[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]




 
               FEDERAL POWER ACT: HISTORICAL PERSPECTIVES

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 7, 2016

                               __________

                           Serial No. 114-164
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                           
                           
                           
                           


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                    COMMITTEE ON ENERGY AND COMMERCE

                          FRED UPTON, Michigan
                                 Chairman

JOE BARTON, Texas                    FRANK PALLONE, Jr., New Jersey
  Chairman Emeritus                    Ranking Member
JOHN SHIMKUS, Illinois               BOBBY L. RUSH, Illinois
JOSEPH R. PITTS, Pennsylvania        ANNA G. ESHOO, California
GREG WALDEN, Oregon                  ELIOT L. ENGEL, New York
TIM MURPHY, Pennsylvania             GENE GREEN, Texas
MICHAEL C. BURGESS, Texas            DIANA DeGETTE, Colorado
MARSHA BLACKBURN, Tennessee          LOIS CAPPS, California
  Vice Chairman                      MICHAEL F. DOYLE, Pennsylvania
STEVE SCALISE, Louisiana             JANICE D. SCHAKOWSKY, Illinois
ROBERT E. LATTA, Ohio                G.K. BUTTERFIELD, North Carolina
CATHY McMORRIS RODGERS, Washington   DORIS O. MATSUI, California
GREGG HARPER, Mississippi            KATHY CASTOR, Florida
LEONARD LANCE, New Jersey            JOHN P. SARBANES, Maryland
BRETT GUTHRIE, Kentucky              JERRY McNERNEY, California
PETE OLSON, Texas                    PETER WELCH, Vermont
DAVID B. McKINLEY, West Virginia     BEN RAY LUJAN, New Mexico
MIKE POMPEO, Kansas                  PAUL TONKO, New York
ADAM KINZINGER, Illinois             JOHN A. YARMUTH, Kentucky
H. MORGAN GRIFFITH, Virginia         YVETTE D. CLARKE, New York
GUS M. BILIRAKIS, Florida            DAVID LOEBSACK, Iowa
BILL JOHNSON, Ohio                   KURT SCHRADER, Oregon
BILLY LONG, Missouri                 JOSEPH P. KENNEDY, III, 
RENEE L. ELLMERS, North Carolina     Massachusetts
LARRY BUCSHON, Indiana               TONY CARDENAS, California
BILL FLORES, Texas
SUSAN W. BROOKS, Indiana
MARKWAYNE MULLIN, Oklahoma
RICHARD HUDSON, North Carolina
CHRIS COLLINS, New York
KEVIN CRAMER, North Dakota

                                 ______

                    Subcommittee on Energy and Power

                                VACANCY
                                 Chairman
PETE OLSON, Texas                    BOBBY L. RUSH, Illinois
  Vice Chairman                        Ranking Member
JOHN SHIMKUS, Illinois               JERRY McNERNEY, California
JOSEPH R. PITTS, Pennsylvania        PAUL TONKO, New York
ROBERT E. LATTA, Ohio                ELIOT L. ENGEL, New York
GREGG HARPER, Mississippi            GENE GREEN, Texas
DAVID B. McKINLEY, West Virginia     LOIS CAPPS, California
MIKE POMPEO, Kansas                  MICHAEL F. DOYLE, Pennsylvania
ADAM KINZINGER, Illinois             KATHY CASTOR, Florida
H. MORGAN GRIFFITH, Virginia         JOHN P. SARBANES, Maryland
BILL JOHNSON, Ohio                   PETER WELCH, Vermont
BILLY LONG, Missouri                 JOHN A. YARMUTH, Kentucky
RENEE L. ELLMERS, North Carolina     DAVID LOEBSACK, Iowa
BILL FLORES, Texas                   FRANK PALLONE, Jr., New Jersey (ex 
MARKWAYNE MULLIN, Oklahoma               officio)
RICHARD HUDSON, North Carolina
JOE BARTON, Texas
FRED UPTON, Michigan (ex officio)

                                  (ii)
                                  
                                  
                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Pete Olson, a Representative in Congress from the State of 
  Texas, opening statement.......................................     1
    Prepared statement...........................................     2
Hon. Jerry McNerney, a Representative in Congress from the State 
  of California, opening statement...............................     3
Hon. Frank Pallone, Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................     4
    Prepared statement...........................................     6
Hon. Fred Upton, a Representative in Congress from the State of 
  Michigan, prepared statement...................................   103

                               Witnesses

Douglas W. Smith, Partner, Van Ness Feldman, LLP, and Former 
  General Counsel, Federal Energy Regulatory Commission..........     7
    Prepared statement...........................................    10
    Answers to submitted questions...............................   109
Clifford M. (Mike) Naeve, Partner, Skadden, Arps, Slate, Meagher 
  & Flow, LLP, and Former Commissioner, Federal Energy Regulatory 
  Commission.....................................................    28
    Prepared statement...........................................    31
    Answers to submitted questions...............................   114
Susan Tomasky, Former General Counsel, Federal Energy Regulatory 
  Commission, and Former President, AEP Transmission of American 
  Electric Power Corporation.....................................    39
    Prepared statement...........................................    41
    Answers to submitted questions...............................   117
Linda G. Stuntz, Partner, Stuntz, Davis & Staffier, P.C., and 
  Former Deputy Secretary, Department of Energy..................    59
    Prepared statement...........................................    61
    Answers to submitted questions...............................   123

                           Submitted Material

Letter of August 30, 2016, from Norman C. Bay, Chairman, Federal 
  Energy Regulatory Commission, to Mr. Upton, submitted by Mr. 
  Olson..........................................................   104


               FEDERAL POWER ACT: HISTORICAL PERSPECTIVES

                              ----------                              


                      WEDNESDAY, SEPTEMBER 7, 2016

                  House of Representatives,
                  Subcommittee on Energy and Power,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 2322, Rayburn House Office Building, Hon. Pete Olson (vice 
chairman of the subcommittee) presiding.
    Members present: Representatives Olson, Barton, Shimkus, 
Latta, Harper, Pompeo, Kinzinger, Griffith, Johnson, Ellmers, 
Flores, Mullin, Hudson, McNerney, Tonko, Engel, Green, Welch, 
Loebsack, and Pallone (ex officio).
    Staff present: Will Batson, Legislative Clerk, Energy and 
Power; Tom Hassenboehler, Chief Counsel, Energy and Power; A.T. 
Johnson, Senior Policy Advisor; Ben Lieberman, Counsel, Energy 
and Power; David McCarthy, Chief Counsel, Environment and the 
Economy; Brandon Mooney, Professional Staff Member, Energy and 
Power; Annelise Rickert, Legislative Associate; Chris Sarley, 
Policy Coordinator, Environment and the Economy; Dan Schneider, 
Press Secretary; Andy Zach, Counsel, Environment and the 
Economy; Robert Ivanauskas, Detailee, Energy and Power; Jeff 
Carroll, Democratic Staff Director; Rick Kessler, Democratic 
Senior Advisor and Staff Director, Energy and Environment; John 
Marshall, Democratic Policy Coordinator; Alexander Ratner, 
Democratic Policy Analyst; Timothy Robinson, Democratic Chief 
Counsel; Tuley Wright, Democratic Energy and Environment Policy 
Advisor; and C.J. Young, Democratic Press Secretary.

   OPENING STATEMENT OF HON. PETE OLSON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Olson. The hearing will come to order. This hearing is 
called Historical Perspectives on the Federal Power Act. And 
that is just what it is: historical perspectives, so we can 
learn more going forward.
    It is a little awkward day for me. I am not used to being 
in this seat. But I will do my best. As per normal, I will have 
an opening statement, Mr. McNerney will, Mr. Upton will, and 
Mr. Pallone will, if they come. And then 5-minute statements 
from the witnesses and questions from the Members.
    OK. First, I want to say a word or two about our good 
friend Ed Whitfield. Ed knows these issues. He knows about the 
policy. And above all, he wants the best for his home State of 
Kentucky.
    Chairman Whitfield was a great steward for this committee. 
He was a mentor, a teacher, and he will be missed around here. 
And of course he helped get this ball rolling on this new 
series of hearings on the Federal Power Act. This should be a 
great opportunity for this committee. We can bring a new and 
much-needed focus to today's power markets. We can see what 
works, what doesn't work, and find long-term solutions.
    But before we take any next step, we need to know how these 
markets developed. Back in 1996, FERC issued Order 888. In 
general, that required open access for transmission lines of 
our Nation's utilities. And since that time, consumers of 
electricity have gained more competitive options beyond their 
local utility.
    Today, at least for the wholesale markets, a large 
purchaser of electricity can not only purchase from the local 
utility, but that consumer can purchase power at wholesale from 
a neighboring utility or an independent power producer or any 
number of competitive suppliers. Texans, and those at half 
other States, can even pick their retail electric electricity 
provider. All these options to choose an electric supplier were 
designed to keep costs down for consumers everywhere by 
checking the prices charged by utilities.
    Yet the markets by no means are perfect. Some people still 
object to subsidies and tax breaks granted to a few types of 
power sellers. Others complain that certain power plants 
generate too much pollution, even if their power helps pay 
lower bills for their users. The owners of power plants object 
that the markets don't always establish the right prices. They 
say prices can be artificially low at times of high demand. Not 
because prices should be low during high demand but because the 
organizations running the markets are too sensitive to 
political pressures.
    We won't solve the serious problems facing our market this 
morning. We won't sort out the difference between the real 
properties and the empty allegations today either. Rather, this 
hearing will set the stage for our work on all of these topics 
in the future. To set this stage, we have gathered four 
witnesses today who have deep experience in the development of 
the markets. They were in the markets in senior policymaking 
positions when the key decisions were made on how these markets 
would roll out. Two were former counsel generals at FERC. One 
was a FERC commissioner. And one was a senior official with the 
Department of Energy. They have a valuable perspective to offer 
this committee. I look forward to today's hearing.
    [The prepared statement of Mr. Olson follows:]

                 Prepared statement of Hon. Pete Olson

    First, I want to say a word or two about my good friend Ed 
Whitfield. Ed knows these issues, he cares about the policy. 
Above all, he wants what is best for the people of Kentucky. 
Chairman Whitfield was a great steward for this committee, and 
he will be missed around here. And of course, he helped get the 
ball rolling on a new series of hearings on the Federal Power 
Act.
    This could be a great opportunity for this committee. We 
can bring a new-and much- neededfocus to today's power markets. 
We can see what works, what doesn't, and find long-term 
solutions. But before we take any next step, we need to look at 
how these markets developed.
    Back in 1996, FERC issued Order No. 888. In general, that 
order required open access over the transmission lines of our 
Nation's utilities (except in Texas, where we'd rather cut our 
interstate power lines than let FERC tell us what to do.). 
Since that time, consumers of electricity have gained more 
competitive options beyond the local utility.
    Today, at least for the wholesale markets, a large 
purchaser of electricity can not only purchase from the local 
utility, but that customer can purchase power at wholesale from 
a neighboring utility, or an independent power producer, or any 
number of competitive suppliers.. Texans and those in a handful 
of other States can even pick their retail electricity 
provider. All these options to choose an electric supplier were 
designed to keep costs down for consumers everywhere by 
checking the prices charged by utilities.
    Yet the markets are by no means perfect. Some people object 
to subsidies and tax breaks granted to a few favored types of 
power sellers. Others complain that certain power plants 
generate too much pollution, even if their power helps people 
pay lower electric bills.
    The owners of power plants object that the markets don't 
always establish the right prices. They say that prices can be 
artificially low at times of high demand --- not because prices 
should be low during high demand but because the organizations 
running the markets are too sensitive to political pressure.
    We won't solve the serious problems facing the markets 
overnight. We won't sort out the difference between the real 
problems and the empty allegations today either. Rather, this 
hearing will set the stage for our work on all of these topics. 
To set the stage, we've gathered four witnesses today who have 
deep experience in the development of the markets. They were in 
the markets, in senior policymaking positions, when the key 
decisions were made on how these markets would roll out. Two 
were former general counsels at FERC. One was a FERC 
Commissioner. And one was a senior official with the Department 
of Energy.
    They have a valuable perspective to offer this committee. I 
look forward to today's hearing.

    Mr. Olson. And with that I yield to my friend from 
California, Mr. McNerney, for 5 minutes.

 OPENING STATEMENT OF HON. JERRY MCNERNEY, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. McNerney. Well, I thank the chairman for holding this 
important hearing on the Historical Perspective of the Federal 
Power Act.
    Mr. Chairman, it is clearly important to give Members the 
opportunity to review some of the thinking and reasoning that 
went into the laws that we do have today. Considering all the 
latest and ongoing developments that the grid now faces, it is 
worthwhile to hear from prominent stakeholders who can provide 
historical and current analysis from legislative, 
administrative, and judicial perspectives.
    The Federal Power Commission, and later the Federal Energy 
Regulatory Commission, played a significant role in providing 
the regulatory structure that provided a balance between 
competition and public interest to help make the United States 
a leader in the generation of distributed public and affordable 
energy. This subcommittee played a significant role in enacting 
the policies that led to those agencies and to how the current 
grid is structured.
    It is time to consider what changes, if any, are needed to 
meet the challenges of today. Mr. Chairman, new technology is 
bringing about fundamental changes in how and where we produce 
and deliver electricity to consumers. This provides 
policymakers with both challenges and opportunities for 
establishing a modernized electric grid. Exciting developments 
such as the emergence of renewables and cheap natural gas, 
distributed power system, demand-side management, improved 
energy storage, local and regional micro grids, electric 
vehicles, rooftop solar, and high speed switching technology 
must now be incorporated into a modern, efficient, and reliable 
grid.
    Today's hearing will provide additional insight into what 
this modern grid should look like, how it should be regulated, 
and what entities should have what authorities. The fact of the 
matter is that with the current regulatory framework 
established back in 1935 with the Federal Power Act may no 
longer be suitable as the bright line distinguishing Federal 
and State regulations of the electric power grid.
    The dividing line giving Federal regulators exclusive 
authority over the wholesale electric sales and interstate 
commerce and relegating retail sales to State regulators may in 
fact need to be updated to account for the current realities of 
today's grid operations. Just as the grid has changed, 
policymakers may need to consider a new regulatory structure 
that takes into account State-by-State decisionmaking processes 
for issues such as permit siting, demand response, blended fuel 
sources, and net metering policies.
    Mr. Chairman, I believe today's hearing is a great first 
step into examining these issues and in gaining valuable 
insight into how we got here in the first place. I hope today's 
bipartisan hearing, one of the first of its kind, can be a 
model for future legislative hearings that may ultimately lead 
to a consensus approach to addressing essential challenges that 
the Congress must additionally address: What should a 21st 
century grid look like. Once against, Mr. Chairman, thank you 
for holding this timely hearing. And I yield the balance of my 
time.
    Mr. Olson. The gentlemen yields back. I have heard Chairman 
Upton will not be here on our side. Anybody want to take some 
time? His time? Going, going, gone.
    We recognize the ranking member of the full committee, Mr. 
Pallone from New Jersey, for 5 minutes, opening statement.

