<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:24412.wais]
ENSURING THE RELIABILITY OF THE NATION'S ELECTRICITY SYSTEM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND RESOURCES
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 8, 2005
__________
Serial No. 109-87
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
______
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada BRIAN HIGGINS, New York
KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of
LYNN A. WESTMORELAND, Georgia Columbia
PATRICK T. McHENRY, North Carolina ------
CHARLES W. DENT, Pennsylvania BERNARD SANDERS, Vermont
VIRGINIA FOXX, North Carolina (Independent)
------ ------
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Energy and Resources
DARRELL E. ISSA, California, Chairman
LYNN A. WESTMORELAND, Georgia DIANE E. WATSON, California
ILEANA ROS-LEHTINEN, Florida BRIAN HIGGINS, New York
JOHN M. McHUGH, New York TOM LANTOS, California
PATRICK T. McHENRY, North Carolina DENNIS J. KUCINICH, Ohio
KENNY MARCHANT, Texas
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Lawrence J. Brady, Staff Director
Dave Solan, Professional Staff Member
Lori Gavaghan, Clerk
Richard Butcher, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on June 8, 2005..................................... 1
Statement of:
Wood, Pat, III, chairman, Federal Energy Regulatory
Commission; Michehl R. Gent, president and CEO, North
American Electric Reliability Council; David Owens,
executive vice president, Edison Electric Institute; and
Dr. Mark Cooper, director of research, Consumer Federation
of America................................................. 8
Cooper, Dr. Mark......................................... 59
Gent, Michehl R.......................................... 30
Owens, David............................................. 42
Wood, Pat, III........................................... 8
Letters, statements, etc., submitted for the record by:
Cooper, Dr. Mark, director of research, Consumer Federation
of America, prepared statement of.......................... 62
Gent, Michehl R., president and CEO, North American Electric
Reliability Council, prepared statement of................. 33
Issa, Hon. Darrell E., a Representative in Congress from the
State of California, prepared statement of................. 3
Owens, David, executive vice president, Edison Electric
Institute, prepared statement of........................... 45
Wood, Pat, III, chairman, Federal Energy Regulatory
Commission, prepared statement of.......................... 13
ENSURING THE RELIABILITY OF THE NATION'S ELECTRICITY SYSTEM
----------
WEDNESDAY, JUNE 8, 2005
House of Representatives,
Subcommittee on Energy and Resources,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:35 p.m., in
room 2154, Rayburn House Office Building, Hon. Darrell Issa
(chairman of the subcommittee) presiding.
Present: Representatives Issa, Westmoreland, Kucinich,
Higgins and Watson.
Staff: Larry Brady, staff director; Lori Gavaghan, clerk;
Dave Solan, Steve Cima, and Chase Huntley, professional staff
members; Richard Butcher, minority professional staff member;
and Cecelia Morton, minority assistant clerk.
Mr. Issa. Good afternoon.
A quorum being present, this hearing of the Government
Reform Subcommittee on Energy and Resources will come to order.
I want to thank all of our witnesses for their indulgence
in the slight delay. I also want to apologize in advance for
stepping in and out during this hearing as we vote on U.N.
reform in another committee. My vice chairman will do an able
job, I am sure, of continuing the meeting.
Meeting the Nation's increasing energy demand is essential
to empowering our dynamic economic economy. According to the
Energy Information Administration, electricity demand is
forecasted to rise 45 percent by 2025. A competitive
electricity marketplace must ensure reliability of the system
and reasonable prices in the wholesale and retail markets. In
the past few decades, the electricity marketplace has moved
beyond the depression era legal regulatory framework. The
system has been superseded by developments in technology and
new ownership structures as well as concerns about the
diversity of sources of energy for electricity generation.
Deregulation at the Federal level in wholesale bulk power
markets and increased competition at the retail level in many
but certainly not all States has occurred with the aim of
increasing efficiency and lowering prices for wholesale and
retail customers. However, the result of the patchwork of
deregulation and restructuring has been inconsistent from State
to State. Management, investment, and maintenance of the
electricity system have varied widely across geographic
regions, as demonstrated by the experience in my home State of
California and the August 14, 2003 Northeast and Midwest
blackout.
I will add, as a Californian and a native of Ohio, I have
been impacted by both the unfortunate experiences so I have an
especially keen interest in these issues. I should also note
that I am disappointed to hear reports that southern California
has an especially tight supply of electricity and may this
summer according to our first witness, experience blackouts
again.
Bearing these events in mind, the subcommittee meets today
to conduct a frank assessment of the Nation's electricity
system, to analyze challenges to investment in transmission
infrastructure and capacity, and to discuss how these issues
must be addressed as part of a comprehensive energy policy.
Ensuring reliability is essential to meeting the growing needs
of the 21st century. I look forward to hearing from this panel
and I particularly look forward to the passage and the signing
of an energy bill out of this Congress, one which the House has
passed repeatedly and on which the Senate has not taken action.
And as chairman here today, I call on everyone who anticipates
that we may have a blackout in California to ask would such
blackout occur if we in fact had passed an energy bill 3 or 4
years ago as we should have.
With that, I will yield to the ranking member.
[The prepared statement of Hon. Darrell E. Issa follows:]
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[GRAPHIC] [TIFF OMITTED] T2412.002
Mr. Kucinich. I want to thank the Chair for holding this
meeting. I note in the prepared testimony for Mr. Wood that he
cites the need for adequate electric infrastructure. I think I
could agree with him on that although I do not agree that the
Public Utility Holding Company Act should be repealed.
Mr. Chairman, in the last 10 years, the deregulation of
electricity markets has pushed electric utilities to cut their
costs to boost profits. I saw that in my own area where First
Energy cut costs and did not adequately maintain their
infrastructure which led to the blackouts that we had
throughout the Northeast. They failed to maintain critical
reliability standards and that led directly to the blackouts.
The blackout began in Ohio and spread quickly as far west
as Michigan and east to New York, north to Ontario, Canada and
as far south as Maryland. The analysis of the blackout revealed
that the principal cause was trees short circuiting major
transmission lines and then critical computer malfunction. Mr.
Wood is familiar with that.
Proper tree maintenance and computer maintenance would have
prevented the blackout. An electric utility has the
responsibility to ensure reliable electricity. That
responsibility includes the prevention of blackouts like the
August blackout of last year that crippled the northeastern
United States. First Energy Corp. was clearly identified as the
leading cause of the blackout because they did a bad job, they
didn't trim the trees around the power lines and laid people
off who were supposed to do that. So when you talk about
infrastructure, you also have to keep in mind there have to be
people around to maintain the infrastructure. If you lay them
off, then work is not going to get done. Tree trimming has been
a necessary task since the electric utilities were created, but
First Energy, in order to save money, didn't perform that task
and that was one of the reasons for the blackout.
What has happened in response is that First Energy Corp.
has swung to the other end of the spectrum and has declared
that all the trees be chopped down in these right-of-ways
because it is cheaper to chop a tree down than to trim it every
3 years. Think about this. You live in a nice community; it
depends on trees for quality of life and all of a sudden, your
local utility is beginning to use this axe to chop down all the
trees instead of trimming them. This is a problem in some of
the suburban areas where these lines run.
First Energy has even instituted a bonus pay system that
may, and I underscore may, encourage its tree trimmers to chop
down trees rather than trim them. Such a system would
incentivize tree trimmer priorities to cut more than necessary
and it would harm property values.
So, First Energy is placing profits above all other
considerations. The last time it was sacrificing reliability;
this time they are sacrificing property values. First Energy
has a right-of-way for power lines, and it is not being a good
neighbor despite this last House energy bill in efforts to
improve reliability of the electric grid. The failure of First
Energy and other utilities in placing safety, security and
reliability before profits I think is going to ensure continued
blackouts.
I want to thank the Chair for holding the hearing and thank
the panelists for being here.
Mr. Issa. We will now hear from the vice Chairman of the
committee, Mr. Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman.
I want to thank you also for having this hearing on the
reliability of our electrical system, something each one of us
takes for granted every day when we walk into a room and flip
on a light switch. I also want to thank the witnesses for being
here today. I look forward to hearing your testimony and what
you have to say.
Electricity transmission is a complicated issue. When you
really get down to it, the bottom line is we have over 680,000
miles of transmission lines in the United States that feeds
about 100,000 substations which then distributes the power
through 2\1/2\ million miles of local power lines to the
people, our constituents and all of us.
Our grid is the largest and most reliable in the world and
of course we are not without problems. We all know that, but in
the past 10 years there have been two instances that come to
mind and they end up being international news because it is so
unusual for us to have these transmission problems. I think we
will have our work cut out for us over the next few years when
we look at the growing demand of electricity we are all going
to have, but I think before we jump the gun on some of the
proposals that are out there, we need to realize that some
parts of the country have things under control. I think in the
southeast our rates are low, we have a good delivery system and
are doing a great job of delivering power and hopefully, we
will pass that along to the rest of the country.
