In recent months, extensive attention has been paid to the flaws in California’s electric restructuring plan and the efforts undertaken by the Governor, the State Legislature, and the Federal Energy Regulatory Commission (FERC) to address the resulting problems. With the passage of time, it has become clear that California’s difficulties are also having a profound impact on other western states who have become involuntary participants in this experiment with retail competition.

Today’s hearing is particularly significant for the Subcommittee because we will be hearing from all three Commissioners of the Federal agency to whom the Congress has given primary responsibility for maintaining viable wholesale electricity markets. Since 1935, the Federal Energy Regulatory Commission and its predecessor, the Federal Power Commission, have been charged with ensuring that power rates are just and reasonable and that the grid is operated in a nondiscriminatory fashion. This has not always been easy, and it is especially difficult now as the electric industry undergoes a period of rapid change.

Today, however, we focus on more narrow issues – the Commission’s role in approving the California retail competition plan, its decision late last year that the State’s plan was not operating in conformance with the Federal Power Act, and its recent efforts to decide what the Act requires FERC to do to restore order to western electricity markets and thereby protect the consumer.

It is widely accepted now that California’s problems began in its own legislature, and that the effort to remedy the resulting fiasco must begin in the State. However, the role FERC played is also worth reviewing:

(1) In 1996, FERC approved the California utilities’ request to participate in the system established by the State’s new restructuring law. The Commission clearly understood at the time that in issuing an approval, it was taking something of a calculated risk. FERC characterized the proposal before it as "a work in progress" which provided only an "acceptable basis for going forward."

(2) Last summer, as prices in California began to spike and the reliability of service degenerated, FERC was drawn into the maelstrom of California’s troubles. On December 15, 2000, FERC amended its original order. It stated that flaws in the State’s plan, coupled with an imbalance between supply and demand "have caused, and continue to have the potential to cause, unjust and unreasonable rates" – a direct violation of the Commission’s mandate under the Federal Power Act.

The discussion of issues in this order is particularly instructive for the Subcommittee, because it goes to the heart of the Commission’s authority -- and responsibility -- under the Act to ensure wholesale markets function in a reliable and fair fashion. In separate concurrences, Chairman Hebert and Commissioner Massey took reasoned, but altogether opposing, views on the wisdom of price caps, about which I am sure we will hear more today.

I do not envy the Commissioners’ task, since any action FERC undertakes will be criticized in some quarter. The situation presents a constantly moving target, complicated by litigation pending in Federal court and California’s attempt to acquire its private utilities’ transmission lines.

In closing, I would offer the Commissioners a modest suggestion. Recent state plans to embrace retail competition have thrust upon FERC difficult questions involving state initiated hybrids that are neither traditional nor fully competitive regimes. The Power Act is not a static document, and it falls to FERC to decide how to apply the law to a changing landscape.

But it is important for FERC to recognize that to date the Congress has not authorized the Commission to promote retail competition. It is not FERC’s job to encourage or to save state retail competition experiments. Instead, Congress has vested the Commission with unique responsibility for ensuring the soundness of wholesale power markets, and until that changes, this should remain the primary focus of the Commission’s efforts.