[Congressional Record (Bound Edition), Volume 147 (2001), Part 9]
[Senate]
[Pages 13285-13288]
[From the U.S. Government Publishing Office, www.gpo.gov]



                      REGULATION OF ENERGY MARKETS

  Ms. CANTWELL. Mr. President, I rise today to address an issue of 
extraordinary importance to the State of Washington, the Pacific 
Northwest, and the entire west coast. That is the role of the Federal 
Energy Regulatory Commission in regulating our Nation's energy markets 
and righting the wrongs that have been visited upon ratepayers in the 
West by runaway energy prices over the last year.
  We are now 22 days into an expedited review process by the Federal 
Energy Regulatory Commission, designed to determine refunds for the 
unjust and unreasonable rates paid by Western consumers.
  At the urging of my colleagues from the Northwest, Senators Murray, 
Wyden, Smith, and myself, FERC finally recognized the realities of the 
energy markets in the West when they allowed Pacific Northwest 
utilities to participate in these proceedings and the expedited review 
process. But my

[[Page 13286]]

main concern is that in the haste of putting the California debacle 
behind it, FERC will again overlook the Northwest and consumers who 
have been impacted by as much as 50-percent rate increases.
  I am afraid my suspicions were borne out last week when the 
administrative law judge charged with overseeing this refund matter 
issued his recommendations to FERC, again paying little attention to 
the Northwest problem. It is now up to FERC to determine what to do 
with the judge's recommendation.
  I believe the Commission should not--and cannot--in the interest of 
fairness ignore the Northwest in its refund calculation. While many of 
my colleagues are well aware of the toll this crisis has taken on 
California, we--and FERC--cannot disregard the impact that it has had 
on Northwest citizens, businesses, and communities of Washington State.
  Equitable treatment in this refund proceeding requires that the 
Commission recognize a certain fundamental truth: That Northwest 
consumers have been harmed, and they have been harmed by unjust and 
unreasonable prices that have prevailed in all energy markets 
throughout the West--inside and outside California, and in spot, 
forward, and long-term power markets.
  There are differences between how California and Northwest utilities 
manage their obligations to serve consumers. Thus, FERC should not come 
up with a one-size-fits-all solution for a refund methodology. The 
basic litmus test should be this: Did power rates meet the commonsense 
test of reasonableness? If the answer is no, then the Commission must 
order refunds. This determination should not depend on whether the 
utilities bought energy on the spot market or made their purchases 
under long-term contracts.
  The Northwest has been hurt by California's dysfunctional 
marketplace, and yet we now also risk being hurt because we in the 
Pacific Northwest do not operate the same way as the California ISO, 
when it comes to the issue of refunds. We run the risk of being 
penalized twice.
  Western consumers have been impacted by the havoc unleashed by 
California's unstable energy markets and the apparent gamesmanship of a 
few who have taken advantage of this broken power market.
  This topic is of particular concern to the Northwest because, as the 
crisis has evolved, FERC has been slow to respond to the situation in 
California, and slower to respond in the Northwest. In the refund 
proceeding, focusing solely on California's spot markets would 
significantly harm the utilities of my State and ignore the residual 
damage that California has caused in all of the energy markets 
throughout the West.
  What are some of those impacts? Make no mistake. The pain inflicted 
by this crisis has been real on the people of Washington State. Over 
the last year skyrocketing energy prices have caused retail electricity 
rates to rise in all corners of my State: 20 percent in Clark County, 
30 percent in Cowlitz, Skamania, and Okanogan counties, 35 percent in 
Snohomish County, and 50 percent in the cities of Tacoma and Seattle. 
Even as these utilities have passed on rate increases to consumers, 
some have been forced to issue hundreds of millions of dollars' worth 
of bonds to cover the cost. Seattle, for example, normally spends $100 
million per year on purchasing power. This year the city spent over 
$450 million to keep the lights on--and that is just in the first 6 
months of the year.
  While the utility in its first 98 years of history issued a total of 
