- JON WELLINGHOFF NOMINATION

[Senate Hearing 110-325]
[From the U.S. Government Publishing Office]

S. Hrg. 110-325

JON WELLINGHOFF NOMINATION

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

HEARING

before the

COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

THE NOMINATION OF JON WELLINGHOFF TO BE A MEMBER OF THE FEDERAL ENERGY
REGULATORY COMMISSION

__________

DECEMBER 18, 2007

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

______

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COMMITTEE ON ENERGY AND NATURAL RESOURCES

JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota LARRY E. CRAIG, Idaho
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana JIM DeMINT, South Carolina
MARIA CANTWELL, Washington BOB CORKER, Tennessee
KEN SALAZAR, Colorado JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
JON TESTER, Montana MEL MARTINEZ, Florida

Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Frank Macchiarola, Republican Staff Director
Judith K. Pensabene, Republican Chief Counsel

C O N T E N T S

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STATEMENTS

Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Domenici, Hon. Pete V., U.S. Senator From New Mexico............. 3
Reid, Hon. Harry, U.S. Senator From Nevada....................... 1
Wellinghoff, Jon, Nominee to be a Member of the Federal Energy
Regulatory Commission..........................................

APPENDIX

Responses to additional questions................................ 21

JON WELLINGHOFF NOMINATION

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TUESDAY, DECEMBER 18, 2007

U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:41 a.m. in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.

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

The Chairman. Why don't we go ahead and get started. I know
Senator Domenici is on his way and will be here very shortly,
but let me get the hearing started; we've got several Senators
that have been kind enough to come.
The committee meets, this morning, to consider the
nomination of Jon Wellinghoff to be a member of the Federal
Energy Regulatory Commission for the term ending June 30th of
2013. Mr. Wellinghoff has appeared before the committee before;
that was a year and a half ago, when we considered his
nomination for his present term, scheduled to expire in June.
The committee favorably reported his prior nomination by voice
vote in June 2006. The Senate confirmed him by unanimous
consent in July 2006.
Before being appointed to the Federal Energy Regulatory
Commission, Mr. Wellinghoff served two terms as the State of
Nevada's consumer advocate for customers of public utilities.
Senator Reid would have liked to have introduced Mr.
Wellinghoff this morning, but is unable to be here, because of
the press of other business. He's asked me to note his strong
support for Mr. Wellinghoff. Without objection, a written
statement by Senator Reid will be included in the record.
[The prepared statement of Senator Reid follows:]
Prepared Statement of Hon. Harry Reid, U.S. Senator From Nevada
I want to thank Chairman Bingaman and Ranking Member Domenici for
scheduling this hearing today, particularly given the incredible amount
of work to come out of this Committee in recent weeks.
I originally recommended Commissioner Wellinghoff for this position
because I firmly believed that the energy problems facing our nation
called for a nominee of Jon's caliber and experience.
I trusted that Jon would put his three decades worth of experience
in energy markets to work to benefit the American consumer. That
experience included not only included time back here working both in
the Senate and for the Federal Trade Commission on such matters, but
extensive experience at the state-level working to protect Nevada's
consumers.
He has served as Chief of the District Attorney's Consumer Fraud
Division in Reno, Nevada, counsel to Nevada's Public Utilities
Commission and a seven-year appointment as Nevada's Consumer Advocate.
In that work, Jon saved Nevada's utility customers more than $40
million. Jon also helped to write and enact Nevada's renewable energy
requirements, one of the strongest in the nation.
As a Commissioner, Jon has actively worked to put his experience to
work for the nation. In conjunction with his colleague Commissioners,
Commissioner Wellinghoff has worked to implement the directives of the
EPAct of 2005. He has worked to provide more opportunities to integrate
wind energy resources into the electric grid.
Commissioner Wellinghoff has also worked to enhance collaboration
between FERC and the states on demand side issues, serving as the co-
chair of the FERC/National Association of Regulatory Utility
Commissioners joint collaborative on demand response.
Commissioner Wellinghoff has worked to develop new innovations at
FERC. For example, along with his colleagues, Commissioner Wellinghoff
created a new ``Energy Innovations Sector'' at FERC. This new staff
department is charged with institutionalizing the consideration of
enhanced energy efficiency, incorporating innovative technologies into
our energy infrastructure and considering issues such as renewable
resources that are now underutilized in our system.
There is, of course, much more work to be done at FERC and I am
deeply pleased that Commissioner Wellinghoff is dedicated to continuing
his tenure at FERC.
I want to thank the Committee again for moving forward today and
thank Jon for his willingness to continue to serve. I know he will
continue to serve Nevada and the nation with great distinction as a
FERC Commissioner.

The Chairman. We are very pleased to welcome Mr.
Wellinghoff to the committee. We appreciate his willingness to
serve a second term on the Commission, and we welcome the
opportunity to consider his nomination.
At this point, we usually would hear Senator Domenici's
statement. We'll interrupt to hear his statement when he
arrives, but let me go ahead and ask Mr. Wellinghoff to come
forward, and we'll go through the normal procedure. The rules
of the committee that apply to all nominees require they be
sworn in, in connection with their testimony. While you're
still standing, could you raise your right hand, please?
Do you solemnly swear that the testimony you're about to
give to the Senate Committee on Energy and Natural Resources
shall be the truth, the whole truth, and nothing but the truth?
Mr. Wellinghoff. I do.
The Chairman. Please be seated.
Before you begin your statement, I'll ask you the three
questions that we traditionally ask of each nominee before the
committee.
First, will you be available to appear before this
committee and other congressional committees to represent
departmental positions and respond to issues of concern to the
Congress?
Mr. Wellinghoff. I will.
The Chairman. Second, are you aware of any personal
holdings, investments, or interests that could constitute a
conflict of interest, or create the appearance of such a
conflict, should you be confirmed and assume the office to
which you've been nominated by the President?
Mr. Wellinghoff. I do not. My investments and personal
holdings and other interests have been reviewed by both myself
and the appropriate ethics counselors from within the Federal
Government. I've taken appropriate action to avoid any
conflicts of interest. There are no conflicts of interests, or
other appearances thereof, to my knowledge, Mr. Chairman.
The Chairman. OK, thank you. The third, and last, question
that we always ask of our witnesses is, Are you involved, or do
you have any assets that are held, in a blind trust?
Mr. Wellinghoff. No, I do not.
The Chairman. All right, thank you very much.
Before we allow you to introduce any family members present
and to make a statement, if you'd like to, Mr. Wellinghoff, let
me see if Senator Domenici would like to make a initial
statement here.

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

Senator Domenici. Mr. Chairman, I do, and it will be brief.
We're here to consider the nomination of Jon Wellinghoff to
a second term as a member of the Federal Energy Regulatory
Commission. Now, Federal Energy Regulatory Commission is one of
those powerful line-item agencies that just go about doing
their work, day in and day out, but it's terribly important
work for the people of our Nation. I believe Chairman Joe
Kelliher has been doing an outstanding job, and it seems to me
that the nominee before us is going to contribute to that
Commission and make it even more effective and more functional.
I have a few comments that are in my statement; they'll be
made a part of the record.
[The prepared statement of Senator Domenici follows:]
Prepared Statement of Hon. Pete V. Domenici, U.S. Senator From
New Mexico
We are here today to consider the nomination of Jon Wellinghoff to
a second term as a Member of the Federal Energy Regulatory Commission
[FERC]. I thank Chairman Bingaman for promptly scheduling this
nomination. I am hopeful that we can quickly get this nominee confirmed
along with another FERC nominee, Chairman Joe Kelliher, who's
renomination has been waiting on the Senate Executive Calendar since we
reported it last May.
Since the enactment of the 2005 Energy Policy Act, many of us on
the Committee have observed numerous times that the new authorities
granted the FERC require a full complement of five commissioners if
that law is to be implemented as we envisioned. So far, the Commission
has, for the most part, been doing an excellent job with that
implementation. But there is till much to be done. I, for one, would
very much like to retain continuity at the Commission as that
implementation continues. While Mr. Wellinghoff's current term does not
expire until June, it seems prudent to ensure that we will have no gaps
in Commission positions. I welcome this opportunity to get Mr.
Wellinghoff's, as well as Mr. Kelliher's, nomination considered quickly
by the full Senate.

Senator Domenici. Needless to say, I support you, sir, and
I hope we can get you confirmed quickly.
Mr. Wellinghoff. Thank you.
Senator Domenici. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Mr. Wellinghoff, why don't you go ahead. If you have any
family members you want to introduce, this would be a good time
to do that.

TESTIMONY OF JON WELLINGHOFF, NOMINEE TO BE A MEMBER OF THE
FEDERAL ENERGY REGULATORY COMMISSION

Mr. Wellinghoff. Thank you, Mr. Chairman.
Yes, I do. I have my wife here, Karen Galatz, and my son,
Jules Wellinghoff. My youngest son, Jacob, could not attend;
he's taking two tests today, one in Spanish that he's having a
tough time with, so we let him off.
I'd also like to introduce members of my office. I have Jim
Pederson here with me, David Morenoff, and Mary Beth Tighe.
With that, thank you, Chairman Bingaman, for your courtesy
and consideration for expediting this hearing. I appreciate it
very much.
Ranking Member Domenici, I understand you're retiring, and
I want to thank you very much for the courtesy and
consideration that you gave me in my first confirmation
hearing. Thank you.
Senator Domenici. Yes, sir.
Mr. Wellinghoff. In summarizing my testimony, I was before
you 16 months ago, and, at that time, I promised to use my 30
years of consumer protection advocacy and knowledge in the
energy field to improve efficiency in the infrastructure
operations of the administration by FERC, and to do so in a way
that would, in fact, benefit consumers. I believe I've done
this, but, of course, I haven't acted alone. I've had the
pleasure, in cooperation and collaboration, working with
Chairman Kelliher, with Commissioner Moeller, Commissioner
Spitzer, and Commissioner Kelly--in addition, I've had the good
fortune to work with the staff at FERC--it is an excellent
group of individuals--and, of course, my office members. As I
indicated in my prepared statement that I've submitted to you,
we've reviewed, and I voted on, individually in the last 16
months, over 1684 orders. Each order, I ask the question, How
will those orders affect consumers, and how can we improve
efficiency to reduce costs for those consumers?
So, I've looked at efficiency in two different sectors. One
is in the area of infrastructure. Regarding infrastructure, one
area of particular interest to me is the natural gas pipeline
system in this country. It's a very effective system that does,
in fact, deliver a commodity to consumers throughout the
country. But I've determined that there are areas where, in
fact, efficiency could be improved in that system. In fact, I
believe there may be somewhere between 10 and 15 gigawatts--
that would be 10- to 15,000 one-thousand-megawatt power plants
worth of efficiency that can be squeezed out of the natural gas
pipeline system. So, as such, I've collaborated with the
chairman and staff, and we're now asking gas pipeline producers
who are in the process of building new facilities as to how
they're going to improve the efficiency of those systems, how
they're going to do waste heat recovery, how they're going to
do things that, hopefully, can, in essence, get more energy out
of the systems that they're now constructing.
Another area is the integration of renewables into the
grid. To the extent that we can have diversity in supply and
also increase competition among resources, it's going to
benefit consumers. With respect to that, I worked on an order
where we provided for cost-allocation methodology for a trunk-
line system for wind energy in California that will facilitate
development of wind. It will be an order that, I think,
ultimately, will be a model for the country for wind.
We also included, in a tariff filing--excuse me--in a
tariff revision rule, rule 890, a provision called
``conditional firm service,'' which provides for a new service
product for, primarily, wind energy that can facilitate them
getting on the grid.
On the operations and administration side, we've also done
work. Mr. Morenoff and I, that I introduced, did a paper for
the Energy Law Journal recently, and in that paper we looked at
a researcher who has developed information that indicates that
there's at least an additional $35 billion in savings that
could be achieved for consumers by integrating demand response
into the wholesale organized energy markets.
So, with this in mind, we've done a number of things. One,
again, is with respect to tariff reform, in order 890, where we
have provided for ensuring that demand response can provide
services to the grid in a comparable way to generation
resources, and get paid just like a generator. This ultimately
will provide for creating a market for demand response and
ultimately ensure the consumers can benefit from the lower cost
in those markets because of incorporation of demand respond
into the markets.
We've also worked to incorporate demand response into the
reliability rule so that demand response, in fact, can be used
as supporting reliability; again, helping create a market for
something that can reduce costs for consumers. I've worked with
the States in a collaborative, that I co-chair with a number of
other State commissioners under the auspices of the National
Association of Regulatory Utility Commissioners, to look at
barriers to demand response in the interface between the State
and Federal sectors in integrating demand response into the
grid.
So, looking to the future, I believe there's much still to
do. If we look at just improving the efficiency of the grid by
5 percent, that 5 percent could have the effect of reducing the
need for 50 one-thousand-megawatt power plants, a tremendous
reduction. I believe this can be done by optimizing grid
operations and software. I note that you, here in the Senate,
passed H.R. 6, which directs FERC to do a demand-response
assessment, and also develop a demand-response plan. If
confirmed, I'd devote my expertise to this effort to, in fact,
maximize savings benefits for consumers by increasing energy
efficiency in the delivery of the energy system.
Thank you, Mr. Chairman. I'll be happy to answer any of
your questions.
[The prepared statement of Mr. Wellinghoff follows:]
Prepared Statement of Jon Wellinghoff, Nominee to be a Member of the
Federal Energy Regulatory Commission
Chairman Bingaman, Senator Domenici, and distinguished members of
the Committee, I am honored to be here today as a nominee to the
Federal Energy Regulatory Commission (FERC). Thank you, Chairman
Bingaman, for scheduling this hearing. I thank President Bush for
renominating me to this position, and I thank Majority Leader Reid for
his continued support and the confidence he has expressed by
recommending me to the President for renomination. At my confirmation
hearing before this Committee in June, 2006, I promised to use my 30-
plus years of experience with consumers, utilities, and energy policy
and regulation to work at FERC to improve the efficiency of our
nation's energy infrastructure and operations, and the effectiveness
and responsiveness of the agency to the needs of consumers through the
more efficient administration of energy regulation. I believe I have
worked to fulfill that promise in my last 16 months at the Commission.
That work, however, has not and cannot be done alone. Chairman
Kelliher, and fellow Commissioners Moeller, Spitzer, and Kelly have not
only been supportive of these efforts, but they have actively
collaborated and contributed significantly to the progress made in that
time. The competent and capable staff of the Commission is also to be
commended for their work in these areas.
In terms of sheer numbers, the work has been substantial. In the
time since I took office in August 2006, I have reviewed, discussed,
and voted on over 1684 orders. These orders range from uncontested
settlements of minor tariff issues to massive rulemaking proceedings of
thousands of pages affecting fundamental issues such as the operation
of our interstate transmission system and electric system reliability.
With each of these orders I have considered, I have applied a
consistent philosophy and approach. For each I have asked the following
two questions:

1. How will the order impact the consumer?
2. Can the order be structured to improve efficiency and
consumer benefits?

Improving efficiency while maintaining reliability of the
infrastructure and operations of our nation's energy system will, in
most instances, lower total life-cycle costs to consumers. Improving
efficiency also often has the added benefits of reducing energy use and
thus reducing local and global emissions, including greenhouse gas
emissions. Improvements in efficiency must be considered, however, in
the context of reliability and first costs, both of which are also
important to consumers. It is within this context that I relate to you
a sample of my experience to date at the Commission.

ENERGY INFRASTRUCTURE

There have been significant opportunities to consider mechanisms to
improve efficiency in energy infrastructure in the numerous cases
presented to the Commission since my arrival. These have included the
areas of electric transmission systems, natural gas pipeline and
storage systems, and innovative technologies including renewable
systems.
In the area of transmission, the Congress in the Energy Policy Act
of 2005 (EPAct 2005) directed the Commission to provide for incentives
for the construction of new electric transmission facilities. The
Commission complied by issuing Order No. 679 that provided for such
incentives. In section 1223 of EPAct 2005, the Congress directed the
Commission to encourage advanced transmission technologies that improve
system efficiency. In those cases where transmission developers have
requested incentives for transmission construction under our Order No.
679, I have linked that incentive in my decision making to the
developer also establishing that efficiency improvements have been
incorporated into the line using some of the innovative technologies
outlined by the Congress in EPAct section 1223. This linkage is
important to encouraging improved transmission efficiency and use of
the EPAct 2005 advanced transmission technologies.
As another transmission example, in Order No. 890 the Commission
has reformed its open access transmission procedures. In that Order,
efficient transmission grid expansion is encouraged by improving the
transmission planning process. Order No. 890 explicitly recognizes that
demand side resources are an integral part of the transmission planning
process and must be considered on a comparable basis to supply side
resources. Consideration of such resources benefits consumers by
promoting efficiency and allowing lower cost options to be considered
by transmission planners.
The natural gas pipeline system in this country delivers essential
fuel for space and water heating, cooking and other domestic and
commercial uses in homes and businesses. It is also vital to the
delivery of fuel for electric generation, process heat, and as an
industrial feedstock. The operation of that system consumes tremendous
energy to compress the gas to move it through the interstate pipeline
system. It is this compression process and the efficiency of the
process that has been another area of focus for me while on the
Commission. It has been estimated that there are between 10 and 15
gigawatts of energy that could be recovered from our natural gas
pipeline system through waste heat recovery at compressor stations and
pressure recovery at pressure let down points. To the extent that this
energy can be recovered economically and used to service consumers,
they will benefit and all will benefit from the reduced carbon
emissions. With assistance of the Chairman and the Commission staff, I
began last year to explore the opportunities to recover this lost
energy to generate electricity. At my request and the Chairman's
direction, inquiries are now sent by staff to new pipeline developers
to determine the extent to which they have considered these energy
recovery techniques in their project. In addition, I have initiated
talks with the pipeline industry to investigate opportunities for
energy recovery on pipelines. I am confident that those discussions
will prove productive, and the industry will agree to voluntarily
collaborate with the Commission to identify and explore such
opportunities.
In the area of innovative technologies, to the extent that new
energy resources such as renewable technologies can be better
integrated into the electric grid and wholesale electric markets,
consumers benefit from diverse supplies providing greater competition
and consumer choice. In an effort to provide for more opportunities to
integrate wind energy resources into the electric grid, Order No. 890
provides for a ``conditional firm'' transmission service option that
allows wind developers to take service that may better match the unique
characteristics of wind systems. With respect to the financing of
transmission necessary to provide for the delivery of renewable energy
from remote locations, the Commission in a declaratory order issued to
the California Independent System Operator (CAISO) allowed for sharing
the costs of trunkline transmission lines necessary to deliver wind and
other renewable energy from remote areas of California. This financing
mechanism could apply not only to projects in California, but to any
area where there are remote dispersed location-constrained resources
(wind, geothermal, solar, hydrokinetic) that can be developed to
provide consumers with new diverse energy choices. This order was
applauded by the American Wind Energy Association (AWEA) and will serve
as a model for other regions of the country.

ENERGY SYSTEM OPERATIONS AND ADMINISTRATION

With respect to energy system operations there have been multiple
opportunities to improve efficiency and thus benefit consumers. Areas
where I believe I have had a substantial impact include work to further
incorporate demand response and other distributed resources into
wholesale electric markets, enhanced collaboration between FERC and the
states on demand side issues, and the institutionalization of energy
innovations and efficiency into the FERC structure.
David Morenoff, an attorney in my office, and I recently published
an article in the Energy Law Journal that has been supplied to the
Committee. In that article we document the substantial consumer savings
possible from the incorporation of demand response into organized
wholesale electric markets. One recent study estimated that the net
present value to electric consumers over a twenty-year horizon could be
as much as $35 billion. In an effort to accelerate the incorporation of
demand response into these markets and secure these benefits for
consumers, I have worked on a number of initiatives at the Commission.
In Order No. 890, the Commission concluded that further reforms were
needed to address deficiencies in its open access transmission tariff
(OATT). For example, the Commission found that sales of ancillary
services by ``load resources . . . should be permitted where
appropriate on a comparable basis to service provided by generation
resources.'' In support of this finding, the Commission stated that
``comparable treatment of load resources is consistent with'' EPAct
section 1252(f), which establishes a national policy to eliminate
``unnecessary barriers to demand response participation in energy,
capacity and ancillary service markets . . . .'' Such comparable
treatment in wholesale energy markets will enable the expeditious
incorporation of demand-side measures like demand response into those
markets thus saving consumers substantial money.
In another example, in Order No. 693, the Commission approved a
number of electric reliability standards proposed by the North American
Electric Reliability Corporation (NERC) and further directed NERC to
submit improvements to several of these standards. In particular, the
Commission directed modifications to include an explicit provision
recognizing that demand response and other demand-side resources may be
used to comply with certain reliability standards. Allowing demand-side
resources to be used to comply with certain reliability standards again
potentially saves consumers costs and increases efficiency.
In the area of federal state collaboration, I have been designated
by Chairman Kelliher to serve as the co-chair of the FERC/NARUC
(National Association of Regulatory Utility Commissioners) joint
collaborative on demand response. I serve with two NARUC co-chairs. The
collaborative meets three times a year and investigates the
relationship between wholesale and retail electric markets and the use
of demand response to make those markets more efficient for consumers.
We are currently undertaking a study to investigate the barriers to
more robust incorporation of demand response into those markets and
mechanisms to reduce those barriers.
Finally, in the area of effective administration at FERC in the
incorporation of efficiency in energy infrastructure and operation, I--
in collaboration with Commissioner Kelly--developed a proposal for the
Chairman to create at FERC an ``Energy Innovations Sector''. The
Chairman endorsed our proposal and created the Sector. This new staff
department is responsible for institutionalizing within FERC the
consideration of enhanced efficiency in energy infrastructures and
operations, incorporation of innovative technologies into energy
infrastructure and operations, and investigating issues related to
demand-side, renewable, and other resources that are now underutilized
and considered innovative. The Sector has been operational for several
months and has a chief and several staff in place, as well as part-time
assigned staff from other areas within the Commission.

FUTURE ACTIVITIES

There is considerable work that lies ahead to advance efficiency in
the realm of energy infrastructure and operations. As an example, if we
could improve the operational efficiency of our electric grid by 5%
through optimization of transmission software, we could save the
equivalent of 50 large coal plants. Integration of storage into the
grid with the promise of plug-in hybrid electric vehicles (PHEVs) could
revolutionize the entire grid operation and provide economic support to
consumers who purchase new advanced transportation technologies like
PHEVs. On October 24th of this year, we demonstrated at FERC for the
first time an electric vehicle providing regulation services to the
grid in real time via a signal over the internet with a response time
of less than a second. This demonstration provided the type of
frequency response necessary to keep the grid stable and reliable and
did so in a manner and time interval far superior to that of a
generating resource that currently provides such grid services. FERC
has taken initial steps, as I indicated above, to allow such ancillary
services to be provided by demand-side resources like a PHEV. But much
still needs to be done to ensure that the tariffs and infrastructure
are in place so that consumers who own these vehicles can receive
payments for the provision of these services when PHEVs become
commercially available.
In the area of demand response the Senate just passed legislation
that directs FERC to conduct a National Assessment of Demand Response
and develop a National Action Plan on Demand Response. Given the work I
have already done in this area while at the Commission I believe I can
provide a substantial contribution to this effort going forward.

CONCLUSION

I appreciate this opportunity to relate to you my experiences and
efforts at FERC. It has been truly an honor and a privilege to have
served as a Commissioner. I have had the good fortune to work with the
Chairman, fellow Commissioners and staff who have all been open and
interested in my ideas and proposals to improve the efficiency of our
energy system for the benefit of consumers. I look forward to
continuing that work. I would be happy to answer any questions that you
might have.