While we have been fortunate in our State to escape the
power outages that other regions of the country have seen, I
know that it is not out of the realm of possibility for us to
experience such an outage. I look forward to hearing what
everyone has to say and I am sure we will learn a thing or two
this afternoon about the importance of making sure that our
grid system stays reliable.
Thank you.
Mr. Issa. Mr. Higgins, do you have an opening statement?
[Mr. Westmoreland presiding.]
Mr. Higgins. Actually, I didn't. I have nothing to say
because I wanted to hear what was going to be said but I am
told we have to fill in some time here, so I will have to give
you something.
The reliability issue is obviously very important to the
Nation. Lessening our dependence on foreign oil is obviously
important for economic reasons as well as national security.
Tom Friedman's recent book, ``The World is Flat,'' where he
argues the old vertical model of economic superiority is over,
that the world is flat, it is horizontal and knowing who is
emerging, who is up and down is a much more complicated
exercise today.
In the book, he also argues that the United States, in
essence, is funding both sides in the war on terrorism. Because
of our over-dependence on foreign oil, we are paying a lot of
money that would be used for other things to help finance the
wrong side of terrorism as far as we are concerned. Then,
through our tax dollars, we are financing the American
interests in the fight against terrorism.
I think when we look at energy reliability, its impact on
our Nation, if you consider since World War II, anytime the
cost of oil has increased beyond 40 or 50 percent, the economy
goes into recession. The reason for that is money, being more
broadly spread throughout the world economy, is going to every
oil producing nation. If you look at the impact on our cities,
why is it kids in the inner city are disproportionately stuck
with asthma and upper respiratory diseases? It is our reliance
on fossil fuels to move our engines and move us around.
I think when we look at an energy policy in this Nation,
obviously reliability is very, very important for the
efficient, safe transmission of electricity, but also the issue
of a more diversified portfolio of energy sources including
renewable sources is fundamentally as important to the economy
as it is to national security as well.
I have talked to people from Chariman Wood's office who
have been very helpful by the way and I thank you for that.
On the issue of New York State who is experiencing all
kinds of problems, we have the State's energy use on a daily
basis which is approximately 31,000 megawatts. The supply is
about 35,000. Those narrow margins do not produce the cost
cutting savings stimulus, if you will, that was to result from
competition because there are not enough competitors in the
system.
We in western New York have an extraordinary resource in
the Niagara Power Project which produces about 10 percent of
the State's energy supply but because the demands throughout
New York State and through seven States outside of New York are
so great, we are unable to use that cheap hydropower for
economic development because it is spread so thin over a large
campus, if you will. Historically, the Niagara Power Project
which is powered by Niagara Falls was built as an economic
development tool for western New York and now is being used to
subsidize the losing operations of a state authority that is
responsible.
The chairman is on his way back and I will stop with my
discourse in a minute.
I have talked to your office and they have been very, very
helpful in terms of information and confirming certain
assumptions, etc. and we appreciate that.
With that, the chairman has returned.
Mr. Issa [presiding]. Thank you.
No ranking member has ever done better by his Chair.
At this time, I would like to request that the witnesses
and anyone else who may be consulting to the witnesses please
rise and raise your right hands.
[Witnesses sworn.]
Mr. Issa. The clerk will report that all present nodded or
spoke in the affirmative.
I would like to at this time introduce the Honorable Pat
Wood III, chairman, Federal Energy Regulatory Commission, the
independent regulator of the Nation's wholesale electric power
supply industry and natural gas, oil and refined products,
pipelines and hydroelectric facilities.
Prior to joining FERC in 2001, Mr. Wood served as chairman
of the Public Utilities Commission in Texas. He has also worked
as an engineer with ARCO Indonesia and as an attorney with
Baker and Botts. He holds degrees from Texas A&M and Harvard
School of Law.
Without further ado, Mr. Wood, you can deliver your
testimony as your able staff prepared it and as we all have
copies of it or at any point you may consider it all in the
record as it will be, and go off script and give it to us from
the heart.
STATEMENTS OF PAT WOOD III, CHAIRMAN, FEDERAL ENERGY REGULATORY
COMMISSION; MICHEHL R. GENT, PRESIDENT AND CEO, NORTH AMERICAN
ELECTRIC RELIABILITY COUNCIL; DAVID OWENS, EXECUTIVE VICE
PRESIDENT, EDISON ELECTRIC INSTITUTE; AND DR. MARK COOPER,
DIRECTOR OF RESEARCH, CONSUMER FEDERATION OF AMERICA
STATEMENT OF PAT WOOD III
Mr. Wood. Thank you.
Actually, I will give you what I worked on last night which
is a version of what I wrote but it tells you a bit more and I
think tries to address the concerns you have.
I would venture that nothing is as directly relevant to our
Nation's economic well being than the topic you are looking at
here today which is a dependable electricity system. The severe
economic impact of the 2003 blackout more than underscored how
critical electricity has become to our way of life. Not only
does there need to be enough power plants to generate the
electricity, but the delivery grid also needs to be robust and
reliable. And, as we saw in the last decade, the need to keep a
vigilant eye on the grid and on the players that use the grid,
who buy and sell the power there, is a critical role for the
Government.
I would like to focus today on two issues, the current
state of our electric infrastructure, which includes the need
for more investment, and the actions the Nation should be
taking today to beef up the grid. Right now, our electricity
transmission system is the weakest link in our electric supply
system. Only about 6 to 10 percent of a customer's power bill
pays for transmission and the men and women who build and
maintain it, but transmission is such a crucial part of keeping
the lights on that it doesn't matter that it is only 6 to 10
percent.
Unfortunately, however, transmission investment is not
keeping up with customer demand for power. This trend has
occurred in every area of the country. Although in the last few
years, we have seen a short term increase in transmission
investment, growth in transmission capacity still appears to be
lagging the growth in demand overall.
According to FERC public reports, transmission investment
increased this last year for the 4th year in a row and it is up
69 percent since 2001, but in the same years, few new high
voltage lines came on line. So just talking about transmission
in the aggregate is a bit of a difficult thing to do when it is
really the interconnectivity of the grid that we are talking
about. It is challenging to measure those on a form that
anybody can agree with.
In the last 4 years, 931 circuit miles nationally out of
150,000 circuit miles were added to the grid on the high
voltage side. This modest progress is in contrast to the 500 to
2,000 miles of interstate natural gas pipeline that FERC
authorized each year of the last 4 years.
There are a number of factors that cause this and I would
like to address those today. At one of our recent workshops on
transmission investment which we held about 6 weeks ago, a
witness for investor-owned utilities discussed the forecast of
a significant increase in transmission investment in the coming
few years. Other witnesses at the same hearing asserted that
much of the investment is catch up to make up for years of
under investment and that U.S. investment levels are
significantly below those in other countries.
In any case, there have been two serious consequences for
the overall under investment, increased transmission congestion
and degradation of reliability. We have seen the increase of
transmission congestion in almost every region of the country.
When the grid is under built, more expensive, less efficient
and in many cases, dirtier, power plants must be run in order
to serve the customers' needs, to keep the lights on, or worse
yet, economic transactions aren't scheduled in the first place.
Congestion is handled several different ways across the
United States from the more market-based mechanisms here in the
East and in the Midwest to manual reconfiguring of the system
through slower processes elsewhere. The amount of congestion
has increased steadily since 2000 and this has cost customers
billions of dollars since then.
I would like to show you the extent of the national
transmission congestion problem. This schematic map is drawn
from the Department of Energy's 2002 National Transmission Grid
Study and shows there is significant congestion and
transmission constraints across the United States. The red
arrows indicate the paths of flow that are often congested
which reflect where transactions cannot be scheduled in the
first place, or if they can be scheduled, they run the risk of
being curtailed.
Only one new large, inter-utility transmission project was
completed in recent years and that was the famous Path 15 in
central California, 500 kilovolt, which is a very big line,
from north to south in the State. The new byproduct of building
this one transmission line is that congestion increases on the
neighboring line. So Path 26 is now the new poster child of
western potential development. This is not unrecognized because
after all each of the Nation's three interconnective grids
carry a product that moves at the speed of light, 186,000 miles
a second, so you can believe the congestion can spread pretty
easily.
To focus on southern California, not for any particular
reason but just because the chairman mentioned it in his
opening statement and our wonderful staff was foresightful
enough to envision this, this chart focuses on what we view as
one of the most concerning areas for the summer for a few
different reasons than we have seen in the past. Yes, southern
California is experiencing congestion problems because imports
are a major factor in meeting the demand in southern
California. Due to a lack of local generation supplies,
congestion has to be closely watched there. There are other
regions of the country that are similar.
Imports from one source curiously impact the ability to
import from another, so depending on how you take power over
the D.C. tie from the hydropower in Oregon, it might affect the
ability to take in gas-fired power imported from Arizona. So
that balancing act is very important and the dispatch of one
line may actually pinch off the ability to bring in power
another way.