only about $1 billion in bonds, it is having to issue $700 million in 
debt this year alone to pay for its purchased power bills. A number of 
Northwest utilities have even had their bond ratings downgraded as a 
result of this crisis.
  Indeed, the economic impacts on Washington have already begun to take 
root. Energy-intensive industries such as aluminum smelting and pulp 
and paper industries have been driven to the brink of collapse, and 
layoffs already number in the tens of thousands. There are innumerable 
other businesses that are on the brink as well.
  For example, Georgia-Pacific has shut down its pulp and paper mill in 
Bellingham, WA, laying off 420 workers. Another pulp and paper mill in 
Steilacom, WA, has had to idle its workforce due to escalating power 
prices.
  Washington's aluminum industry, which provides my State with between 
7,000 to 8,000 family-wage jobs, has curtailed a large part of its 
production anywhere from 6 months to 2 years. And it is unclear whether 
those companies will ever resume production at their current levels 
given this agreement to shut down.
  These companies, which produce a large portion of the Nation's 
aluminum, have given up more than 75 percent of their power in order to 
minimize the rate increase for the entire region.
  Due to drought conditions and the cost of purchasing power for 
irrigation, many farmers in the State of Washington have also been 
hurt. They have chosen to forego the planting this summer.
  Because agriculture is already one of the most stressed industries in 
Washington, the impacts of the current energy situation are 
particularly devastating. Many of our irrigators have been paid not to 
farm based on energy savings compared to the their previous year's 
usage. When irrigators can't farm, that has ramifications for entire 
communities and related businesses such as cold storage, food 
processing, and transportation. So the agricultural impact is being 
felt broadly in our State.
  The effect on small businesses have been equally harrowing. At a 
Small Business Committee field hearing that was held in Seattle by the 
chairman, Senator Kerry, I heard from the president of a steel foundry 
based in Tacoma, which has been in operation since 1899--a company that 
employs over 350 people. In the face of this crisis, this plant, with a 
very aggressive approach, reduced its power consumption by over 20 
percent. At the same time, the foundry has increased its efficiency and 
will actually produce more steel this year. But despite this 
extraordinary effort to reducing energy consumption, the company's 
power bills are 60 percent over what it was the year before, virtually 
eliminating any profits and already forcing a handful of layoffs. In 
the words of the company's president, any further rate increase will 
mean that the foundry will have to close its doors.
  This crisis has a very human face. The LIHEAP caseload in the State 
of Washington is expected to grow 50 percent this year. I have heard 
from many senior citizens who can't afford to light their homes at 
night and will be making hard choices later this fall and winter about 
heating their homes and buying food. I have visited children who are 
worried that their parents, in some of those industries I mentioned, 
will lose their jobs. And those children are concerned they will then 
lose their homes when their mothers and fathers do not have the work to 
pay their bills.
  Our schools have also had to cut corners. The Central Valley School 
District near Spokane, for example, has had to divert over $200,000, 
that would otherwise be used to purchase textbooks, to pay its energy 
bills.
  What is more startling is the gravity of these impacts, and the 
number of Washington residents suffering from this crisis, is going to 
continue to grow. I say that because the Bonneville Power 
Administration, which provides Washington with 70 percent of its power, 
will be forced to raise its rates another 46 percent this October.
  It is clear that FERC has an obligation to help these people I have 
just mentioned, and to help the State of Washington overcome the 
economic impacts caused by the California market and by a serious 
drought. FERC must not only stabilize our market and ensure fair rates 
in the future, but must also address past wrongs and the harm that has 
impacted consumers.
  FERC took its first serious step in its June 19 price mitigation 
order. Given the economic casualties in my State, I believe this action 
was long overdue. But it was a positive first step.
  The effectiveness of FERC's price mitigation plan will remain of 
vital concern to all of us from the West. We