The Chairman. Thank you very much. Let me ask a few
questions to start with here.
One of the main issues that I know you folks have been
grappling with is this whole issue of deregulation of the
electricity markets. There's an article in the Energy Daily
today; I'll just read the first sentence of it and ask your
comment. It says, municipal utilities, State consumer
advocates, and industrial energy users, Monday, called on FERC
to launch an investigation into, quote, ``unjust and
unreasonable prices in deregulated wholesale electricity
markets, complaining that the agency has failed to adequately
protect consumers due to a blind ideological attachment to
competition.''
Can you give us any thoughts you've got on that kind of a
charge?
Mr. Wellinghoff. I'm familiar with the charge of that
group. I've met with many of those groups, including the APPA,
American Public Power Association, ELCON, and a number of the
consumer advocates, including the NASUCA, which is the consumer
advocate organization. I believe they do have some legitimate
concerns with respect to wholesale markets, but two things I'd
point out.
No. 1, they need to look at the facts. The facts with
respect to wholesale markets in this country is--from 2005 to
2006, rates have gone down in every single organized wholesale
market where's an RTO and ISO.
No. 2, to the extent that they wish to provide for
improvements to those markets, we need specific suggestions.
When I looked at that petition that was filed yesterday, there
were about 30 different individual organizations on that
petition. Of those organizations, there was only one that has
offered to FERC a concrete suggestion of how to improve the
organized wholesale markets. That was the Forest Paper and
Products Association. In fact, they had a very interesting
suggestion that they submitted in an ANOPR that FERC has issued
regarding the wholesale markets; and so, we're investigating
this right now. I think we do need to investigate it. What we
do need is concrete solutions from groups, rather than
petitions.
The Chairman. Sort of another aspect of that is the
question of whether or not the incentives that we have in place
for RTOs are aligned with the interests of consumers to result
or produce the lowest possible rates consistent with reliable
service. Do you believe that those incentives are properly
aligned?
Mr. Wellinghoff. I certainly think we can make
improvements. To the extent that we have incentives for
individuals to stay in RTOs, I think that's appropriate,
because I think we have seen data that shows that RTOs, in
fact, are saving consumers money; not simply from the area of
markets that are being created and those markets providing for
more competition, but another area that a lot of people forget
about with respect to RTOs is economic dispatch. Those RTOs are
dispatching generators over a large footprint; and, by doing
so, they, in fact, can choose the generators that will provide
consumers with the lowest costs. So, I think there are a number
of reasons why RTOs are ultimately providing benefits to
consumers. I'd say we do have to, certainly, align the
incentives with those benefits to make sure that we're not
paying too much to get the end result of the benefits that
consumers are seeing. I would agree.
The Chairman. All right.
Senator Craig.
Senator Craig. Mr. Chairman, thank you very much.
Jon, again, it's good to have you before us.
I appreciate--well, let me put it this way, I have watched
you closely, and, while I may disagree with some of your
thoughts, I appreciate your sincerity, I appreciate your
commitment to the consumer, and one of the things that I feel
I've gained here is a reality that we do not empower our
consumers as much as we should. I think some of what you're
doing, and your advocacy, is helping that a great deal, and I
believe in that. I think it's tremendously important.
When you ask a consumer to conserve, you ought to provide
them with the knowledge and the tools to do that. Price and
conservation can go hand in hand when, in fact, that consumer
knows how to do it and how to shift his or her lifestyles, or
adjust accordingly. Clearly there ought to be all the
incentives out there to do so. I think you are an advocate of
that, and I appreciate that.
Let me ask this question. It is in relation to some of your
thoughts and public statements over the past while.
Commissioner, can you please give us your thoughts on a
national renewable portfolio standard, an RPS? What role, if
any, should FERC play in the oversight an RPS, should a
Congress pass one?
Mr. Wellinghoff. Thank you, Senator Craig.
I actually was very involved in the first RPS in the State
of Nevada. I actually wrote that legislation--or, actually,
amendments to that legislation, that expanded considerably--and
was involved in about six or seven other States that were
developing RPSs, including Arizona and Colorado and California.
At one time, I didn't believe it would be appropriate to have a
national RPS, in the sense that I was concerned that there
might be some Federal preemption, and some States actually had
levels of targets that were above what the Federal levels were
being proposed. But, ultimately, I believe that we do need it--
a Federal RPS--simply for the requirement that we have to be
able to trade credits across State boundaries, and we have to
be able to do that if we're going to achieve the kind of
greenhouse gas reductions that we really need in this country
and in the world. I think a Federal RPS would facilitate that.
I think, with respect to your question as to who should
administer it, I do believe that FERC should be the
administrating agency. We are a regulatory agency, we have
experience with the utilities, we have experience with this
type of administration, and you can see what we've done in the
reliability area. I think we've carried out the provisions of
the 2005 EPAct, under the direction of Congress, very well. I
think we could do the same thing with respect to an RPS.
Senator Craig. As you know, Jon, one of the difficulties we
have, here on the Hill, of fashioning a national RPS, is to try
to not pick winners and losers, but, obviously, to have
something that might fit all. Senator Domenici and I, in the
last energy debate, in relation to our colleague, the chairman,
here, got into an interesting discussion as it relates to RPS
and what is new and what fits, versus what's old and may not
fit as well. We were very sincere when we offered what we
called a CPS, or a clean portfolio standard, believing that
that is a much more modern way at looking at markets and
driving markets, and a much more uniform way, by including new
nuclear, new hydro, if any, new clean technologies, clean coal,
all of those things that would drive a market toward a
cleanliness, if you will, at the same time being much more
acceptable, nationwide, as a standard. Do you have any thoughts
on that concept?
Mr. Wellinghoff. I do have concerns about including clean
coal and nuclear into a Federal RPS, primarily because those
two technologies are fundamentally different than the other
renewables that we've talked about, and they're different in
two areas. No. 1, they're different because they're usually
very large-scale systems, 1,000 megawatts or more, unlike
renewables that are usually very small-scale, relatively small-
scale. No. 2, they're not location-dependent, as renewables are
very location-dependent; you can, in essence, site these plants
anywhere. So, I really see them as very separate, and I'm not--
I personally would not include them in an RPS.
Senator Craig. OK. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Mr. Wellinghoff, I've always seen you as a decent fellow
and somebody trying to be responsive, but, I've got to tell
you, in the area that affects Oregon and Washington, with
liquified natural gas and related, you know, pipeline issues,
that's just not going to be enough for me right now. It is
absolutely bedlam out there. There are all kinds of projects,
at least five interrelated projects, proposing the production
of far more gas than our region can possibly use. Our citizens
are running around to scores of meetings now, trying to deal
with scoping and comment meetings and information. They say
they can't get good information. In the case of one project on
the Oregon coast, Bradwood Landing, two of the Federal
agencies, FERC and the Corps of Engineers, have different
descriptions out with respect to the same project. That's just
unacceptable, you know, to me. I think that the agency has got
to get away from this sort of blinders-on approach that just
basically says, ``Well, we'll permit all these things. We'll go
ahead with all of 'em. You know, we're not really interested in
the environmental impact, we're not really interested what
makes the most sense for energy production. All you people can
just put your lives on hold out there on the Oregon coast and
Washington.'' That's not acceptable to me.
So, what I want to see is a change in the agency's policy
in this area so that the agency looks at these projects
comprehensively, looks at the projects in aggregate, and makes
some key judgments as to which project best serves the market.
So, my question to you is, having stipulated, already, I
think you're a fine fellow, What are you going to do to shake
this up and come up with a workable policy, now, when we've got
bedlam, certainly in Oregon and Washington, with all these
projects that our citizens can't even begin to track down the
information on, given that the agencies are putting out two
different accounts, in many respects?
Mr. Wellinghoff. Senator Wyden, I do understand that there
is a huge impact from all these projects that are seemingly
simultaneously descending on Oregon. It is an issue that I'm
concerned about, extremely concerned about. You've submitted 12
questions to me, prior to this hearing, and I've tried to
answer those as best I could. I think the best answer that I
provided in those questions, hopefully, is that I'm committed
to take our director of energy projects, Mark Robinson, and
myself out to Oregon in January to talk to State officials, to
look, on a generic basis, how we can deal with these issues in
a way that we can make the process more transparent for the
citizens in Oregon, and we can ease the process in a way that
will hopefully allow for input, but do it in a way that does
not overburden the----
Senator Wyden. I appreciate that, but will you be the point
person at FERC to change the policy here and get a policy that
says, when you've got projects intended to serve the same
market, the agency is going to look at them comprehensively to
determine what best serves the market? That's the policy change
I want to see, and I want to see--given the fact that you're
the one up today, I want to see somebody say, ``I'll be the
point person to get a new policy to look at what's best for the
area.''
Mr. Wellinghoff. I certainly would look at that policy,
Senator, but I will tell you that I'm very hesitant to propose
to my fellow commissioners a policy where FERC is picking
people and markets. Let me----
Senator Wyden. I don't----
Mr. Wellinghoff [continuing]. Let me give you an example
because Oregon's not the only place that's impacted. Let's talk
about my State of Nevada. In my State of Nevada, we've got
three coal plants--three huge coal plants being proposed that,
from a baseload standpoint, could never be absorbed by the
State of Nevada. One in Ely, that's being proposed by Nevada
Power; another one outside of Ely that's being proposed by L.S.
Energy; a third one that's being proposed in southern Nevada by
Sythe, at Toquop. The BLM is doing the EIS on all those,
they're not looking at them in a comprehensive manner in any
way, fashion, or at all, they're, in fact, doing them
individually and serially, I think, as FERC is doing the
projects in Oregon.
I really wouldn't want the BLM picking for Nevada which
coal plant should go forward. I don't think that would be an
appropriate thing to do. I have some concerns about FERC
picking whether we should be doing Bradwood or the Oregon
project or the Jordan Coal Project as the appropriate project
for Oregon. I think the markets will ultimately pick, and, I
think, if we do them serially, but consider, however, the
multiple impacts--and I certainly will do that--there's no
reason why we shouldn't consider the multiple impacts of
projects, knowing that they are being proposed. That has to be
considered, and that--how that impact will impact the citizens
of Oregon, we should do that. I will----
Senator Wyden. My time----
Mr. Wellinghoff [continuing]. Commit to that.
Senator Wyden. My time is up, but that's what I'm looking
for, not picking winners and losers, but looking at this
comprehensively. That isn't being done. Seems to me you've made
at least aN open door to a fresh approach there, and I think
that's constructive. But looking at them, collectively,
comprehensively, determine all the impacts--which isn't being
done today--that's what I'm looking for, and I appreciate it.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman.
Commissioner, appreciate your good work. I want to ask a
couple of questions this morning about natural gas;
specifically, Alaska's natural gas and how we can get that to
the American market. As you know, we have been working up in
the State. Governor had a new proposal, applications have been
submitted. There have been a handful that have come in, as well
as a proposal that's outside of the regular process that the
Governor is now considering.
I guess the question to you this morning is, From the
FERC's perspective, how do you view this process working, and
is it on track to the level that we would like, in order to be
able to provide this country the volume of gas that we have
available in Alaska? We've just got to figure out how we get
from there to here. So, just a few comments on that, if you
would.
Mr. Wellinghoff. Yes. Thank you, Senator.
I believe that the resource of the natural gas in Alaska is
essential to this country's economic viability. I believe that
FERC, as I understand it, stands ready, at the point that
projects ultimately are selected by the State, to move forward
in a rapid fashion with respect to the EIS overview and other
aspects of project planning, to ultimately license and site
those projects.
So, my understanding is that our Office of Energy Projects
is prepared, and stands ready, to move forward expeditiously.
Senator Murkowski. We appreciate that commitment and hope
that we'll be working with you quickly in this manner.
Let me ask you a little bit about LNG terminal approvals.
How many do we have in place? What's the status of them? Just
from a bigger-picture perspective, what do you view as, then,
the future for imported LNG in this country? Is this an area
where, in your perspective, we continue to rely more and more
on these imports, and that's the direction that we go, in terms
of a policy, as it relates to natural gas consumption in this
country?
Mr. Wellinghoff. I think LNG terminals are an essential
part of the supply for natural gas. You can see, from the
questions from Senator Wyden, we have a number of them proposed
in Oregon, and there are a number of them proposed on the East
Coast, as well, and in the Southeast, where the terminals have
predominated, in the Southeast, and a couple in the Northeast.
But I think we're going to see more terminals be necessary
closer to load centers on the West Coast and on the East Coast,
as well, and I would say that it's one of the part of the mix
of supply of natural gas, that we're going to keep natural gas
competitive in this country.
Senator Murkowski. In terms of when those LNG receiving
terminals will be online--I know that you've got applications
in the works, but give me a 5-year picture of what it looks
like, in terms of new LNG receiving terminals, in your opinion.
Or maybe there's nothing in 5 years. Is it 10 years?
Mr. Wellinghoff. I'll tell you, I--if I could, I'd like to
get back to you----
Senator Murkowski. OK
Mr. Wellinghoff [continuing]. In writing on that.
Mr. Wellinghoff. I think I could probably give you a much
more detailed and answer, and give you an answer----
Senator Murkowski. What I'm trying to understand is just
what we have in the pipeline and what's realistic within a
given timeframe.
Mr. Wellinghoff. We have quite a few in the pipeline. I
couldn't give you an exact number, but I think we have at least
10 to 12 in the pipeline right now. I think it's realistic to
see at least five of those over the next 5 years. But, again, I
would like to reserve the right to get back to you and give you
some detail----
Senator Murkowski. We'd appreciate that.
Mr. Wellinghoff [continuing]. For our project----
Senator Murkowski. From the Alaskan perspective, of course,
there's a concern that the longer our project, up north, is
delayed, you've got to have commitments to make things happen
around the Lower 48 to meet that demand. Once a commitment has
been made and you've got your LNG receiving terminals in place
and your contracts with your countries overseas to provide that
gas, all of a sudden the domestic natural gas is not a part of
the picture. We don't want to be pushed out of that picture.
So, I'd like to understand, kind of, how the timeline moves
for, and if you can provide that, we'd appreciate it.
Mr. Wellinghoff. I'll do that.
[The information follows:]

