will grant Federal siting authority to 
FERC. And, although it delays implementation of the Standard 
Market Design rulemaking--we talked about that again at our 
last hearing--it will allow FERC to strengthen existing 
Regional Transmission Organizations in order to ensure that 
problems and mistakes--like the ones detailed in the interim 
report we are discussing today--are eliminated in the future.
    The House passed the conference report by a bipartisan vote 
of 248 to 160 on Tuesday, and we will be voting on cloture 
tomorrow morning on this bill. The Senate needs to follow suit 
and send this critical legislation to the President as soon as 
possible--it is very important we this done.
    As I mentioned earlier, the purpose of today's hearing is 
to discuss the interim report entitled, ``Causes of the August 
14 Blackout in the United States and Canada,'' that was issued 
yesterday by the U.S.-Canada Power System Outage Task Force. 
Before we proceed, I would like to include the interim report 
in the record. Without objection, it is ordered.\1\
---------------------------------------------------------------------------
    \1\ The report entitled ``Interim Report: Causes of the August 14 
Blackout in the United States and Canada'' appears in the Appendix on 
page 211.
---------------------------------------------------------------------------
    I understand that the administration is currently planning 
to accept public comments on this interim report and then 
publishing a final report early next year. I intend to hold a 
final hearing on this topic when the administration releases 
the final draft and makes its recommendations as to what 
further steps need to be taken to prevent such an occurrence 
from happening again, and I would be really interested if any 
of you witnesses want to comment about whether this conference 
report contains enough to get the job done? And if you do not 
believe that it does I would like to know what your ideas are 
on what other things we need to have in order to give you the 
tools to get the job done.
    We have got an impressive lineup of witnesses this morning 
to outline the preliminary findings of the task force. I look 
forward to an informative discussion.
    Our first witness today is the Hon. Pat Wood, the Chairman 
of the Federal Energy Regulatory Commission. And joining him on 
behalf of the administration is James Glotfelty, the Director 
of the Office of Electricity Transmission and Distribution at 
the Department of Energy, a new job, and Michehl Gent is the 
President and CEO of the North American Electric Reliability 
Council, and I think that the acronym is NERC. We are very 
happy to have all of you here today, and thank you for 
testifying.
    Gentlemen, it is the custom of this Subcommittee that we 
swear in our witnesses, and I wish that you would rise, and I 
would administer the oath to you.
    [Witnesses sworn.]
    Senator Voinovich. Let the record show that the witnesses 
answered in the affirmative.
    Mr. Wood, we will start with your testimony.

 TESTIMONY OF HON. PAT WOOD, III,\1\ CHAIRMAN, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Wood. Good morning, Mr. Chairman. It is nice to be 
back. I appreciate the opportunity to discuss the very heavy 
report yesterday that was presented by Secretary Abraham and 
Minister Dhaliwal.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Wood appears in the Appendix on 
page 193.
---------------------------------------------------------------------------
    Watching and studying the blackout for me, and I think for 
a number of us, has been a sobering experience. The reliability 
of the North American electric system is normally so excellent 
that this year's notable service interruptions from the August 
14 blackout here in the Northeast, blackouts overseas in 
London, Italy, Argentina, Scandinavia, and also and recently 
back here again from Hurricane Isabel and related weather 
damages have forced us all to look afresh at all of the old 
assumptions that we have about the value of reliable electric 
service and what it takes to keep the lights on.
    So here are some thoughts from an energy regulator about 
what I have learned from this blackout investigation, from the 
thorough investigation encompassed in the interim report, and 
from thinking about these other blackouts that we have seen in 
the past year. The blackouts in the Northeast, in Italy, and in 
London and elsewhere, have a common theme: Something routine 
happens, like a tree contacting a power line, or a minor relay 
setting trips because it was done wrong, and the time to react 
and keep the system stable suddenly shrinks beyond the 
capability of human control, when the machines take over.
    The grid is a tremendously complex machine, and the 
interconnectedness that allows us to benefit from both higher 
reliability and lower costs in all hours also causes the domino 
failures experienced in many countries in recent months. We 
cannot ever prevent blackouts, but we can and must learn to 
reduce their frequency, magnitude and impact.
    The best way to manage blackouts is to prevent them, not to 
hope for heroic rescues when we are already in a jam. And the 
secret to reliability lies in making sure that every 
transmission owner, control area operator, and reliability 
coordinators takes care of the basics: Adequate tree trimming, 
adequate training for emergency as well as routine operations, 
effective communications within and across organizations, and 
having effective backup facilities, procedures and tools.
    The investigation clearly shows that had First Energy 
trimmed its trees, used a solid state estimator program after 
the trip of the East Lake 5 Unit along the lake, and regularly 
throughout the afternoon of August 14, and trained its 
operators to better recognize and deal with these emergencies, 
the blackout would not have happened. The blackout study shows 
that the current reliability standards were violated by First 
Energy and the Midwest Independent System Operator. We need 
better compliance and tough, clear standards.
    The FERC will be working closely with NERC and the 
stakeholders to develop those standards and to implement the 
reliability provisions of the energy bill if Congress approves 
it.
    In anticipation of approval and because the timelines are 
so short, and the needs are so great, on December 1, the 
Commission has scheduled a conference to discuss the 
implementation of the reliability provisions in the statute, in 
order that we can have mandatory rules in place and operational 
by this summer. We do need some major investments in new 
transmission facilities and new grid technologies, especially 
those that make it easier for us to manage the basics of 
electricity. But we need to make these investments wisely, for 
lines and equipment that expand the reliability parameters of 
the grid where it is needed, for example, new sources of 
reactive power in the Cleveland-Akron area. These appear to be 
long overdue.
    Further analysis conducted by the blackout investigation 
teams will teach us much about how the cascade spread, why it 
stopped where it did, and those things will help us to design a 
system that, over the long-term, should perform more reliably 
and cascade more narrowly. The new energy bill offers options 
to site long-needed transmission lines and to pay for the 
reliability investments, and I am eager, as my colleagues are 
at the Commission, to put these measures into place.
    We also need to invest in hardware and software that let 
operators manage the grid more effectively. Tools that improve 
system monitoring, evaluation, visibility, and information 
sharing about the grid operations over a wide region will allow 
operators to manage the grid more reliably on a day-to-day 
basis as well as in emergencies. Our colleagues at the 
Department of Energy have done some excellent work in this area 
over the past few years, and we will be looking to these 
technologies and others to raise the bar for effective grid 
management.
    Transmission is regulated at both the Federal and the State 
level. Clearly, we need to regulate it better to assure that 
the reliability that Americans have come to expect is, in fact, 
delivered. As the present energy bill recognizes, the days of 
voluntary reliability standards with no enforcement teeth must 
end. Federal regulators must work closely with our State 
colleagues to make sure that utility cost-cutting that allows 
14-inch diameter trees to grow in a transmission right-of-way 
or inadequate operator training or the widespread use of 
inadequate software ineffectively used must end.
    I pledge that my Commission will work closely with our 
colleagues in Ohio and other States to deliver better 
regulation for better reliability. I do note with that that my 
former panelist, Mr. Shriver, from the State of Ohio, announced 
yesterday some remedial measured that they have initiated with 
the utilities in Ohio already, with the governor's support.