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Pallone. We are going to have an auction on the other 
side for the time.
    I want to thank Mr. Olson as the chair of the committee 
now, and also thank Mr. Whitfield for his service to the 
subcommittee. Thank you for holding this important hearing to 
provide us with a historical perspective on how our system of 
electricity regulation has evolved over the past three decades.
    The Energy and Power Subcommittee was the first 
subcommittee where I had the privilege to serve as ranking 
member opposite the late Chairman Dan Schaefer of Colorado. And 
I mention this today because today's hearing is about 
historical perspectives on the Federal Power Act and because 
there was a time, beginning with Chairman Phil Sharp, when this 
subcommittee focused an enormous amount of its time on electric 
utility restructuring.
    In my 2 years as subcommittee ranking member, Chairman 
Schaefer held what seemed to be almost weekly hearings on 
electricity. And these hearings focused on the vision of a 
national mandate for retail competition as well as overseeing 
the Federal Energy Regulatory Commission or FERC's development 
of wholesale electric competition. And Chairman Barton then 
continued the subcommittee's focus on the electric utility 
sector and the development of regional wholesale markets that 
led to the Energy Policy Act of 2005. And that law included 
critical structural and regulatory changes that modernized and 
solidified the regional system that we have today.
    Since that time, the subcommittee has turned its attention 
to other issues. However, new developments in the electricity 
sector and the regional markets, both promising and concerning, 
require us to return again to a serious assessment of the state 
of the electric sector and how it is regulated. For one thing, 
technology has dramatically transformed the possibilities for 
cost effective generating and efficiently delivering electric 
energy to homes, businesses, and manufacturing facilities. 
Today this can all be done from a variety of sources. For 
example, distributed generation, both fossil and renewable 
based, along with improving storage options, smart meters, 
micro grids, and other technologies, have altered the 
possibilities for effectively and economically ensuring 
reliability. And this has called into question even the most 
basic tenets of rate making.
    At the same time, these technological and market changes 
have challenged the longstanding and financial models for 
utilities, and the economic viability of many large nuclear and 
coal-fired facilities. Beyond technological transformation, 
recent decisions by the Supreme Court have also called into 
question many of our past assumptions about electric sector 
regulation. One example of that is the court's decision earlier 
this yearly in the FERC versus Electric Power Supply 
Association case. This decision provided for markets where 
conservation and efficiency could be sold at wholesale 
alongside electric power. It has also upended traditional views 
of what constitutes sales of wholesale or retail and what is 
within the purview of the Federal Government and FERC as 
opposed to State governments and their public utility 
commissions. And these are enormous and complex matters that 
are important and should be examined by Congress and 
specifically this committee.
    We need to begin exploring what types of changes if any 
need to be made to the Federal Power Act or whether some of the 
technological and legal developments I have discussed have made 
the act itself obsolete. And these are legitimate questions 
that we should be exploring. And while we represent different 
parties and philosophies as well as different States and 
regions, it is critical that our committee spend significant 
time examining these matters so that we arrive at decisions 
that are informed by fact.
    Again I will say, Mr. Chairman, it is an important hearing 
because we have worked in a bipartisan fashion to bring 
together some of the best minds and public servants in the area 
of electricity. These are not just academic experts. They are 
people who played significant roles at key moments in the 
development of our modern electric regulatory regime. And again 
I want to commend Chairman Upton, you, Mr. Chairman Olson, and 
of course our Ranking Member Rush for not only holding this 
hearing but doing so in a thoughtful, collaborative, and 
serious manner that this subject deserves.
    And I am grateful to our witnesses who include a former 
FERC Commissioner, former general counsels, and the former 
deputy Energy secretary, all of whom continue to be well-
respected experts in this field, for helping begin this effort 
to understand and assess the evolution of the electric sector.
    I yield back unless somebody wants my time on our side. I 
don't think so. Thank you.
    [The prepared statement of Mr. Pallone follows:]

             Prepared statement of Hon. Frank Pallone, Jr.

    Thank you for holding this important hearing to provide us 
with a historical perspective on how our system of electricity 
regulation has evolved over the past three decades. I also want 
to welcome Mr. Olson as the chair and thank Mr. Whitfield for 
his service to the subcommittee.
    The Energy and Power Subcommittee was the first 
subcommittee where I had the privilege to serve as ranking 
member, opposite the late chairman, Dan Schaefer of Colorado.
    I mention this because today's hearing is about historical 
perspectives on the Federal Power Act, and because there was a 
time -beginning with Chairman Phil Sharp--when this 
subcommittee focused an enormous amount of its time on electric 
utility restructuring. In my 2 years as subcommittee ranking 
member, Chairman Schaefer held what seemed to be almost weekly 
hearings on electricity. These hearings focused on the vision 
of a national mandate for retail competition, as well as 
overseeing the Federal Energy Regulatory Commission's (FERC's) 
development of wholesale electric competition. Chairman Barton 
then continued the subcommittee's focus on the electric utility 
sector and the development of regional wholesale markets that 
led to the Energy Policy Act of 2005. That law included 
critical structural and regulatory changes that modernized and 
solidified the regional system we have today.
    Since that time, the subcommittee has turned its attention 
to other issues. However, new developments in the electricity 
sector and the regional markets, both promising and concerning, 
require us to return again to a serious assessment of the state 
of the electric sector and how it is regulated.
    For one thing, technology has dramatically transformed the 
possibilities for cost-effectively generating and efficiently 
delivering electric energy to homes, businesses and 
manufacturing facilities. Today this can all be done from a 
variety of sources. For example, distributed generation, both 
fossil- and renewable-based, along with improving storage 
options--smart meters, microgrids and other technologies--have 
altered the possibilities for effectively and economically 
ensuring reliability. This has called into question even the 
most basic tenets of ratemaking.
    At the same time, these technology and market changes have 
challenged the long-standing financial model for utilities, and 
the economic viability of many large nuclear and coal-fired 
facilities.
    Beyond technological transformation, recent decisions by 
the Supreme Court have also called into question many of our 
past assumptions about electric sector regulation. One example 
of that is the Court's decision earlier this year in the FERC 
v. Electric Power Supply Association (EPSA) case. This decision 
provided for markets where conservation and efficiency could be 
sold at wholesale alongside electric power. It also upended 
traditional views of what constitutes sales at wholesale or 
retail, and what is within the purview of the Federal 
Government and FERC, as opposed to State governments and their 
public utility commissions.
    These are enormous and complex matters that are important 
and should be examined by Congress and, specifically, this 
committee. We need to begin exploring what types of changes, if 
any, need to be made to the Federal Power Act, or whether some 
of the technological and legal developments I've discussed have 
made the Act itself obsolete. These are legitimate questions 
that we should be exploring. And while we represent different 
parties and philosophies, as well as different States and 
regions, it is critical that our committee spend significant 
time examining these matters so that we arrive at decisions 
that are informed by fact.
    This is an important hearing. We have worked in a 
bipartisan fashion to bring together some of the best minds and 
public servants in the area of electricity. These are not just 
academic experts: they are people who played significant roles 
at key moments in the development of our modern electric 
regulatory regime.
    I commend Chairman Upton, Chairman Olson, and Ranking 
Member Rush for not only holding this hearing, but doing so in 
such a thoughtful, collaborative and serious manner that this 
subject deserves. And, I am grateful to our witnesses, who 
include a former FERC Commissioner, former general counsels and 
a former Deputy Energy Secretary--all of whom continue to be 
well-respected experts in this field--for helping begin this 
effort to understand and assess the evolution of the electric 
sector.

    Mr. Olson. The gentleman yields back. And now it is the fun 
time.
    Our four witnesses will speak for 5-minute testimony. We 
are starting from my left to my right. No politics involved. 
That is just how we do that. Our first witness will be Mr. Doug 
Smith. Doug was a former general counsel at FERC from 1997 to 
2001, and now is a partner at Van Ness and Feldman LLP. Mr. 
Smith.

STATEMENTS OF DOUGLAS W. SMITH, PARTNER, VAN NESS FELDMAN, LLP, 
     AND FORMER GENERAL COUNSEL, FEDERAL ENERGY REGULATORY 
 COMMISSION; CLIFFORD M. (MIKE) NAEVE, PARTNER, SKADDEN, ARPS, 
 SLATE, MEAGHER & FLOM, LLP, AND FORMER COMMISSIONER, FEDERAL 
  ENERGY REGULATORY COMMISSION; SUSAN TOMASKY, FORMER GENERAL 
   COUNSEL, FEDERAL ENERGY REGULATORY COMMISSION, AND FORMER 
    PRESIDENT, AEP TRANSMISSION OF AMERICAN ELECTRIC POWER 
  CORPORATION; AND LINDA G. STUNTZ, PARTNER, STUNTZ, DAVIS & 
  STAFFIER, P.C., AND FORMER DEPUTY SECRETARY, DEPARTMENT OF 
                             ENERGY

                 STATEMENT OF DOUGLAS W. SMITH

    Mr. Smith. Good morning. My name is Doug Smith. I am a 
partner at Van Ness Feldman. I did serve at both FERC and the 
Department of Energy before I was at Van Ness. But the views I 
am going to express today are my own, not those of my 
employers, past employers, clients, colleagues, or anybody 
else.
    I have been asked today to provide a brief review of the 
legal history of the Federal Power Act, and to address 
particularly the relationship between Federal and State 
regulatory responsibilities as shaped by that act. When utility 
regulation got started in the early 1900s, it was States that 
comprehensively regulated electric utilities. There wasn't a 
Federal role. But in 1927 there was a Supreme Court decision 
called Attleboro in which the Supreme Court found that the U.S. 
Constitution put some utility activities beyond the reach of 
State regulation.
    In particular, the court held that the dormant commerce 
clause prevented Rhode Island from regulating the rates charged 
by a Rhode Island utility to a utility in neighboring 
Massachusetts. This constitutional limitation was referred to 
as the Attleboro gap. In 1935 Congress moved to fill that gap 
by enacting what is now part two of the Federal Power Act.
    Part two authorized the Federal Power Commission, the 
predecessor of the Federal Energy Regulatory Commission, to 
regulate two categories of transactions; wholesale sales of 
electricity in interstate commerce, and transmission of 
electricity in interstate commerce. And sections 205 and 206 of 
the Federal Power Act require that the rates, terms, and 
conditions for such wholesale sales and transmission must be 
just and reasonable, and must not be unduly discriminatory or 
preferential. And those standards enacted in 1935 remain in 
place today and are the foundation for much of what FERC has 
done in the intervening years.
    Importantly, the Federal Power Act expressly provides that 
the Commission does not have jurisdiction over retail sales, 
generation, and local distribution, reserving those areas of 
activity to State regulation. In 1964, the Supreme Court, in a 
case called Colton, described this division of labor in the 
Federal Power Act as a bright line easily ascertained. As we 
might see from today's discussion, it may not be quite so 
bright or easily ascertained anymore.
    In 1935, and for several decades thereafter, the electric 
utility business model was a vertically integrated utility 
principally focused on serving their own retail customers, not 
wholesale sales, not transmission for third parties. But that 
industry structure and the related regulatory structure started 
to change in the late 1970s, moving towards increased 
competition in generation.
    In 1978, Congress enacted the Public Utility Regulatory 
Policies Act, a provision of which section 210 enabled non-
utilities to own and operate certain cogeneration and renewable 
generation facilities, really providing a first step into 
competitive generation.
    In the Energy Policy Act of 1992, Congress further opened 
the door to independent power production by authorizing FERC to 
require transmission owning utilities to provide wheeling 
service on case-by-case basis. And by reforming PUHCA, the 
Public Utility Holding Company Act, to provide for exempt 
wholesale generators, which allowed IPPs to avoid the most 
significant regulatory obstacles created by PUHCA.
    And on that basis, the next steps were really taken by FERC 
as an administrative agency. Under sections 205 and 206 it 
authorized sellers to make wholesale sales at market-based 
rates if the seller could show that it did not have market 
power. It issued its landmark ruling on transmission open 
access, Order No. 888, and it moved further to promote 
formation of regional transmission organizations.
    In the Energy Policy Act of 2005, Congress again amended 
the Federal Power Act, responding in part to perceived 
regulatory problems that were highlighted by the California 
electricity crisis by, for instance, imposing a statutory ban 
on market manipulation, raising the civil penalties under the 
act to $1 million per day, providing for mandatory reliability 
standards for the first time, and adopting policies that were 
intended to support transmission investment, some of which were 
successful and some less so.
    But all these changes from PURPA on, that I have listed, 
were intended to promote competitive wholesale markets. The 
questions about the boundary between Federal and State 
regulatory jurisdiction continue to arise. Just this year the 
Supreme Court was presented with two such questions. In a case 
called FERC v. EPSA, the court held that regulation of the 
price that demand response receives in an organized wholesale 
energy market is a proper subject for FERC regulation, and was 
not an impermissible intrusion on State authority to regulate 
retail sales.
    And in a case called Hughes, the court held that a Maryland 
State program to support development of in-State generation 
that was directly linked to FERC-regulated wholesale capacity 
markets was preempted. Further, technology and market changes 
such as expanded use of distributed generation, micro grids, 
energy storage, and plug in electric vehicles will continue to 
present questions about the proper roles for Federal and State 
regulatory authority.
    I look forward to your questions.
    [The prepared statement of Mr. Smith follows:]
    
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    Mr. Olson. Thank you. I recognize now Mr. Naeve.
    Mr. Naeve was a former Commissioner of the FERC. He is 
currently a partner at Skadden, Arps, Slate, Meagher & Flom, 
LLP. And he wants to be called Mike. So, Mike, you have 5 
minutes.