If we have normal temperatures this summer, there should be
adequate electricity to meet peak loads in southern California.
However, if it is warmer than normal, a 1 in 10 summer, for
example, we could have problems meeting electricity demand,
particularly in the peak month of August. Population and
economic growth will continue in that region which, of course,
is a good thing, but southern California will have continued
difficulties the next summer to match delivered supplies with
the increased demand.
Our commission met at the California Public Utilities
Commission's offices with the CPUC commissioners and with the
California Energy Commission commissioners and chairman last
Thursday to talk about this issue and to work on solutions for
this problem so that in fact we do not have a repeat of 2000
even if there are shortfalls and that they can be contained,
localized and not replicated elsewhere.
In addition we see this type of congestion not only in
southern California but in many regions of the country. I think
Mr. Owens' testimony points out how that has increased eight-
fold. There are reliability concerns for not having a robust
transmission infrastructure. We saw this most recently in the
summer of 2003 when the northeast States and Canadian provinces
were affected by that. It was estimated that brief but profound
blackout cost American and Canadian customers $4 billion to $10
billion in costs for just the day or in some cases, up to 6
days that the power was out in Canada.
If customers are to get the benefits, and there are many,
of competitive wholesale markets and also avoid the cost of
congestion and reduced reliability, we have to find ways to
accelerate investment in transmission. Inadequate transmission
infrastructure becomes particularly acute as we look at
developing a large transmission grid to handle new clean coal
supplies and more nuclear power which I think have to be a big
part of our future development. Those types of plants are, by
nature, going to be located distant from the cities and from
where the load is and will require a much more robust and
stable grid than we have today.
I think one of the thoughts we have been grappling with at
the Commission since I have been there and actually before are
what are the hurdles to getting transmission built? I think
from several conferences and several years of experience on my
part, and on our staff's part as well, we categorize them into
about five: local and State siting approvals; retail rate
freezes at the State level that discourage new investment; and
where you don't have those, the lengthy regulatory cost
recovery proceedings that do ensue; intra-corporate competition
for capital, if you have a chance to build a power plant or
build some distribution lines or build a transmission line,
transmission tends to always be third in that race; and
concerns about losing customers to outside competitors.
Why build a line that is going to help your competitor take
away your customer? It is just an intuitive thing that you have
to address your fiduciary obligation to your shareholders if
you are privately held companies, so if it doesn't make a lot
of sense to them, why are you building that line to help your
competitor take away your customer? It is tough.
We are working within our current statutory authority to
encourage an adequate investment climate and additional
measures are needed. I think we have before you in the Congress
a bill that you mentioned, Mr. Chairman, that I think can
address three of these things.
Those things are only in service of a greater vision. We
brought copies of a study that came out unfortunately a week or
so before the blackout in North America. The Department of
Energy did an excellent study which has been a fixture at our
Commission for the last couple of years, ``The Vision: Where
Are We Going To? What is it we want to build toward?'' This is
Grid 2030, it is a vision, a high level document but it is one
I think is important to get the ball rolling. What is it we are
building toward? We are building toward interconnection of the
regions across the country so that the fuel diversity of our
great country can work to the advantage of everybody without
working to the detriment of the people who have the supplies
near them.
This vision statement is one I fully support and it
describes a regulatory framework as well as a technological
framework that governs system planning and market operations
for the years ahead. It builds on existing infrastructure much
as the interstate highway system was built on the old U.S.
highway system and doesn't try to Federalize the transmission
grid but indicates there are some areas of national interest
that need to be addressed. I would highly recommend that as
really the end point.
This bill before the Congress has a number of steps in it
that I think move in that direction and for that reason, I
share your exultation that the Congress should adopt and get it
to the President so he can sign it. You have passed it a few
times as has the Senate. It is just sewing that suit together
that makes an ugly part, so if that could be done this year, I
think it will be important for America.
I want to close with three things of particular interest to
us at the Commission as we try to look after the broad public
interest that are real critical parts of this bill. The first
is the mandatory and enforceable reliability standards of
setting up a system by which the rules of the road are not only
clear and enforceable but they have a sting if you don't obey
them. That is an important step we do not have today. As I have
heard my friend Michehl Gent say a lot of times, this is going
to be one of the most important things we could do this century
to make our grid reliable and it could have prevented what
happened in your colleague's hometown and I think your former
hometown.
An important thing the House did stick in was a specific
explicit authority over the interstate grid's cyber-security
standards. While I think anybody would view these as
incorporated in reliability standards, the current situation
that allows utilities or doesn't really govern utilities'
ability to get inconsistent cyber protection for their grid
across the country would be remedied here and be put under all
the other reliability standards and treated that way.
I think a focused cyber attack is one of the things I am
concerned about. I think, more than inadequate tree trimming,
the potential for somebody at a desk to infect the weakest part
of the grid and reek some damage is a real concern. I think the
standards that govern that need to be very agile and very smart
and need to be mandatory and consistent. It has been 2 years
since the blackout and I think it is unconscionable that we
don't have this enacted despite the recent actions of the
Congress.
Back stop siting authority for our Commission is the second
of the three big items. I think some certain critical electric
corridors can be identified by the Department of Energy. Much
like the Grid 2030 vision, those types of corridors are the
ones where you would focus the backstop authority, but not
Federalize the whole system as we have on natural gas which
admittedly has worked quite well, but make sure the focus is on
the backbone systems that are not being built if a State cannot
or does not act in a timely manner.
Finally, I know there are some points of discussion about
this but I do think repeal of PUHCA, the Public Utility Holding
Company Act, is overdue. I think the protections that were not
in place in 1935 that would have prevented the need for PUHCA
in the first place are in place and have been in place for
quite a while at the State and Federal level both at the
utility commissions and at the Securities and Exchange
Commission. I think those laws do ensure quite an amount of
redundant customer protection which PUHCA was intended to
adopt. I think it would spur investment in transmission
infrastructure and would facilitate competition across the
country.
Thank you for the opportunity to talk on a topic near and
dear to my heart and I look forward to any questions you may
have after our good panelists get through.
[The prepared statement of Mr. Wood follows:]
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Mr. Issa. I will note for the record, without objection,
the entire document, ``The Grid 2030,'' will be included in the
record of this hearing.
[Note.--The U.S. Department of Energy document entitled,
``Transforming the Grid to Revolutionize Electric Power in
North America `Grid 2030' A National Vision for Electricity's
Second 100 Years, July 2003,'' may be found in subcommittee
files.]
Mr. Issa. At this time, if I may go back to regular order
for a moment, I would like to introduce the rest of our
speakers and then get to Mr. Gent.
Our next speaker will be Michehl R. Gent, president and
CEO, North American Reliability Council. After he speaks, we
will have Mr. David Owens, executive vice president, Edison
Electric Institute; and then Dr. Mark Cooper, Director of
Research, Consumer Federation of America.
With that, we would next go to Mr. Gent.
STATEMENT OF MICHEHL R. GENT
Mr. Gent. Thank you.
As we approach the second anniversary of the largest
blackout in North American history, I think it is important
that I share with you the status of our efforts to prevent such
a reoccurrence. I thank you for that opportunity. My prepared
comments have the details of many of the programs, processes
and standards that we have implemented and I again make the
case that the next move, passing the reliability legislation,
is up to Congress.
The electricity industry has undergone profound changes in
the past decade as competition has taken the place of
regulation in major parts of our country. Those changes have
had significant consequences for how the industry maintains the
reliability of the bulk electric supply systems serving North
America. The introduction of competition means that we must
change the way we deal with reliability matters. I think the
blackout of August 14, 2003 proves that the old way of handling
reliability will not work effectively in a restructured
electricity market.
There are understandable reasons why the old ways will not
work. Before restructuring, the industry was comprised of
entirely vertically integrated utilities, both investor owned
and publicly owned, each owning its own generation, each owning
its own transmission, its own distribution system, and in fact
owning its own customers, if you will.
Utilities sold electricity to one another but it was mostly
between neighbors trading back and forth and then in later
years, it developed into emergency purposes and then finally
with the advent of the passage of the Energy Act of 1992 we
have more transactions on the interconnections.
As the competitive wholesale electric market developed,
trade in electricity spanned longer and longer distances with
organizations moving larger and larger blocks of power from one
region to the other. However, the electric transmission system
was not designed, nor was it built, to move such large amounts
of power. In fact, it hasn't changed substantially in the last
10 years.
Along with the increased competition and supply of
electricity came what we call corporate restructuring. Here are
just a few examples of what has happened. Some organizations
have sold off generation assets as part of their move to
competitive wholesale markets. Other organizations have turned
operation of their transmission system over to independent
transmission operators or regional transmission organizations.