    Some claim that electric competition and higher energy 
flows caused underinvestment in an overworked grid and made 
this blackout inevitable. What they ignore is that the 
operators' primary challenge is to work the system that you 
have and that the operator has the power to cut back any 
transaction, whether it is a long distance transaction or one 
to serve local load; to tighten the operational limits on any 
transmission line or power plant; and even to cut customer load 
if that is what it takes to keep the system safe and secure. 
Markets do not compromise reliability, but we must redouble our 
efforts to assure that all necessary reliability measures are 
taken.
    Perhaps the saddest portion of the blackout report is 
Chapter 6, the comparison of this outage to those that have 
happened since 1965. The common factors are overwhelming: 
Conductor contact with trees due to inadequate vegetation 
management; insufficient reactive power; inability of system 
operators or coordinators to recognize and understand events 
across the broad, regional system; failure to ensure that 
system operation was within safe limits; lack of coordination 
on system protection; failure to identify emergency conditions; 
ineffective communication; lack of safety nets; and inadequate 
personnel training.
    The seven outages that the report reviewed from 1965 to 
1999 include all of these elements. Extensive analysis followed 
each outage, and blue ribbon panels were developed with good 
recommendations after each of these outages. Some of the 
recommendations that have followed these outages have been 
implemented but not many. It is my hope that with the adoption 
of the new reliability provisions in the energy bill, we can 
finally implement most if not every one of these 
recommendations and stop repeating the mistakes again and 
again. The cost of the mistakes is high for our Nation, for our 
sister nation to the north, and all of our citizens deserve 
better.
    The cost of blackouts is immense, both in human and 
financial costs. I have seen estimates every day that try to 
impact the cost not only to your home State, Senator, but to 
the entire Northeastern quadrant of the continent. New 
transmission facilities and tools are not cheap, and business 
practices are not cheap, either, but these improved business 
practices will need to be paid for; they will need to be part 
of the overall cost of electricity, and as an economic 
regulator, I am prepared to put those in the rates and justify 
that is in the public interest.
    But if you ask New Yorkers who were stuck in the Subway on 
August 14 or the Cleveland residents who had to boil their 
water for days or folks around Maryland and Virginia who sat 
without power for as long as a week after Hurricane Isabel, 
most would tell you that they would rather pay a little more 
for a reliable electric system than reduce their bills to avoid 
incremental, reliability and improving costs.
    So I do think it is important to recognize that there will 
be a cost to improve this system. I think that it is one that, 
as a Nation, we should pay, because the benefits far outweigh 
the costs. But again, as an economic regulator, I do think the 
findings here were very important and force us all to rethink 
the paradigm that we have been operating under.
    I look forward to your questions, Senator Voinovich and 
Senator Lautenberg. Thank you.
    Senator Voinovich. Thank you, Mr. Wood. Mr. Glotfelty.

    TESTIMONY OF JAMES W. GLOTFELTY,\1\ DIRECTOR, OFFICE OF 
  ELECTRIC TRANSMISSION AND DISTRIBUTION, U.S. DEPARTMENT OF 
                             ENERGY

    Mr. Glotfelty. Thank you, Mr. Chairman and Senator 
Lautenberg.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Glotfelty appears in the Appendix 
on page 196.
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    I appreciate the opportunity to testify before you today 
and outline the findings of the U.S.-Canada Power System Outage 
Task Force investigating the blackout that occurred on August 
14.
    Three months ago today, large sections of the United States 
and Canada were still recovering from one of the largest power 
blackouts in our Nation's history. Since that blackout, 
hundreds, literally hundreds, of technical experts have worked 
tirelessly, long hours, sleepless nights, to help the U.S.-
Canada Task Force determine how and why this blackout occurred.
    Yesterday, as you know, the task force released the interim 
report that marks our progress to date in the search for 
answers on what happened that day. The interim report focuses 
on events, actions, failures, and conditions that led to the 
blackout and caused it to cascade over such a large region as 
well as questions relating to the nuclear power plant 
operations in both countries and the security of our grid 
control systems. It presents facts collected by the 
investigation team, and it does not offer speculative or 
unconfirmed information or hypotheses.
    Without going through a line-by-line review of how the 
system failed, I would like to walk you through the causes that 
we outlined in the interim report. But before I do this, I 
would like to make it clear that it is the control area 
operator, in this case, First Energy, who had the primary 
responsibility to maintain system reliability, regardless of 
the conditions. They are required to have the tools to ensure 
that the grid is reliable. They must be able to take all 
actions necessary to ensure a reliable system.
    With that caveat in mind, I will walk you through the 
causes that we outlined in our report. The first type of cause: 
First Energy did not properly assess the changing conditions on 
their system. They did not use an effective contingency 
analysis tool routinely. They lost their monitoring alarm 
systems and lacked procedures to understand that. After they 
made repairs, they did not check to see if they were 
effectively working to monitor the system. And once both 
systems failed, they did not have effective backup tools to 
ensure that they really had a basic understanding of the system 
conditions before them.
    Second, First Energy failed to adequately maintain its 
transmission rights of way. This seems so very basic, yet, as 
Mr. Wood said most of the blackouts that have occurred in this 
country and overseas, some portion of that or some cause of 
that deals with inadequate vegetation management in our rights 
of way. Our report specifically stated: Overgrown trees in 
First Energy's transmission rights of way caused the first 
three major 345 line failures in Ohio. These lines trip when 
contacting trees that had grown past their maximum allowable 
limits in their rights of way.
    Our investigators found that First Energy rights of way 
being clean are not a new problem. They found one tree over 42 
feet tall in a right of way that they approximated the age was 
14 years old. Another was 14 inches in diameter currently in 
the rights of way. These trees do not grow overnight. This 
means that there is a long, systemic issue that needs to be 
dealt with not only with First Energy, but it needs to be 
looked at by utilities all across the country on how we ensure 
our rights of way are maintained.
    It seems so very basic that we would maintain our rights of 
way. However, it does conflict reliability of our system grid 
with land owner rights, and that is something that the State 
commissions as well as FERC will have to deal with in the 
coming months.
    The third and final group of causes of this blackout deal 
with reliability coordinators, in this case, the Midwest ISO. 
They were unable to provide adequate diagnostic support over 
the entire region to help First Energy respond to their 
problems. Their State estimator failed. Their monitoring 
equipment did not have real-time line status and information. 
Their operators could not identify where lines had tripped. And 
the Midwest ISO and their neighbor, PJM, did not have adequate 
measures to understand issues on the seams between the two 
borders.
    According to NERC and outlined in our report, these 
failures amount to at least six NERC reliability standards 
being violated, four by First Energy and two by MISO. 
Hopefully, the Congress will take action on the energy bill and 
make these rules mandatory, and we can move down the road to 
ensuring that we have stiff penalties for violation of 
reliability rules.
    Mr. Chairman, I would like to reference a critical point in 
this investigation: 3:05 in the afternoon on August 14 is the 
critical time frame. At that time, the investigation's 
extensive modeling determined that the system was being 
operated reliably, within safe operating limits. That fact 
alone eliminates a number of possibilities as causes of the 
blackout. It eliminates high power flows to Canada, of which 
the majority of the power flows going across First Energy's 
system were actually ending in First Energy's system. 