             STATEMENT OF CLIFFORD M. (MIKE) NAEVE

    Mr. Naeve. Thank you very much, Mr. Chairman, members of 
the committee. We are focusing today on the evolution of 
electric power markets. When I was on the Commission, in 
effect, those markets did not exist. So I would like to 
describe how they came into being. And you really can't discuss 
the evolution of electric power markets until you first discuss 
the evolution of natural gas markets. Because FERC cut its 
teeth bringing competition to the natural gas industry, and 
then later applied those lessons to the power industry.
    In the mid-1980s when I served on the Commission, we had a 
strange phenomenon. We had gas surpluses and rising prices. 
Now, how does that happen with a surplus and rising prices? You 
have to go back actually to the mid 1970s. In the mid 1970s the 
Nation was confronted with severe natural gas shortages, at 
least in the interstate markets. In the unregulated intrastate 
markets, which constituted about 40 percent of the gas sales, 
supplies were plentiful. Prices were a little bit higher but 
supplies were plentiful. But in the interstate markets, which 
were regulated at the time by the Federal Power Commission, 
which was the predecessor to FERC, prices were set much lower 
and they weren't sufficiently high to attract new supply. So we 
had shortages.
    So in response to that, Congress passed the Natural Gas 
Policy Act. And what Congress did in the Natural Gas Policy 
Act, is it basically substituted itself for the Federal Power 
Commission, and the later FERC, in establishing prices. And 
where the Federal Power Commission had set prices too low, 
Congress in effect set prices too high. It specifically 
dictated prices. They were inflation adjusted prices. And in 
response to those prices, those higher prices, gas producers 
began to drill again and sell into the interstate market. And 
we created a surplus. But even though we had a surplus, we had 
rising prices. And the reason for the rising prices was because 
we had rigid market structure. We had very long-term contracts. 
We had obligations to purchase that had all been entered into 
at a time when there was pervasive regulation. And that rigid 
structure of those rigid contracts caused prices to increase, 
notwithstanding the surplus supplies.
    So when I joined the Commission, we were faced with a 
dilemma. How do we address this perplexing problem. We began to 
ask ourselves, Why are we even regulating gas production? We 
regulate natural monopolies. But there is nothing about gas 
production that appeared to look like a natural monopoly. There 
were 12,000, at the time, 12,000 natural gas production 
companies. That looked like plenty of companies to produce 
robust competition. So we concluded that to get the right 
prices so that prices would rise when there was a shortage, 
prices would fall when there is a surplus, the normal workings 
of the market, we needed to introduce competition into the 
marketplace.
    So that was a decision made by FERC that they were going to 
attempt to do that. It wasn't so easy, though, as to just 
simply pull back from the market. The market itself was 
structured, as I previously mentioned, in a response to 
pervasive historic regulation. So the Commission actually had 
to begin to restructure the market so that competition could 
take root. So among the other things that I had to do, first 
they had to make sure that suppliers could reach their 
customers. And in those days, pipelines only carried the gas 
that they themselves owned. They wouldn't carry gas for 
competitors. So we had to require pipelines to carry their 
competitors' gas, open access on the pipeline system. That was 
the first step. We had to free gas supplies from pervasive 
regulation.
    The FPC had set prices, the Natural Gas Policy Act had set 
prices. We had to find a way to allow prices to float up and 
down with the market. And we worked on that and then later the 
Wellhead Deregulation Act helped us further on that. But we had 
to let prices float. We had to make sure that pipelines 
couldn't compete against--excuse me--couldn't favor their own 
supplies when they transported gas over supplies from their 
competitors. So we had to develop a series of rules to prevent 
favoritism.
    And then finally we had to free up the supply. Because as 
strange as it may sound, back in 1983, 1984, 1985, if a 
producer made a sale to an interstate pipeline under a 5-year 
contract or a 10-year contract, and if that contract expired, 
the Commission nonetheless required that producer to continue 
to sell in perpetuity to that same pipeline for the same price. 
So we had gas supplies--gas contracts that had been entered 
into in 1950s for 16 cents and 17 cents. And they were being 
told that even though those contracts had expired 20 years 
earlier, they had to continue to deliver supplies to the 
interstate market at those prices.
    So we had to find a way to allow those prices to be--those 
supplies to be freed up and so they could go to the parts of 
the country where the supply was needed the most at a market 
price. So those were changes that had to be made in the 
structure of the industry before competition could even be made 
to work.
    It is amazing that FERC was able to kind of take all of 
those steps under the Natural Gas Act. The Natural Gas Act was 
passed in 1938, just 3 years after the Federal Power Act. It 
was largely structured after the Federal Power Act. Very, very 
similar. FERC was to set just and reasonable rates. Well, FERC 
used that power to set just and reasonable rates to require or 
permit market-based rates. So they concluded that if we can 
show there is enough competition, then market competition can 
set just and reasonable rates. And the courts agreed with that 
determination. FERC used the power in that statute that said 
you have to prevent undue discrimination. They used that power 
to order open access transportation.
    So it was a broadly written statute written in very broad 
strokes that gave FERC the ability to fill in between the lines 
as the market changed, as conditions changed. And it turned out 
to be a very powerful and lasting statute. We will get to this 
in a second. But the Federal Power Act is very similar to that. 
It gives FERC very broad powers. And it has lasted, you know, 
more than 85 years.
    So after FERC had great success in deregulating the Natural 
Gas Act, and today we have a very thriving industry, it is 
largely because of the work that FERC did, they turned their 
attention to the Federal Power Act and to the power industry. 
And they concluded maybe we should be doing the same thing here 
as we had accomplished in the gas industry. After all, 
generation doesn't look, again, like a natural monopoly 
business. Why not permit competition for generation like we 
permitted competition for gas production. By that time, PURPA 
had been passed. We had an independent power industry. There 
wasn't much competition. The PURPA generators signed up under 
long-term contracts and their supplies were locked in. So there 
wasn't a tremendous amount of competition. And their prices 
were set by regulators, not by the market. But nonetheless, we 
did know that an independent power industry could stand alone 
on its own. So the Commission then set about trying to 
deregulate the power industry.
    Initially they tried to apply the same model that they had 
applied to the natural gas industry. Let's require open access 
transportation. If we can show adequate competitions, let's let 
the market set the price, not set the price ourselves through 
cost of service type regulation. Let's prevent favoritism in 
transmission service by transmission owners and so forth.
    So that was the initial approach. And that approach was a 
very good start. But there were major differences between the 
power industry and the gas industry which frankly made it much 
more difficult to implement competition in the power industry. 
So let's talk about some of those major differences. The first 
is the statutory framework.
    I am sorry?
    Mr. Olson. I am sorry, sir, I know it didn't occur to you 
about the microphones, but you are about 4 minutes over. So 
wrap up quickly.
    Mr. Naeve. Oh, OK. All right. Well, let me just say there 
are very, very significant differences between the two 
industries that make competition and the implementation of 
competition more difficult. Power doesn't flow in a straight 
line like gas through a pipeline. That makes it harder. 
Reliability is much more difficult to impose in the power 
industry because supply and demand have to be a perfect balance 
minute to minute. There are structural differences in the 
industry and shared jurisdiction and so forth. And I will be 
happy to respond in the Q and A session to some of those 
issues.
    [The prepared statement of Mr. Naeve follows:]
    
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    Mr. Olson. Thank you, sir.
    Our next witness will be Mrs. Susan Tomasky. Susan was a 
former counsel general at FERC. After that she was the 
president of the Transmission of American Electric Power 
Corporation. And she will talk about Order No. 888. Five 
minutes, Ms. Tomasky, please.

                   STATEMENT OF SUSAN TOMASKY

    Ms. Tomasky. Yes, sir. Good morning, Mr. Chairman, Mr. 
Pallone, and members of the committee. Thank you so much for 
the opportunity to actually come back before this committee 
after many years to talk about the history of electric supply 
competition in the United States.
    I would like to start by first explaining that, from my 
perspective anyway, Order 888 was very much the product of 
changing market conditions that FERC observed at the time, as 
well as the regulatory model that it had previously seen with 
respect to natural gas. Really, for most of the 20th century, 
from a customer perspective, electric service wasn't very 
complicated. People paid a bill. That bill was, for the most 
part, regulated by State commissions, and they paid a single 
bundled rate. And behind all that was a complicated set of 
assets; transmission, distribution, generation. That was all 
priced on a cost-of-service basis. The State figured out the 
bill, the utility charged it, and the customer turned the 
lights off and we hope, in the utility industry, in most 
instances paid for the bill. However, in the 1990s we saw an 
extraordinary escalation of the price of electricity in many 
parts of the country. And that was due largely to the decision 
of utilities that really had a lot to do with securing power 
supply to build large nuclear generation facilities. There was 
significant cost escalation associated with that. And as a 
result, customers resisted that. They resisted it in State 
regulatory proceedings, but they also resisted it by trying to 
escape from the regulatory regimes that were in place in that 
time and find alternative suppliers.
    In the early days, the alternative supply market was pretty 
thin. But as it became pretty clear that the opportunity was 
available, technology improved, capital was available, but 
customers were still bound to their utilities under existing 
regulatory rules. And even if they could escape those, they 
didn't have the ability to get power from the independent 
generator to the transmission because they didn't have access 
across the utilities monopoly transmission system.
    At that point FERC began to face a number of case-by-case 
requests to address this for individual customers, to make 
market-based rates available, and the Commission did begin to 
respond to that. But ultimately came to the conclusion that not 
only was it a slow process, but it created uncertainty and 
risks for both the utility industry and all parties, and in the 
end only benefitted a handful of customers. And, really, it was 
to address these issues more broadly and systematically that 
the Commission undertook the rulemakings in Order 888.
    At the heart of the Commission's action was the conviction 
that electricity customers would benefit from power prices if 
they were determined on the basis of efficient competitive 
marketplace rather than through a utility-driven process that 
was overseen by regulators and paid for by States on the basis 
of the utility's cost. To accomplish this, as Mr. Naeve said, 
they did turn to the model of the natural gas industry. They 
ordered the separation of wholesale sales from transmission 
service. And that helped to create a distinct transparent power 
supply market. They also provided a relatively simple path for 
market-based rates for both utility and non-utility sellers. 
And then they continued to regulate the transmission business 
as a monopoly business but under a new set of standards that 
required terms for the utilities to provide open access service 
to both non-utility service users and to themselves on 
essentially the same terms.
    So the question is how are things working. And in my view, 
we have had some very painful learning lessons along the way. 
But the competitive markets that do exist are working fairly 
effectively. We have a large number of suppliers. And capitalis 
generally available to support new investment when it's 
justified. And I think equally important, when markets are 
permitted to work, capital doesn't flow to projects that aren't 
justified. That is the market discipline, and it directly 
benefits customers. In recent years we have seen price declines 
that pass through to customers. And we also have seen price 
increases that pass through to customers.
    I am sorry. Is there something wrong? No. OK.
    These are good things. These are price signals that go to 
the marketplace. They prompt generation and in transmission 
development. And those are the operation of a properly 
functioning market. There are winners and losers. Some 
generators are not effective competitors. Others are. And of 
course there are external factors that affect this. But 
generally I would have to say that the outcome is that the 
customer isn't at risk when these risks are assumed by the 
generators. And that is pretty much the vision that the 
Commission had of the competitive marketplace.
    This committee, I know, is going to be looking at 
significant challenges. I would be happy to discuss any of 
those in my comments if you like, but that concludes my 
testimony. Thank you.
    [The statement of Ms. Tomasky follows:]
    
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    Mr. Olson. Thank you very much. Our final witness is Ms. 
Linda Stuntz. And Ms. Linda Stuntz was the former Deputy 
Secretary of Energy from 1992 to 1993. And she is currently a 
named partner at Stuntz, Davis and Staffier, P.C.
    Five minutes, please, ma'am.
    Mr. Barton. And a former staffer of this committee.
    Mr. Olson. I apologize.

                  STATEMENT OF LINDA G. STUNTZ

    Ms. Stuntz. Thank you, Mr. Barton and Mr. Chairman. It is 
an honor to be before you today, to be back. As you have heard, 
part two of the Federal Power Act was enacted in 1935 to fill a 
regulatory gap. It provides the Federal Power Commission, now 
FERC, with the ability to regulate what the States could not. 
The States retained authority over generation, intrastate 
transmission, local distribution, and retail sales of 
electricity. Interestingly, it is a challenge. None of those 
things is self-defining, of course. And a lot of what we at 
this table have done over many, many years is try and flesh out 
what those terms mean.
    As the economy has grown, and not to repeat what some of my 
colleagues have said before, and as electricity markets and 
industry structure have evolved, Federal jurisdiction under the 
Federal Power Act has expanded. The gap-filling function has 
how become much more a blanket. Wholesale markets for 
electricity administered by RTOs and ISOs now provide power 
across much but not all, and that is an important--not all of 
the country. I included in my testimony a chart, I think on 
page 5, that reveals that. It is about two-thirds of all 
customers. The restructuring of the electric industry was 
driven by multiple factors. And as Mr. Pallone mentioned, I 
think sat through a lot of those hearings, you have heard some 
of these, but let me just tick them off.
    Clearly PURPA sort of established the principle that 
generation could be competitive. It didn't need to be provided 
by utility suppliers under cost of service regulation. And yes 
there were rate shocks in some parts of the country. In part 
because of over-budget nuclear plants, in part because of 
general inflation and the price of oil and so forth where oil 
was used in the Northeast. But there was also, I think, a 
favorable experience with oil and natural gas deregulation, as 
you have heard from Mr. Naeve, which drove a desire to rely 
more on market forces and markets rather than cost of service 
utility regulation, to better protect consumers and to 
encourage innovation.
    Finally, even back then there was technology development. 
And I think this is often overlooked. But the simple adaptation 
of the aero derivatives, sort of jet engine, to be able to be 
used to supply electricity from natural gas-fired turbines was 
huge. Because this was a lower capital cost. It could be built 
more quickly. It could be almost modular. And in the 1990s this 
became a source of tension. And there may be important lessons 
there as you look at technology developments today.
    Electric restructuring has taken many different forms 
across the country, as many of you know based on your own 
experiences with the States. But as Mr. Smith observed, the 
Supreme Court decisions earlier this year confirmed that FERC 
jurisdiction under the FPA now extends to the purchase of 
demand management resources, energy efficiency, if you will, by 
RTOs and ISOs, and that States may not act in a way that a just 
and interstate wholesale rate, even if the State is acting in a 
way that it believes is necessary to secure supply generation 
adequacy.
    Other pending State initiatives known well to many of you, 
ranging from support for nuclear power to perhaps coal plants 
in Ohio, are likely to raise similar questions in the future 
and likely to be equally difficult. One thing that has not 
changed, and here is where the lawyer is going to play engineer 
if you will forgive me for just a minute, one thing that has 
not changed since passage of the FPA is that electricity cannot 
be stored in meaningful amounts, despite very considerable 
current efforts to change that. This simple fact has very large 
consequences because demand for electricity varies greatly over 
the course of a day and over the course of the year.
    What this means is that--and yet at the same time supply 
and demand have to be balanced perfectly in order to preserve 
reliability in real time. Doing this is becoming more 
challenging as intermittent resources such as wind and solar 
play bigger roles. Reserve margins are no longer sufficient to 
ensure reliability. We need new planning paradigms. And again, 
I put a chart in my testimony, the famous duck curve, on page 
12, which shows a sort of extreme version of this. But those of 
you from Texas are already seeing this. In other places, 
Colorado, where there have been significant penetration of 
renewable resources.
    And finally with great respect to Mr. Pallone, there is no 
such thing as the grid. North America is actually made up of 
four separate networks, if you will. The western 
interconnection, the eastern interconnection, ERCOT, most of 
Texas, and Quebec. There are only weak direct current ties 
between these two. We can talk more about why that exists and 
whether it is a good idea. Certainly there is a lot of history 
there. But again, that has meaning because it affects the 
jurisdictional status of the folks in Texas.
    And in addition, there are some 500, more or less, it 
changes almost every day, transmission owners in the U.S., 
ranging from TVA, the PMAs, to co-ops to large industrial and 
utilities. Each of these is regulated differently, each with 
greater or less FERC involvement. In all cases that I know of, 
States do the siting. So you have to--it is unlike natural gas 
which has Federal eminent domain, you don't have that to site 
electric transmission. This complexity creates major challenges 
for initiatives to change the way that the grid in this country 
is upgraded, operated, paid for, and constructed.
    With that, let me conclude my oral statement. And I welcome 
your questions.
    [The prepared statement of Ms. Stuntz follows:]
    