status of lng projects
The U.S. has five operating liquefied natural gas (LNG) import
terminals that are able to regasify up to 5.8 billion cubic feet (Bcf)
per day. These terminals are located in Everett, MA; Cove Point, MD;
Elba Island, GA; Lake Charles, LA; and offshore Louisiana.
The Commission has approved 14 new LNG terminals and expansion of
five LNG terminals. Of this total, four terminals and two expansions
are under construction as show in the table below.

Based on the above schedule of projects, the U.S. can expect to
have an additional 10.1 Bcf per day of LNG regasification capacity by
early 2009. In addition, a deepwater port LNG terminal--the Northeast
Gateway, offshore Boston, MA--is scheduled to go into service this
month with the ability to regasify up to 0.8 Bcf per day.
Eight new projects and three expansions totaling 21 Bcf per day of
new regasification capacity have been approved by the Commission, but
currently are not under construction. These projects are shown in the
following table.

----------------------------------------------------------------------------------------------------------------
Volumes
Project Name Order Date Proposed In- (Bcf per
Service Date day)
----------------------------------------------------------------------------------------------------------------
Corpus Christi LNG (TX) 04/13/05 2009 2.6
----------------------------------------------------------------------------------------------------------------
Vista del Sol LNG (TX) 06/20/05 2009 1.1
----------------------------------------------------------------------------------------------------------------
Weavers Cove LNG (MA) 08/15/05 2010 0.8
----------------------------------------------------------------------------------------------------------------
Ingleside Energy (TX) 07/21/05 2010 1.0
----------------------------------------------------------------------------------------------------------------
Port Arthur LNG (TX) 06/15/06 2010 3.0
----------------------------------------------------------------------------------------------------------------
Crown Landing LNG (NJ) 06/15/06 2008 1.2
----------------------------------------------------------------------------------------------------------------
Creole Trail LNG (LA) 06/15/06 2009 3.3
----------------------------------------------------------------------------------------------------------------
Casotte Landing (MS) 02/16/07 2010 1.3
----------------------------------------------------------------------------------------------------------------
Clean Energy LNG (MS) 02/16/07 2009 1.5
----------------------------------------------------------------------------------------------------------------
Calhoun LNG (TX) 09/20/07 2009 1.0
----------------------------------------------------------------------------------------------------------------
Freeport Expansion (TX) 09/26/06 2009 2.5
----------------------------------------------------------------------------------------------------------------
Cameron Expansion (LA) 01/18/07 2010 0.8
----------------------------------------------------------------------------------------------------------------
Elba Island Expansion (GA) 09/20/07 2010 0.9
----------------------------------------------------------------------------------------------------------------

Eight proposals to construct liquefied natural gas terminals are
pending at the Commission. Seven of those proposals have filed formal
applications for siting; one proposal--Oregon LNG--is in the
Commission's mandatory pre-filing process that precedes the filing of a
formal application. The regasification capacity associated with these
projects totals 9.2 Bcf per day.

------------------------------------------------------------------------
Volumes
Project Name Location (Bcf per
day)
------------------------------------------------------------------------
Broadwater LNG (NY) Long Island Sound, NY 1.0
------------------------------------------------------------------------
Long Beach LNG (CA) Long Beach, CA 0.7
------------------------------------------------------------------------
Northern Star LNG (OR) Bradwood, OR 1.0
------------------------------------------------------------------------
Quoddy Bay (ME) Pleasant Point, ME 2.0
------------------------------------------------------------------------
Downeast LNG (ME) Robbinston, ME 0.5
------------------------------------------------------------------------
Sparrows Point (MD) Baltimore, MD 1.5
------------------------------------------------------------------------
Jordan Cove (OR) Coos Bay, OR 1.0
------------------------------------------------------------------------
Oregon LNG (OR) Astoria, OR 1.5
------------------------------------------------------------------------

The combination of the existing capacity, the capacity of the
offshore terminal that will begin service shortly, and the capacity of
the projects that are under construction has the potential for 16.7 Bcf
per day of regasification capacity. This amount, plus the potential
capacity from those projects that have not yet commenced construction
and those projects that are under analysis at the Commission add up to
an additional 30 Bcf per day of capacity. We believe that the market
will decide that not all of this capacity is needed due to financing
requirements and the availability of LNG supplies, among other things.
However, if the market perceives that natural gas from Alaska will
not be forthcoming in a timely manner, those LNG projects that may have
seemed marginal may look more attractive, especially those projects
with an in-service date in the next several years. Alaska offers a
reliable continental source of natural gas for the Lower 48 States that
will help the U.S. economy to grow and thrive, and also contribute to
the economic well being of the State of Alaska.
The average post-approval siting time is variable. Approval of an
application for the siting of a LNG terminal by the Commission does not
allow the applicant to commence construction the following day. All
approvals have conditions attached to mitigate the environmental impact
of a project, as well as conditions regarding safety and security of
the facility. Certain conditions must be satisfied prior to the
commencement of construction. If those conditions are met, then the
Director of the Commission's Office of Energy Projects will issue a
letter allowing construction to commence. Further, project sponsors may
not opt to commence construction even when they receive approval, due
primarily to non-environmental reasons (e.g., financing decisions,
execution of contracts, procurement of materials and labor). Therefore,
it is difficult to predict the post-approval siting time between
Commission approval and the actual commencement of construction.
As a general rule, when construction does commence, it can take
approximately three years for an LNG terminal to go into service. The
critical path is the construction of the storage tanks for the LNG. All
of the other facilities at a LNG terminal can be constructed within
this timeframe.