Approximately 20 percent of First Energy's load was being 
imported.
    System frequency variations; low voltages earlier in the 
day and prior days; low reactive power output from independent 
power producers; outages of individual generators and 
transmission lines that occurred well in advance of the 
blackout; all of those were considered by the investigations 
team, modeled and discarded as not causes of the blackout.
    Finally, the task force spent time understanding the 
nuclear plants and the security of the system. The report 
outlines that all of the nuclear plants in the United States 
and Canada shut down safely. They were not a cause of the 
blackout. They were reacting to system conditions and tripped 
themselves from the grid. The security group found that there 
was no terrorism or deliberate cause. There were no SCADA 
system violations with the information that they have reviewed 
to date and no computer viruses that caused any of this 
blackout.
    Phase one of our task force investigation and the public's 
response to it will give us a wealth of information that will 
be the basis for forming recommendations. Phase two of our 
investigation will include three public forums in Cleveland, 
New York City, and Toronto in early December. These forums will 
offer an opportunity to all of those listed in this report as 
well as other interested parties to provide the task force with 
comments and recommendations. The task force will then issue a 
final report containing our recommendations for improving the 
electric system and its reliability.
    Thank you, Mr. Chairman. I would be happy to answer any 
questions.
    Senator Voinovich. Thank you, Mr. Glotfelty. Mr. Gent.

TESTIMONY OF MICHEHL R. GENT,\1\ PRESIDENT AND CHIEF EXECUTIVE 
      OFFICER, NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL

    Mr. Gent. Thank you, Mr. Chairman and thank you, Senator 
Lautenberg. You probably do not know this, but you are my 
Senator in the State of New Jersey. I appreciate your being 
here this morning.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gent with attachments appears in 
the Appendix on page 200.
---------------------------------------------------------------------------
    Senator Lautenberg. I am glad to represent you. It depends 
on your testimony. [Laughter.]
    Mr. Gent. Thank you all for inviting me this morning to 
speak to NERC's perspective on the interim report of the U.S.-
Canada Power System Outage Task Force on the causes of the 
blackout. NERC, as most of you know, is a not-for-profit 
organization that was formed after the Northeast blackout in 
1965. Our job is basically to prevent blackouts from happening. 
That cascading outage of 1965 was supposed to have been the 
last one, and it was not. So this study adequately covers what 
the problems were leading up to this recent blackout.
    We are structured as a regional organization that every 
electric utility and member that participates in the electric 
system market belongs in one of 10 regional reliability 
councils. They own a not-for-profit organization, which is 
NERC. NERC has been an integral part of the joint fact-finding 
investigation that led to the interim report that was issued 
yesterday. We fully support the report's findings and 
conclusions, and I would like to add that I fully support the 
testimony of Mr. Glotfelty and Mr. Wood here this morning.
    With respect to what happened, the key findings and 
conclusions may be difficult to find, but I will reference page 
23 for the information that Mr. Glotfelty briefly described, 
and on page 25, you will see the NERC standards that we believe 
that we have determined have been violated.
    Immediately after the onset of the blackout, NERC began 
assembling a team of the best technical experts in North 
America to investigate exactly what had happened and why. Every 
human and data resource that we have requested of the industry 
has been provided, and experts covering every aspect of the 
problem have volunteered from across the United States and 
Canada.
    In the week following the blackout, NERC joined with 
representatives of DOE and the Federal Energy Regulatory 
Commission to establish a single joint fact-finding 
investigative team. The question has often been asked: Are 
there more than one investigation underway? And the answer is 
no. We stand side-by-side in this.
    All of the members of the team, regardless of their 
affiliation, have worked to help correlate and understand the 
massive amount of data that we have received. We have hundreds 
of volunteers from organizations all over North America, and we 
believe more are to come as we venture further into the 
investigation.
    To lead our NERC effort, we established a steering group of 
the industry's best executive-level experts from systems not 
directly involved in the cascading grid failure. The steering 
group's scope and members of that group are described in our 
Attachment A to our written testimony.
    On October 15, I sent a letter to the CEOs of 160 control 
areas and reliability coordinators across North America that 
control our electric grids, and I directed them to verify that 
within 60 days that their organizations are measuring up to 
reliability requirements in six key areas. Those are also 
described in an attachment to my written testimony. Those 
responses are due on December 15. The purpose was to make sure 
that we are reducing, to the extent possible, the likelihood of 
any further action like the blackout.
    Chapter 6 of the interim report has been mentioned this 
morning by Mr. Wood. It compares this blackout to blackouts 
that we have seen in the past, and while it is true that the 
same things seem to continue to crop up as the reasons, it is 
also true that we have a number of situations where automobiles 
were involved in deaths, and we have not been able to stop 
that. I do not mean to be flip about this, but the area of 
study is so wide that we are virtually unable to totally 
prevent these things from happening.
    What we have done, though, is we have made tremendous 
strides. The whole reliability coordinator system is a result 
of recommendations of a previous blackout. We now certify our 
operators. That is the result of the recommendations of the 
report. And we have taken other large steps.
    One important step that Congress can take is, as you have 
indicated earlier, Mr. Chairman, is to pass the reliability 
legislation or the energy legislation with the reliability 
language in it. I believe, as you asked, I believe that 
legislation, the reliability part, is adequate. It will provide 
us with the assurances that we need to see that the rules are 
developed correctly and that they are enforced and complied 
with.
    As for the August 14 outage, much remains to be done. As 
the entity responsible for reliability standards, NERC must 
understand and communicate with its members what happened on 
August 14 and why. The interim report is a major step; in fact, 
it may go beyond a major step. This may be the finest document 
of its type ever produced, even though it is the result of a 
disaster. We must also determine if there are other standards 
that have been violated. We must determine if our standards are 
adequate. We must make modifications to take into account what 
happened with this blackout and how the system is now being 
used.
    We will continue to work with the task force. The 
investigation will proceed, and recommendations will be 
developed. We expect to learn many more lessons from this 
event, and I expect that I will be back here again some day in 
the future.
    Thank you, and I would be happy to take your questions.
    Senator Voinovich. Thank you, Mr. Gent.
    We have been joined by Senator Lautenberg. Senator 
Lautenberg, would you like to make a statement before I start 
the first round of questions.

            OPENING STATEMENT OF SENATOR LAUTENBERG

    Senator Lautenberg. I would appreciate the chance to just 
make a short statement. I would like to first welcome Mr. Gent.
    And I thank you, Mr. Chairman, for convening this second 
hearing on the electricity blackout. It takes someone who has 
been a governor and a mayor, who has been up front with the 
problem, to recognize the importance of getting on with this 
thing and not letting it linger, and we appreciate your 
direction and your action here.
    The critical loss of power on August 14 brought a large 
part of the country to a standstill, and we still have 
unanswered questions, as all three of you have identified. One 
of the questions that arises for me is heaven forbid that 
terrorist organizations that we know threaten us from many, 
many points and could coordinate something with the lights out 
would be devastating in terms of not only the damage that might 
occur but the panic that would follow if news ever got out that 
there was something underway that was attacking the American 
people in that area.