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    Mr. Olson. Thank you, Mrs. Stuntz. And I will yield myself 
5 minutes for a round of questions.
    This hearing is called, again, the title was, the ``Federal 
Power Act: Historical Perspectives.'' The subtitle, I think, 
could be, ``Those who forget the lessons of history are doomed 
to repeat them.''
    I would like to start with you, Mrs. Stuntz, and open this 
to the panel.
    Mike is on my right? Curveball from up on stage here.
    Early in the course of the electrical restructuring efforts 
at FERC, Congress and this committee were fairly active on the 
topic. We kept our oversight and passed significant 
legislation. Overall, Mrs. Stuntz, for you, and then work down 
the panel, were these efforts of this committee helpful in 
guiding FERC in improving efficiency in markets? Yes? No? 
Lessons learned?
    Ms. Stuntz. Absolutely yes. And as the one person here who 
never worked at FERC, I guess, but I worked closely with this 
committee both as a staffer but then particularly in the 1990s 
Energy Policy Act, which probably gets insufficient 
appreciation in my view, for its role of contributing to 
generation competition. And the oversight and the guidance 
provided by that committee, and I know Mr. Barton remembers 
that well, and Mr. Schaefer, I think, was critical in setting a 
path which FERC then went beyond. But in 2005 as well, this 
committee was very important.
    Mr. Olson. Ms. Tomasky, in your comments you mention a 
painful experience. Do you want to elaborate on that how we 
don't repeat a painful experience? Your comments on oversight 
by this committee with FERC and this issue.
    Ms. Tomasky. Well, sir, and I am sure Mr. McNerney would 
agree that the most painful experience was the experience of 
the California marketplace. And there are some really important 
lessons from that, I think. I will say that one of the things 
FERC didn't do when it moved to competition was require States 
to do exactly as FERC was doing and didn't mandate unbundling.
    But some States like California did take the lead in moving 
forward. And their markets today, I want to say, it ends as a 
good story, their markets work very effectively as part of a 
competitive market. California was plagued with a lot of 
issues. One of the most significant of course was that the 
markets were new. The regulations were new. And there was a lot 
of market manipulation that led to unfortunate circumstances. 
There also were extraordinary supply problems. And California 
did a good job under tough circumstances of responding with 
efficiency initiatives and things like that that we have also 
learned from.
    I think the most important thing that we have all learned 
from these experiences is that while we have a vision of 
electricity as a commodity, we have to always remember that to 
society as a whole, it is an essential service. And we all have 
to figure out how to come together when there is a crisis, when 
there is an outage, when things aren't working right, to 
acknowledge that. Because it has to work. And I think that to 
me is the most significant lesson of these painful experiences. 
Thank you.
    Mr. Olson. Thank you, ma'am. Mr. Naeve, you were a FERC 
Commissioner. Did we help you or hurt you back in the old days?
    Mr. Naeve. I think the oversight of the committee and the 
legislation passed by the committee with respect to the power 
industry has been helpful. I think, for example, both of the 
prior witnesses mentioned the Energy Policy Act of 1992. That 
act was very important if for no other reason it eliminated 
some of the restrictions under the Public Utility Holding 
Company Act.
    The independent power industry was being held back by the 
Public Utility Holding Company Act. If you owned a generator--
generators were considered utilities. If you owned a generator, 
you were a utility holding company. There are a lot of 
restrictions on utility holding companies. In some ways they 
are a shared jurisdiction with the SEC and FERC over in this 
area.
    Mr. Naeve. And it eliminated to some extent the 
restrictions on generation ownership through EWGs and the 
creation of EWGs. That was very helpful. The Energy Policy Act 
of 2005 finally repealed the 1935 act. That was extremely 
helpful as well. So that gave FERC more or less exclusive 
Federal jurisdiction in this area. And the 1935 act had itself 
served its usefulness and its purpose and was no longer needed. 
So that was also very helpful.
    Granting FERC greater enforcement authority and powers was 
very helpful again. If one thinks backs about it, FERC was 
really a cost-of-service regulator with engineers and 
accountants and that sort of stuff. And once we had 
competition, the model changed. And FERC, now their role is to 
preserve competition. So they need new resources and new 
powers, and that statute give it to them. Also you gave FERC 
more jurisdiction over certain entities that previously--over 
their transmission systems that they previously didn't have. So 
that was also very helpful.
    But I want to add--I am sorry. Let me add one thing. 
Notwithstanding all those important changes, the Federal Power 
Act, as I mentioned, like the Natural Gas Act, is very broadly 
written. And it is written in a way that has given FERC the 
flexibility to adapt to changing conditions. So it is a very 
useful statute. And it has served well over the 85 years that 
is has been there.
    So thank you.
    Mr. Olson. Thank you. Mr. Smith, how did this committee 
help or hurt restructuring about a decade ago?
    Mr. Smith. Well, I will endorse the comments of my 
colleagues about the 1992 act and some of the core provisions 
in the 2005 act. In addition, I think it is important that the 
reliability provisions in the 2005 act were enacted. There was 
concern that as the market got more competitive, moved away 
from cost-of-service rates, that spending on things, that 
promote reliability might decline when all of a sudden that 
couldn't necessarily be recovered directly from ratepayers.
    So the conversion of what had been up until then 
essentially a voluntary industry program of reliability 
standards into a regulatory program was important. The 2005 act 
also made important policy changes on transmission development, 
some of which worked and some of which didn't work. So, for 
instance, the Congress directed FERC to provide for incentive 
rate treatments for new transmission investment. And I think 
overall that has been quite successful at getting the industry 
focused on deploying capital to needed transmission 
investments.
    There were provisions that you might recall on backstop 
transmission siting which I would say have had no effect on 
easing the problems of transmission siting at all. So it's a 
mixed bag on that front.
    Mr. Olson. And my time has expired. I now yield time to the 
ranking member from California, Mr. McNerney, and you will have 
6 minutes and 17 seconds per my example. Bipartisanship.
    Mr. McNerney. You know, I really appreciate the sort of 
bipartisan sheen that this hearing has so far. So thank you for 
that, Mr. Chairman.
    Ms. Stuntz, you mentioned technology developments had a 
large impact. And you cited the jet engine adaption. It seems 
to me that technology is changing at a very rapid pace now. And 
I think that is going to have a large impact on the way we have 
to structure this thing. How do you feel about that?
    Ms. Stuntz. I agree absolutely both at sort of the 
utilities level but also the whole rise of distributed 
generation, is this going to cause a whole new business model, 
who will be in charge, are we going to end up with RTO-type 
entities at the distribution level the way we have at the 
transmission level? You know, New York is sort of probing that. 
You know, it is not at all clear whether that is the right 
answer.
    But yes, it is forcing a change. And there are real 
questions, interesting questions, about whether regulators can 
keep up with the pace of technology and what happens if they 
don't and----
    Mr. McNerney. Not to mention that the legislators keeping 
up is even more of a challenge. Thank you.
    This leads into my next question. Mike, you mentioned a lot 
of stuff that the I think the FERC was able to do--or not the 
FERC, but the power commission--was able to do before FERC on 
natural gas based on the Natural Gas Act. Were there a lot of 
court challenges in that time? And if not, has the current sort 
of legal ecosystem changed enough that we have to worry 
significantly about that today?
    Mr. Naeve. Certainly not with respect to natural gas. We 
don't need to worry about that. There were court challenges. 
And as a general rule, the Commission did very well in those 
court challenges. The courts accepted the proposition that if 
there is adequate competition, competition can set just and 
reasonable rates. The courts accepted the proposition that to 
prevent undue discrimination you have to require the pipelines, 
if they are going to carry their supplies for themselves or 
more specific customers, they have to carry supplies for 
everybody.
    So the courts as a general rule were very supportive. And 
at times the courts actually led the Commission. There was a 
famous case, the Maryland People's Counsel case in which the 
court turned down a proposal that FERC had approved because it 
provided transportation for only a certain class of customers 
and not for all customers. So I think that educated FERC that 
they had the power to go out and require transportation for all 
customers. So as a general rule, I think the statutory 
boundaries today in the gas industry are more than adequate. 
They are very robust.
    Mr. McNerney. Thank you.
    Mr. Smith, you mentioned that some of the legislation in 
more recent years had some problems in it and some successes. 
How hard was it to overcome the problems that legislation 
introduced?
    Mr. Smith. Well, the particular example I was giving was 
about backstop transmission siting. So transmission siting is 
fundamentally a function at the State level. The 2005 act 
attempted to provide a means through a combination of actions 
by the Department of Energy and then the Federal Energy 
Regulatory Commission for transmission developers to be able to 
go to FERC to get certificates to develop transmission if they 
couldn't get State approvals. And for a variety of reasons, 
including a couple of court of appeals cases, that authority 
hasn't gotten used.
    So in the absence of that, transmission developers are 
going to the individual States in which the transmission is 
located and working through those State processes. And if they 
need to--if there are disputes about that, they get litigated 
in the State courts instead of through a Federal system.
    Mr. McNerney. Thank you.
    We talked about technology a minute ago. Cyber issues are a 
big part of that. Is that something that we are going to be 
able to take specific language out or should we leave that to 
the regulators, the cybersecurity and cyber protections?
    Ms. Stuntz. The part--because of this committee, and I 
remember it was Mr. Boucher was involved in 2005 when it set up 
the reliability framework, it expressly granted sort of FERC 
the ability to monitor cyber as part of--and to promulgate 
reliability standards on the subject of cyber. So under FERC's 
direction North American Electric Reliability Corporation or 
NERC and its regional entities have been embarked on on doing 
that. It is a tough enterprise, very challenging enterprise.
    You can never be complacent about it. They are up to like 
critical infrastructure protection standards five or six now, I 
think. But it is certainly something that bears look because it 
doesn't respect jurisdictional lines or the law, for that 
matter, and it will affect the weakest link of the systems.
    Ms. Tomasky. I would add to that. I would agree with it. 
And I would say that the focus of legislators on this issue is 
an extremely important one. It is very difficult, and I share 
my experience as a member of a board, of an electric utility, 
it is very difficult, and it is not appropriate, I think, to 
get into the weeds of a lot of these issues. But the importance 
of it is significant. And what the committee did, what the 
Congress did, was to change the governance structure and 
essentially direct FERC to make sure that utilities were 
focusing on it in a systemic way.
    And having been involved in the implementation of these 
from the utility side, I can say that it was an extremely 
important refocusing of efforts. It is a very, very difficult 
and a constant area. I continue to urge you to oversee it.
    Mr. McNerney. Thank you. Mr. Chairman, I yield back.
    Mr. Olson. The gentleman yields back. And perfect 6 minutes 
and 17 seconds. Thank you, my friend.
    The Chair recognizes the chairman emeritus from a happy, 
double-overtime Texas Aggies, Chairman Emeritus Joe Barton. For 
5 minutes.
    Mr. Barton. Well, let's wait until we see what happens with 
Alabama and LSU before we see how happy we are this year in 
Aggieland.
    Well, thank you, Mr. Chairman and ranking member, for 
holding this hearing. And thank you, panelists, for your 
excellent testimony. I have been on this committee for 30 
years. So I have lived through most of what you folks talked 
about. And I would postulate that we have three basic 
requirements for our utility system here in the United States. 
First and most important is we have to have an absolutely 
guaranteed adequate base load supply. If you don't have supply, 
the rest doesn't matter.
    You saw that in California. The lady talked about the 
California market. They wouldn't let outside power bid into the 
system and they had $2,000 per megawatt hour charges. And the 
State of California, rightfully so, revolted against that. So 
we have to have an adequate base load supply. And it is 
difficult in the Northeast because the demand is not where the 
supply is.
    Second, you have to have a transmission system that has 
adequate capacity to deliver that supply. In a large State like 
Texas, which as Mrs. Stuntz pointed out, we have ERCOT. So we 
basically have one entity that regulates the transmission 
system. So you don't have the interstate problems between 
States.
    And finally, you have got to have a retail framework that 
the customers consider fair. And we have been all over the map 
on that the last 30 years. Again, what happened in California 
compared to States like Georgia, Mississippi where they have 
always had retail rates regulated by the State PUCs. And in my 
State of Texas, we have tried it both ways. We have gone from 
retail regulation to an open competitive system where in the 
home that I live in I routinely get five or six requests a 
month to switch power supply.
    So this is a complicated issue. It is not an issue that any 
of us get any kudos for at our townhall meetings. You know, I 
have never had a question at a townhall meeting about an ISO or 
an RTO or any of the things that we have to do to make the 
system work.
    So I am not sure where the committee is going to go based 
on this hearing. I think there is work to be done on a 
bipartisan basis if we want to. But this is a very complicated 
issue. And we have tried a number--I mean, 1992, 2005. We tried 
to handle the interstate transmission siting issue. And we have 
yet to get that right. I thought we had it right in 2005, and 
the court struck it down two to one.
    So I guess my question, since I am supposed to ask a 
question, you all are sitting here looking at me. Yes, I could 
say: Don't you agree with what I just said. That would be not 
fair.
    I am going to ask Mrs. Stuntz, which is something that 
hasn't come up yet, how do we interact between the Federal 
Power Act and the Clean Air Act? Because EPA more and more is 
usurping the decisions in providing power at adequate prices to 
the customers. The Clean Power Plan that has currently be 
stayed, if that is fully implemented, we are going to have base 
load supply problems in Texas in the next 4 or 5 years. So how 
would you interact those two so that you get a fair balance 
between environmental protection and power availability?
    Ms. Stuntz. Thank you, Mr. Barton. That is a really----
    Mr. Barton. You have got 33 seconds to answer.
    Ms. Stuntz. That is a really tough question and it is an 
important question, and it is one of the reasons why I commend 
you all for what you are doing today. Speaking strictly for 
myself, I have thought from the begin--I have not understood 
from the beginning of the announcement of the clean power plan 
how that would--how a plan that envisions individual States or 
potential regions adopting compliance plans on a rate or a mass 
basis is going to work on the back of a market base regional 
wholesale electric system.
    I mean, the simplest way I could put it is, if you are a 
State and you have a plan that depends on importing power from 
somewhere else, but they are not going to send it out anymore 
because they want the clean power, I mean, I don't know how it 
is going to work. And it leads to a bigger--you know, maybe the 
bigger question is sort of, do these markets adequately 
reflect--you know, we want competitive markets that are based 
on marginal costs. Is that the value that we want now? If you 
want to overlay on top of that environmental dispatch, which is 
really what we are doing now, but we are not putting a tax on 
carbon, we are doing something else, I foresee real 
difficulties. I can't fit them together. I don't know how that 
is going to work.
    Mr. Barton. I thank the chairman. I thank the panel.
    Mr. Olson. The gentleman yields back. The Chair recognizes 
the ranking member of the full committee, Mr. Pallone, for 6 
minutes and 11 seconds.
    Mr. Pallone. OK.
    Mr. Olson. Following Chairman Barton's example.
    Mr. Pallone. I wanted to ask Ms. Stuntz, but then anyone 
else can answer as well, but in your testimony you raised a 
point regarding the Federal Power Act that I raised in my 
opening statement, and that is, you know, where you said, and I 
quote, ``the Federal Power Act has weathered these changes, but 
whether it remains fit for purpose for the electricity industry 
in the 21st century is an important question to consider.''
    I honestly don't know whether the act has outlived its 
usefulness, but I think it is an important perspective to 
consider, particularly as I see not only the blurring of 
regulatory jurisdictions, but also the growth of technologies 
that really make me question whether traditional rate-making 
formulas are able to fairly value deployment of things like 
distributed generation, micro grids, and storage.
    So I just wanted to ask you, and again, I would like to 
hear from the other witnesses, this is my only question, 
whether we have come to a point in time where all these 
technological, legal, and other developments warrant us to 
conclude that the Federal Power Act has outlived its 
usefulness. I will start with you, and if anybody else wants to 
answer.
    Ms. Stuntz. I will try to be very brief, because others, I 
am sure, have views. As Mr. Naeve said, that one of the 
strengths of the Federal Power Act is its breadth that has 
enabled regulators to accommodate a lot of developments, but 
fundamentally this Colton wholesale retail bright line, I 
think, is going to be challenged by things like distributed 
generation. I mean, we already--you are seeing on the net 
metering sites, I mean, is that really the basis on which you 
want to decide whether the Federal or the State regulator has 
the ultimate say? And is that a distinction that even will make 
sense when, as in California now and some parts, you are seeing 
very large amounts given certain times, of generation coming on 
the system from the customer. So that may be an adaptation that 
is beyond the capability of the current FPA.
    Mr. Pallone. All right. Thank you. Would the others like 
to--go down the table there.
    Ms. Tomasky. Sure. Mr. Pallone, I am not prepared to 
conclude that the basic framework of the power act is no longer 
useful. As Ms. Stuntz and others have said, it is pretty broad. 
And the competitive market design that we have today, I think, 
is very effective. I think that we have an inherent problem in 
its implementation that is pretty thorny and I don't have a 
good answer to, which is that we have a lot of different 
approaches, because one of the things FERC didn't do was to 
require retail and bundling and have a uniform system across 
the country, so you have got some States that have competition 
and others don't.
    And the way it is relevant to the question of technology is 
that I do think that the States and the local--which had the 
retail jurisdiction, they are going to be the testing ground 
and the proving ground for a lot of these new technologies, but 
ultimately their implementation needs to be on a much broader 