Senator Murkowski. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Commissioner, we want to acknowledge your exemplary service
on the Commission, particularly your interest in energy
efficiency and distributed generation, as well as plug-in
hybrids. I think that those are all things to be commended. I
only wish more of your colleagues would take some of your leads
on these things.
I do have, however, a specific set of questions that I want
to raise with you about New Jersey. Some of them have broader
policy context than New Jersey, but--and it's about these
extension cords that take place.
We have a situation where we have the so-called extension
cords being built to transport electricity from New Jersey to
New York. There's one called the Neptune cable, that has saved
Long Island customers millions of dollars, but has cost New
Jersey customers much more. To accommodate this export, the
Neptune cable paid only about 5 million of the 30 million
necessary to accommodate the problem, and has cost New Jersey
customers hundreds of millions of dollars in capacity payments.
Not surprisingly, more cables are planned. In one of these
proposals, the Cross Hudson Corporation proposes taking what we
call the Bergen II Power Plant, one of New Jersey's most
efficient natural-gas plants, and unplugging it from the PJM
grid. All of its electricity would go under the river to
Manhattan. In effect, Bergen II would be transported to New
York to serve New York, but current regulations and laws do not
require New York or the corporations involved in the deal to
compensate New Jersey for the loss of capacity or this loss of
electricity.
So, my question is, Does the FERC--or is the FERC looking
at this whole issue? I mean, New Jersey is specific, but I'm
sure it's not unique. If everybody can go sell for higher
prices and drain capacity from one State, is the FERC looking--
particularly contemplating any changes to rules governing
capacity export charges to reflect changed circumstances, such
as happened--some of these that I've described to you?
Particularly, do you know if the FERC has any action--taking
any action to address the impact that these extension-cord
projects are having on New Jersey's already high electricity
prices? How are we going to get customers compensated for the
loss of capacity--electricity and capacity from these projects?
This is an ever growing issue in my State. I assume that other
States that will find itself in this set of circumstances will
begin to raise these issues, and I'd certainly like to get your
thinking on this.
Mr. Wellinghoff. Certainly, Senator, to the extent that New
Jersey can create capacity, it should be compensated. I
absolutely believe that. I know that New Jersey has been one of
the leaders in, for example, photovoltaics and also later and
distributed generation. To the extent that those resources are
creating capacity in lines, I think there needs to be ways that
we, in fact, can compensate people in New Jersey who are
creating that capacity. I think that's something--and something
I'm certainly absolutely looking into. To the extent that any
area is creating capacity on lines through the demand side or
through distributed generation or other means, I think they,
ultimately, need to be compensated for it, as a generator would
be compensated for creating capacity.
Senator Menendez. Let me ask you this. I appreciate hearing
that; the problem is that that's not happening, largely
speaking; certainly not happening in the context of any just
compensation. Do you think there are any laws or regulations
necessary to ensure that the entire power plants are not
diverted to another wholesale electricity market without
compensation? Do you think you all have the wherewithal to take
care of such challenges today, or do you need to have
authorities you don't have today in order to do this?
Mr. Wellinghoff. Again, I would provide you an answer in
writing on this, specifically, because I don't want to
misspeak.
Mr. Wellinghoff. However, I don't believe that, from the
standpoint of a generator, that FERC has the ability to dictate
how that generator sells its capacity, as far as where it sells
it. If it can, in fact, market it--skip where it's at, to the
next line jurisdiction--I believe that a generator has,
ultimately, that right. To restrict it to a certain area, I
don't believe is in our authority, but I definitely would get
back to you on that.
Senator Menendez. We'd like to see how some type of just
compensation takes place, because, if not, we're going to have
a major problem. Ratepayers are just going to go off the wall.
Last, you know, we need a market monitor----
Mr. Wellinghoff. Could I add to that, my last answer, just
one thing, if I could? Excuse me, but--to the extent that these
plants in New Jersey have been paid for by New Jersey
ratepayers, I would think the appropriate jurisdiction to
determine payments of that capacity would be the State Public
Utility Commission, rather than FERC.
Senator Menendez. Last--well, we will continue to follow up
with you--lastly, on--you know, we had a whole issue with PJM
and the market monitor saying he was being interfered with.
It's, you know, imperative that we have a strong, independent
market monitor that consumers can have confidence in that
they're not being cheated by manipulation and/or monopolies,
and we hope that you, as a commissioner, along with your fellow
commissioners, are going to ensure that we do everything that's
necessary to strengthen the hands of these market monitors to
be truly independent. I have a real concern about this issue.
When you look at all this other issues that we've just talked
about, in terms of electricity costs, we hear from ratepayers
all of the time. So----
Thank you, Mr. Chairman.
Mr. Wellinghoff. I would commit to you on that--on the
market monitor--absolutely, Senator.
The Chairman. Senator Tester.
Senator Tester. Thank you, Mr. Chairman.
I want to thank Jon Wellinghoff. Thank you for being here
today. Thank you for being willing to serve. This is the first
time I've had an opportunity to meet you, and I am very
impressed with your knowledge of the area. I'm doubly impressed
with the fact that you're one of the few of us that know how to
spell your first name correctly.
[Laughter.]
Senator Tester. So, thank you.
As you know, Montana deregulated their utilities in 1997.
Maybe you don't know that, but they did. Our old regulated
company sold off their assets, all of 'em. To be honest--it's a
bit of an understatement--but deregulation has not been smooth
in Montana. Prices have gone from some of the lowest in the
region to some of the highest. They have more than doubled in
the last 5 years, and are anticipated to continue to rise.
Do you believe that competition in the electricity market
is working the way it ought to?
Mr. Wellinghoff. I believe it is working; it's not working
as well as I'd like to see it working, but I think it can work.
I think that consumers can benefit and be provided with more
choices and more opportunities. The part about it that I like
most is, I think it has the opportunity to bring in the demand
side that we don't have now fully integrated into the markets.
The demand side, I mean, really consumers participate in the
market by reducing their demand at times that they--that's
appropriate for them, but, ultimately, that--where they can
ultimately make money. Things like plug-in hybrid electric
vehicles that we're going to see coming to the markets will
really benefit from a competitive market. I think we'll see
real benefit. So, I think the benefits are really there. We're
moving much slower than a lot of people, I think, would like to
see. I know there are areas of the country, like Montana and
others, that have been impacted, that have been impacted
severely, and that concerns me--does concern me.
Senator Tester. What can FERC do to encourage competition
in rural areas like Montana?
Mr. Wellinghoff. One thing we can do is, I think, better
integrate in renewable systems. I think, the more renewable
systems--and I know you've got a lot of wind in Montana--the
more renewable systems that we can integrate into the grid,
you're going to see that helping competition tremendously. So,
we've worked on that in a number of orders that I mentioned,
that I have detailed in my statement that I submitted to the
commission--to the committee. I think that's one significant
area where, in fact, we can improve competition by getting a
more diverse supply.
Senator Tester. I don't want to get into the rate case,
but, as you well know, there was a case brought to FERC about a
lack of competition in the marketplace. One of the problems we
have goes to what Senator Menendez was talking about, in that,
we can't get juice out, we produce more than what we utilize
now, in the State of Montana. So, the question falls, in
relation to the lines. There's a lot or proposals for
additional lines going out of Montana, there's a lot of
proposals for renewable, and, for the most part, I think that
renewables have some real advantages. I want to see this kind
of stuff happen, as long as it's done smartly. But, what can we
do to protect our consumers, and not end up with high rates?
Our rates are high enough, I don't want to end up with
California rates. What can we do, what can you do, to protect
the consumers in a State where we pay transportation, going
both ways, in most every area, and would like not to have to do
that in electricity?
Mr. Wellinghoff. I think the biggest ways to protect
consumers is to enable consumers to, again, participate in the
markets. If you can enable consumers to, ultimately, use what
they can on the demand side to ensure that their costs are
managed, which consumers can do--in fact, there was a great
experiment by Pacific Northwest Labs up in Washington--did an
experiment, ultimately, with consumer appliances and how those
consumer appliances could be utilized to, in fact, provide grid
services. Consumers got paid for that, ultimately. So, to the
extent that FERC and the States can work together to enable
consumers to participate in these markets, with demand-side
distributed generation, energy efficiency, demand response,
those are ways that consumers can help protect themselves. We
can enable them, and they then can protect themselves.
Senator Tester. So, you anticipate it happening, from a
usage standpoint, a conservation standpoint, and, when they use
the electricity, more than just cents per kilowatt.
Mr. Wellinghoff. I think that's going to be the best way
for consumers to control bills--total bills.
Senator Tester. OK.
Can you tell me what FERC is doing now to encourage
renewables in the marketplace? Let me preface this a little
bit. When we had the first energy-bill debate, and we talked
about a renewable portfolio standard. Many of the people who
were opposed to a renewable portfolio standard just talked
about wind as being the only renewable out there, but I see it
as being much more than that, whether it's geothermal or
biomass-powered, or whatever. What has FERC done to--and what
can they do--to help promote renewables, so that it's not just
seen as one entity supplying it?
Mr. Wellinghoff. We're doing a number of things. One, we
just had a workshop on interconnection to the grid. In the
organized markets, in the ISOs and RTOs alone--there's over 300
gigawatts of new development that is actually applied for an
application to interconnect to the grid. Of that 300 gigawatts,
45 percent is wind, and they're having great difficulty getting
the studies done to make these interconnects and to ultimately
develop the projects. So, we had a workshop at FERC to try to
figure out how to break that logjam, so ultimately, we can get
more of these projects connected. That was one thing we did.
Commissioner Moeller and I had a workshop in Oregon that
dealt with a new evolving renewable area, and that's
hydrokinetics, which is wave power and also ocean current and
in-river systems, that seemed to be very promising. FERC, in
fact, has come up with a pilot-license project--pilot-license
process, where, in fact, we can license small projects to
demonstrate them, to determine if they can be interconnected,
if they're environmentally benign, and if, in fact, they are in
the public interest. That process seems to be working well.
We're moving forward with that process, as well.
We've done a number of things, in changing our open-access
tariff provisions that allow for such things as conditional
firm, where wind can actually hook onto the grid and not have
to have the ability to have capacity in that grid every hour of
the year, but just for the hours that they may need it over
time on a conditional-firm basis. So, we're doing a number of
things that I think are moving forward with fully integrating
renewables into the grid and ensuring that we have more diverse
supply in this country.
Senator Tester. Finally, if I might, Mr. Chairman, I just
want to thank you and thank the Commission for the relicensing
of Mystic Lake. It's something in Montana that has been a bit
contentious and, I think, just this last Monday, you did that.
Mr. Wellinghoff. Yes, we did.
Senator Tester. I want to thank you for that.
The last thing is that being a farmer, a small-businessman,
and a consumer of electricity in a State that's on the northern
latitudes, energy cost is becoming a big thing, not just
electricity, but transportation fuels, too. I'm sure we're not
alone with that problem. I don't know how often you get out--
you talked about going to Oregon soon. If you get the
opportunity, maybe stop off on your way out there; it's not
really on the way, but it's kinda. It would be great to have
you come out and visit Montana. Maybe you've already done this;
if you have, I apologize--but it would be great to have you
come out and visit with some of the public-service
commissioners onsite to let them show you what's going on.
Because for a State like Montana that's had such a great
company as Montana Power for so many years, to have them sell
off all their assets and have this whole thing up in the air
for electricity rates is really sad to see. To be honest with
you, and it's really inhibited our economic development in the
State--in rural areas, in particular--even though the co-ops
have done a fine job in protecting their customers, everybody
knows that's not going to last forever.
Mr. Wellinghoff. I'll do that, Senator.
Senator Tester. Thank you.
Mr. Wellinghoff. Thank you.
The Chairman. Thank you very much.
We'll allow members to file any additional questions with
the committee, up until 5 o'clock this afternoon, if they have
additional questions for the nominee.
The Chairman. Again, thank you for being here.
That will adjourn our hearing.
[Whereupon, at 11:28 a.m., the hearing was adjourned.]