    This event dramatically demonstrated our vulnerabilities in 
the Nation's electrical grid and the need for mandatory 
reliability standards. Now, if we fail to correct the flaws in 
the Nation's electricity transmission system, experts, they say 
that other parts of the country will suffer similar blackouts. 
I think that is a given at this point. Blackouts come with a 
high price tag: Massive public inconvenience, increased danger 
for citizens who find themselves in the dark. Reliable 
electricity is not a new issue.
    Some regions have made great progress, while others remain 
locked in outmoded systems dating back to the beginning of 
electricity regulation in this country. And I understand that 
some of my colleagues have concerns about deregulation of the 
electric industry, but I would like for them to take a look at 
what has happened in New Jersey, where we are part of PJM, the 
Pennsylvania, New Jersey, Maryland interconnection, the 
country's first fully-operating regional transmission, RTO, and 
the world's largest competitive wholesale electricity market.
    And as an aside, Mr. Chairman, I am going to start a 
society to get rid of acronyms. [Laughter.]
    Because by the time we get finished with FERC, NERC, MISMA, 
MISO, and all of the other things, I do not know whether it is 
a Japanese menu that I am ordering from. [Laughter.]
    And they all get an explanation. So why bother trying to 
shorten them when we are going to lengthen them by a second 
statement of understanding?
    The ratepayers of New Jersey reaped enormous benefits from 
belonging to this RTO, including stable rates that have not 
risen effectively in 11 years. More to the point of this 
hearing: During the blackout, only 7 percent of PJM's 25 
million customers lost their power. Well, it is still a very 
significant number, but it is a long way from having the 100 
percent blackout. And today, that is referred from the 
witnesses, we want to talk about the need for more RTOs like 
PJM, and given the multiple interconnections that exist across 
the grid, it strikes me that we need some kind of a regulatory 
structure for regional, not just State or local transmission 
systems. I do not think that in that forum, it can be handled 
just by one State or by one community.
    So I welcome the release of the U.S.-Canada Task Force 
Interim Report, and hopefully, it will shine the light--we have 
not had a chance to examine it yet--but it will shine a light 
on the events and conditions which led to the blackout. And, of 
course, because the report was so recently received, we are 
going to need a little bit of time to fully digest the findings 
that it contains. And I do not know whether our witnesses have 
had the chance to read all of the words or every word in it, 
but we have experienced people, Mr. Chairman, good people who 
work on these things, and we congratulate you each for your 
part in that.
    And I have talked, the last time I mentioned this, to some 
of the employees at First Energy who came in to see me, and 
they complained bitterly about the antiquated state of 
transmission lines at First Energy. And this was not intended 
to be a labor dispute. We are not taking sides. But when the 
people who have to do the work say hey, this facility is 
outmoded, you ought to pay attention. And so, we did better 
than we might have, but when we look at the source of the 
problem, as it seems to be indicated, the source of the problem 
was where these folks were pointing when we had our 
conversation.
    So, Mr. Chairman, I thank you for the courtesy of letting 
me make the statement, and I would be happy, after you, to ask 
some questions.
    Senator Voinovich. Thank you, Senator Lautenberg.
    I guess the new organization decided to get rid of that. 
[Laughter.]
    I would like to congratulate all of you for your testimony 
this morning and also to underscore the fact that instead of 
everyone working individually on this investigation, that you 
have pooled your resources, and we were able to get Canada and 
the United States to work together on this issue.
    As many of you know, there were several other organizations 
that have taken a look into the blackout and have published 
reports on their findings, such as the State of Michigan, the 
Electric Power Research Institute, and the National Commission 
on Energy Policy, and I would like to enter these studies into 
the record without objection
    One of the things that I support in the energy bill is 
themandatory reliability standards with penalties. I also 
support the incentives for utilities to encourage investment in 
transmission lines, transmission lines are less of a payback 
than investing in generating electricity. And, of course, the 
other problem was environmental concerns and not in your own 
back yard kind of thing.
    That is all in the energy bill, and I think was it you, Mr. 
Wood, who said that you thought we could really move and review 
and come up with some new mandatory reliability standards, by 
when?
    Mr. Wood. I would like next summer, if the bill passes. We 
have 180 days to adopt a rule to set up an electric reliability 
organization, which could be anybody but could be NERC, and at 
that point, NERC and anybody else would come in and file to be 
declared. It is my intention that we basically say when you 
file, you also file the basic reliability rules. There will 
probably be some that are controversial that will take time to 
kind of hash out, but the entity that would be approved here, 
say, NERC, would design the rules; through their normal, open, 
transparent process.
    Senator Voinovich. But the point I am making is you are 
talking about this summer.
    Mr. Wood. Of 2004.
    Senator Voinovich. But that is based on the fact that this 
legislation would be passed now.
    Mr. Wood. That is correct.
    Senator Voinovich. If it is not passed now, that means we 
are in limbo until such legislation is passed or this title is 
pulled out and considered as a separate piece of legislation. 
Most of us would not want to do that, but it could be necessary 
if this thing just continues to be in limbo.
    Mr. Wood. Yes, sir. We are assuming, the fact I gave you 
would be an enactment in the next couple weeks. We would be 
able to go forward and do the proper open process that the law 
would require us to do.
    Senator Voinovich. Second, we talked--you were mentioning 
about Mr. Schreiber in Ohio heading up the PUCO, the Public 
Utilities Commission of Ohio.
    Mr. Wood. Yes, sir.
    Senator Voinovich. You do not necessarily have to do this 
today, but there are different jurisdictions. In other words, 
if we pass this legislation, and FERC has a much larger role to 
play, what responsibilities would the PUCO have in Ohio and 
other public utilities commissions in other States have. Would 
they be responsible tree trimming, or would FERC or the 
organization that FERC would empower to do this?
    What is the difference in terms of jurisdictions between 
FERC, under the new legislation, and States?
    Mr. Wood. Under the new legislation, FERC would approve the 
standard that NERC would say this applies to either the whole 
country or to the eastern part of the country, what have you. 
This is how often you must do the tree trimming, and this is 
how much clearance you need to give it, etc. This is how you 
should train operators, backup plans; all the operational.
    NERC is also in charge, at the first instance, with 
enforcing compliance with those regulations, NERC or the ERO 
certified under the law. If someone complains that they were 
unfairly treated----
    Senator Voinovich. Now, we want to make it clear that FERC 
is not anticipated to do this. You would authorize an 
organization like NERC or some other organization to go and be 
involved in this. Is that correct?
    Mr. Wood. Correct, and then, we would be, for example, a 
court of appeals if someone wants to contest the finding of 
NERC that they violated a rule, but by and large, that would be 
handled, at the first instance, by NERC and would not involve 
either the State or the Federal commission until an appeal is 
brought before us. So that would actually streamline, I think, 
the compliance process. Although we could end up handling a lot 
of appeals; the PUCO would have independent authority under 
their State law. For example, when I was a Texas regulator, we 
had independent reliability authority over transmission and 
over distribution. From my understanding, from what Mr. 
Schreiber said yesterday, they have clear authority over the 
distribution side, and they do not over the transmission side.