and regional scale. There really isn't a coincidence between 
the boundaries of the State jurisdiction and how a technology 
should operate and deploy in order to be efficient. We know 
that. That is why we have regional markets.
    So I think it is probably fair to say that at the end of 
this inquiry, you would come to conclusions that changes to the 
power act need to be made, but I think it would be most useful 
to try to understand what are the values in terms of generation 
power supply you are trying to accomplish, you know, where are 
you going to--what technologies and how do you want to 
facilitate them, and then figure out how to change the 
boundaries under the Federal Power Act to make that effective.
    Mr. Pallone. Thank you.
    Mr. Naeve. I would add that it is very difficult to always 
anticipate the effects of new technologies or new developments. 
Often they have unintended consequences, the so-called duck 
curve that Ms. Stuntz mentioned is a good example of that.
    So I would tend to prefer, as much like the Federal Power 
Act statutes, that are broadly written, that delegate broad 
authority to the experts and allow them the flexibility to 
adapt to changing market conditions as opposed to having 
Congress constantly passing new bills trying to catch up with 
yesterday's technology.
    The Federal Power Act is one of those statutes. It gives 
FERC very broad authority. It could well be that they need 
additional authority in the future, but to say make rates just 
and reasonable, it doesn't tell them how to do it. It gives 
them a lot of flexibility to do it. It gives them a large 
amount of jurisdiction. I think some of these issues where they 
have deferred to the States, they probably have the power if 
they want to choose to assert jurisdiction over many of these 
issues, they could probably do so.
    So I think it is kind of--I would take a wait-and-see 
approach, but it is a statute that has served well for a great 
many years, and the reason it has held up over that time is 
because it does paint with such a broad brush and delegate to 
the Commission authority to be flexible.
    Mr. Pallone. Thanks.
    Mr. Smith. I would agree with the conclusion that I think I 
heard from my colleagues, which is that it hasn't outlived its 
usefulness, that the core provisions of the Federal Power Act 
should be kept in place and then adjusted as necessary as 
market changes or technology changes present problems where the 
answer doesn't make sense under the current allocation of 
responsibilities. And I think the best example of that is for 
most of the life of the Federal Power Act, generation was 
interconnected to the transmission system. And now that you 
have generation in little tiny chunks that is connected to the 
distribution system on one side or the other of the consumer 
meter and is often owned by a retail seller so that you have 
somebody--I mean, retail customer who is both a buyer and a 
seller potentially, it leads to versions of this application of 
this bright line that were never anticipated when the act was 
written.
    So in my mind, the way to deal with that is not to get rid 
of the Federal Power Act and start over again, but rather to--
if that becomes a problem that is not fixable under the current 
regime, to make adjustments for things like net metering, 
distributed storage, that is workable for those particular 
technologies.
    Mr. Pallone. Well, thank you all.
    Thank you, Mr. Chairman.
    Mr. Olson. The gentleman yields back. The Chair recognizes 
the gentleman from Illinois, Mr. Shimkus, for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. It is great to have 
you here. This shows you how nerdy I am getting. I am really 
enjoying this panel.
    Ms. Stuntz. Thank you.
    Mr. Shimkus. And this is a great topic, because there are 
issues and evolution and processes. Just a brief comment to Mr. 
Naeve, though. I understand his statement on vagueness and 
flexibility, but really on the Republican side here, we have 
been burnt too much by vagueness of law, and there is really a 
desire by many of us to be more specific, because in other 
agencies, we feel that they have kind of overstepped that, and 
then it gets into litigation and you have all these problems.
    I want to kind of talk about two kind of regional problems, 
and so maybe--and so let's start with the RTOs and, quote 
unquote, ``price takers.'' So you know in an RTO, generators 
can bid, we have a whole bunch that would bid zero to make sure 
that they can keep their plants running, but the question is, 
if you have--if the market has too many price takers bidding at 
zero, does that mean it is no longer a competitive market? Does 
anyone want to try that out?
    Ms. Tomasky. Well, I don't know whether it is no longer a 
competitive market, but it is not a function----
    Mr. Shimkus. Pull that a little closer.
    Ms. Tomasky. I am sorry. It is certainly not a functioning 
market that is going to bring suppliers in, because there is 
only so long you can bid at zero. The----
    Mr. Shimkus. See, let me go where I am. Illinois used to be 
a net exporter of power.
    Ms. Tomasky. Yes.
    Mr. Shimkus. And now with this change, Illinois may be 
transforming through decommissioning for a lot of reasons, one 
of it might be this market that is not functioning normally 
because of the price takers. So that may be added onto some 
generators who now aren't getting a market signal for price, 
already feeling the pressure from other regulatory pressures, 
and will in essence walk away from the market.
    Ms. Tomasky. Well, I think the fundamental problem, as I 
understand it, it really kind of goes to nuclear plants. Is 
that really what you are talking about, sir?
    Mr. Shimkus. No, because I don't think they are the--they 
are not the price takers. They are not bidding--they can't, 
because their operating costs are too high.
    Let me--so I guess the question is, who is a price taker? 
Who is a price taker, in your--in these markets?
    Mr. Naeve. Let me begin with your first question, if you 
have significant numbers of price takers that are bidding zero, 
for example, can you have a functioning market? And I think the 
answer depends on why people are bidding zero. So, for example, 
if you are a nuclear plant, nuclear plants can't be turned off 
and turned right back on 5 hours later. They have to run 
continuously. So they can't bid a price such that at some 
point--if they bid a higher price and then the market sets a 
lower price, they will be told to shut down. They can't afford 
that. So they bid a very low price so that regardless of the 
market price, they are still taken by the RTO, because they 
can't turn back on again the next day.
    So they hope to make enough money during the daytime to 
make up for their losses in the evening, and that is their hope 
at least. So----
    Mr. Shimkus. But it is a risk, it is a gamble too on their 
part?
    Mr. Naeve. It is a gamble, right, of course. And if they 
are not making enough sufficient revenue, then they may have to 
shut the plant down, but they are behaving like a rational 
market participant. And I think if participants are bidding 
with those characteristics, they are bidding that way, it still 
means you have a functioning market. Now, if you have people 
bidding----
    Mr. Shimkus. Let me stop. I only have 1 minute left, and I 
want to get this out. So I do appreciate that, because we are 
seeing that right now and it is forcing decommissioning early 
of--well, I don't know about early, but plants along with the 
other stress.
    Let me address another kind of a distortion of the market 
that we see right now. So you have, you know, States who enact 
PURPA laws, so then you have granted transmission siting which 
will go from--and my colleague, Mr. Pompeo, is not here--from 
Kansas, through the State of Illinois, through a couple States 
just to reach PJM, because some of these States are making 
State regulatory decisions on the State portfolio, but there is 
really no benefit. That is not feeding into MISO. They are 
designed to feed into PJM and access these State requirements. 
That is kind of a distortion of the market too, wouldn't you 
say? Anybody can jump in. I mean, I don't----
    Mr. Naeve. Well, can I finish just one comment on the prior 
question, and then I will be happy to respond to that?
    Mr. Shimkus. Yes.
    Mr. Naeve. That is, if you are bidding as a price taker at 
very low prices because of a particular Government subsidy that 
you have, then that subsidy makes it profitable to bid at a low 
price, like a price below zero.
    Mr. Shimkus. What kind of subsidy are you referring to?
    Mr. Naeve. Well, like production tax credit, for example.
    Mr. Shimkus. OK. We all know what that is, right?
    Mr. Naeve. And that does affect the functioning of the 
marketplace, so I kind of depends on why they are bidding.
    With respect to your second question, I am not sure I quite 
understood the context. People are----
    Mr. Shimkus. Well, I am just saying you have got multi-
State transmission grids built solely to affect the PURPA 
market in PJM, crossing State lines that have no--really in 
essence are designed to feed the PJM market and not to feed the 
MISO market.
    Ms. Tomasky. Sir, I think that that is a legitimate policy 
issue. I am not sure that I would agree that it is a function 
of the design of the marketplace. I think it is a result of the 
fact that the transmission entities have an opportunity, the 
suppliers have an opportunity to build, but these lines are not 
built yet. They are seeking to build them.
    Mr. Shimkus. No. They have being built. There are two 
crossing the State of Illinois right now.
    Ms. Tomasky. Yes, sir. They are being built. They are not 
in service at this point, so I don't think we know how the 
market works. But I completely agree with you that one of the 
issues that we have as a result of the divisions among the 
regions is that we don't have a consistent policy for 
reconciling the interests of one region to another. I think 
that is a very legitimate issue.
    Mr. Shimkus. Thank you. Thank you.
    Mr. Olson. Well, thank you. The gentleman yields back. The 
Chair recognizes the gentleman from New York, Mr. Tonko, for 5 
minutes.
    Mr. Tonko. Thank you very much, Mr. Chair. And let me thank 
our witnesses for being here today. I very much appreciate 
hearing more about the historical changes to our electricity 
markets from the Federal perspective, because I have a slightly 
different perspective from my time as chair of the New York 
State Assembly Energy Committee beginning in the 1990s. I saw 
the rush to restructure utilities in my home State and some of 
the unintended or even unconsidered consequences, where 
consumers to this date are paying for stranded assets a long 
time after the fact.
    That being said, it is clear that utilities' business 
models were changing then. It is even clearer now that they 
will continue to need to evolve drastically. We should do our 
best to understand these changes, and that is why this hearing, 
I think, is very helpful. We need to keep up to ensure reliable 
and affordable electricity is the result.
    So, Ms. Tomasky, let me ask, in the years since FERC's 
Order 888, have there been times when competitive markets have 
worked better and worse than anticipated? And, in your opinion, 
what have been the most influential factors in having a working 
market?
    Ms. Tomasky. Thank you, sir. I would say that, as I 
mentioned earlier, certainly the poster child for failures of 
marketplaces were the events that happened in California. There 
have been other--and I think that this committee has looked at 
them extensively, and they have a lot to do with bad actors in 
the marketplace, inadequate supply planning. I personally 
believe that supply needs to move effectively across State 
lines whenever it can and that that actually creates 
efficiency. We had some of those issues in California as well.
    There have also been certainly perturbations in the 
marketplace, but generally I would say that we have a lot of 
good things that happen. They happen--when I say ``good,'' 
though, I mean from the perspective of achieving that goal of a 
competitive marketplace, which is to have your price set by the 
marketplace. For example, we have seen a recent decline in 
capacity prices into competitive markets that have been 
occasioned by the vast supply of natural gas available. So that 
is good from the perspective that it brings down the cost, but 
as I think others have alluded to, it does create public policy 
issues, because it creates questions around the viability of 
nuclear plants, it creates issues about local investment values 
for other existing facilities, and it really doesn't have that 
ability to look at other values.
    So I guess I would say that there is a lot of success in 
the operation of competitive marketplaces, but there is a whole 
host of policy issues that people want to talk about and should 
talk about that aren't necessarily able to be addressed by 
competitive markets.
    Mr. Tonko. Thank you. And for our panelists that were at 
FERC in the 1980s and 1990s, there was this decision obviously 
that FERC made to open access, allowing the creation of 
competitive markets. Do you, individuals, believe that the 
decision to open access envisioned preserving the traditional 
jurisdictional boundaries between States and Federal 
authorities?
    Mr. Naeve. Well, first I would say the experiment proved, I 
think, in many ways, certainly with gas markets, incredibly 
beneficial and stabilized the gas markets and lowered prices. I 
think, as the other witnesses have testified, competitive 
markets have functioned in most circumstances, certainly 
recently, very well.
    With respect to how that has affected--open access has 
affected State boundaries--the jurisdictional boundaries, in 
some ways the boundaries are the same, but what happens is more 
and more of the, for example, power supply becomes wholesale 
supply, and wholesale supply is subject to FERC jurisdiction as 
opposed to local supply. So FERC's jurisdictional reach has 
increased.
    When you have regional transmission organizations, 
previously most transmission service was part of the integrated 
system when serving local service, it was regulated by the 
State, maybe 5 or 10 percent or 15 percent for some utilities 
was regulated by FERC as they served interstate markets. Today 
if you are in a regional transmission organization, 100 percent 
of that transmission is now regulated by FERC. So because of 
the change in the operation of the industry as a result of 
competition, more subject matter is subject to FERC 
jurisdiction than previously, although the boundaries are the 
same; it is just simply the system operates differently than it 
previously did.
    Mr. Tonko. Mr. Smith, did you want to add to that at all 
or----
    Mr. Smith. Well, I would just say I recall specifically 
conversations with policymakers from California in which they 
seemed surprised that the market restructuring that they had 
undertaken was going to cause State regulators to lose a lot of 
jurisdiction over things that they had previously regulated. So 
I am not sure the regulatory shift that was caused by the 
creation of the RTO markets was fully understood by some of the 
proponents of the RTO markets.
    Ms. Tomasky. Would you like me to add? Having been there, I 
can say that we certainly sought to respect at the time that 
division, but it was our expectation that over time there would 
be a pretty significant shift and that markets should--and 
regulators should be adjusting to that.
    Mr. Tonko. OK. Thank you. Mr. Chair, I yield back.
    Mr. Olson. The gentleman yields back. The Chair recognizes 
the gentleman from Ohio, Mr. Latta, for 5 minutes.
    Mr. Latta. Well, thanks, Mr. Chairman. And thanks very much 
for our panel for being here. Again, it has been very, very 
informational this morning. I really appreciate it.
    If I could go back to the gentleman from Illinois' 
questions, especially when we are talking about the price 
takers.
    Ms. Tomasky, if I could ask you, when they were designing 
the markets, how do you think FERC anticipated the 
participation of the price takers? Do you think that there was 
a lot of anticipation of exactly what was going to happen 
there, the price takers?
    Ms. Tomasky. Well, sir, I would say that there were--we 
actually did anticipate that there would be--I don't think we 
spent a lot of time talking about that particular issue, but I 
will say that there was an expectation that there would be 
plenty of circumstances--particularly as the RTOs and the more 
complicated market structures developed, we certainly did 
expect that people would be--that the market would set a price 
and people would have to make a decision whether to bid into 
that market on the basis of what was there or they wouldn't be 
able to support their generation. There were, of course, things 
we didn't expect.
    And as I mentioned, the price of natural gas and the effect 
that it is having on existing generation is not something--
while we expected it to happen at times and in cycles, the sort 
of pervasive sustainable preference that the market currently 
has for natural gas and the effect it is having on people who 
are putting in--having to make those decisions into the 
marketplace, I think it is fair to say we did not anticipate 
that.
    Mr. Latta. Thank you very much.
    Ms. Stuntz, if I could ask you a couple questions here. You 
mentioned in your testimony that during the advent of the 
regional transmission organizations, the RTOs, and also the 
independent system operators, ISOs, were designed to be 
independent entities to manage transmission with the ultimate 
goal of opening access to transmission. Would you share your 
thoughts to the subcommittee on whether the RTOs and the ISOs 
have been successful opening that access to transmission?
    Ms. Stuntz. I think they have been. I think fundamentally 
FERC started that and imposed an obligation on all entities, 
really all transmission owners whether or not they are in RTOs, 
but I think the advent of those entities--I mean, it is a sort 
of a strange situation where the owners of transmissions still 
own them, but they basically have turned over functional 
control of those assets to this nonprofit entity who runs 
markets as well as sort of really manages the transmission 
system to ensure that it is operated on a nondiscriminatory 
basis.
    It also does planning. It helps determine on a regional 
basis where they exist on a regional basis or in an in-State 
basis, whether it is just a single State, with ERCOT or 
California or New York, here is what we need, here is when we 
need it. It has gotten more complicated lately because we now 
have fights about who gets to build it, which we don't need to 
go into today, but it is--I think they have been successful in 
that area.
    Mr. Latta. Let me ask you a follow-up. Do you think there 
are any improvements out there that you would suggest to the 
RTOs and the ISOs, what kind of improvements that could be 
made?
    Ms. Stuntz. Well, I think there--you know, I think what--
particularly coming into a State like Ohio, I mean, I think the 
seams, planning across the seams and where they exist--you 
know, electrons don't respect the boundaries of PJM and MISO, 
and when you have two RTOs adjacent that have different 
policies on capacity markets or different kinds of planning 
paradigms, it is creating--even how to measure whether they 
are--and FERC has tried to set rules about how you measure 
whether transmission is available. FERC has tried to work on 
those seams, but to me, that is--it is not so much--I mean, 
they are different, they are not the same, they do things 
differently, but the seam issue, I think, is a big problem and 
stands in the way of, I think, markets that operate better for 
consumers and planning that works better for consumers.
    Mr. Latta. OK. But when you say that FERC is out there 
trying, trying is not the same thing as succeeding.
    Ms. Stuntz. Right.
    Mr. Latta. Wouldn't you agree?
    Ms. Stuntz. I agree. I don't--I would say that on the area 
of sort of interregional planning and you across the seams, I 
don't think FERC has had a lot of success yet, and they need to 
pursue it more aggressively.
    Mr. Latta. OK. When you say, ``pursue it more 
aggressively,'' how do they pursue it more aggressively, then, 
so they can be successful in that, then?
    Ms. Stuntz. Well, I don't--I mean, they have created Order 
1000, which is more recent history than we are talking about 
today, but they have specified that there should be 
interregional planning, but I think--and they have sort of--but 
it is more--to me it is more an exhortation. It hasn't been 
backed up with firm requirements and compliance requirements. 
And I think that--and I think they are still struggling with 