Some have become transmission only organizations. Independent
power producers have become the primary developers of new
generation plants and services have been unbundled in many
parts of the country. We no longer have this link between the
generation plant and the customer.
The net result is often that several generating plants
under separate ownership might now sell their output to an
unaffiliated marketer who would arrange for an unaffiliated
transmission company to transmit the electricity to an
unaffiliated distribution company for delivery to the ultimate
customer who may feel unaffiliated. With that degree of
unbundling and restructuring, the required near constant
coordination and communication among the operators of the
transmission system that formerly took place in a vertically
integrated system became at the same time more difficult and
yet more important than ever.
An important indicator of the status of the electric
system, as Chairman Wood said, is the amount of congestion
occurring on the system. For each year in the last decade, more
transmission lines have been experiencing congestion for more
hours of the year. We have fashioned reliability rules for
handling that congestion but that could also mean that someone
doesn't get transmission service. Someone is going to have to
pay more for their electric energy because of the congestion.
It is obvious to me that the needed construction of additional
transmission capacity has not kept pace either with the
expansion of generation or with the increase in the customer's
demand.
Since the blackout of August 14, 2003, the electricity
industry has accomplished much to strengthen the reliability of
bulk electric systems in North America, yet much more needs to
be done. Long before the blackout, the industry realized that
the way we had been handling reliability for the previous three
decades would no longer suffice. The voluntary system of
cooperation and peer pressure that had worked so well for 30
years would not be sufficient to maintain the reliability of
the system. We all agreed that the answer was to make the
reliability rules mandatory and enforceable.
To accomplish that, we started about 6 years ago--that is
NAERC and a broad coalition of the electric industry
stakeholders from all industry sectors as well as the customers
and regulators--to put together legislation that we could all
live with. We have been seeking amendments to the Federal Power
Act and as you mentioned, that has been passed in the House
bill. That legislation would make reliability rules mandatory
for all owners, operators and users of the bulk electric system
regardless of those entities' jurisdictional status under the
Federal Power Act.
It would authorize creation of an industry-based electric
reliability organization to set and enforce reliability
standards subject to the oversight in the United States of the
Federal Energy Regulatory Commission. I might add, in Canada,
that would include a provisional agreement.
Legislation also recognizes that the international nature
of the interconnected grid does exist and that the reliability
activities have to be carried out by regional entities, not
some central force located in either Washington or Princeton,
again with FERC oversight.
Congress now appears poised to finally enact the
reliability legislation that we have been seeking as part of
the comprehensive energy bill, but we have been here before and
we have been disappointed before. This time it is a little
different because, as a result of the blackout we had 2 years
ago, we even have the support of the United States and Canadian
governments. In fact, the U.S.-Canada Power System Outage Task
Force that investigated the 2003 outage concluded, ``The single
most important step for maintaining a high level reliability is
for Congress to enact the reliability provisions in the pending
legislation you already passed.'' NERC is very hopeful that
this will be our year.
I am convinced that if we had the legislation 3 years ago,
the blackout would not have occurred. In my written testimony
is a brief description of many of the steps that we have taken
to assure that a blackout like the one that occurred in August
2003 cannot be repeated. We have implemented many of the steps
that were called for in our own report, recommendations in the
report of the U.S.-Canada Power System Outage Task Force and
steps in the proposed legislation.
Those implemented steps include a rewrite of our standards
to make them sharp and clear; required training programs for
system operators that will be handling emergencies; standards
for vegetation management; and readiness audits of the
operating centers to just name a few. However, memories are
short and all we have are promises. We need the reliability
legislation to make all of this mandatory and lasting.
After the blackout, we were able to accomplish much because
everyone was focused on reliability. However, as time has
passed, priorities have shifted, people have moved on, and
other issues are competing for your time and my time. Having
the reliability legislation in place finally will make sure
that NERC and the entire electricity industry can make the
proper focus on reliability an ongoing and sustainable
activity.
Thank you, and I would be pleased to answer your questions.
[The prepared statement of Mr. Gent follows:]
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Mr. Issa. Mr. Owens is executive vice president for
business operations with the Edison Electric Institute. He
joined the Institute in 1980 and has held a number of positions
related to power supply policy and industry regulation. Prior
to joining Edison, he served as Chief Engineer of the Division
of Corporate Regulations of the Securities and Exchange
Commission.
Mr. Owens holds a Bachelors and Masters degree in
engineering from Harvard University as well as a Masters from
George Washington University.
Welcome, Mr. Owens. Your entire testimony will be put in
the record. So again, feel free to, within our timeframe,
expand upon your written testimony.
STATEMENT OF DAVID OWENS
Mr. Owens. Thank you.
You dated me a little. In 1980, I was a child prodigy. I
was about 4 years old when I started my career.
Mr. Issa. I was a child prodigy captain in the Army at that
time, so our prodigy background is duly noted. [Laughter.]
Mr. Owens. On a serious note, EEI is the association of
U.S. shareholder-owned electric utilities and industry
affiliates and associates worldwide. We certainly do appreciate
this opportunity to testify on electric reliability and
transmission issues.
As you know, the energy bills now pending in Congress
contain a number of important transmission reform provisions
that would help to strengthen our Nation's transmission
infrastructure. EEI strongly supports these provisions. I would
like to take a moment and highlight for you eight items I think
are very critical to maintaining reliability and enhancing our
overall transmission infrastructure.
Like the other witnesses, I feel very strongly that
Congress should establish mandatory reliability rules for all
market participants with important FERC oversight. We strongly
urge the inclusion of these provisions in an energy bill, but
without the budget limitations contained in this year's House
passed version of H.R. 6.
My second point would be that Congress should require FERC
to reform its transmission rate policy in a manner that will
provide greater certainty to investment in the transmission
system. We certainly do support the FERC pricing and
technologies provisions in H.R. 6, and particularly those
incentives to expand transmission infrastructure. I also
appreciate the comments that Chairman Pat Wood has made with
respect to some of the things FERC is seeking to undertake.
Third, I would urge that Congress give FERC backstop
transmission siting authority for many of the various reasons
that Chairman Pat Wood spoke of. In my view, regional
electricity markets require a transmission siting process that
has the ability to consider regional and even national needs.
As you know, most siting laws do not allow the consideration of
regional benefits. Many of them also do not recognize the role
of some new important entities such as multi-state, regional
transmission organizations or independent transmission
companies. These entities, in my view, play a significant role
in the planning and siting of transmission.
H.R. 6 would give FERC limited backstop transmission siting
authority. This authority would certainly not be as
comprehensive as the authority that FERC currently has with
respect to natural gas pipelines, but it would help site
transmission lines in interstate congested areas, which are
designated by the Department of Energy. This would occur only
if States have been unable to agree or to act within a year.
My fourth point is that Congress should reform the
transmission permitting process on Federal lands by designating
the Department of Energy as the lead agency to coordinate and
set deadlines for the Federal environmental review and
permitting process. As you know, the Federal transmission
permitting process needs to be coordinated, needs to be
simplified, and needs to be able to work. It is a very
cumbersome, complicated process today. We strongly support the
provisions in H.R. 6 that would accomplish this goal.
My fifth point is that Congress should ensure all
transmissions providers must allow open access to their
transmission lines to any third party power seller. The current
system that we have today is one where government-owned
utilities and electric cooperatives collectively own and
operate about 32 percent of the Nation's transmission system.
Unfortunately, these transmission owners are not subject to the
same level of FERC jurisdiction over transmission that applies
to shareholder owned utilities.
In my view, this bifurcated regulation of interstate
transmission lines certainly will not work as the industry
structure continues to evolve. We believe that sound public
policy to protect consumers would mean putting all utilities
participating in interstate wholesale electricity markets under
FERC's full, just, and reasonable requirements. At a minimum,
EEI strongly supports inclusion of an effective FERC-lite
provision in any electricity bill, which would make all types
of utilities subject to non-discriminatory open access
transmission rules.
My sixth point is that Congress should clarify Federal law
to authorize Federal utilities to join an RTO or independent
transmission system operators voluntarily. I am not supporting
mandatory RTOs but I do believe that certain Federal entities,
such as in the Pacific Northwest, where the Bonneville Power
Administration controls over 70 percent of the transmission
system in that region, has to have the clarity that they can
become a part of a regional transmission organization.
My seventh point is that Congress should repeal and
modernize the Public Utility Holding Company Act of 1935. As
the Chair correctly pointed out, PUHCA acts as a substantial
impediment to new investment in energy infrastructure. It is
keeping billions of dollars of capital out of the industry and
particularly capital that could be very useful in modernizing
our transmission system. We believe this outdated statute has
contributed to the failure of electricity infrastructure to
keep pace with growing electricity demand and the development
of regional wholesale electricity markets.
H.R. 6 contains provisions that will repeal PUHCA and
transfer consumer protections to FERC and the States. These
provisions are similar to PUHCA repeal language that has been
included in every major electricity bill considered by the
Congress over the last decade, and which have been endorsed by
every administration, Republican and Democratic, since 1982.