[[Page 13287]]

need to remain mindful of what the effects of this California-focused 
mechanism on supply in the Northwest, as our region's peak winter 
heating season approaches.
  But let me address specifically the issue of refunds and where we are 
today in the process. Of particular concern to me is the fact that, as 
part of the June 19 order, FERC established a 15-day settlement 
conference for participants in California energy markets, and others in 
the West, to reach agreement on potential refunds for overcharges and 
settlement of California's unpaid accounts.
  As has been the case throughout this crisis, the order was initially 
silent on the issue of relief for the Pacific Northwest. It was only 
after the intervention of a bipartisan group of Northwest Senators that 
FERC amended its order clarifying that Northwest parties would also 
participate in those discussions.
  But the 15-day settlement window has now closed and no agreement has 
been reached--for consumers in either Washington State or California. 
As I have mentioned, the administrative law judge made his 
recommendation last week on how to proceed. He was mostly silent on the 
issue of relief for the Pacific Northwest. It should also be noted 
that, to the extent the recommendations did comment on our concerns, it 
was not factually correct.
  While the recommendations said Pacific Northwest parties ``did not 
have data on what they were owed, nor an amount of refunds due them,'' 
it is a matter of public record that a group of Northwest utilities--
net purchasers in the West's dysfunctional power markets--submitted a 
claim for $680 million, as well as documentation and a proposed 
methodology for calculating those refunds.
  That notwithstanding, this is a silence the Commission itself cannot, 
in the interest of fairness, sustain. FERC must seek an equitable 
solution for the Northwest. In order to do that I believe it is 
critical that FERC recognize some fundamental differences between the 
Northwest and California energy markets--and that fundamental fairness 
requires that refunds go to customers in California and the Northwest.
  First, FERC needs to recognize that most Northwest participants in 
the California markets are load-serving utilities. These load-serving 
utilities are responsible for a very small percentage of the power sold 
into the California market--certainly no more than 4 percent--and they 
are clearly not the parties that broke the market. Further, many in the 
Northwest, especially the Bonneville Power Administration, have been 
partners in helping solve the California problem by keeping the lights 
on during emergencies, at costs to the Northwest that cannot 
necessarily easily be quantified--particularly when one takes into 
account the Northwest's endangered species and salmon issues, and the 
delicate balance we work hard to achieve. Every time we generate power, 
it is quite a delicate balance.
  Unlike power marketers or merchant generators, Northwest utilities 
operate under a statutory obligation to meet all their customers' 
electricity needs. Further, our region's power supply is essentially 
based on hydropower. A full 78 percent of Washington state's generation 
comes from hydropower. As has been made painfully clear by this year's 
drought--which has amounted to the second worst year of drought on 
record in the history of our State--the vagaries of hydroelectric 
production require that our utilities make other wholesale power 
purchases to meed load. In keeping with reasonable utility planning 
practices, these companies buy a portfolio of products of varying 
duration.
  This points to a second, fundamental difference between the Northwest 
and California markets: Whereas California utilities were forced, under 
the State's restructuring law, to make all of their purchases in a 
centralized hour-ahead or day-ahead market, we have no such centralized 
market in the Northwest. While we do have very short-term bilateral 
markets, our utilities have traditionally only used these to balance 
the difference between forecasted and actual loads, streamflows, 
weather conditions, and other similar factors.
  Unlike the California ISO market, the Northwest utilities rely 
heavily on ``forward'' or long-term contracts that last for periods 
varying from a month ahead to a quarter or two or even longer.
  But these contracts have been closely affected by the skyrocketing 
spot market prices in California. It is thus absolutely crucial, for 
the purposes of its refund proceeding, that the FERC recognize that 
power prices throughout the West--and not just in spot markets, but in 
these forward contracts as well--are unjust and unreasonable. 
Washington State's prices have moved in lockstep with the spot market 
prices.