the balance we have talked about today in terms of trying to be 
sensitive to regional differences and the way regions and 
States want to do things, but when you have two, as I said, 
next to each other in places like Ohio that have differences, 
how do you--when do they come in and say, all right, this is 
how you have to do it? And being that prescriptive, I think, 
has been hard for them. At some point I think they may have to 
be that prescriptive on these seams issues.
    Mr. Latta. Thank you very much, Mr. Chairman. My time has 
expired and I yield back.
    Mr. Olson. The gentleman yields back. The Chair recognizes 
the gentleman from New York, Mr.--oh. Oh, from Texas. I am 
sorry. Mr. Green from Texas.
    Mr. Engel. Almost got in there when----
    Mr. Olson. He slipped in there on you.
    Mr. Green. It is very seldom a Texan moves faster than a 
New Yorker.
    I want to congratulate our new chair and neighbor and 
friend. Congratulations, Pete. And I look forward to working 
with you. The good news is we both speak Texan and we both work 
together on energy, so--but, again, looking forward to working 
with you.
    I want to thank the chair and ranking member for holding 
the hearing. The Federal Power Act has provided a foundation 
for stable, low cost electricity, and I hope to learn how the 
policy developed and how the market has changed.
    Mr. Naeve, Mike, in your testimony, you discussed how over 
time FERC has moved from being an agency primarily focusing on 
regulating rates to an agency that protects competition and 
balances supply and demand, and I think this is an extremely 
important role. You also provided an important context on the 
difference between natural gas markets and electric power 
markets. Can you elaborate on the challenges the electric power 
markets face in balancing supply and demand while enhancing 
competition?
    Mr. Naeve. Well, the ideal would be if we have robust 
competition. Competition itself would balance supply and 
demand, just as it happens in the natural gas markets. However, 
in the power markets, there are, as I mentioned, important 
differences; one difference being, for example, that you have 
to instantaneously balance supply at any given moment with 
demand at any given moment. That is not so much the problem in 
the natural gas industry where you have line pack, you have 
fuel storage, and so forth. So it is far more complicated in 
the power industry. And so consequently, you have to have much 
more robust regulation to provide reliability.
    In terms of having adequate supply, we have designed 
capacity markets to try to ensure sufficient surplus supply, 
that we meet the reserve requirements, but that is complicated. 
It is really a tweak on the competitive market to add these 
capacity markets to see if we can ensure sufficient surplus 
capacity, but it is complicated. If you left it purely to the 
market and asked the markets to respond to prices, it is not 
clear that we would have enough surplus capacity at any given 
moment to meet our needs. We may have more, we may have less, 
but it wouldn't be the right amount, so we have had to tinker 
with the markets to try to address that problem.
    Mr. Green. What constraints has the Federal Power Act 
placed on these factors, in your opinion, or what improvements, 
if any, are needed statutorily that would improve that balance?
    Mr. Naeve. In my mind, the jury is still out on whether 
additional changes are needed to the Federal Power Act. I don't 
see any immediate constraints at this stage. The Commission has 
been given additional jurisdiction by this committee and the 
Congress over reliability, and they can use those powers. As I 
mentioned earlier, the statute gives them tremendous amount of 
flexibility. So at this stage, in my mind, the jury is still 
out as to whether additional changes are necessary.
    Mr. Green. OK. Of course, in Texas we have a deregulated 
market for our retail and we have ERCOT, and we still have some 
challenges during the heat--we didn't have them this year 
during the hot summer, but we have had over the years, and the 
interconnect issues. Would States and regions like the 
Southeast choose to continue to stay regulated, and what are 
the advantages or disadvantages of that model? And, again, even 
though we have the three different or four different grids, how 
we can somehow still keep their independence and yet still have 
the reliability helping one region over the other?
    Mr. Naeve. Well, it is interesting with respect to ERCOT, 
because ERCOT has limited interconnections with the rest of 
the--with the other grids.
    Mr. Green. And let me just say, years ago we said we are 
willing to sell it to you, we just don't want you to take it 
from us.
    Mr. Naeve. No. And actually, I was working in the Congress, 
in the Senate when we had some issues relative to ERCOT, and 
central and southwest company, and attempted to connect their 
nonERCOT utilities with the ERCOT utilities, and it created a 
jurisdictional crisis. And in PURPA, a statute we have 
mentioned, they created a fixer in that which allowed FERC to 
order ERCOT utilities to interconnect with utilities outside of 
Texas, and by doing it under FERC order, they wouldn't become 
FERC jurisdictional. So you do have a few high voltage DC 
interconnections between ERCOT and the rest of the country.
    Would there be greater stronger reliability if there were 
more interconnections? I think there would be, yes. Texas faces 
this issue, perhaps some other areas as well, like Florida, for 
example, probably could stand to have stronger interconnections 
as well.
    Mr. Green. Anybody else on the advantage or disadvantages 
of the model?
    Ms. Tomasky. Yes, sir. I do--the advantages of increased 
interconnection, I think, are going to be demonstrated over 
time. I really do. I think that, as we have mentioned before, 
the physical limitations aren't the same as geography. There is 
a lot of important stuff that gets done at States, including 
attention to reliability. I can't emphasize the importance of 
the State regulator being local and being able to address local 
needs, but with that said, we really do have the ability now to 
move power in a very broad geographic region to coordinate it, 
and there is so much resource that is in one area that can be 
moved to another.
    I think the key is continued build-out of transmission and 
continued build-out of interconnection. It has to be done 
sensitively, but I really do think there is a lot of advantage 
in continuing to pursue that.
    Mr. Green. Mr. Chairman, I know I am out of time. Thank 
you.
    Mr. Olson. The gentleman yields back. And on behalf of my 
friend from Texas, don't mess with Texas.
    The Chair now recognizes the gentleman from Mississippi, 
Mr. Harper, for 5 minutes.
    Mr. Harper. And we are excited to know that the Dallas 
Cowboys now have the Mississippi State quarterback, Dak 
Prescott starting, Mr. Chairman, so we are happy with that.
    But thanks to each of you being here. And I would like to 
also say how much we appreciate everything that now former 
chairman Ed Whitfield did on this committee. He will be missed, 
and we wish him the very best.
    These two questions that I have, the comments and then a 
couple of questions, are really for the entire panel, so when I 
get done, I will start with you, Mr. Smith, and we will go down 
the line on this.
    We have two basic types of wholesale power markets in the 
country today, largely but not entirely coinciding with the 
type of retail regulation present in individual States. In 
States where there is traditional retail rate regulation, it 
seems we have bilateral wholesale markets where generators sell 
to utilities through company-to-company contracts for power. In 
areas where States have decided to move to retail market 
competition, it seems we have bid-based wholesale markets where 
multiple generators bid into a centrally operated market to 
serve the load.
    So my questions are, in which market are we seeing lower 
levels of concern about maintaining reliability; and then, 
second, in which market are we seeing capital intensive--or 
which areas are we seeing capital intensive new facilities like 
nuclear power plants being built?
    Mr. Smith. Thank you for those questions. I guess the first 
observation I would make is I think there is not a perfect 
correlation between competitive wholesale--or organized 
wholesale markets and retail competition. There are areas of 
the country in which there are RTOs or ISOs operating but don't 
have retail competition. There are also areas of the country 
that have traditionally resisted RTO formation that are now 
inching, inching towards competitive markets.
    There is something called the energy imbalance market that 
is being developed sort of around California starting with 
Pacificore and some other utilities in that area joining it. So 
anyway, those aren't perfectly correlated.
    But to get to the thrust of your question, I think the 
question of how to assure adequate capacity is one that was 
traditionally handled by States. When States were regulating 
vertically integrated utilities, they could establish reserve 
margins, they could essentially oversee the resource planning, 
including the generation planning, the vertically integrated 
utilities. And in States where the utilities were restructured 
and in particular divested most or all of their generation, the 
States no longer have that sort of direct control over what 
generation is owned by the--what generation is being used to 
serve the retail customers in that State.
    So in many places we have many RTOs, we have now developed 
organized capacity markets of one sort or another. As you may 
well know, those have--there is controversy around capacity 
markets: A, are they too expensive, are there ways they could 
work better; B, are they accomplishing what they are supposed 
to accomplish, and maybe part of the problem there is they are 
supposed to accomplish several different things which don't 
always necessarily entirely line up, but certainly one of them 
is assuring sufficient resource availability on a long-term 
basis.
    I think it is--there is a quite observable pattern that 
investment in new nuclear carbon caption sequestration 
projects, for instance, are happening in States that are not 
restructured, where essentially State regulatory oversight of a 
vertically integrated utility is providing regulatory comfort 
that the utilities will recover their costs for those new 
assets.
    Mr. Harper. OK. Thank you. And my time will be up before we 
can go all the way down the line, but if you have a quick 
response, that would be great.
    Mr. Naeve. I do think it is not entirely clear that in the 
bid-based markets, that reliability have proven to be a problem 
at this stage, but it is the case that in, you know, the 
markets that have not been restructured, regulators have the 
ability to choose particular technologies that might not 
otherwise be attractive in a competitive market and saying we 
are going to support that particular technology, and can cause 
investment in that technology and recovery in that investment 
from customers, so it does give regulators more power to direct 
resources to particular technologies.
    Mr. Harper. It appears that my time has expired, but thank 
you all for being here.
    Mr. Olson. The gentleman----
    Mr. Harper. I yield back.
    Mr. Olson. The gentleman's time has expired. The Chair 
recognizes the gentleman from Vermont, Mr. Welch, for 5 
minutes.
    Mr. Welch. Thank you very much, Mr. Olson. Thank you to the 
panel. Very good testimony.
    Mr.--or I guess, Mike, I wanted to ask you a little bit 
about your experience doing a very difficult thing when you 
were at FERC with respect to the changes you had to make and 
how that might apply to trying to have much more sensitivity 
and flexibility with demand response energy efficiency and 
distributed generation. I mean, one of the challenges we have 
with energy policy is trying to make certain that those options 
are treated fairly in the process, and it is difficult, because 
it is a big change. Generally the focus on reliability and 
costs, obviously very legitimate, have been driven by the 
centralized generators. They have a seat at the table.
    The only ISO where some of these other folks with 
alternative energy have a seat at the table is ISO New England, 
but in Vermont where we have had some utilities that have been 
all in on being leaders rather than resisters to this, there is 
documented savings on transmission costs of about $400 million. 
Now, we are a small State. That is real money.
    So if we want to have some flexibility here so that those 
regions of the country want to implement as much as possible 
demand response distributed generation, what are the one, two, 
three steps that we would need to take in order to facilitate 
that effort?
    Mr. Naeve. Whenever the Commission goes about trying to 
restructure a market, they have to be careful about a lot of 
things. If they are restructuring a market, there are going to 
be winners and losers. There are some people that will have 
invested in reliance on regulations, for example, and then that 
regulation is taken away and their investments may not be 
attractive at all. They also need to be sensitive to evolving 
technologies and to regional differences. And I think FERC has 
been sensitive to those concerns over the years.
    So, for example, with respect to distributed generation, 
some would say FERC has jurisdiction over distributed 
generation. Sales back to the utility by distributed generation 
to many look like wholesale sales. FERC has chosen not to 
regulate many of those sales, and step back. You have a 
laboratory in a lot of the States with respect to distributed 
generation, with respect to demand response----
    Mr. Welch. Yes, but what I am looking for is what, if any, 
changes do we need to make at FERC or either expansion of their 
authority or legislative direction in order to facilitate 
States that are choosing to invest in this distributed 
generation approach?
    Mr. Naeve. I think States today are making those decisions, 
and FERC is not standing in the way, so I, frankly, don't think 
that there are changes that are necessary right now. You see a 
tremendous growth in distributed generation throughout the 
United States, certainly in States that have abundant renewable 
resources available to them, but the Commission has exercised 
its flexibility to allow that growth to occur. So at this 
stage, I am not sure if there is a----
    Mr. Welch. I don't have much time, so let me go to Ms. 
Tomasky. Thank you very much.
    Ms. Tomasky. Same question?
    Mr. Welch. Yes, same question.
    Ms. Tomasky. Well, I would agree that FERC has done some 
things to accommodate that. I would really direct your 
attention to the RTOs. I do think you are right. I think ISO 
New England has created a framework that is useful for 
integrating that. I don't think it is easy. It is certainly 
easy to establish the principle. It is--but the system still 
has to be managed. And it is really a question of how do you 
effectively balance the cost value versus the compensation back 
on distributed generation. I think that actually over time, 
these costs are coming in and there really will be the 
opportunity to do it, but I think it is a nitty-gritty issue, 
it is not a big policy issue. And because I think as a policy 
issue, it is accepted, so it is really something that the RTOs 
have to be told that it is a high value and it needs to be 
integrated. I think that is the solution.
    Mr. Welch. But there is a tension, I mean, it goes to the 
point you made about companies that rely on a certain 
regulatory framework. I mean, the old energy model was 
centralized distribution, and the more you produced and the 
more you could sell, the better it was. We have got some 
utilities now. And in Vermont, there was an effort to change 
the compensation model to actually include the ability of 
utilities to reduce demand and get paid for it, and it has been 
a tremendous savings for our businesses and to our consumers.
    Ms. Tomasky. Yes.
    Mr. Welch. And, you know, on this committee, it is very 
tough, because we all come from different regions, and some are 
oil areas and some are renewable areas, and we have all got to 
try to represent our constituents here, but it has got to be a 
policy where FERC has a huge role.
    I guess my time is up, but thank you all very much.
    Ms. Tomasky. Thank you.
    Mr. Olson. The gentleman yields back. The Chair recognizes 
the gentleman from Illinois, Mr. Kinzinger, for 5 minutes.
    Mr. Kinzinger. Thank you, Mr. Chairman. Thank you all for 
being out here; appreciate it. Ms. Stuntz, thank you for giving 
us your time as well. I appreciate it. My question is for you.
    In your testimony, you highlight the vital importance of 
balancing supply and demand in realtime to create electricity 
service, something that I believe is becoming even more 
important as new intermittent technologies are being 
increasingly deployed around the country.
    In designing electric markets, did FERC consider how 
intermittent resources would impact overall reliability?
    Ms. Stuntz. I probably should defer to Susan since--Ms. 
Tomasky since she was at FERC and I wasn't. I think given the 
tremendous growth in intermittent resources and given the 
policy framework around them in terms of we talked a little 
about it about the investment tax credit and so forth, you 
know, I guess I am not sure that they could have anticipated 
the way that is--the way that is all developing, but--and it 
certainly is producing, I think, some challenges in some 
markets, but maybe I would defer to Susan to----
    Mr. Kinzinger. Yes. And if you can add on, just, you know, 
what considerations were made, like, production tax credit, 
things like this into the overall.
    Ms. Tomasky. Well, with respect to the issues like 
production tax credits, Congressman, we really took whatever 
was there as a given. We didn't initiate them, of course. We 
accepted them in the marketplace. And they were coming and 
going at that point in time. We certainly had the lessons from 
PURPA, very, you know, different than the situation we have 
today, but what we really were concerned about was making sure 
that as an operational matter, whoever was running the utility 
system, notwithstanding our competition requirements, had the 
ability to operate it effectively, so they had the ability to 
make judgments about the integration of resources.
    So I think it is fair to say that while we didn't 
envision--we certainly didn't envision the issues of 
intermittency, we didn't envision the challenges of moving 
power across long distances to accommodate that, and the 
underlying adequacy issues that needed to be addressed, we did 
understand that when you bring a lot of different sellers 
together with different performance characteristics and then 
you are going to distribute them against long distances, there 
were real challenges to getting that done effectively. That is 
one of the reasons that we looked to the RTOs as coordinating 
organizations, because we thought they had the ability to bring 
together the technical knowledge in order to do that.
    Mr. Kinzinger. So just to kind of follow up, did anybody 
perceive that there could--I mean, obviously we didn't envision 
what has happened, but did anybody perceive that wind, in fact, 
wind energy would become so dominant that you would see a lot 
of these current existing power plants have to actually 
throttle back or shut down because of the them?
    Ms. Tomasky. Well, certainly at the time of Order 888 we 
didn't contemplate that scenario. As you got further down into 
the years and we began to see wind development, I saw that as a 
utility developer of transmission in Texas, we saw some similar 
kinds of issues there.
    Mr. Kinzinger. So in the existing regulatory framework, 
what options does FERC have to value existing generation that 
contributes to overall reliability, generation diversity and 
the ability to run in severe weather?
    Ms. Tomasky. Yes. I would have to say that FERC has very 
little ability to value generation. I think that----
    Mr. Kinzinger. Is that because of what we have done or, 
like, kind of the rules you are operating under?
    Ms. Tomasky. I think it has to do with the basic structure 
of the regulatory framework. Now, in the RTOs, there has been 
some allusion to capacity markets that overseen by FERC. There 
has been some ability to try to think about longer term supply, 
but really I think you are hitting on the fundamental policy 
issue that has to be addressed, which is are there--do we--are 
we going to see values outside the marginal costs of a power 
supply that we want to choose to integrate and that we want to 
require RTOs. And the problem, of course, is that there are a 