They should be included in the energy bill again this year.
My eighth and final point is that Congress should provide
for enhanced, accelerated depreciation for electric
transmission assets, in other words, reducing the depreciable
lines from 20 years to 15 years similar to the tax treatment
governing other major capital assets. Currently, transmission
assets received less favorable tax treatment than any other
critical infrastructure and technology. Accelerated
depreciation for transmission will help increase investment in
and strengthen our energy infrastructure.
Let me conclude. Congress needs to finish the job and pass
an energy bill as soon as possible to help promote fuel
diversity, to improve the energy efficiency and conservation of
our systems, to provide regulatory certainty in energy markets,
and to encourage investment in critical infrastructure. We urge
Congress to adopt an energy bill that includes the transmission
provisions contained in H.R. 6.
This completes my statement and I would be pleased to
answer any of your questions.
[The prepared statement of Mr. Owens follows:]
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Mr. Issa. Thank you, Mr. Owens.
We now turn to Dr. Mark Cooper, an author of many books and
writings and a scholar. Dr. Mark Cooper is director of
research, Consumer Federation of America, where he is
responsible for energy, telecommunications and electronic
policy analysis. Dr. Cooper is author of a book, ``Equity in
Energy,'' and has published numerous articles on energy policy
and deregulation over the last 20 years.
Dr. Cooper received his Ph.D in sociology from Yale
University, a Masters degree in sociology from the University
of Maryland, and a Bachelors degree in English from the City
College of New York.
With that, I very much look forward to hearing parts of
your written testimony and anything wlse you may be willing to
give us that is not yet included in your written statement.
STATEMENT OF DR. MARK COOPER
Mr. Cooper. There is always a tendency to just throw them
away and respond to what went before because I have a rather
different point of view, but let me sort of lay the base by
explaining why we view the electric utility industry rather
differently from the market philosophy you have heard
heretofore. Then I will try and go through about 10 points at
which we disagree.
Frankly, the failure of Congress to pass the legislation
the last couple of years has not troubled us a great deal
because bad legislation is worse than no legislation. We don't
think that the legislation will do us a great deal of good.
I want to start with a simple observation. I commend the
committee for focusing on the important point here, the
reliable supply of electricity and casting a very broad net,
because the framework of the letter invited me to go where I
thought I needed to go to make my points.
Electricity is like oxygen in the 21st century. The way I
like to get my audiences to understand this is the ``E'' in e-
commerce stands for electronic. If the electrons don't flow,
all the gee-whiz digital gadgets we love won't work. This is
the foundational service in our society. In fact, we believe
that reliability is a public good. The transmission system is a
commons in the following sense.
The benefit of reliability is shared. Once people are
hooked to the grid, it is hard to exclude anyone from enjoying
the benefits of the reliability that is provided to the group
as a whole and is non-rivalrous. That is, the fact that I get
the benefit of reliability does not deny my neighbor the
benefit of reliability. In that sense, it is a classic public
good. But there is more than that.
Electricity has massive positive externalities. You heard
the numbers. A few days' blackout cost $4 billion to $6
billion. That is the external value of electricity. There are
also severe negative externalities with respect to building
these facilities, so people do resist having lines built
through their neighborhoods because there are environmental,
health, and property values that are undermined by these
facilities. This is a legitimate source of debate between
people about the private value of transmission versus the
external negative values that it imposes on people.
We firmly believe that as long as you try and take this
public good and commodify it, this infrastructure, you will in
fact restrict the supply of reliability and undermine the
public benefits that it can provide. So we see critical public
values here in electricity. The law says it is affected with
the public interest. It is a public good in its infrastructure,
it relies on public resources, it demands public participation
and cooperation between all these many entities that must make
the system work.
I believe that we had the best electric utility system in
the world precisely because we found the way to balance the
public obligations with the private incentives, the social
responsibility, and the private profit motive. We believe
irrational exuberance for deregulation in the 1990's undermined
that important balance.
Electricity is not a commodity that can be easily sold in
the marketplace on a spot market basis, and we have seen that
in the last 10 years. It is not shirts or shoes. You can't
build them in Taiwan, transfer them to Brooklyn and put them in
a warehouse for a year and wait to sell them. It is not a
store-bought commodity. It doesn't behave well as a commodity
market, and therefore, we have to treat it very, very
differently.
The cost of capital in this industry, if you try and treat
it on a merchant basis, goes through the roof because it needs
a very long term perspective, but the merchants want to recover
the costs on a very short term basis. You have heard about
accelerating depreciation to 15 years. This is for facilities
that will last 30 and 40 years. When I studied economics, the
idea of financial accounting was to match the financial life to
the economic life because that is what keeps things in balance.
These are assets that need long financial lives because they
have long economic lives and they are shared facilities.
As we look out at the experience of deregulation, we
understand that restructuring puts stress on the grid. You
heard some of the reasons here: a dramatic increase in the
number of transactions, a dramatic increase in the complexity
of transactions, increased difficulties of coordinating these
sales, and contracts which were not what the system was built
to do.
It is a physical system, intending to move electrons, and
electrons are the most nasty little beings in nature on which
we depend. First of all, they go where they want, the path of
least resistance; when they arrive under the wrong
circumstances, they actually do a great deal of harm. In the
end, the engineers are going to tell what is supposed to
happen, not the market transaction. So we have wasted a
tremendous amount of effort and energy in trying to build
transactions on top of the physical system.
This leads us to a very different view of how to deal with
the transmission system. It needs to be affected deeply at its
core, its root has to be in the public interest, not in the
maximizing of profits and markets transactions. When we look
down the list of things, you have heard about what needs to be
done. We need long term, integrated resource planning around
these facilities, that is a comprehensive, rigorous approach.
We need a study of the grid to figure out exactly which
facilities need to be built.
We don't need the marketplace to figure out where we need
to build facilities; the engineers know exactly where to build
facilities. In fact, we can move that around if we want, but
the simple, physical nature of the system dictates in the end.
We don't need to have the marketplace to discover that
mechanism.
Frankly, every time we amend the Public Utility Holding
Company Act, a consumer pays the price. Enron lost its Public
Utility Holding Company Act exemption about 2 years after the
disaster in California and, in fact, if they had never been
given it, the consumer would have been better off.
The Public Utility Holding Company Act has a simple
purpose, to keep utilities focused on their central task, which
is providing electrons to consumers, to not get distracted with
other businesses, to not get distracted with maximizing
profits. In California, we learned a lesson. Electric utilities
worry about keeping the lights on. Merchant generators only
worry about getting paid and maximizing profits. When the
lights went out, we have now discovered they were joking in
their control rooms about the pain being imposed on people. We
cannot run the system that way. The Public Utility Holding
Company Act went a long way to protecting us from those
difficulties.
Ultimately, we believe in open access systems, but the
problem is not with governmental entities who are in fact
created to promote solely the public interest. We think the
problem has been with the investor-owners who have used their
control over the grid to prevent the flow of electrons.
On each of these points we have a rather different view
which arises from a fundamental difference of opinion about how
we need to organize this sector. The primary core of the
electric utility industry, the transmission grid, is not a
market, it is a commons. It is a public good and that needs to
be the way it is designed, thought about and administered.
Thank you.
[The prepared statement of Dr. Cooper follows:]
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Mr. Issa. Thank you.
With that, I would ask unanimous consent that all Members
be allowed to put their opening statements and any other
pertinent or extraneous information into the record for 5 days
after this hearing.
The Chair would recognize, as is our custom, myself for 5
minutes. I will make my questions short and we will alternate,
and undoubtedly, we will get a second round.
Dr. Cooper, I really enjoyed your testimony. I say that
with no reservations. I think you hit on something that is
very, very important. Perhaps I agree with you in part and
disagree with you in part. You said that electricity isn't a
market. Might I ask you a leading question, isn't it, no matter
how you look at it, a market? What we are debating in
deregulation is whether it is, as you used the term, a spot
market or whether it is a market in slow motion, in other words
a market of 30 year purchases, a market of 30 minute purchases.
In California, we had a market of 30 year purchases for 100
years. You bid the plant prior to construction based on a
formula of what you anticipated to be the cost and you
recovered it. If you bid a hydroelectric plant that cost 2
cents a kilowatt hour and never changed prices for all
practical purposes for 100 years, or you bid a natural gas-
fired plant that might be 2 cents a kilowatt hour at the
beginning, but over the years because of the cost of that fuel,
might go up higher and higher, you were still bidding its cost
plus a profit.
Would it be fair to say that the debate is between that
model which I would still call a market, but a market that in a
sense is a 30 year market versus the market that you didn't
seem to like which you called the spot market?
Mr. Cooper. We were vigorous supporters of the 1992 EPACT.