  In its June 19 order, the Commission itself commented on this, 
stating that there is a ``critical interdependence among prices in the 
ISO's organized spot markets, the prices in the bilateral spot markets 
in California and the rest of the West, and the prices in forward 
markets.''
  So the Commission itself has recognized the relationship between 
these prices. Indeed, when one compares forward contract prices in the 
Northwest with spot market rates both within the region and in 
California over the last year, they show a correlation of more than 80 
percent on a monthly average basis; that is, forward prices in the 
Northwest have moved in tandem with California's prices, which the 
Commission has deemed unjust and unreasonable. It is these forward 
prices that have largely driven the rate increases in the Northwest.
  It is clear, then, that any FERC refund order that seeks to treat all 
Western participants fairly, as the Power Act says it must, must 
recognize the relationship between spot markets and forward markets.
  Simply put, any refund policy must not disadvantage the utilities in 
the Northwest because of the contractual mechanism they have used to 
acquire power.
  Let me just touch on the case of BPA because I mentioned it earlier. 
Throughout this crisis, BPA has responded to the California ISO's 
urgent calls for power supply when the State was teetering on the edge 
of rolling blackouts. In fact, on three separate occasions, the 
Department of Energy issued emergency orders directing Bonneville to 
sell power into the State of California. It should also be noted, 
however, that California entities have yet to repay BPA for about $100 
million of these transactions.
  As one of these entities has entered into bankruptcy, it remains 
questionable how the Northwest will ever receive this $100 million 
repayment. Meanwhile, BPA has at times drawn down its reservoirs, 
arguably compromising the reliability of Northwest power system to aid 
California. So while BPA has sold into the California spot market, it 
has actually been a net purchaser during the crisis, when one takes 
into account its forward contracts. And when faced with the volatile 
energy prices throughout the West, Bonneville earlier this year made 
the difficult decision to pay consumers to curtail their loads rather 
than to venture into the market.
  I mentioned various of those efforts earlier in my remarks about the 
aluminum industry. Bonneville and the Northwest customers it serves 
have been victims of the power crisis touched off by this 
experimentation in partial deregulation, which has created this 
dysfunctional market.
  In conclusion, it is important that the Commission act fairly and 
that my State's utilities not be penalized for sales into California 
when they have been forced to purchase power at a similar unjust and 
unreasonable rate.
  It is very important that the Commission work toward a solution that 
gives the Northwest refunds, just as it is promising to do in 
California. FERC must work towards a comprehensive settlement that 
addresses the claims of both California and the Northwest. In order to 
reach an equitable solution, it must acknowledge the fundamental 
differences in the two markets. I believe a fair outcome requires FERC 
to take a few simple steps.
  First, FERC must recognize an inescapable commonsense conclusion: 
that

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all Western power markets have been dysfunctional for quite some time. 
The Commission's duty under the Federal Power Act is to ensure just and 
reasonable rates in all markets at all times. I urge the Commission to 
act in accordance with section 309 of the Power Act in doing this.
  Second, power prices have been unjust regardless of the type of 
market which the Northwest operates in. The fact is, we in the 
Northwest have a different market than California, and FERC simply 
cannot use the same formula when calculating refunds for our consumers. 
It must take into account both forward and long-term contracts. Those 
utilities that can, using this methodology, demonstrate a legitimate 
complaint should receive refunds.
  Third, FERC must not leave the Northwest behind. Northwest utilities 
must be allowed to plead their case during the upcoming evidentiary 
hearing.
  Finally, repayments of amounts due to the Northwest for sales into 
California must be an integral part of any refund calculation.
  I call on the FERC Commissioners to incorporate these principles into 
a refund policy for the Northwest. It is indisputable that the 
Northwest has been harmed. Now it is up to FERC to take the action to 
mitigate those damages and to repay the consumers in Washington State.
  The PRESIDING OFFICER. The Senator from West Virginia is recognized.

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