long list of those and they are conflicting----
    Mr. Kinzinger. Yes.
    Ms. Tomasky [continuing]. But I do think that that is very 
much something the committee should be looking at.
    Mr. Kinzinger. OK. And any--yes. Go ahead.
    Ms. Stuntz. Could I just add to that? I do think FERC--
maybe a slightly different take on it. There are--going back to 
a thing called ancillary services, which have been developed 
and are called transmission services because they support the 
grid and they are regulated by FERC, but essentially they are 
things like spinning reserve, nonspinning reserve, A black 
start capability, there are being developed markets for those 
things, they are valued. They can--people that provide voltage 
support, reactive power are able to collect a value for that. 
And although a lot of this has been developed from sort of the 
ground up either by State regulators or by RTOs, FERC has been 
pretty good, I think, about saying, yes, OK. And I think the 
Cal ISO is now in the lead of trying to say, well, if we are 
going to handle that duck curve thing, we need a generator out 
there or a demand response offerer who can either ramp up 
really quick or ramp down really quick, because when the sun 
starts going down at 4 o'clock in the afternoon, we have got to 
have somebody that can step up, and if you can do that, we will 
pay you for that. I mean, that is the only way these markets 
can work, right, is you define a product that meets the need 
you have, and then let--and then hopefully find a value for it, 
but it is the big challenge, because sometimes standing by with 
a gas plant that is only going to operate 20 minutes of a day, 
you know, 3 months of a year and then getting a return on that 
investment, that is a big challenge.
    Mr. Kinzinger. OK. I yield back. Thank you.
    Mr. Olson. The gentleman yields back. The Chair recognizes 
the gentleman from New York, Mr. Engel, for 5 minutes.
    Mr. Engel. Thank you, Mr. Chairman. I had almost gotten in 
under the wire about 20 minutes ago, so it shows you when you 
don't get under the wire, things get delayed, but thank you 
very, very much. And I want to thank all of four of you. This 
has really been very interesting, very enlightening, 
bipartisan. That is what makes this committee great. So thank 
you.
    As we consider applying the lessons of the past to energy 
markets of the future, I think it is important to keep three 
fundamental goals in mind. First is resilience. We in New York 
suffered through superstorm Sandy and other tropical storms, 
such as Lee and Irene, which left millions of New Yorkers 
without electricity. In the face of increasingly common extreme 
weather events, we obviously need to keep the power running at 
all times so Americans can keep their food and medicine cool 
and their homes warm.
    Second is financial cost, because we can't ignore that. As 
with virtually all goods, the price of electricity has risen 
through the years. Though the increasing electricity prices 
have been relatively low compared to other goods, we need to be 
mindful of generation, transmission, and distribution costs all 
with an eye on keeping prices low for rate payers.
    And thirdly, environmental costs. Power generation is the 
primary source of greenhouse gas emissions in the U.S. and 
across the globe. We have to diversify our sources of energy 
and accelerate deployment of clean, low-carbon technologies to 
protect the health and well-being of all Americans. So with 
these objectives in mind, we must adapt to the changing ways 
that we are generating and using electricity.
    Today's consumers are taking advantage of various smaller 
scale distributed energy resources like solar panels and 
electric vehicles to generate and store power in line. They are 
monitoring and managing their energy consumption through smart 
meters and other devices.
    So in light of these game-changing technologies, let me ask 
anyone who cares to answer, was there a time in the past when 
we experienced widespread changes in power generation similar 
to the changes we are experiencing now, and if so, how did we 
handle that and what lessons should we take from that 
experience?
    I stumped everybody.
    Ms. Tomasky. Well, I will go. I think it is fair to say 
although the pace has accelerated, that we have, throughout the 
history that we are talking about, seen new technologies change 
where we are and what we--how we needed to adjust. To be fair, 
most of those technological innovations have happened in larger 
scale generation, but as Linda said and I discussed at length 
in my testimony, the natural gas turbine really did precipitate 
a lot of this. Similarly, we have seen improvements in solar 
and we have seen improvements in wind, and as the cost 
structure associated with that has come down, we have had--we 
have seen proliferation and changes in the marketplace that we 
have had to adjust to.
    The specific things that you are talking about, which I 
think are very interesting, take us to sort of the different 
arena. They take us to the retail side of the equation, because 
they really are things that have the ability for the customers 
to change the shape of the way the utility does business. We 
have seen over the last few years, and I think this is one of 
the things that surprised us, is seen relatively flat demand, 
even as the economy has come back from the recession, and some 
of that has to do with efficiency, some of that has to do with 
choices. There is still huge still, in my view, low hanging 
fruit out there to be harvested in terms of energy efficiency, 
and there is this whole arena of things that you are talking 
about.
    I think it is fair to say--what we have learned from them 
is that you need to be flexible, that you need to have enough 
authority in the hands of people making the decisions that they 
can move the pieces around to make that happen. I think, to me, 
that is the single most important lesson.
    Mr. Engel. Well, thank you. I want to get in one other 
question before my time is up, and I want to piggyback on some 
of the things that Mr. Welch asked, and tie it to my home 
State. New York is leading a program called Reforming the 
Energy Vision to overhaul the longstanding electricity business 
model, and its aim is to modernize, to centralize and 
decarbonize the grid largely through substantial additions of 
distributed energy. In early July, New York's six investor-
owned utilities submitted their 5-year plans to add distributed 
energy sources to the grid.
    How do you see the intersection between FERC's oversight of 
markets and New York's program, and do you foresee any 
potential problems? Let me ask Ms. Stuntz and Mr. Smith, 
because they didn't comment on Mr. Welch. And I am wondering if 
you could comment on that.
    Ms. Stuntz. As I understand it, and I have reviewed it 
briefly, because California is very interested and I serve on a 
board there, I don't see any conflict at this point, because it 
appears to me that New York is focused on sort of the 
distribution system.
    Now, as I said at the outset, sometimes that line between 
distribution and transmission is as wavery as the line between 
wholesale and retail, but I think looking at retail and 
distribution and what the future of sort of the whole 
distribution system means and who administers it and how do you 
make it more effective to support distributed generation is 
something that California is very much in the middle of as 
well, and I don't--you know, I think so long--again, there may 
come a time when you run up against that Hughes Supreme Court 
decision that you are directly affecting the wholesale rate, 
but as I pointed out in my testimony, the court--the majority--
the court there went out of its way to say, you know, we are 
mindful that States are doing things like trying to decarbonize 
their energy, like trying to increase security, and we will 
not--we don't intend this to be read broadly to interrupt those 
efforts so long as they don't directly affect a wholesale rate.
    I would just add, you know, the three criteria you point 
out, you know, resilience, cost, and environmental improvement, 
the real challenge to me on a lot of these things is those are 
not necessarily going to be consistent. Some of the things that 
will make your grid most resilient, you know, there are really 
hard questions about how you incorporate a lot of new 
distributed generation while maintaining security, while 
maintaining safety, you know, both at its very low level, you 
have got to know whether the line is energized or not, somebody 
has got to be able to work on it, and at a much higher level, 
cyber and so forth. So keeping those things in balance, but 
keeping them, I think, at the forefront appropriately is going 
to be the challenge, but I don't see FERC as being a problem 
for what New York is trying to do.
    Mr. Engel. Thank you. Thank you both for your answers.
    Mr. Olson. The gentleman yields back. The Chair recognizes 
the gentleman from Virginia.
    Mr. Griffith. Thank you very much, Mr. Chairman.
    Mr. Barton his on it earlier when he said the EPA's clean 
air versus what FERC is trying to do and are they in conflict, 
and, Ms. Stuntz, you indicated there were going to be some 
stress there, if I remember your answer correctly. Those 
weren't your words, but that was pretty much what you were 
saying, there was going to be some difficulty there. And we 
have got all kinds of things going on in my district. I 
represent southwest Virginia, the mountains, the coal district. 
We have lost two of our power facilities there, as you would 
know, Glen Lyn and one of our Clinch River, the other two were 
converted from coal to natural gas, given us about half that 
power, and so that is a concern to the area, but as a result of 
some of what is going on with coal around the country, we also 
have the stress of all these pipelines coming through that FERC 
has to take a look at. And I am told that in regard to the 
pipelines, that FERC is just looking to see if there is some 
kind of market, and this is open for everybody, but there is 
some kind of a market out there, but not necessarily the full. 
So I have got--in coming through the mountains, one of them is 
in Bob Goodlatte's district and Robert Hurt's district, the 
other is in mine and Robert Hurt's and touches Bob's a little 
bit. We have got two large proposed gas pipelines coming 
through to make sure that there is reliable electricity in 
other parts of the country, and I think Mr. Shimkus touched on 
this too, and yet we are disrupting all kinds of communities, 
some of them have been there for hundreds of years that are now 
having a pipeline going right through them. This is a great 
concern.
    So how do we balance all that out? And did we make a 
mistake in shutting down those plants? And I am not talking 
about the electric power companies shutting them down, because 
EPA had rules that forced it. But as a sense of reliability, 
did we make a mistake in shutting some of these plants down? 
Could we not have figured out a way to leave them on to make 
sure we had reliability?
    I will open that up to you all, and then I have got some 
more questions about what do we do about the stranded assets 
and the fact that should we be paying those folks who have the 
baseload plants for being there, for their reliability, not 
just gas, but also coal, because we are losing coal and we are 
seeing some even nuclear plants get shut down.
    Anybody want to touch any of those five or six issues I 
threw out there? That is what happens when you only get 5 
minutes and you have got all kinds of things.
    Ms. Stuntz. And I will try to be brief, to allow my 
colleagues to speak, but you are touching on one of, I think, 
the greatest challenges we confront right now, which is 
infrastructure. You know, we have the benefit in this Nation of 
tremendous clean natural gas resources, and if we want to 
decarbonize, it is just a fact that natural gas prior to 
electricity is about half as carbon intensive, depending on 
your studies, as coal-fired.
    So given that premise, so we should want to move to natural 
gas generation, but you have to transport it, and, you know, we 
have to find a way for people to understand either as a shared 
value, this is good and we should accept it given appropriate 
royalties and so forth, payments, or not, or we are not going 
to get there in terms of where we want to go decarbonizing the 
economy, where public policy seems to want to go.
    And it is not just gas pipelines. It is oil pipelines. You 
see all the news. It is all that infrastructure. We have got to 
figure out--because it doesn't always--you are right. Exactly. 
It doesn't always benefit the place where it goes. But it 
benefits us as a country. So how do we bring that together? And 
that is an--I don't have an answer to that.
    Mr. Griffith. Well, and as one interesting side note, many 
of the people who are opposed to the pipelines also favor 
getting rid of coal. So you have got the dilemma that they 
didn't want the coal plants. And now they don't want the 
pipeline. But you also have this dilemma that I have in one of 
my communities that is really--I don't know the answer. And I 
guess I should ask if FERC actually pays attention to this.
    I have got a little community that butts up against the 
National Forest. It even butts up against or pretty close to a 
wilderness area. And you have got a historic community, and 
they want to put the pipeline basically through the middle of 
the town. Does FERC look at those things? Because I got to tell 
you, I can't figure out where that goes where you don't destroy 
something that is a natural wonder or destroy this little 
community that has been nestled in the mountains for a couple 
hundred years. Does FERC looks at those things when it is 
trying to approve this?
    Ms. Tomasky. Yes, sir, the FERC does. And it certainly 
should. I mean, that is exactly the kind of thing in the siting 
process that should come forward. And I would certainly 
encourage that community, if they haven't done so----
    Mr. Griffith. Oh, they are all over this.
    Ms. Tomasky. I bet they are all over it. It is a 
consideration, at least in my experience. We went to great 
effort. Even though there was general support for pipeline 
development, we went to great effort to make sure that the 
right analysis was done and that important issues like that 
were protected.
    Mr. Griffith. That is my dilemma. I can't figure out at 
that one spot, I cannot for the life of me figure out how you 
approve the pipeline without doing damage to something. Because 
there is just a narrow spot there where you don't have much 
choice.
    Ms. Tomasky. Of course I don't know anything about that.
    Mr. Griffith. Yes ma'am.
    Ms. Tomasky. But I would think routing around it, I would 
hope, could happen.
    Mr. Naeve. You know, it is almost impossible, of course, to 
site a pipeline without doing some damage. And the 
responsibility of FERC is to try to find a routing that does 
the least damage at not too great an expense. But it is not 
unusual at all for a pipeline to propose a particular route, 
and then that hold--for FERC to hold public hearings and 
investigations to decide what are the effects of that 
particular route and to ask for changes in the routing to avoid 
some of those damages. That is a fairly common result.
    Mr. Griffith. Stay tuned. Thank you very much. My time is 
up. I yield back.
    Mr. Olson. The gentleman's time has expired. The Chair 
recognizes the gentleman from Ohio, Mr. Johnson, for 5 minutes.
    Mr. Johnson. Well, thank you, Mr. Chairman. And thank you 
to the panel for joining us today. I appreciate your time. You 
know, earlier this year in FERC versus EPSA, the Supreme Court 
case held in favor of the Commission's demand response program. 
Finding that FERC has jurisdiction because the program directly 
affects wholesale rates.
    And we will go right down the line here to all four of you. 
Do you think this ruling could be interpreted in a manner that 
expands FERC's jurisdictional or other types of electricity 
programs or practices? Mr. Smith.
    Mr. Smith. Well, the affecting jurisdiction is one that the 
court tried hard to draw some bounds around because--in fact, 
it announced a principle about direct effects or directly 
affecting. Because there is so much interconnection between--
bad word. So much interrelationship between things subject to 
FERC jurisdiction and things subject to State jurisdiction, 
that if you read affecting literally, it might swallow 
everything that had been previously State jurisdiction.
    So the court tried hard to impose some bounds there. I 
guess the other thing I would say is the court noted that in 
that particular policy that the States had the option of opting 
out so that the State could decide that the demand response 
providers in its State couldn't participate in the PJM market. 
And the court seemed to lean on that as a helpful fact to say 
this isn't a FERC power grab. This is FERC trying to stay in 
its lane and leaving the related choices that are the State 
regulatory choices to the State.
    Mr. Johnson. OK. Any of the rest of you have anything to 
add to that or you agree?
    Ms. Tomasky. I think it is a really good summary.
    Mr. Johnson. OK. All right. Well, given the fact that the 
Supreme Court ruled on two cases focused on the Federal Power 
Act this year, do you anticipate that the Supreme Court will 
continue to be active in the area of electricity markets? Now, 
you know, this is asking you to pull out your crystal ball. I 
realize that. Mr. Naeve, why don't you take that one.
    Mr. Naeve. I think they will be merely because we are in 
such a state of flux and there will undoubtedly be future 
concerns about the scope of FERC's jurisdiction, the scope of 
State jurisdiction, other issues. So I do think we will see 
future challenges. And the court has shown its willingness to 
step in and decide these cases. So I can't say today what that 
case may be, but I do think, yes, they will continue to be 
active.
    Mr. Johnson. OK. All right. You know hydropower often can 
be dispatched into the power grid a lot like a battery. That 
is, sometimes hydro dams can store up a lot of water and then 
they can spill it when it is needed to generate electricity. 
When the markets were being developed, how did FERC value that 
storage capacity in hydro? Ms. Tomasky, do you have a----
    Ms. Tomasky. You know, we certainly were aware of it. But I 
have to tell you, there was so little new development. You 
know, there is an awful lot of existing facilities out there. 
And some of them are within the geographic areas that were 
likely to go to competition. But a lot of the larger facilities 
out West, sort of publicly owned, and maybe outside the kind of 
sort of operation of the system.
    So it is something that I would say was probably on the 
list of things that we thought might develop in an interesting 
way. But I can't say that it was central to our consideration.
    Mr. Johnson. OK. All right. Did FERC make any effort, Ms. 
Stuntz, to create a market value or product for the 
capabilities of hydro plants?
    Ms. Stuntz. Not specifically. But they have certainly 
approved--I am aware in the Northwest and a litigated 
proceeding involving BPA. They have approved sort of tariffs 
that essentially offer firming service for wind because you are 
absolutely right. Hydro is one of the few things which you 
can--by keeping water up or letting it go, it is instantaneous.
    You don't have to worry about ramping things up and fuel 
and all that. And so when the wind goes down, it has enabled 
wind to be sold on a firmer basis in the Northwest, where it is 
prevalent. And FERC approved those kinds of services.
    Mr. Johnson. OK. Well, thank you very much. Mr. Chairman, 
let it be noted that Ohio left 10 seconds on the grid. I yield 
back.
    Mr. Olson. So noted. And that is all of our members right 
now. So here is the second round of questions. Just kidding. It 
was his idea.
    I thank our witnesses. I also want to apologize. I noticed 
about 10 minutes into the hearing your lights aren't working. 
They are going straight from green to red. So there is no 
warning going to yellow. So that is why we let you go way 
beyond 5 minutes. Because you guys had no chance to curtail 
your remarks based on those lights. So I apologize for that.
    I ask unanimous consent that a letter is entered into the 
record from FEC Commissioner Bay to Chairman Upton and Chairman 
Whitfield about the current and future state of organized 
electricity markets. Without objection, so ordered.
    [The information appears at the conclusion of the hearing.]
    And I remind all Members you have you 5 working days to 
submit questions for the record.
    This hearing is adjourned.
    [Whereupon, at 12:12 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