We were one of the few groups that supported it. There was not
a market before that. There were regulated franchise service
territories. There were no bids or a few bids but very little
bidding. In the 1980's, we discovered that every time a utility
was told to go out to bid, this was for bid chunks, not a
retail spot market. Every time they went out to bid for
capacity, they were offered 10 megawatts for every 1 they
needed. It looked like why couldn't we run the system in that
bidding framework.
In fact, the previous 30 years, the whole history of the
industry did not have that market discipline. We were
interested in that market discipline, but let us be clear, in
the 1990's, we never tried that model of what we could call
managed competition. It wasn't very popular around here when
you talked about health care, but that was the model that was
in the 1992 act.
That model was never tried. It got hijacked into the short
term spot market transactions model, the Enron model, which I
have testimony from 1997 in Pennsylvania where we were opposing
it even before we saw how ugly it was precisely for these
principles.
I agree with you in that sense. There was a middle ground
which was not dependent upon the spot market, and in fact, in a
certain sense when people tell me just get long term contracts
and you can protect yourself, the utility franchise was a long
term contract between the ratepayers and the utility. So one
answer is yes, there may be a middle ground we need to get back
to but that looks very different than what we had in the one-
third of the States that tried it.
The second problem with the 30 year versus 30 minutes, once
you start with the mixed model, what happens is, and you heard
this described, the people who think they can maximize their
profit in the 30 minute market don't want to sign deals in the
30 year markets. So it gets very difficult to have that mixed
basis. So there are people outside in two-thirds of the States
who are signing long term contracts and doing long term deals,
but in the area where you have this 30 minute market, you have
difficulty raising funds even around prominent projects
obviously needed.
On the one hand, there is a middle model; on the other
hand, it is very, very difficult to run this mixed set because
everyone keeps holding out for the fantastic profits they think
they can make in the 30 minute market, starving the 30 year
market of the capital it needs.
Mr. Issa. Let me ask not a followup question but a question
that came out of the part of your testimony that was
extemporaneous. I appreciate that. You seemed to be concerned
that accelerating depreciation was somehow unjust. Perhaps I am
a recovering businessman, but say we are talking 30 year
assets, matching assets with depreciation is an interesting
question of accounting more than economics.
Isn't it true that for the first 15 years of a 30 year
depreciation, even if you accelerated the 30-year lifespan to
15, what you really have is you have loaned the Federal
Government money because you have put in your tax paid capital
and now you are waiting to get back against the loss. At the
15-year mark, in a 15 year depreciation of a 30 year asset, you
actually only get even. You paid the Government as though it
was profit, and then get your money back over 15 years.
I might suggest for your future testimony, that when you
match it, remember that capitalization is to a certain extent
loaning the Government against tax revenue and getting it back
over time. If you match it 30 for 30, what it really means is
you put all your money up front, pay the taxes and then were
allowed to depreciate it as it went to zero value, but
essentially you still made a loan of that tax money to the
Government.
Mr. Cooper. In the utility model, the matching between the
long and the short term is much less of a problem because you
have that long term relationship, which is precisely why the
cost of capital is so much lower.
The other problem that I see with the incentives schemes,
and you heard two of them here, accelerated depreciation and
higher rates of return, is that the theory of giving those
incentives is to induce people to build things that they might
not otherwise have built. The impediment to building
transmission by and large is not an economic impediment. We
have social impediments, we have socially imposed scarcity
frequently, and we have heard a lot about that. We can argue
about whether that is a rational or irrational choice, but it
certainly is a choice that people have to make.
From my point of view, throwing incentives at transmission
projects is good money out for bad. I don't need to incentivize
these things. I know where they are, I can guarantee, or pretty
much guarantee, the rate of return without paying too much for
them. So to me these two incentive schemes are in fact not
efficient. The problem in this industry is that it is rich in
rents, and rents have nothing to do with efficiency.
The other point about acceleration is that on the tail end,
the rate payer is supposed to get it back because what they are
paying for depreciation declines. Our experience has been that
when the tail end finally arrives, as it did with the nuclear
power plants, they decided to find some other way to make sure
they didn't lower my rates. They decided they needed to
transfer those assets to companies that were about to face
competition.
My problem is that I paid the price in the short term and I
don't tend to get the benefit in the long term.
Mr. Issa. I appreciate that.
My time has really expired. I will give one more question
for Commissioner Wood if I have my vice chairman's permission.
The repeal of PUHCA, or its substantial elimination and
reform, is timely according to Warren Buffett, one of the most
trusted men in America. And we might all say Warren Buffett is
no Enron and get very little if any argument. His estimate is
that there will be $10 billion to $15 billion in new energy
capital that will come in if PUHCA is either reformed or
repealed, a win-win, if you will.
Could you give us your thoughts on how accurate Mr. Buffett
is and how much of that relates to your belief as an outgoing
commissioner that PUHCA ought to go?
Mr. Wood. Of course that may be Mr. Buffett's share, what
he is talking about.
Mr. Issa. It could be just his share. That is a good point.
Mr. Wood. I think it is common knowledge.
Mr. Issa. I apologize, it is his share, so I guess we are
talking about probably double that if we include the rest of
the investors.
Mr. Wood. It is an attractive business, if the two big
impediments which are cost recovery and siting issues can be
dealt with. As a regulator of a State that has kind of gone
through the full transition, when it was all fully regulated,
the cost recovery and the siting issues were dealt with pretty
cleanly, so there was investment in transmission, not
necessarily the kind of transmission we need to facilitate a
market but transmission got built.
When it gets fully unregulated, you have clear mechanisms
in place as, for instance in my home State of Texas where they
have now transmission, is getting built there as well,
windmills are getting interconnected, and new power plants. It
is this awkward transition that we are in and I think PUHCA can
address all three worlds.
Allowing utilities to bulk up is not a bad thing, if we are
talking about their wires business. Having one wires company
over maybe four States like in Mr. Westmoreland's case,
Southern Co. covers a lot of States as opposed to having four
companies in one State, just natural intuition tells you
economies of scale, those four companies could pack together
and become one company and you could probably save some money
and run a smooth operation That is not a bad thing and PUHCA
doesn't necessarily prevent that but I think it does discourage
that the way it is set up.
So unleashing capital, yes, I think you would have also
some foreign investment in the United States, which I am not
concerned about, you would allow companies to buy across the
country, which from a generation market power point of view, we
actually like better than companies buying their next door
neighbor, which is about the only thing you can merge with the
way PUHCA is written.
I think the capital is there, but I do think the bigger
questions honestly could be addressed by cost recovery and
siting. PUHCA is important. I don't know if it is the
dispositive one.
Mr. Issa. As a followup, wouldn't you say that we have
hundreds of billions of dollars of foreign investment coming
into this country from Canadian electricity, Canadian gas,
Middle Eastern oil, and soon to be large amounts of LNG. In a
sense, we have that investment and the choice is will it be
dollars, or will it be an imbalance of payments that we have to
make every day by buying their products?
Mr. Wood. That is fair and I think certainly electricity is
a little different for the reasons I think Mark Cooper laid
out. It is going to be made in America because of the way you
can't store it and you have to consume it right away, but the
interconnectivity of us with Canada, as a good example, one Mr.
Gent went through with the blackout, we do have a lot of
investment across border and energy, particularly to the north
going both ways. Now with LNG coming in, we will have it much
more like it is with oil, stretched around the world. It is not
necessarily a bad thing.
I do think the balance of payments issue is of concern, but
an interdependent economy does probably lead to a more peaceful
world. I guess as one who plans to be here a few years longer,
that is not a bad outcome.
Mr. Issa. Very good.
I will now turn to Mr. Westmoreland for his questions. You
certainly will have any extensions of time you feel you need. I
have taken them.
Mr. Westmoreland. Thank you, Mr. Chairman. You have always
been fair about that.
I want to put it on a simpler level since we are talking
about the reliability of electricity. Most people who go into a
room and turn on their light may not know where this
electricity comes from. They just know they have it. They know
when they have a power outage. I think a lot of people assume
when they have a power outage that it is the lack of
electricity when it could be too much electricity or too much
demand on the lines.
As you mentioned, electricity cannot be stored. This is an
energy that you cannot store, so it is a complicated situation
I am sure when you look at how much power is being generated
and how much of the 680,000 miles of transmission line can put
into these substations that distributed 2.5 million miles of
power lines. We were talking about building more generation
plants.
I know in my district we have built what they call peak
plants. When the loads are there, they cut on and in the peak
power use, they put them through there. It is almost as if we
are taking congestion, and I will use traffic congestion as an
example, and saying rather than building more roads, we are
going to build more cars to help with the congestion.
I think Mr. Owens said to let any generation go on
anybody's transmission line, you can't use more power than what
that transmission line will accept. It can only handle X amount
of power. So I don't know that generating more and allowing
somebody else to put on a commodity that cannot be used, unless
it is used at that moment, it can't be stored anywhere.
I guess my question is this, is there any technology, or
whatever, that is going about? We talk about the siting
problems. Nobody wants a transmission line in their backyard.