    Senator Voinovich. That protocol would have to be worked 
out, because you have different situations in different States, 
which I think it would be very important to understand that.
    Now, let us talk about transmission lines. It is my 
understanding that in terms of transmission lines and where 
they go that that is a State responsibility.
    Mr. Wood. Correct, yes, sir.
    Senator Voinovich. They are responsible for siting it, 
correct?
    Mr. Wood. Correct.
    Senator Voinovich. Now, what if the mandatory reliability 
organization says that we need a transmission line in order to 
improve upon the grid, and the States say we are not going to 
do it? What happens then?
    Mr. Wood. The reliability provisions specifically state 
that the reliability organization cannot mandate construction 
of a transmission line or a generation plant. However, another 
provision in the law, in the proposed law before the Senate 
today, would empower the Department of Energy, Mr. Glotfelty's 
group, to identify national interest lines of a national 
nature, both large lines and multi-state lines. One year after 
identifying those lines, if a permitting process has not been 
successfully pursued and a permit received by a utility from a 
given State or States, then that would elevate up to the 
Federal Government to look at that. And we call it the backstop 
siting authority.
    So the States are still in the driver's seat. It is only 
when they cannot act, or they are prohibited by their law from 
acting, or they choose not to act, that it comes to the Federal 
Government, in which case, we have to look at the issues you 
laid out, which are landowner, environmental siting. We might 
say no as well, but it is looked at on a broader scale and 
looked at on behalf of what is a national interest line.
    Senator Voinovich. So from a practical point of view, the 
reliability standard organization, say, NERC, if they get the 
job, would say this is really needed. They tell the States 
about it, and if the States refuse to act, if this was 
something that they considered to be very essential to the 
grid, would make that information available to the Department 
of Energy----
    Mr. Glotfelty. Correct.
    Senator Voinovich [continuing]. Who would then review the 
situation, and a year after that, would come back and say yes, 
this is absolutely necessary and DOE would be able to take 
action to get the transmission line constructed; is that right?
    Mr. Glotfelty. That is possible; we----
    Senator Lautenberg. May I interrupt just for a minute? I 
have got to go to another committee, but the record will be 
kept open so that we can submit questions, I assume, and I 
would ask our witnesses to respond as quickly as you can.
    Senator Voinovich. Thank you, Senator Lautenberg.
    Senator Lautenberg. Thank you very much.
    Mr. Glotfelty. The process that we would like to go through 
for identifying national interest transmission corridors is not 
in place yet. Obviously, that is something that we need to do 
if the legislation is passed. But we would not wait for NERC or 
the reliability organization to come to us with information for 
necessary, needed upgrades. We would do our independent 
modeling. We would work with the regions to determine national 
security, economic security or reliability lines that are 
necessary, and we would designate those in our own process.
    It will be a public and open process where everybody can 
participate. Then, the State will--if the utility agrees and 
would like to build the line, then, that is when the State 
process gets triggered. And if they are not completed in a 
year, the authority would then go to FERC.
    Senator Voinovich. OK; so the fact is that we are putting 
incentives in here for companies to go ahead and invest in 
transmission lines. The State says fine; we will site this, but 
the utility says hey, we are not interested in going forward 
with it, what authority would you have in that situation?
    Mr. Wood. Assuming it is identified as a national interest 
line, that is the trigger. And say there were 50 lines in the 
country that the DOE puts forward, and all but one of them gets 
built. If the one does not get built, it can be built also--and 
this is a provision that was, I think, put in during the 
conference--it could also be built by someone other than the 
utility in the area. So you could have what we call a merchant 
transmission company come in and have the ability to get 
Federal eminent domain to build as well.
    So I do not anticipate that there will just be an absence 
of anybody willing to build the line, particularly in light of 
the fact that it has a predictable--it may be a relatively low 
cash flow compared to what generation used to be. I think I am 
thinking about a comment that you all made. But it is pretty 
steady; I mean, 12 percent, 13 percent return on equity, 
predictable over time, is a lot better than 20 percent 1 year 
and 5 percent the next year that we have seen on the generation 
side.
    Senator Voinovich. So you think it----
    Mr. Wood. It would be an attractive investment, I think. It 
is steady. I hate to use the term widows and orphans, but it is 
kind of what traditional utility stocks used to be. This is 
still a regulated entity. Transmission is actually highly 
regulated. So it would continue forth in that regard.
    Senator Voinovich. OK; and the PUCO, the respective State, 
would be the one that would have the jurisdiction over 
increasing the rate in order to pay for the transmission line.
    Mr. Wood. Well, as it stands now, in the RTO format, which 
the Ohio utilities are part of, the rate is actually approved 
as part of a Federal rate, which the utility can then seek to 
recover, say it is Cinergy, can seek to recover that in its 
Ohio-regulated rate. So it is kind of two levels. We set a 
wholesale rate, transmission rate. We say the transmission rate 
is X. Then, the company pays for that to all of the other 
companies that sell transmission. And then, its payment is one 
cost like income taxes or employee or labor costs or new power 
plant costs that go into the retail rates.
    So it is one that the Ohio commission would have ultimate 
say on what the total rate is, but the FERC component of that 
rate is a valid and effective rate in the first place.
    Senator Voinovich. So you kind of set the parameters of the 
rate on the national level, and then, it is up to the----
    Mr. Wood. State how they might want to----
    Senator Voinovich [continuing]. Organization to work with 
the utility as they traditionally do in terms of their rate-
setting.
    Mr. Wood. Yes, sir. They might allocate the cost, for 
example, to large customers and small customers differently 
than the next State would do.
    Senator Voinovich. Senator Carper has joined us, and 
Senator, I have had a little opportunity here to ask some 
questions, and Senator Lautenberg was with us for a couple of 
minutes. And we welcome you.
    Senator Carper. Thank you.
    Senator Voinovich. And would you like to make some kind of 
opening statement before we continue the questions?
    Senator Carper. No; I am sorry I missed your questions, 
though. I would like to ask just a couple of questions.
    Senator Voinovich. Yes, sure; we welcome you.
    Senator Carper. Thanks very much. And to our witnesses, 
welcome to this morning's hearing.
    As we are gathered here in this hearing room, a debate is 
going on on the Senate floor, as you may know, on the energy 
bill that has been reported out of conference. Regrettably, 
during the conference, the Democrats in the Senate were not 
invited to participate. And I believe nor were Democrats in the 
House, and that is regrettable.
    And while there are some good things in that energy bill, 
there are a number of aspects of it that are troubling to a 
number of us. Today's hearing is, as I understand it, the 
second of two hearings that are designed to deal with the 
Federal role in preventing power outages, the likes of which we 
witnessed in the Northeast and Midwest a couple of months ago.
    The energy bill that is before us, specifically the 
conference report that is before us, lays out a Federal role 
with respect to transmission of energy, whether you happen to 
be in our part of the country where we participate in what is 
regarded, I think, as a very successful grid network. My 
question of each of you is--and I have not read this report--
but I would just like to know when you marry up what your 
beliefs are what the Federal role should be, and you compare 
that to what is proposed in the energy conference report, how 
close are we, how near are we to the mark in terms of where you 
think we ought to be?