APPENDIX

Responses to Additional Questions

----------

Federal Energy Regulatory Commission,
Washington, DC, December 19, 2007.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, United States
Senate, Dirksen Senate Office Building, Washington, DC.
Dear Chairman Bingaman: Thank you for conducting a hearing
yesterday for my nomination to another term on the Federal Energy
Regulatory Commission and thank you for reporting my nomination to the
full Senate for consideration.
Following the hearing you forwarded additional written questions
from members of the Energy and Natural Resources Committee and asked
that the answers be provided by the time you were to begin a business
meeting to consider my nomination. That deadline was to be 11:30 AM
today.
Attached you will find my responses to all of the written questions
posed by members of the Committee. In addition, I am responding in
writing to Senator Murkowski's general question posed during the
hearing about Liquefied Natural Gas terminal proposals currently
pending before the Commission.
Sincerely,
Jon Wellinghoff,
Commissioner.
[Attachment.]
Responses to Questions From Senator Bingaman
Question 1. Over the last two years, as the Commission has
implemented the Energy Policy Act transmission pricing provisions I
have been concerned that the Commission might be awarding incentive
rates for behavior that would have been undertaken by utilities in any
event, and that petitioners before the Commission might view incentive
rates as an entitlement and not as an inducement to increase beneficial
investment. How can the Commission make clearer to builders of
transmission that the term ``incentive rates'' does not always and only
mean increased rates of return for all transmission?
Answer. I believe that in providing an incentive return on equity
(ROE) adder for transmission construction, the Commission should focus
on encouraging investment decisions beyond the upgrades simply required
to meet a utility's service obligations or the minimum standard for
good utility practice. Incentive ROE adders should be more narrowly
targeted to transmission investments that provide incremental benefits,
such as those resulting from the deployment of best available
technologies that increase efficiency, enhance grid operations, and
result in greater grid flexibility. In this regard, I have linked each
of my decisions on incentive ROE adders for new transmission
construction to a demonstration by the developer that it has considered
and, to the extent practicable, incorporated into its project some of
the advanced transmission technologies specified by Congress in section
1223 of EPAct 2005. I have also considered incremental benefits
associated with new transmission construction that is needed to
accelerate the integration of renewable energy resources into our
nation's energy portfolio. I believe that this approach is engendering
positive responses from transmission developers to now consider and
incorporate such technologies into their projects.
In several cases, including incentive proposals submitted by
American Electric Power Service Corporation and Southern California
Edison Company, applying these criteria led to me support the granting
of incentive ROE adders. In other cases, including incentive proposals
submitted by Trans-Allegheny Interstate Line Company and Baltimore Gas
and Electric Company, I concluded that applicants failed to demonstrate
that an incentive ROE adder was appropriate. My conclusions, however,
have not always been shared by a majority of fellow Commissioners,
resulting in my dissenting in a number of cases.
Question 2. During the last few years utility rate increases in
much of the Nation have brought questions as to whether markets are
genuinely competitive and are producing the most efficient price
signals in the electric industry. Does the Commission intend to
undertake a comprehensive overview of the state of competition in
electricity markets in the near future? Are market institutions
functioning, in your view, to produce the lowest rates consistent with
reliable service? Particularly, are such mechanisms as forward capacity
markets, locational marginal cost pricing, ancillary services markets
and other market mechanisms working to produce lower rates, or only
adding to cost?
Answer. The Commission conducts an annual State of the Markets
Report analysis that has shown consistently that the wholesale markets
are competitive. The market monitors in each RTO and ISO region also
produce such reports that have demonstrated that markets are
competitive. In addition, the Commission conducts a market power test
prior to authorizing an entity to charge market based rates.
At this time I do not believe a comprehensive overview of the state
of competition in electricity markets is required. This is not to say
that I believe those markets are functioning perfectly or that there is
not room for improvement. I believe that as a whole, rates are just and
reasonable. As I indicated at my hearing, the latest data from the RTO/
ISO Council indicates that wholesale rates have substantially declined
in each RTO/ISO region from 2005 to 2006.
While not a comprehensive overview, the Commission did issue an
Advance Notice of Proposed Rulemaking (ANOPR) on June 22, 2007, to
examine a variety of specific issues associated with competitive
electric markets administered by Regional Transmission Organizations
(RTO). The ANOPR followed two technical conferences that the Commission
had convened to discuss some of the challenges facing wholesale energy
markets and to address head-on some of the criticism being leveled at
the competitive model. In the ANOPR, the Commission sought comment on
the role of demand response in organized markets, how to increase
opportunities for long term contracting, ways by which the Commission
might strengthen market monitoring, and ways to better ensure that RTOs
are responsive to their stakeholders. We have received a number of
comments and suggestions for possible reforms--including a recent
request to broaden the scope of the inquiry to examine additional
issues. I am open to these requests to the extent that they can lead to
concrete recommendations for solutions to current market problems.
But the overarching issue from my perspective is not rates but
total consumer bills. It is my belief that the construct of a wholesale
competitive electric market provides the most efficient structure to
give the consumer the opportunity for lowest total overall bills. This
is through the mechanisms of fostering participation of consumers in
those markets through demand response, energy efficiency, distributed
generation and other distributed resources. Creating markets and
industries to support those consumer dependent resources is the promise
of organized competitive wholesale electric markets. This together with
diversity of supply through enhanced opportunities for new renewable
resources to participate in these markets will provide consumers with
the opportunity to keep total bills stable and manageable.
Currently market institutions, in my view, are not functioning to
produce the lowest bills consistent with reliable service. But I
believe that the Commission is incrementally moving toward implementing
such market institutions that will produce lowest bills for consumers
while maintaining reliable service. That is why market mechanisms such
as forward capacity markets, locational marginal cost pricing, and
ancillary services markets have been instituted to assist in producing
lowest bills for customers. But to the extent that demand response and
energy efficiency have only recently been incorporated into some of
these market mechanisms and have not yet had the opportunity to provide
full benefits to consumers, we do not yet know the extent to which
consumer bills can be stabilized or reduced.
Question 3. Many have argued recently that regional transmission
organizations do not have either the proper governance structure or
incentive structure to be sure that transmission prices and prices in
the markets they administer are sufficiently protective of consumers.
How should the Commission proceed to be sure that incentives for RTOs
are aligned with interests of consumers to produce the lowest possible
rates consistent with reliable service?
Answer. The Commission recognizes both the type of concerns noted
in your question and the importance of ensuring that RTOs' governance
structures and incentives are consistent with consumers' interests.
Indeed, such concerns contributed to the Commission's decision earlier
this year to initiate a rulemaking proceeding on a variety of issues
associated with competitive markets administered by RTOs. As noted
above, following several technical conferences, the Commission issued
an ANOPR in June that specifically sought comment on ways to ensure
that RTOs are adequately sensitive to the needs of their customers. For
example, the Commission preliminarily found in the ANOPR that
representatives of customers must have some form of effective direct
access to an RTO's board of directors, and sought comment on how that
goal can best be achieved. The Commission is now in the process of
reviewing the many comments that it received in response to the ANOPR
and considering proposals to improve RTOs' responsiveness to consumers'
concerns.
More generally, it is important to recognize that RTOs are already
providing important benefits to consumers. For example, as I discussed
above, I believe that competitive markets administered by RTOs offer
the greatest promise for efficient use of demand-side resources and
renewable energy resources. The economic dispatch of these and other
resources will drive down costs to the benefit of consumers.
In addition, the Commission's Order No. 890 established new
requirements for regional transmission planning in RTOs and other
regions. The required open and transparent planning processes will
provide opportunities for resources that are technically capable, such
as demand response and distributed generation, to complement the build
out of needed transmission infrastructure, thus lowering total costs
and consumers' total bills.
Question 4. The Advanced Notice of Proposed Rulemaking on
Competition proposed what is called ``scarcity pricing'', which amounts
to taking price caps off markets during emergencies, even for sales to
and from affiliates. It seems to me that the only time price caps are
important is during emergencies. Does this scarcity pricing not raise
the danger that markets might spiral out of control again? What is to
prevent sellers from taking advantage of emergency situations to charge
unreasonable prices?
Answer. The issue of how to appropriately price electricity during
times of system shortage is one that the Commission raised in the
ANOPR. The Commission sought comment on the need for further forms of
``scarcity pricing'' and on various mechanisms to send price signals
when additional resources are needed to serve consumers, such as during
hot summer days when the electric system is running short. Commenters
have raised some of the issues your questions raise.
I believe that the objective of a shortage pricing mechanism should
be to obtain the resources needed to provide electricity services at
the lowest cost to customers. It is my position, which I stated at the
Commission's open meeting when we released the ANOPR for public
comment, that I will not vote for the scarcity pricing proposals in the
ANOPR unless and until RTOs have fully integrated demand resources into
their operations and planning. Further broadening the pool of resources
to include demand response resources can improve the efficient
operation of the markets, improve reliability and lower prices to
consumers. Indeed, I believe that distributed energy resources, such as
demand response, energy efficiency and distributed generation, are the
most potent protection customers have against those who might try to
take advantage of an emergency. Demand resources can provide a
competitive threat to generators, lessoning the reward to withholding
or other efforts to raise prices, before a market gets to the point of
emergency conditions.
The ANOPR asks questions about the potential of several methods to
remove barriers to more widespread demand response by customers. There
are many difficult issues associated with how to appropriately price
electricity during emergency conditions, which are under active
consideration at the Commission. We have sought, and continue to seek,
workable solutions to inefficiencies that remain in RTO markets. I can
assure you that I intend to fully consider all of the comments we have
received to the ANOPR as I work through these difficult issues with my
colleagues at the Commission.

Responses to Questions From Senator Wyden

In response to questions for the record during the Committee's 2005
hearing on LNG permitting, Mark Robinson, Director of the Office of
Energy Projects, responded that,

The Commission is supportive of competition within the energy
industry and of the idea that the market drives infrastructure
development. Past experience, particularly since the
restructuring on the gas industry following Order No. 636, has
demonstrated that market forces can serve the same end as a
competitive or ``Ashbacker'' hearing. Where the Commission
approves multiple projects to serve a similar market, only an
economically viable project will actually be built, i.e., only
where customer commitments ensure new service will fulfill a
genuine need.

Question 1. How is this policy consistent with the obligation of
the Commission to make an affirmative finding of public convenience and
necessity under the Natural Gas Act?
Answer. A finding that a project is in the public convenience and
necessity requires a determination regarding both economic and
environmental considerations. Environmental considerations include
design, safety and security issues.
I believe that the Commission's current policy to allow the market
to determine which project should be built is consistent with our
obligation under the Natural Gas Act. A project results from an open,
competitive process with customers making service choices, and the
developer and customers to be served bearing the economic risks. In
practice, the Commission's current policy has worked well to bring the
right infrastructure into service at the right time. Under the current
policy, there has not been any significant underinvestment or
overinvestment in gas infrastructure.
With regard to environmental considerations, the Commission has
exercised its authority to condition the certificates we issue to
prevent and mitigate as necessary the project's environmental impacts,
including impacts on landowners and citizens. The FERC Environmental
Impact Statement (EIS) is a comprehensive analysis of the design,
safety, security and environmental issues of a project that underlie
the conditions we attach to a certificate.
Taken together, our certificate process fulfills our obligation
under the NGA.
Question 2. Do you agree with this policy that competitive or
``Ashbacker'' hearings need never be conducted where multiple projects
are proposed for a given market?
Answer. No. Nonetheless, I do not believe that ``Ashbacker''
hearings are generally the appropriate or preferred method. I have
serious doubts that consolidating projects at very different levels of
development and review would result in a better selection process. Such
a policy could delay needed supplies and increase costs to consumers.
The rationale for an ``Ashbacker'' hearing is mutual exclusivity where
issuing one license would preclude issuing the other. Therefore, it
would be an appropriate process for virtually identical projects
proposed to be sited in close proximity in the same timeframe.
Question 3. Are there circumstances where you believe that it is
ever appropriate for the Commission to conduct competitive or
``Ashbacker'' hearings where multiple projects are being proposed to
serve a single market? If so, when?
Answer. Please see my response to question #2 above and my answer
to your pre-hearing question #3.

Responses to Questions From Senator Menendez

EXTENSION CORDS TO NEW YORK

Question 1. I want to discuss the so-called ``extension cords''
which are being built to transport electricity from New Jersey to New
York. The ``Neptune'' cable has saved Long Island customers millions of
dollars, but has cost New Jersey customers much more. To accommodate
this export, the Neptune cable paid only about $5 M of the nearly $30 M
needed to accommodate the problem and has cost New Jersey customers
hundreds of millions of dollars in capacity payments.
Not surprisingly, more cables are planned. In one of these,
proposals the Cross Hudson Corporation proposes taking the Bergen-2
power plant, one of New Jersey's most efficient natural gas plants, and
unplugging it from the PJM grid. ALL of its electricity would go under
the river to Manhattan. In effect Bergen-2 would be transported to New
York to serve New York, but current regulations and laws do not require
New York or the corporations involved in the deal to compensate New
Jersey for this loss of capacity or this loss of electricity.
Does the FERC plan to take any action to address the impact that
these ``extension cord'' projects are having on New Jersey's already
high electricity prices?
How will the FERC ensure that New Jersey customers are compensated
for the loss of capacity, electricity and capacity from these projects?
In particular, does FERC contemplate any changes to rules governing
``Capacity Export Surcharges'' to reflect changed circumstances as
happened with the Neptune Line?
In relation to the Bergen-2 project in particular, PSEG has shown a
willingness to work with me and my office to ensure New Jersey
ratepayers are fairly compensated. But what laws or regulations are
necessary to ensure the entire power plants are not diverted to another
wholesale electricity market without compensation?
Answer. I share your concerns with respect to the difficulties
associated with allocating the potential costs and benefits of regional
transmission projects that are built within the PJM footprint, as well
as inter-regional projects such as underwater cables connecting New
Jersey and New York. While our national economy works most efficiently
when energy is traded freely across state boundaries, FERC has approved
measures for PJM that can help offset certain negative, local effects
of the types of projects you mention.
With regard to transmission solutions, the Commission had taken a
series of actions to improve the transmission planning process within
PJM, which should result in a more robust transmission system and
provide constrained areas such as portions of New Jersey with access to
additional lower cost power supplies.
In March 2007, the Commission issued an order (currently pending
rehearing) that facilitates cost allocation for transmission projects
identified as needed for either reliability or economic (congestion
relief) reasons. The Commission's order allocates on a PJM region-wide
basis the costs of new, centrally planned ``backbone'' transmission
facilities that operate at or above 500 kV. The Commission reasoned
that the benefits from those large ``backbone'' projects were
sufficiently broad that a rate that spreads the costs region-wide was
appropriate. The Commission also required the development of a detailed
methodology for allocating the costs of new facilities below 500 kV so
that the beneficiaries of those projects would bear the cost of the new
facilities. Taken together, the modifications the Commission has
required to the cost allocation method for new transmission facilities
within PJM are aimed at developing transmission resources that can help
supply the power needs of constrained areas like northern New Jersey at
a reasonable cost.
Indeed, looking at northern New Jersey alone, there are already
several backbone projects currently under evaluation within PJM that
could address congestion and looming reliability concerns. I would also
point to PJM's Regional Transmission Expansion Plan (RTEP), which sets
forth a structure that assures opportunities for demand response and
generators using all fuel types. PJM presently has interconnection
requests in New Jersey for plants that are fueled by wind, hydro,
biomass and methane.
I believe that the actions the Commission has taken in these
various areas recognize the regional interconnected nature of the PJM
transmission system and provide a platform for addressing the energy
needs of all states within the PJM region. That platform allows
effective regional planning and provides a level playing field for
demand response, generation and transmission options for meeting the
wholesale electric power needs of New Jersey's consumers. While there
are difficult policy choices that lie ahead, I believe that we can work
through those challenges together with our state regulatory colleagues
to fashion energy solutions that work for all the states in the PJM
region.