Is there anything about these lines being able to carry more
electricity on the same routes as they are now? I know it used
to be when you had a telephone line put in your house, that is
exactly what you got, one line.
Now, with some of the cables and capabilities that we have,
you can get an unlimited number of telephone lines in your
house by just running one line. Is there any technology that we
are looking at from that standpoint that may make our power
situation more reliable?
Mr. Wood. One that comes to mind is one I heard about 2
weeks ago, XCEL Energy, which is the investor-owned utility
that serves Minneapolis Twin Cities as well as other areas
which put in a conductor, the same diameter conductor, the same
diameter wire. It has the capability to carry over a 10 mile
period a pretty tight right-of-way, right there in the Twin
Cities and was able to double the capacity without a new right-
of-way. They didn't have to condemn any more land or have any
more landowner hearings, or do any more environmental reviews.
They were able to use a newer technology for metal alloy and
actually use a line that was lighter and because it is lighter,
it can carry more load and not require a bigger tower.
Those types of things cost more, so each of these utilities
is going to run through a cost benefit. Is it cheaper for me to
buy more expensive wire than to go through another siting
hearing?
I saw the same thing in New England. They are using some
newer technologies in some of the cities there and go
underneath the city. We have seen that in Detroit as well. I
think the cost benefit issues are very real to these utilities.
It is true with public power as well. TVA and Bonneville have
been very much leaders in exploring new technologies because
they had some leeway from their boards and from their corporate
structure to do that.
I do think the laboratories, and I know Mike probably knows
about them as well, are approving a lot of new technology. As
with telecoms, the power industry will be transformed by
technology I would predict. Right-of-ways is certainly the most
easy point to think of it.
Mr. Cooper. I would just offer the observation, Chairman
Wood has sort of described of what is an incremental advance. I
don't think we will see the exponential advances that you have
mentioned in the digital products, telephone products. One of
the fundamental differences is in contrast to electrons, which
are these nasty little beings, bits are wonderfully, remarkably
behaved. You can take a bit and tell it what to do and if you
download something on your screen, you will see the packets
arriving as it goes in pieces, so they are very different, the
physics of the two things are different.
So the incremental improvement is certainly there and ought
to be encouraged. Things like distributed generation which
saves on both generation and transmission are interesting and
advances in technology, but I think it is incremental as
opposed to the exponential hope and advances that we have had
in information services.
Mr. Westmoreland. Thank you.
I guess the last question is for Mr. Wood and I will give
you these extra questions since you are leaving in a couple
weeks.
You mentioned four companies becoming one company. Does
that not take away a little of the competition? I know you said
maybe they could do it for less money by having one company but
what we found especially in Georgia is we have some EMCs and
different power companies along with the Southern Co. and even
though we have not deregulated, we do offer competition. I
think if you use more than 900 kWs or something you have your
choice of using any power company that will come in there. It
has made it very competitive.
I was talking to some folks that do business in Georgia and
some of the other southeast States and they were talking about
how much money they save by us doing that and not just having
to buy from one power company. I guess my question is, do you
think we need to federally deregulate power and what is the
real reason, the guts of it? Why do you think it would be
better?
Mr. Wood. That has kind of been my career for the last 10
years, which is allowing customers to choose. What we do at
FERC is regulate the wholesale level between and among parties
but I think I differ from what Mark Cooper laid out, in that I
do think it is very important not just for ideological reasons
but for the innovations in both technology and in customer
service, the improvement in price, to allow customers to pick.
A guy introduced me the other day who was chairman of the
Maryland Commission. He said the best way to get to deregulated
power in Maryland would be to put my poster board up and say,
do you want this man setting your power rates or do you want to
pick them yourself? That is a little flippant but the point is
true. In so much else in our economy, customers have gotten a
choice in items we never dreamed we would have choices in. I do
look forward in a month to moving home to Houston and I have 21
choices of electric power providers. Some are 100 percent
renewable, some give you airline miles with it, one was at an
18 percent discount to the going rate everybody else was
paying. I like that, I like that when I shop for cars, but I do
think that the State should make that choice.
You asked me about Federal. I testified 9 years ago to Mr.
Blyley's committee and I had to think long and hard about that,
but I think each State is different. Some of the States, for
example, that have low cost resources, some of the hydro and
coal plants that have been depreciated, it is probably better
to keep those in rate base because customers have paid those
off and the price would actually go up in the competitive
market.
My four to one comment was really talking about the part
that stays regulated. Wires are regulated yesterday, today and
tomorrow. If you aggregate a bunch of generation in one area,
then you have a problem because of what Congress said in 1992
and everybody has agreed since that generation is competitive.
So if you have one big competitor on the block, that does
deprive customers of the choices that they should have. We have
tools to deal with that.
Mr. Westmoreland. So you are talking about just the grid?
Mr. Wood. Yes. I think the aggregation of just the grid
companies is a good idea. I hope it does accelerate. I do think
PUHCA reform could allow that to happen and so long as either
our commission or the Justice Department, Congress or somebody
is keeping an eye on making sure that the generation stays
diverse and competitive, then I think we have a win-win there.
Mr. Westmoreland. Thank you.
That is it, Mr. Chairman.
Mr. Issa. Thank you.
Since Chairman Wood did such a great job of mentioning his
testimony 9 years ago, I will read my testimony of much less
than that ago before the Energy and Commerce Committee when I
said three markups ago of the energy bill, ``I would like to
urge the body to think federally, to think long term. First of
all, deregulation has not proven to be a failure because,'' and
this was at the time the lights were going out in California,
``because California has not deregulated. Second of all,
deregulation of any free market system to work, it must tear
down barriers to entry. California did not do so.''
Mr. Chairman, like you, I believe in deregulation. I just
was in Moscow last week and I have seen they haven't quite
figured out that they can't run things from the top anymore,
proven by the government taking over Yukos, in order to get
back one of their significant commodities that happens to be
producing today but much of its efficiency came from the time
in which it was privatized. Now they want it back because oil
is at $50 a barrel and at that point, any inefficient
organization can make a profit. It really rings a bell, doesn't
it, that anyone can make a profit if the price is high enough?
Looking at the likelihood that California is going to be
somewhere between just enough power and very tight and not
quite enough power and the lights go out, more than 3 years
after we had the lights go out or 4 or 5 years after we had the
lights go out, and more than 3 years after an energy bill
initially left this House, do you think that if we had passed
the energy bill, we would have gone a long way toward not
having that tight market this summer in California? Because I
suspect that alone wouldn't have done it. What should
California and States like it be addressing now if we are not
going to have the lights go out? That goes more broadly to
yourself but also to Edison and so on because you are part of
the producers.
Mr. Wood. Let me say I don't think the problem you have in
southern California would have been addressed by the Federal
bill, either the 2002 version or the one on deck now. The
California issues have to be solved by California. The first
one they have to resolve is do they want to go to a retail and
bundled state, do they want to stay at the interim phase, or do
they want to go all the way back?
I think the debate is probably between go all the way to a
competitive world and stay in the middle. Nobody will make
investments unless they know we are talking about the 5 to 10
year future. You can't ask utilities or even public power
companies to live in that world. That is one of the problems,
there is not a vision about where they are going longer term.
Second, I think what is problematic in southern California
is what is called resource adequacy. This is what we had our
hearing about with the California PUC last week. That is a
problem that is actually teed up. The Governor has gotten very
involved, the bipartisan commission of the CPUC is very engaged
on this issue and I think they will be resolving some core
points on that by the end of the summer.
By next summer, every utility and everybody serving power
in California will be obligated to have 15 percent or X percent
margin over and above their peak needs, and the PUC will be
looking at making sure everybody has that and is enforcing
that. That provides more security. That obligation does not
exist under State law there today.
I don't think that a Federal solution was even offered that
would have fixed this. This is one the State knows it has to
fix and to their credit, they are addressing it although I
think a little more slowly than I would have liked.
Mr. Issa. Being the sixth largest economy in the world,
California tends to be closer to France than to a small State.
France is fifth I understand but soon California will pass
them.
Following up on that, and my ranking member has arrived--
this is the real ranking member not each of the other ranking
members I introduced earlier--I just want to ask one sort of
leading question. Mr. Westmoreland talked about peaker plants
and as some here know, I have a 500 megawatt peaker plant that
is under proposal. It has gone through the FERC, it is going
through the process, it has been funded. It is a pump storage
station in my district and I am very excited about that because
I think it brings that opportunity not to build a 500 megawatt
plant somewhere else and yet still have 100 percent clean power
when you need it.
To that extent, particularly for those who look at the
savings we have had in California, isn't it true that
California to a certain extent has been its own worst enemy
because of its past good behavior? We have a good system of
shutting down or peak shaving due to various uses, we have done
a good job of insulating, we have done a good job of updating
our air conditioners, lights and so on.