    Mr. Glotfelty. First of all, the report outlines the 
causes. It does not have recommendations on how we make our 
system more reliable. This was just phase one of our 
investigation. Phase two, which will be done, and we will have 
a report out early in January, we hope, January or February of 
next year, will list recommendations that we think are critical 
for ensuring the reliability of the system.
    Most of those, in my mind, will be pretty technical. They 
will not be broad policy decisions that need to be addressed by 
Congress. We think that the majority of the broad policy issues 
actually have been addressed in the energy legislation before 
the Senate. First and foremost, mandatory reliability standards 
are critical. I think all of the witnesses here as well as the 
majority of the Congress supports mandatory reliability rules 
and getting them in place as quick as possible.
    But we also believe that other parts of the electricity 
title in the energy bill and in the tax title provide a basis 
for expanding our transmission system and making it more 
reliable as well; specifically, siting provisions; tax title 
provisions, which encourage transmission investment; incentive 
base rates for transmission investment; all are critical for 
ensuring that our system maintains reliability and is robust to 
serve our citizens.
    So we believe that it is accurate, and it is a very strong 
foundation for a reliable system going forward.
    Senator Carper. Thank you. Other thoughts?
    Mr. Wood. Yes, sir, Senator Carper; since I have been at 
the Commission, I have been involved in the large debate we 
have had on electricity policy, and I do think certainly, some 
certainty is called for. We really have been in kind of a 
stasis now for some 6 years; certainly, the last 8 months. And 
we cannot really afford to keep going.
    So that is kind of a timing issue. As far as the substance, 
I do think the substance here is good. I think the NERC 
language, the reliability language, where you would--and this 
has been, again, kicked around for 6 years--it is time to get 
it down so we can get rules in place by next summer so that 
there is true accountability, true enforceability, a much more 
formal as opposed to informal organization of the reliability 
enforcement across the country, because it is a multiowner grid 
that really works as a single machine for the two halves of the 
country.
    To the extent that new transmission investment is required, 
and this report shows that it is not just a hardware issue; it 
is a human resources issue, too, but to the extent that 
investment is required, the incentives that are provided in 
this bill, which I think are actually progressive; yes, it is 
not just throwing money at a problem. It has a very strong 
focus on new technologies that are involved. That was 
introduced at conference. That was not in the original bill. 
But the technology angle is one that our Commission has been 
increasingly adamant on, and to have that kind of support to 
incentivize and attract the new technologies to bring them out 
of the lab and into the marketplace and onto the poles and the 
wires and the systems that make our grid reliable are really, 
actually, progressive standards.
    The siting authority that we have just discussed with the 
Chairman, clearly, I would rather it never be used; that the 
States actually handle these siting issues, because I do think 
that with land owners in particular and environmental issues, 
the decisions on those should be as close to the people as 
possible. But to the extent that there are obstacles, either 
legal or bureaucratic, to getting the needed infrastructure in 
place, this bill makes it clear that that is going to happen, 
and those things should be handled on a broader scale than 
perhaps is being done.
    I also think that the bill's strong endorsement for 
regional grid operators, the RTOs, while not mandatory is a 
sufficient and quite important provision that this Congress 
goes on the record supporting competitive wholesale power 
markets and supports regional transmission organizations and 
that utilities should join them; it is very important to our 
Commission. I think there has been a big skirmish over the 
Commission's desire to make those mandatory, which, of course, 
I do support but is being put on the side burner for 3 more 
years.
    Well, if in 3 years, we do not have everybody in RTOs 
anyway, then, shame on us, because this blackout report, our 
experience with economic efficiencies and Senator Lautenberg's 
market that he talked about in his comments, which your State 
also is a part of, Senator Carper, is very compelling, and that 
story is one that the rest of the Nation is starting to 
understand as we kind of get past and learn from the California 
experience about how markets can also be done very wrong.
    And finally, when markets are done wrong, this bill 
provides enforcement and penalties that our Commission has 
never had before, not only the ability to order refunds for 
cases the day that they happen but to actually put punitive 
administrative penalties on top of people who violate the power 
market rules and violate the law. We have less authority today 
than the Delaware PUC has. But yet we are intended to be the 
national regulator. So this bill corrects that as well.
    So there is a lot in it. You have other issues on it, but I 
do think just from the point of view of what you asked me as a 
regulator for the electricity industry, there is a compelling 
case to be made for this legislation.
    Senator Carper. Thank you. Mr. Gent.
    Mr. Gent. Senator Carper, if I could just add, NERC's only 
interest in the energy bill is the reliability provisions. We 
have had consensus on that for nearly 4 years, and I believe 
that if we had this in place a couple of years ago, we would 
not have had the blackout. So I would urge you to do what you 
can to help us out by passing that legislation.
    Senator Carper. OK; in Delaware, we are part of one of 
those SROs that is called PJM, which we think is a model in 
some respects for our country. And I guess I am just especially 
interested in how the provisions of the energy conference 
report might affect the dependability of the grid, the electric 
grid, within PJM. We think we have a good system. We like the 
way it operates, and when we are losing power in a lot of other 
parts of the country, it is sort of like washed up against our 
region and pretty much stopped there, and we do not want to 
mess up a good thing.
    Mr. Wood. Nothing in the bill would impact--and I care a 
lot about that, too, because it is, from a national 
perspective, the experience in PJM and now, more recently, in 
New England, which has adopted a very much close to PJM, the 
same type of market model and organizational model, just since 
I have been on the FERC; New York is in the process of probably 
by March of adopting that same. So you are going to have really 
the whole Northeast in largely the same format. They are close 
today; they will be even closer after New York.
    We are very interested in that model not only surviving but 
thriving, and nothing in this bill, in my read or in anybody 
else's read, would set that back at all. In fact, with the 
reliability overlay here, I think it enhances it, because it 
gives not only the economic oomph that we have under current 
law to back up economic practices and economic decisions, but 
it now adds that important sister consideration of reliability 
and says they are both important; they are both enforceable 
under the national law, and that is the way it is going to be.
    So I think that that buttresses, actually, the capabilities 
of PJM and the other independent operators in the region.
    Senator Carper. All right. Anybody else have a thought on 
this?
    Mr. Gent. For at least 30 years, I have been preaching that 
we need to have, first, larger power pools, and then, the term 
was regional transmission organizations, and then, it was ISOs, 
and now, it is RTOs. Speaking only from an operating 
standpoint, I think that North America would be far better off 
if we had a dozen or less of these types of organizations, and 
certainly, PJM is the all-star model that we would point to in 
terms of operation.
    For my constituents, I have to make it clear I am not 
proposing the economic operation of PJM, but from a reliability 
operational standpoint, I think it is stellar.
    Senator Carper. Good. Thank you. Mr. Chairman, could I ask 
one more?
    Senator Voinovich. Go ahead.
    Senator Carper. This is a fairly broad question. You have 
been here testifying. Our Chairman has had the benefit of 
listening to your testimony. The reason why there are not more 
of us here is because all of us have three or four hearings 
going at the same time, and we are just trying to spread 
ourselves around. Some of us may have a press conference around 
12 o'clock that we are looking forward to.