DISTRIBUTED GENERATION

Question 2. In your oral testimony, you explained that full
participation in real-time electrical markets is one way to make sure
these markets treat consumers fairly. This participation can take the
form of demand-response programs, but it also includes small renewable
sources of electricity.
In the PJM region, we have seen intermittent renewable sources,
such as solar power, participating in capacity markets only when
aggregated. Individual small solar projects can get paid for excess
electricity, but do not receive capacity payments. What needs to be
done to allow small intermittent electrical sources to participate
fully in forward capacity markets? This question also applies to
disaggregated demand-response programs.
Answer. Small intermittent electric sources, such as individual
small solar projects, present unique problems in forward capacity
markets. Because they are intermittent, individual projects may not
generate electricity at the same time as system peak demand or during
shortages of available generation. Grid operators will be reluctant to
provide capacity payments under these circumstances. Nevertheless, a
variety of solutions could be employed to firm output from these
intermittent sources. First, on-site storage (which could be based on
battery technology, flywheels, small hydroelectric facilities with
storage capability or plug-in hybrid electric vehicles) could be added
or linked to the project. Producing and storing electricity during
solar or wind availability would allow the project to inject
electricity into the grid at the time of high system demand or when
directed by the grid operators. A recent November 2007 study by the
California Independent System Operator on the integration of renewable
resources indicates that this linkage is feasible.
Second, the intermittent electric source could be linked to demand
response technologies or actions at an associated facility. If capacity
is required during a period when the intermittent resource is not
operating, reductions in demand could be achieved that match the
capacity of the intermittent resource. Third, additional research could
be focused on measuring and verifying generation patterns from the
individual resource. If the resource can be demonstrated to produce
electricity under a variety of conditions with identifiable generation
patterns, then grid operators may allow these intermittent sources to
participate in forward capacity markets.
Disaggregated demand-response programs have a greater ability to
participate fully in forward capacity markets. Both PJM and ISO New
England currently allow demand resources to participate in their
forward capacity markets. In order to receive capacity payments, demand
response providers must submit detailed measurement and verification
plans that document the ability of their demand resources to provide
demand reductions during peak periods or when directed over time.
Increased participation in these forward capacity markets by
disaggregated demand-response programs could be achieved by additional
actions. First, the installation of advanced meters at all residences
and businesses could increase participation by allowing cost-effective,
detailed measurement and verification to be achieved at more
facilities. Second, grid operators typically impose minimum size
requirements for demand resources in capacity markets because their
systems cannot model or sense smaller resources. If a disaggregated
demand-response program is below the minimum size threshold, it cannot
participate. Additional investment in software or sensors may be
required to expand the capability of the grid operator to model and
monitor smaller, disaggregated demand response resources. The
Commission has recently created an Energy Innovations Sector within our
staff that is tasked to explore such issues with PJM and other
stakeholders.

MMU

Question 3. I'd now like to discuss an issue which affects the
entire PJM RTO region. Last spring, Dr. Joseph Bowring from PJM's
market monitoring unit came public with disturbing allegations that his
work was being interfered with and manipulated. Under FERC's oversight,
PJM and its Market Monitoring Unit have been trying to resolve their
dispute.
It is imperative that we have fair and competitive electricity
markets. Without a strong, independent market monitor, consumers cannot
be confident that they are not being cheated by monopolies or
manipulators. In evaluating any proposed solution, FERC should make
sure that the Market Monitor has timely access to whatever information
they need to determine whether prices need to be mitigated. The Market
Monitor must have the staff and infrastructure needed to do their job.
And, in order to preserve its independence, the Market Monitor should
report to a board outside of the PJM hierarchy, a board which
represents all stakeholders. What steps will the FERC take to make sure
that this dispute does not result in a weakened Market Monitor or
uncompetitive markets?
Answer. I agree that strong independent market monitors are
essential to fair and competitive electricity markets. I am committed
to that objective, as is the Commission, as can be gleaned by actions
we have taken in the last six months.
First, in June, the Commission issued an Advance Notice of Proposed
Rulemaking (ANOPR) that, among other issues, sought comments on
proposals to strengthen the effectiveness of market monitors by
safeguarding their independence and fostering useful and transparent
market analysis. As particularly relevant to your concerns, to ensure
that market monitors would have adequate tools with which to do their
jobs, the Commission proposed requiring each RTO or ISO to include in
its tariff a provision imposing upon itself the obligation to provide
its MMU with access to market data, resources, and personnel sufficient
to enable the MMU to carry out its functions. Furthermore, we noted
that an inherent tension exists in a structure that requires MMUs to
report to RTO/ISO management yet, at the same time, perform evaluations
and issue reports that may be critical of that management. We stated
that it could be difficult for an MMU to discharge these oversight and
reporting obligations effectively unless it had some degree of
independence from RTO/ISO management. Therefore, the Commission
proposed that each RTO and ISO, in addition to maintaining a market
monitoring function, be required to have its MMU--whether internal,
external, or a hybrid combination of the two--report either directly to
the RTO's or ISO's board of directors or directly to a committee of
independent board directors. The Commission is currently considering
comments with respect to these issues and others that were raised in
the ANOPR.
Second, with respect to the PJM market monitoring situation, as you
are aware, the Commission has under active consideration two complaints
that alleged interference by PJM in the ability of the MMU to monitor
the market. The parties are engaged in settlement discussions being
facilitated by the Commission's Chief of Staff, whose report is due to
the Commission this week. I am confident that the ultimate resolution
of this matter will not result in a weakened market monitor or
uncompetitive markets, as neither would be acceptable to the Commission
under current policy or to me personally.
reliability pricing model
Question 4. About a year ago, FERC approved PJM's ``Reliability
Pricing Model.'' RPM was intended to encourage the construction of
power plants in New Jersey and other locations where they are needed
most, by increasing the revenues that power plant owners and developers
would receive for selling the rights to their capacity.
Thus far, RPM has caused some plants that were slated to retire to
stay online, but there is no sign of getting more power plants built in
the locations where they are needed most. In the meantime New Jersey
customers are paying billions more for electricity.
Some have suggested new plants have not been built because there
are many market barriers for new entrants to build plants. Others have
suggested that the capacity markets need to be put to auction 6 or even
8 years in advance instead of the current 3 in order to give companies
the ability to show the financial community a long-term stream of
revenues to attract financing.
What is FERC doing to ensure that this system is working, and that
this money will result in needed generation?
Does FERC have any plans on how to change RPM if the new capacity
they have projected does not come online?
Answer. I supported the Commission's order that approved RPM as a
mechanism to address the long-term reliability needs of all electricity
consumers within the PJM footprint, including consumers in New Jersey.
The early stages of RPM implementation have produced some positive
results: available capacity in 2009-2010 should increase by 9,107 MW as
a result of the RPM implementation, and the most recent auction for the
2009-2010 delivery years cleared 893 MW of demand response. It is also
noteworthy that RPM includes a reliability backstop mechanism. If PJM's
market is short for three consecutive delivery years, PJM's Office of
the Interconnection will declare a capacity shortage and make a filing
with the Commission for approval to conduct a reliability backstop
auction.
The Commission will continue to actively monitor implementation of
RPM. If experience demonstrates that RPM is not achieving its goals,
the Commission will consider modifications to the RPM rules, as
necessary.

Responses to Questions From Senator Cantwell

THE MOBILE-SIERRA DOCTRINE AND FERC DISCRETION

In a brief recently filed with the U.S. Supreme Court, FERC took
the position that, under the Federal Power Act's statutory ``just and
reasonable'' standard, it was free to approve long-term contracts
arising out of the 2000-01 Western power crisis notwithstanding
evidence that, in the words of Stanford University energy economist Dr.
Frank Wolak, suppliers to the Western markets during this period were
``able to exercise market power at unprecedented levels,'' resulting in
``prices vastly in excess of competitive levels.'' FERC also claimed
authority to override contracts for essentially any reason. In light of
these claims, please answer the following:

Question 1. How does FERC define ``just and reasonable'' in the
context of market-based rates and, in light of its position that the
unprecedented contracts signed during the 2000-01 crisis are ``just and
reasonable,'' is there any remaining upper limit on prices FERC will
approve?
Question 2. Given FERC's claim of virtually unlimited discretion to
override contracts, will FERC provide any clarification explaining the
circumstances under which it will intervene to abrogate or reform
contracts arising from dysfunctional markets?
Question 3. How can FERC reconcile its claim to the Supreme Court
that it is free to ignore evidence of market manipulation and market
power abuse in determining whether to correct contracts affected by
that abuse with its recent emphasis on enforcement of market standards?
Does FERC's position in the Supreme Court allow market abusers to
protect their ill-gotten gains by locking them up in contracts,
undermining any incentive they might otherwise have to obey market
rules and report abuses by other market participants?
Question 4. Given that the courts have concluded that FERC is the
sole forum to bring complaints of market power abuse and manipulation,
isn't FERC's refusal to intervene in contracts arising from the Western
power crisis tantamount to granting market abusers complete immunity
from antitrust laws?

Answer. I believe that these questions are most effectively
answered together.
With regard to the U.S. Supreme Court's consideration of Morgan
Stanley Capital Group, Inc. v. Public Utility District No. 1 of
Snohomish County, Washington, et al., it is first important to
recognize that the Commission did not support the petitioners' petition
for a writ of certiorari. In a brief filed with the Court in August
2007, the Commission stated that further review of the Ninth Circuit
Court of Appeals' underlying decisions was not warranted. In support of
that conclusion, the Commission stated that the Ninth Circuit's
decisions ``stand for the narrow proposition that, if there is a
credible claim that severe market dysfunction has affected the
formation of a market-based contract, the Commission must take that
fact into account in determining whether the public-interest standard
of Mobile-Sierra applies to its review of that contact.'' These
statements align with the Commission's and my belief that the Ninth
Circuit's decisions could be implemented consistent with our statutory
responsibilities.
Unfortunately, despite the Commission's brief to the contrary, the
Court granted the petition for certiorari. After the Court made that
decision, the Commission was obligated under the Court's decision in
SEC v. Chenery Corp., 332 U.S. 194 (1947), to defend its underlying
orders on the grounds set forth in those orders. Consistent with that
obligation, the Commission filed a brief on the merits with the Court
in November. The Solicitor General (at the U.S. Department of Justice)
represents the U.S. government before the Court and has the final say
as to the content of the government's briefs. I do not necessarily
agree with all of the arguments that appeared in the Commission's
November brief.
Because the case now before the Court may still come back to the
Commission on remand, it is not appropriate for me to discuss the
merits of the specific case. However, on a more general issue raised by
your questions, I have clearly stated my views about how the Commission
should approach application of the Mobile-Sierra ``public interest''
doctrine, such as in the attached concurrence to the Commission's
October 2006 Entergy Services, Inc. order. Applying the standards
described in my Entergy statement, I have concluded in dozens of
subsequent cases that the Commission should not agree with requests to
apply the ``public interest'' standard to future changes to settlements
sought by nonparties to those settlements or the Commission acting on
its motion. My conclusions often have not been shared by a majority of
my fellow Commissioners, resulting in my dissenting in numerous cases.

THE CONVERSION TO MARKET FUNDAMENTALISM

When you were first nominated, you expressed healthy skepticism
about FERC's market-based reform efforts, pronouncing yourself
``agnostic'' about whether markets deliver benefits to consumers
greater than traditional regulation. In light of the unmitigated
disaster that resulted from California's deregulation effort, this
skepticism seems justified. Moreover, recent analysis reveals a large
and growing gap between prices paid by consumers in states without RTOs
and ``organized'' markets and states operating in such markets, which
were created at FERC's behest. At the same time, the Amaranth episode
reveals that markets continue to be vulnerable to market power abuse
and manipulation of market prices. Despite any clear evidence of
bottom-line benefits for electric consumers, you recently reversed
course, declaring yourself a ``convert'' to the religion of market-
based reforms.
Question 1. Given what is, at best, a mixed record of results for
consumer benefits, how can you justify abandoning your skepticism about
market-based reforms?
Question 2. During the 2000-01 Western energy crisis, it is now
clear that the FERC commissioners then sitting allowed their enthusiasm
for market-based reform to trump growing evidence of market dysfunction
and abuse until the crisis reached historic proportions. Without a
skeptic of markets on the Commission, isn't there a danger that hope
will once again triumph over experience at FERC, and that the
regulatory failure of 2000-01 will repeat itself?
Answer. As I discussed yesterday in response to questions from
Senator Bingaman, I have come to believe that open, fair competitive
markets offer a better structure for development and implementation of
innovative new technologies such as renewables, distributed generation
and demand response. For example, the use of economic dispatch in
wholesale electric markets provides the opportunity for these resources
to compete on level playing field with more traditional resources. And
where these innovative resources such a demand response are lower cost
traditional resources, use of them in our electric system will lower
total costs to consumers and provide consumers with real choices.
Therefore, contrary to abandoning my skepticism about market-based
reform, I have embraced the opportunities for innovation that
competitive markets open and intend to work to improve the efficiency
or these markets in order to lower the total costs to consumers. As I
stated yesterday, I think there are opportunities to improve the
current competitive market structures. In my 16 months at the
Commission, I have work aggressively to ensure the demand resources and
renewable technologies receive comparable treatment in all aspects of
electric transmission and market operations and planning. I am actively
engaged with my colleagues in a rulemaking to examine a variety of
specific issues associated with competitive electric markets
administered by Regional Transmission Organizations (RTOs). Among the
issues we are considering are ways to increase access and participation
in these markets by demand resources. We are also considering ways to
improve the responsiveness and accountability of RTOs to their
stakeholders. I assure you that I continue to aggressively pursue
implementation of the specific reforms necessary to make a market
structure work best for consumers.