                 Prepared statement of Hon. Fred Upton

    Today marks the first time since I became chairman of the 
full committee that my friend Ed Whitfield is not the chair of 
the Energy and Power Subcommittee. For 119 hearings over the 
last 6 years, Ed has held the gavel. A workhorse for sure. 
Today we say thank you. He's been a trusted, respected, and 
valued voice and a terrific friend. He's a gentleman through 
and through. With Mr. Whitfield's departure, Mr. Olson as vice 
chair will carry out the duties for the subcommittee, and we 
appreciate him stepping in.
    Today's hearing lays the foundation for a new effort to 
take a more comprehensive look at recent developments in the 
way we generate, transmit, and consume electricity in the 
United States, and how that system has evolved under the 
Federal Power Act. This effort began with a letter I sent, 
along with Mr. Whitfield, to FERC Chair Norman Bay, outlining 
several current and evolving issues that the committee will 
begin to explore more thoroughly next year. These issues 
include newly blurring lines between historic Federal and State 
jurisdictional divides, how regulated and competitive markets 
continue to fare under both FERC's and the States' oversight, 
how reliability and security of the grid, innovation and 
distributed energy resources are prioritized in the current 
system, and how other external factors, such as tax policy and 
renewable mandates factor in to the functioning of competitive 
markets.
    But before we do that, we need to take a look back in order 
to better understand how we got here. Electricity is critical 
to all of our daily lives, here, in Michigan, and across the 
country--something often taken for granted until the power goes 
out. It is also a lifeline to our national security, our 
economic interests and our basic health and welfare. Both the 
committee and FERC have the important responsibility of 
ensuring that electricity markets function in a reliable and 
efficient manner. We have an outstanding and distinguished 
panel here today to help us learn from the tough decisions that 
each of them had to make in the past, in order to help build a 
successful grid for the future.
    As you know, this committee has a longstanding history of 
legislating on these issues, a history that spans numerous 
congresses and decades. In fact, Part II of Federal Power Act, 
passed in 1935, originated in this very committee under then-
Chairman Sam Rayburn. Those amendments granted the Federal 
Power Commission, the predecessor to FERC, its jurisdiction 
over wholesale electricity transactions. In the intervening 
years, Congress has acted through its oversight role and on 
legislation to ensure that wholesale electricity rates continue 
to result in ``just and reasonable'' rates. This hearing 
continues that long tradition of oversight.
    I am glad to say we have worked to conduct this hearing 
together in a bipartisan manner. Electricity plays a crucial 
role in all of our everyday lives, and disruptions in supply 
create farreaching implications. Today, power generated by 
windmills in Kansas will energize lights and toasters from 
Georgia to Michigan. And natural gas and coal plants in 
Kentucky will likewise power smart phones and electric cars 
from Iowa to Washington, DC. Nuclear plants, an unknown 
technology in 1935, continue to provide a baseload supply of 
energy that Americans across the country can rely on for 
reliable and carbon-free energy. Modern electricity markets are 
unprecedented in scope and scale, allowing us to send 
electrical energy across the Nation both quickly and 
efficiently.
    The evolving questions facing us going forward on 
developments and changes in the electricity system will be 
difficult. When faced with difficult questions, it's often 
essential to understand how we faced--and resolved--similar 
issues in the past. That's really the purpose of our hearing.

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