    But as I walk out of here, another point or two that you 
would want me to take along, just say if you remember nothing 
else or keep nothing else from this hearing, what would that 
be?
    Mr. Glotfelty. From my standpoint, I think it would be that 
this blackout is a reminder that the States and the Federal 
Government must work together; the economic cost of a blackout 
of this magnitude is huge. We have smaller blackouts or smaller 
lines that trip every day across our system, and a renewed 
focus and renewed attention at the Federal level within the 
Congress and within the States to ensuring that our system is 
reliable is actually critical for our economic growth moving 
forward.
    We do, as Mr. Wood said, have tremendous technologies that 
have been in our labs. Entrepreneurs all across the country are 
coming to us every day with new technologies that make our 
system more robust and more reliable. And giving them the 
opportunity to put those on the system, to make it a more 
reliable system, is critical moving forward. And the energy 
bill provides that in our mind.
    Senator Carper. All right, thank you. Mr. Gent.
    Mr. Gent. I believe that the legislation, particularly the 
reliability part of the legislation, provides for a way for the 
stakeholders to remain engaged and keep their expertise out in 
front and fresh and involved in the standards-making and 
enforcement process with a Federal backup when needed. So I 
would urge you to do something about passing the reliability 
legislation.
    Senator Carper. All right. Mr. Wood.
    Mr. Wood. I am going to echo my colleagues here on the 
reliability issue. As a natural gas regulator, too, I do want 
to point out how critical it is, and this bill does address it, 
that the Alaska natural gas pipeline project come to be in the 
next decade. The availability of reliable and environmentally-
benign and domestically-produced natural gas is very critical 
to the overall economic health of our country. We have just 
seen last year, those prices have actually doubled as supply 
has come, now, to more of a crunch than we ever thought; that 
has had a lot of impact on a lot of industries. I know some in 
your home State and some in mine of Texas as well that are very 
gas-intensive industries that, if we are looking into the 
future, $5, $7, or $8 gas when we have our own gas right here 
in Alaska to bring down and keep the price in the $3, $4, or $5 
range, that is a step that has to be taken, and I think it will 
not be taken unless Congress provides the kind of regulatory, 
legal, and in the case of the loan guarantees, some financial 
security for what is probably the biggest engineering project 
in our lifetime.
    The additional increment of liquefied natural gas to that 
overall mix is very important. These things all, this is where 
the electricity of the future is coming from. It is coal and 
natural gas. Yes, there will be nuclear; yes, there will be 
renewable; yes, there will be more hydro, perhaps, but coal and 
natural gas are going to be the two big pistons of that engine, 
and there are provisions in this bill. I know they are not 
beloved and all, but we have got to step back and think what 
else do we have? We are not going to put solar panels in space 
and beam it down like something out of a Star Trek movie. It is 
going to be coal and natural gas. So we have got to make sure 
we have got clean coal, and we have got to make sure we have 
abundant natural gas.
    And so, the steps that are laid in this bill to make that 
happen in the nonelectricity pars of this bill are real 
important. And I hope that is weighed into consideration by 
Members of the Senate.
    Senator Carper. When I was first reading the press reports 
on the conference report of the energy bill, among the 
provisions that raised my spirits and my hopes were the 
provisions dealing with the construction of a natural gas 
pipeline from Alaska. I have since learned that the chairman 
and CEO of Conoco Phillips, which is the oil and gas company 
that was believed to be most likely to participate in building 
a natural gas pipeline to bring natural gas down from Alaska 
had written to the conferees several weeks ago and indicated 
what needed to be in the bill in order for them to go forward 
with the project.
    And what his company needed to be in the bill was not 
included, and he has indicated, as I understand it, that they 
are not going to go forward with the project.
    There were several labor unions, some building and 
construction trade unions; I think the IBEW was among them; the 
Teamsters was another labor group that was strongly in support 
of actually opening up ANWR but also very much in support of 
the natural gas pipeline proposal. And I learned yesterday that 
they have withdrawn their support from the bill because it 
falls short of really making good the commitment to build a 
natural gas pipeline.
    We are still trying to run this one down fully and 
understand it, but Senator Voinovich and I talked a whole lot 
about the need for natural gas and our concerns about rising 
natural gas prices. I was born in West Virginia, and my dad 
used to be a coal miner for a period of time. I have a whole 
lot of concern about coal there and other places in the 
country. We are the Saudi Arabia of coal here in America. And I 
want to make sure we have access to coal and clean coal 
technology to use it, and I sure want to make certain that we 
can bring that natural gas down from Alaska, and I am just 
troubled by the prospect that maybe we are not.
    Senator Voinovich. Well, I am glad you brought up some of 
these other issues.
    First of all, I think that we should all feel very good 
that finally, we are doing something about reliability and 
mandatory standards. I think in the testimony that you have 
given that we have had these things happen before, and we just 
ignore them until the next time, and I think that you should be 
congratulated, and I think my colleagues in Congress should be 
congratulated, that we have decided to take this on and do 
something about it.
    My concern is that if this bill is not passed, what are we 
going to do in the interim period of time? I mean, is there 
anybody----
    Mr. Wood. I have made a career out of looking at statutory 
language pretty closely, and I think it would be a challenge, 
but certainly, this Commission is compelled, in light of what 
we hear here in this report and what we have learned from 
participating on the task force that we would push hard to find 
it in the Federal Power Act somewhere. It is going to be a 
challenge, and it is going to be hard, but we are going to do 
our best to go forward under whatever statute we can find. And 
we are scrambling hard to do that, but I can tell you it is 
going to be infinitely harder to do it that way than if 
Congress says we want it this way--do it. But we will commit to 
trying our best under the Federal Power Act and look in the 
penumbra of the statute and find it where we can.
    Senator Voinovich. Well, it would be very important to this 
Senator and to Senator Carper if you could communicate that to 
several of the Senators on my side of the aisle and perhaps 
some on Senator Carper's side of the aisle about how important 
this is in terms of they may have some problems with other 
parts of this bill, but if you do not have this authority, you 
are not going to be able to move forward and deal with this 
issue that could substantially impact on the wellbeing of their 
respective States.
    Mr. Wood. I appreciate the opportunity you all have given 
us today to do that. I know the timing is pretty----
    Senator Voinovich. Well, somebody ought to pick up the 
phone. We all know who they are---- [Laughter.]
    And try to influence them to say this is important stuff, 
for this country. The problem here in the Senate is that there 
is never a perfect piece of legislation, and too often, we let 
the perfect get in the way of something that is good and moves 
us down the field, and if it is not as good as we would like it 
to be, we have another shot at it when Congress comes back.
    But in this case, it is not going to be done; then, if it 
is not going to be done, then, you have got to decide you have 
got to try to figure out some other way you can get it done. 
And then, the next thing will be that we pull this out of this 
bill and then try to get it done next year, and you know how 
difficult that is going to be.
    There was a statement that if--did you make it, Mr. Gent?--
the mandatory reliability standards had been in place, and 
there were penalties--one of you said this--that you believe 
this would not have happened. I want you to comment on it.