ATTACHMENT

United States of America
Federal Energy Regulatory Commission

Entergy Services Inc. Docket No. ER05-1065-002

(issued october 18, 2006)
WELLINGHOFF, Commissioner, concurring:

The parties to the ICT Agreement have asked the Commission to apply
the ``public interest'' standard of review if and when it considers
requests from any of those parties to change the Agreement in the
future.\52\ The parties have also asked the Commission to apply the
``public interest'' standard when such changes are sought by either a
non-party to the Agreement through a complaint or the Commission acting
sua sponte.
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\52\ The ``public interest'' standard of review and the related
Mobile-Sierra doctrine stem from the U.S. Supreme Court's rulings in
United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332
(1956), and FPC v. Sierra Pacific Power Co., 350 U.S. 348 (1956).
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In its original order approving the ICT Agreement,\53\ which issued
prior to my becoming a Commissioner, the Commission did not comment on
or explain why it was appropriate to apply the ``public interest''
standard in the circumstances sought by the parties, rather than
retaining the ``just and reasonable'' standard of review for
prospective contested changes to the Agreement. I believe that the
particular facts of this case warrant the Commission agreeing to apply
the ``public interest'' standard when it considers such changes to the
Agreement. In light of the importance of this issue, I want to take
this opportunity to explain how I reached that conclusion.
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\53\ Entergy Services Inc., 115 FERC 61,095 (April 24, 2006 ICT
Order), errata notice May 4, 2006, order on reh 'g, 116 FERC 61,275
(2006) (ICT Rehearing Order).
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The Federal Power Act and the Natural Gas Act require that rates,
terms, and conditions of service must be ``just and reasonable'' and
not unduly discriminatory or preferential.\54\ There is little dispute
that the Commission's initial review of an agreement is conducted under
the ``just and reasonable'' standard.\55\ Similarly, there is little
dispute that the parties to an agreement should be able to expressly
prescribe the standard of review for future disputes over the agreement
as between or among the parties to that agreement. Thus, the parties to
an agreement may request that the Commission use the ``public
interest'' standard, which is generally viewed as higher or stricter
than the ``just and reasonable'' standard,\56\ in reviewing proposed
changes to their agreement that are contested between or among the
parties at some future time after the agreement is initially approved
by the Commission.
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\54\ 16 U.S.C. Sec. 824d; 15 U.S.C. Sec. 717c.
\55\ See, e.g., Maine Pub. Utils. Comm'n v. FERC, 454 F.3d 278,
283-86 (D.C. Cir. 2006).
\56\ See, e.g., Standard of Review for Modifications to
Jurisdictional Agreements, Notice of Proposed Rulemaking, 113 FERC
61,317 at P 4 (2005) (citing Papago Tribal Utility Authority v. FERC,
723 F.2d 950, 954 (D.C. Cir. 1983)).
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Other circumstances, however, present more difficult policy
decisions for the Commission. These include what standard of review
should apply when the parties to an agreement fail to expressly state
the standard of review that should apply when the Commission considers
future contested changes to the agreement. Difficult questions of
policy also arise when the parties to an agreement ask the Commission
to apply the ``public interest'' standard when it considers changes
sought by either a non-party to an agreement or the Commission acting
sua sponte.
Case law on the applicability of the ``public interest'' standard
is not entirely clear and is, in fact, inconsistent.\57\ Indeed, the
courts have noted that ``[w]hether and when Mobile-Sierra applies in
varying contexts is going to remain in confusion'' until the Commission
establishes a clear policy.\58\ The courts have further suggested that
the Commission need not tolerate the ``public interest'' standard at
all and could require prospectively that all contracts be subject to
the ``just and reasonable'' standard.\59\
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\57\ See, e.g., Boston Edison Co. v. FERC, 233 F.3d 60, 67 (1st
Cir. 2000) (stating that even cases within the D.C. Circuit ``do not
form a completely consistent pattern'').
\58\ Id. at 68.
\59\ Id.
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Given this uncertainty in case law, I believe that the Commission
should set a clear policy on these issues. That policy should strive to
strike a balance between recognizing contracting parties' needs for
certainty with respect to their agreements and protecting the interests
of energy consumers. An agreement, by its terms, may affect not only
the rights and interests of the parties thereto, but also the rights
and interests of others, as well as the operation of markets that shape
rates, terms and conditions of service within the Commission's
jurisdiction. Therefore, the Commission's determination as to whether
and when it will agree to apply the ``public interest'' standard to
future changes to an agreement sought by non-parties or the Commission
acting sua sponte should not be limited to a consideration of the
rights and interests of the contracting parties alone.
To strike the proper balance, I would first require parties to
include specific language in an agreement if they intend to ask the
Commission to apply the ``public interest'' standard with regard to
future changes sought by any or all of a party, non-party, or the
Commission acting sua sponte. Thus, unless specific language appeared
in an agreement, the Commission would apply the ``just and reasonable''
standard to future changes. This approach reflects my belief that as a
general matter, retaining the right to future review under the ``just
and reasonable'' standard enables the Commission to more effectively
fulfill its statutory mandate under the FPA and the NGA.
The ``just and reasonable'' standard is not new; it is well-known
and well-defined. The electric and gas industries have operated and
thrived under this standard for seven decades, during which it has
served the Commission well as a tool to protect the interests of
consumers. The Commission should not surrender this important tool
absent a compelling factual and policy basis for doing so.
I reject the argument, made by some advocates of broad use of the
``public interest'' standard, that the ``just and reasonable'' standard
is antithetical to the principle of sanctity of contract and fails to
promote certainty and stability in energy markets. Past precedent
demonstrates that the Commission recognizes the importance of sanctity
of contract and that the Commission uses the ``just and reasonable''
standard judiciously in considering contract modification. In Order No.
888, for example, the Commission made precisely these points and
indicated that an entity ``has a heavy burden in demonstrating that the
contract ought to be modified'' even under the ``just and reasonable''
standard.\60\
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\60\ Order No. 888 at 31,665.
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Second, where the parties to an agreement ask the Commission to
apply the ``public interest'' standard to future changes to sought by
non-parties or the Commission acting sua sponte, I would require the
parties to demonstrate by substantial evidence that a factual and
policy basis supports their request. In particular, I believe that the
Commission should only grant such requests in narrowly proscribed
circumstances where substantial evidence affirmatively demonstrates
that the contract or agreement has broad-based benefits to both parties
and non-parties. In making this assessment, I would take into
consideration, among other issues: (1) whether the contract or
agreement was negotiated through a stakeholder process reflecting a
wide range of interests, (2) whether state commissions had meaningful
opportunity to participate in the stakeholder process, (3) the extent
of and justification for opposition to the request for the Commission
to apply the ``public interest'' standard; and (4) whether granting the
request is necessary to the resolution of the proceeding. Requiring a
showing of broad-based benefits, supported by substantial evidence, is
an appropriate condition precedent to the Commission granting such a
request because the term ``public interest'' implies interests beyond
and distinct from those of the contracting parties.
Third, it is important to recognize that the Mobile-Sierra doctrine
assumes that agreements are entered into voluntarily. The courts have
stated that ``the purpose of the Mobile-Sierra doctrine is to preserve
the benefits of the parties' bargain as reflected in the contract,
assuming that there was no reason to question what transpired at the
contract formation stage.''\61\ Therefore, the standard of review that
applies to prospective contested changes to an agreement--whether it be
the ``just and reasonable'' standard or the ``public interest''
standard--does not affect the ability of a party, or the Commission
acting sua sponte, to seek to make that agreement void (e.g., on the
basis of fraud, mistake, misrepresentation, duress, or undue
influence).
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\61\ Atlantic City Electric Co. v. FERC, 295 F.3d 1, 14 (D.C. Cir.
2002) (citing Town of Norwood v. FERC, 587 F.2d 1306, 1312 (D.C. Cir.
1978)). See also PacifiCorp v. Reliant Energy Services, Inc., 105 FERC
61,184 at P 55 (2003) (``All three cases [cited by PacifiCorp]
recognize that Mobile-Sierra preserves the parties' bargain as
reflected in the contract, when there is no need to question what
transpired at the contract formation stage. Our decision here is
consistent with those cases, as there has been no showing of fraud,
duress, or the exercise of market power at the contract formation
stage.'').
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Applying these standards to the facts of this case, I believe that
it is appropriate for the Commission to agree to apply the ``public
interest'' standard when it considers future changes to the ICT
Agreement sought by parties, non-parties, and the Commission acting sua
sponte. Concerns about transmission access on the Entergy system have
been extensive and persistent. The ICT proposal, as modified by the
Commission, promises to alleviate such concerns and significantly
improve access to transmission service.
Since 2002, the Commission, state regulators, and market
participants have worked with Entergy to improve access to transmission
service on Entergy's system.\62\ The first attempt toward that end was
the Generator Operating Limits (GOL) proposal. However, significant
errors in Entergy's use of the GOL methodology did not permit the
Commission or market participants to determine whether available
transmission capacity was being restricted or withheld from independent
power producers and other generators that use transmission service. The
next attempt was the Available Flowgate Capability (AFC) proposal.
Again, implementation errors led to numerous claims by customers of
loss of access to transmission, lack of transparency, and data
reliability problems.
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\62\ See April 24, 2006 ICT Order at P 4-21; ICT Rehearing Order at
P 2-7.
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The ICT proposal marks the third, and a significantly different,
attempt to improve access to transmission service on Entergy's system.
The ICT appears to have sufficient authority to independently and
fairly grant or deny transmission service, perform necessary
feasibility and system impact studies, administer Entergy's OASIS, and
ensure that the terms of Entergy's OATT are administered in a
nondiscriminatory manner. In particular, having an independent entity
oversee and evaluate Entergy's AFC process and verify Entergy's data,
and requiring Entergy to report any disagreements it has with the ICT
over proposed modifications to the AFC process, will provide
transparency to Entergy's transmission program. The ICT is also
required to develop and chair a stakeholder process that will provide
safeguards for continued nondiscriminatory access to transmission
service, as well as a forum for further improvements.
In addition, several of Entergy's retail regulators were parties to
the Commission's proceeding on the ICT Agreement, and the Commission
took their comments, as well as the comments of other parties, into
account when making its determinations. Consideration of those comments
was entirely appropriate and helped the Commission in reaching its
conclusion that Entergy's ICT proposal, as modified, is just and
reasonable and consistent with or superior to the Commission's pro
forma OATT.
Taking all of these factors into account, I believe that it is
appropriate for the Commission to grant the request of the parties to
the ICT Agreement, and to apply the ``public interest'' standard when
it considers future changes to the ICT Agreement sought by parties,
non-parties, and the Commission acting sua sponte.
For these reasons, I respectfully concur with the Commission's
order.