What we have done is all the easy fixes other than build
power production and now aren't we in a position in which for
all practical purposes, the things others will say what about
this, ``what about this, you don't have to build,'' have
already been done and in some ways we would have been better
off if we had been building. Isn't that sort of the trend that
public utilities often incentivize us to do things that reduce
consumption or at least reduce peak and that is good except at
some point you run out of that and then you have to build that
capacity?
Mr. Wood. Build now or build later. I think that
conservation buys you some time but it doesn't avoid the need
to do it at all. That California was able to wait until much
later to build probably is a lot of money that stayed in their
pocket, but it is not free. To do conservation, in which
California certainly probably leads the world, costs money and
I think the customers have paid for it.
Mr. Issa. Mr. Gent.
Mr. Gent. I can speak to that issue personally because I
worked in Los Angeles in the 1960's and it was well known to
every electric utility in the State that we could never build a
plant in-State again. That was public policy. You may not be
able to find that in the papers or in the books, but it was
certainly known to all of us in the business.
Mr. Issa. Mr. Owens.
Mr. Owens. I think you have to have all of the above and I
do agree with Chairman Wood, you can only count conservation
once. I think unfortunately California historically had an
attitude against building major new facilities.
You made reference to peaking facilities. I think there is
also a recognition that there is a need for base load
facilities. All the things Dr. Cooper talked about increased
electrification of our systems, and so forth, and the average
consumer--even though we are conserving--is still using more
electricity and they are using it longer hours of the day.
Obviously that suggests to me that the infrastructure,
particularly in California that exists, will not be sufficient
to sustain the level of service customers are demanding.
I think there is a need to recognize that more and new and
efficient facilities need to be constructed. Unfortunately,
California had an environment that was opposed to that.
Mr. Issa. Thank you.
Mr. Cooper. Let me offer the observation that is exactly
one of the things that needs to be in the Federal legislation
is the fact that California did do more than other States and
their neighbors didn't and in the public good sense, if you go
back and look at the press when the lights started going out,
the first tune was oh, those Californians consumed too much
energy for their swimming pool heaters and stuff and they were
mostly solar installations and we quickly discovered that
California was more efficient than other States.
So precisely because this is a public good, reliability is
a shared product, the neighboring States and the other States
in their grid who haven't done what California has done need to
do it. They need to stop being free riders, the classic
economic question, and make their contribution to the public
good. That observation is fundamentally correct. Californians
have higher standards.
Mr. Issa. I appreciate that. You are going to get a
followup question before you can blink, because Ms. Diane
Watson has joined us and she has not had a question yet and I
know she has them for you.
Ms. Watson. I would like to read my statement because it
then places the position that I probably share with you as
well.
Mr. Issa. We have already put it in the record but you can
read all or part of it as you see fit. That is what you get to
be the ranking member for.
Ms. Watson. Let me just say I thank Dr. Cooper for coming
and I am sure he expressed the position coming from a consumer
standpoint. I want to join the Chair of the committee and
really comment that I think California has been shortchanged.
You have to take into consideration, and I am sure you have,
the size of our State and the climate of most of our State and
the need for air conditioning and the need for warming, cooling
and so on, all electrical matters and the fact that we over the
years have set in place policies that would restrain the use,
not necessarily rationing, but we have been very sensitive to
the issue.
Solar power has come into play in the last few decades and
many people are turning toward it, but I don't think we were
treated fairly by the FERC and the middleman. I do think that
California is owed some credit and maybe some returns, and I
can't appreciate enough the fact that you have presented this
timely hearing publicly.
If my statement is already in the record, I won't reiterate
it but I just wanted to say that we have to look at ways of
restructuring and ways of saving and ways of implementing our
policy so it is serving the public good. I promise you I will
not be late on the next hearing of this kind.
Thank you very much, Mr. Chairman.
Mr. Issa. Thank you and you can now go forward with your
questioning. For everyone's understanding, to be honest you
were doing your duty in the International Relations Committee
while I was flicking back and forth and not quite doing my duty
to either one, so I appreciate your efforts in IR.
Ms. Watson. One of the questions I would like to raise, to
whoever would like to respond, is--I think a couple of years
ago--the Governor of the State of California said we would need
19 new peaker plants. One was proposed in a neighborhood in
which I live. I never saw so many homeowners at a meeting,
1,800. That was a miracle. That peaker stack was going to go
right up in the center of their residence and so they were very
concerned.
That one was taken off the list but the Governor at that
time had a goal of 19. Can someone inform me if those 19 peaker
plants and stations were completed?
Mr. Wood. Ms. Watson, I work at the FERC. We do track that.
I will get that information to you. I know all were not built,
some were. I was actually at the dedication of one Friday in
San Jose. It is more than a peaker though. I think it runs a
bit more often than that but some progress has been made.
Governor Davis did set some ambitious goals. He directed his
agencies to process the permits and to his credit, they were.
It is the investment climate: people were reluctant to come and
invest there.
As one who has dealt with siting, there is always another
site that will work if you have to. That is probably why yours
got taken off.
Ms. Watson. There were a couple of Native American
reservations that came forth with proposals, particularly in
the Palm Springs area. Are any of you familiar with those
proposals and what happened to them in the long run? I know I
was getting telephone calls and trying to get some
consideration for their proposals but something happened with
the ownership of the land and so on. Can anyone shed any light
on what happened with those proposals?
It seemed like they had the capacity to take care of the
peaker operations and so on. I just want to get a followup as
to what has happened?
Mr. Wood. I will get that information for you.
Ms. Watson. Good. If you can give it to me in writing, I
would be satisfied.
Mr. Wood. I would be glad to.
Mr. Owens. Congresswoman, I think you are raising a
fundamental point. I don't know the details or the status of
any of those facilities. A point we were trying to make and I
think all of the witnesses sought to make, I think even Dr.
Cooper sought to make, was the recognition that if we are
expanding our infrastructure, siting is always going to be a
big issue. Nobody wants a power plant built in their backyard,
nobody wants a transmission system running through their
neighborhood but the reality is if we are going to seek to
provide the level of reliability and low cost electricity that
our customers are demanding, then we do have to find a way to
streamline and harmonize the siting laws and get public
acceptance of these areas.
Ms. Watson. This is the reason I was so interested, Mr.
Owens, in the proposals that came from the Native American
groups, because there is a lot of vacant land, desert land and
so on out there. It seems to me there was a mechanism by which
they could pump electricity into the urban areas in southern
California. So I just need to have some followup.
Mr. Cooper. Let me make two points to followup on that. I
said this on the Senate side at one of the first forums they
held. I think there are three critical elements and these are
going to be tough decisions. The health and safety and land
value impacts are real and this is a democracy, so we are going
to have to deal with them.
I think it is important to have a structure in
decisionmaking that accomplishes three things. One, the people
have to be convinced that you really need this facility,
whether it is a transmission line or power plant. A lot of
debate goes around whether we really need it. You have to have
a framework that they come away with, understanding that we
really need it. Second of all, they have to be convinced this
is the best way to meet that need. Third, they have to be
convinced they have the opportunity to represent their
interests in the process. There will always be people who are
disgruntled, but a fair and democratic process is critical to
getting these things built.
The more we work on designing that process so that they
understand they need it; this is the best thing to do and they
get to give their side about why they would be the most
impacted and have others come forward and say if there is an
economic benefit here, we will take the impact. That process is
a part of the democracy and we have not spent a lot of time
working on that process. We have spent more time fighting about
jurisdiction than really figuring out whether it is the State
or Federal level, how to accomplish those three things in the
process.
Ms. Watson. Mr. Chairman, if I can reclaim my time for a
second, I would like you, Dr. Cooper, to put that in writing to
me and I am asking the Chair to talk to the FERC. We might see
a piece of Federal policy here. We ought to be doing this all
over the country in grids. So if we can concentrate maybe in
the southwestern areas of the United States, it might be very
helpful as we try to solve this problem.
Mr. Issa. You are absolutely right and even before you came
in, it was one of the areas of great agreement between the FERC
and Dr. Cooper that some of these things can very much be
agreed on and we certainly understand the impediments. Nimbyism
is not a debatable infection. It is certainly something we
have.
If it would be OK with Dr. Cooper, we can allow 2 weeks for
any answers to any questions, any additional information you
want to add. If you need more time, let us know, but without
objection, we will hold the record open for 2 weeks from this
date.
Mr. Owens. Are we also invited to provide some additional
input as well?
Mr. Issa. Absolutely. Not only would we enjoy it, but so
would the majority and minority staffs that made this all
possible today, that did all the background work to have this
be effective and who lobbied all of you to come here. We don't
get the kind of great witnesses we had here today without their
efforts coaxing and I suspect making promises they can't keep.
Once again, I want to thank our witnesses and our staff for
making this happen and with that, this hearing is adjourned.
[Whereupon, at 2:52 p.m., the subcommittee was adjourned.]
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