    Mr. Gent. Yes; I believe that we have the right standards, 
but what we do not have now are the rights to do audits, to 
enforce compliance with the standards. We have been trying for 
several years on a voluntary basis to get people to agree 
through contracts to subject themselves to reliability 
standards. We have been successful in the West of getting three 
standards agreed to by a wide group of people, and even there, 
certain companies have refused to sign up and allow themselves 
to be subjected to mandatory standards.
    So we are convinced that the only way we can really do this 
is to have a law that says you have to do it.
    Senator Voinovich. And this does get it done for you, with 
penalties.
    Mr. Gent. My general counsel here testified at a recent 
hearing 2 years ago that it was not a question of if; it was 
just a question of when, and I think that we can state that 
again if we do not get the legislation.
    Senator Voinovich. So again, you really feel that if what 
is in this legislation was in place, in your opinion, this 
probably would not have happened.
    Mr. Gent. The reliability legislation, yes.
    Senator Voinovich. All right.
    Mr. Gent. That is my opinion.
    Senator Voinovich. The other thing that I would like--we 
have identified the responsibilities of the various parties in 
terms of, in your opinion, the cause of this. The issue is did 
anything, did the grid contribute to this, were the 
transmission lines adequate? It is like when we had the stock 
market crash of 1929, and it went down. And we know that there 
were certain things that happened. But there was something 
wrong with the market that allowed it to collapse. And since 
that time, we have changed some of the things to try to prevent 
that kind of thing from happening.
    We had a crash here, did we not, a big crash? And the issue 
is is the transmission system inadequate to the extent that it 
contributed to this at all? Or was it strictly a matter of 
certain people not doing certain things?
    Mr. Glotfelty. I will begin that one. I think it is the 
latter, at least on this example. First Energy and MISO had the 
tools that were available. They had the responsibility to 
ensure that this did not happen. The system has worked very 
well every other day since and every day before.
    There were smaller lines that do fail, as we have said, 
every day. But the system failed that day. And that is not an 
indictment of the whole region and the transmission lines 
within that region on any other day. That was just the process 
and procedures and failures, human, computer and mechanical 
that happened on that day. Saying that, there probably are 
transmission lines that can be built in Ohio, around Lake Erie, 
that can provide more stability to the system, and that is 
something that I suspect the Midwest ISO and FERC, as well as 
the Ohio Public Utility Commission, are all considering.
    Mr. Gent. But there is another aspect to your question that 
I would like to address. As we proceed in the investigation, 
and we take a closer look at all of the things that actually 
did happen, we may actually decide that we have to redesign 
some of the ways that we set relays. I hate to get too 
technical here, but there is a process underway. We might be 
reaching out too far. We might be tripping too soon or not soon 
enough. And all of this has to be considered in our committee 
stakeholders process. It might call for a redesign of certain 
elements.
    Senator Voinovich. In other words, if the grid had been 
more robust, would that have had anything to do with this?
    Mr. Gent. I am not sure I can say. I believe that the 
events, as they transpired, would transcend any robustness.
    Senator Voinovich. So the thing is that the utilities that 
were involved in the MISO, when the new law goes into effect, 
you are going to have the mandatory reliability standards which 
will put in some discipline into those organizations to do 
certain things. And then, you will, at the same time, look at 
the grid to see how that can be also enhanced to make it even 
more effective in terms of moving electricity and responding to 
the kinds of things that occurred on August 14.
    I just want to say to you that I will never forget that 
day, because I was coming into Cleveland with my wife, and we 
were not sure whether the plane would land. We thought that 
maybe the control tower might not let us in. And then, when we 
got there, it took us a couple of hours to get our bags, 
because all electricity was off in the place, and I will never 
forget it. And then, we were without electricity for 24 hours, 
which was not too bad, but my daughter and many other people 
were without electricity for several days.
    For the every day citizen, this is a big deal. And I think 
that sometimes, we take for granted, I know after they had this 
hurricane here, my staff people were without electricity for 6 
or 7 days. And it is very significant. It is a very high 
priority. Having reliable electricity is important to our 
quality of life and to our standard of living and also 
reflective on our economic well being.
    And one of the reasons why we have been so successful as a 
Nation is that we have had reliable electricity at reasonable 
costs, and it seems to me that if you look at the cobweb and 
the maze out there of all of the things that the utilities in 
this Nation are confronted with that we need to streamline the 
whole process. I think what we are doing here will streamline 
it; the fact that there are going to be incentives to build 
transmission lines; that it is going to be a little bit easier 
to site them and move forward with them is good.
    But other issues, Mr. Wood, are very important: Things like 
new source review that has been kicking around, and finally, 
the administration has had the courage to take it on and is 
being criticized, vastly by many of the environmental groups. 
But utilities were in limbo. They did not know what to do, 
whether to move forward or not. So they did nothing. It did not 
make their operations more efficient and did not do anything 
more to improve in terms of the quality of the environment.
    And then, we have the whole issue that has been kicking 
around here for the last several years in terms of the 4-P bill 
and how we deal with NOx, SOx, mercury 
and then deal with the issue of greenhouse gases. And I do not 
think people appreciate the fact that all of these things that 
are going on make it very difficult for us to get through. It 
is almost like the Maginot Line, trying to figure out how you 
can get anything done.
    And I would urge all of you in your respective 
organizations to take a little more interest--I am on the 
Environment and Public Works Committee, and this hearing could 
have been held there. But the fact is that we need to start to 
have a much more global look at--U.S. look at how all of these 
things connect up with each other and bring some sense and some 
certainty to a very uncertain environment that we have had for 
too long. And I think it is really important that we get our 
environmental groups, harmonize our energy, and our 
environmental concerns in this country and that we start 
talking to each other instead of talking past each other.
    This is very serious business, and I can tell you right now 
it is impacting on my economy in my State. You talked about 
natural gas. We are losing business after business from our 
State, because they are going--some of them are going overseas 
because of their natural gas costs are being lowered.
    We had a situation where we have done everything we can to 
close down the availability of natural gas and exacerbate the 
demand for natural gas. And the prices have skyrocketed. The 
people have got to understand that that impacts on not only our 
businesses, our manufacturers, on agribusiness, on the chemical 
industry; it also impacts on just ordinary citizens: People, 
particularly, who are what I refer to as the least of our 
brethren, the elderly and those people, who are poor.
    All of this has got to be taken into consideration as we 
deal with this. And so, I would say to you you have your 
respective responsibilities, but I think it is also incumbent 
on you, the Department of Energy, Mr. Gent at NERC, the FERC to 
start to connect up with some of the other agencies to start 
looking at the big picture and maybe come back with us and say 
look, this is what we are going to need if we are going to have 
an environment where we can provide reliable electricity at 
reasonable cost and, at the same time, make sure that we 
protect our environment.
    So I want to thank you very much for being here today. We 
will be back again after the report is finished, and I am 
interested in that final report, and I think it is important 
that you give everyone an opportunity that has some issues with 
it to be heard so that their points of view are recorded there, 
or they feel like they have had their ``day in court.'' And the 
next time we get together, I would also, hopefully, this 
legislation will have passed, and if it has not, then, we will 
have to decide on how we are going to get this job done 
together. Thank you very much.
    [Whereupon, at 11:28 a.m., the Subcommittee adjourned.]
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