[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
FERC: REGULATORS IN DEREGULATED ELECTRICITY MARKETS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY POLICY, NATURAL
RESOURCES AND REGULATORY AFFAIRS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
AUGUST 2, 2001
__________
Serial No. 107-88
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
U. S. GOVERNMENT PRINTING OFFICE
81-342 WASHINGTON : 2002
___________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida DANNY K. DAVIS, Illinois
DOUG OSE, California JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JIM TURNER, Texas
JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida ------ ------
C.L. ``BUTCH'' OTTER, Idaho ------
EDWARD L. SCHROCK, Virginia BERNARD SANDERS, Vermont
JOHN J. DUNCAN, Jr., Tennessee (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs
DOUG OSE, California, Chairman
C.L. ``BUTCH'' OTTER, Idaho JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEVEN C. LaTOURETTE, Ohio PATSY T. MINK, Hawaii
CHRIS CANNON, Utah DENNIS J. KUCINICH, Ohio
JOHN J. DUNCAN, Jr., Tennessee ROD R. BLAGOJEVICH, Illinois
------ ------
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Dan Skopec, Staff Director
Connie Lausten, Professional Staff Member
Regina McAllister, Clerk
Elizabeth Mundinger, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on August 2, 2001................................... 1
Statement of:
Madden, Kevin, General Counsel, Federal Energy Regulatory
Commission; Shelton Cannon, Deputy Director, Office of
Markets, Tariffs, and Rates, Federal Energy Regulatory
Commission; James E. Wells, Jr., Director, Natural
Resources and Environment, General Accounting Office; Terry
M. Winter, president and CEO, California Independent System
Operator; Phillip Harris, president and CEO, PJM
Interconnection, LLC; and William W. Hogan, professor, John
F. Kennedy School of Government, Harvard University........ 16
Letters, statements, etc., submitted for the record by:
Harris, Phillip, president and CEO, PJM Interconnection, LLC,
prepared statement of...................................... 81
Hogan, William W., professor, John F. Kennedy School of
Government, Harvard University, prepared statement of...... 93
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio, prepared statement of................... 7
Madden, Kevin, General Counsel, Federal Energy Regulatory
Commission, prepared statement of.......................... 18
Ose, Hon. Doug, a Representative in Congress from the State
of California, prepared statement of....................... 3
Otter, Hon. C.L. ``Butch'', a Representative in Congress from
the State of Idaho, prepared statement of.................. 9
Tierney, Hon. John F., a Representative in Congress from the
State of Massachusetts, prepared statement of.............. 14
Wells, James E., Jr., Director, Natural Resources and
Environment, General Accounting Office, prepared statement
of......................................................... 57
Winter, Terry M., president and CEO, California Independent
System Operator, prepared statement of..................... 65
FERC: REGULATORS IN DEREGULATED ELECTRICITY MARKETS
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THURSDAY, AUGUST 2, 2001
House of Representatives,
Subcommittee on Energy Policy, Natural Resources
and Regulatory Affairs,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:45 p.m., in
room 2154, Rayburn House Office Building, Hon. Doug Ose
(chairman of the subcommittee) presiding.
Present: Representatives Ose, Otter, Duncan, Tierney,
Towns, Kucinich, and Waxman (ex officio).
Staff present: Dan Skopec, staff director; Barbara Kahlow,
deputy staff director; Connie Lausten, professional staff
member; Regina McAllister, clerk; Michelle Ash and Elizabeth
Mundinger, minority counsels; Ellen Rayner, minority chief
clerk; and Earley Green, minority assistant clerk.
Mr. Ose. The committee will come to order. I want to thank
everybody for showing up today. Today's hearing is to discuss
the prospective efforts of the Federal Energy Regulatory
Commission--that I'm going to now refer to as FERC from
hereafter--as they relate to energy markets and the effective
functioning of them. We have a choice to make today. There are
two paths that we could easily follow. Path A--sort of like
Path 15. Path A is to engage in finger pointing and the like,
and that is pretty pointless, however, I'm confident that some
wish to pursue that path. Path B is to explore how to prevent a
repeat of this debacle we've worked our way through over the
past year. I am intent that today's hearing will pursue the
second path.
FERC has been asked to do many things lately. Up until a
year ago, this agency operated in the obscure back waters of
the regulatory world. Over the past 12 months, though,
circumstances have significantly changed. Today's challenge is
that energy has become a commodity that is traded across
electronic markets, traded across national borders and traded
among market participants who, in some cases, have no
generating capacity. If FERC is to meet its statutory
obligations to ensure just and reasonable prices, then Congress
must periodically examine the tools that are available to FERC
to meet its responsibilities.
Now that FERC's role has evolved into one of market
monitoring, as opposed to regulatory control, does the agency
have the necessary tools to perform that function? As FERC
tries to monitor the energy market, does it have the necessary
staff to do its job? From a statutory standpoint, does current
law constrain FERC in ways that are no longer useful? For
instance, what was the original purpose of a 60-day lag between
the time a pricing complaint was filed and the time when FERC
could actually examine that complaint?
Given the possibility that egregious pricing behavior might
occur, why were the remedies available to FERC restricted to
ordering only the amount of an overcharge to be refunded as
opposed to assessing fines or penalties?
I have introduced legislation, H.R. 1941, to address these
two particular problems, and I look forward to the witnesses'
comments on this piece of legislation. Members on both sides of
the aisle and all of you in attendance are quite familiar with
the facts in the energy crisis. The question remains, are we
going to try and fix the problems, or are we going to engage in
political sniping? I'm challenging every single member of this
subcommittee to focus on the question that I just posed. Are we
going to try and fix it or are we going to snipe?
The residents of my State of California need the Congress
to examine this matter and provide direct concrete input as to
how to avoid a repeat of this debacle elsewhere in the country.
I look forward to the testimony of our witnesses today. I will
submit the balance of my statement to the record. I recognize
the gentleman from Cleveland for an opening statement.
[The prepared statement of Hon. Doug Ose follows:]
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Mr. Kucinich. I thank the Chair, and I'm sure the Chair is
aware that yesterday I had the opportunity to support
California legislators who were looking for assistance in
various amendments to the bill. So I have a great deal of
sensitivity to the issues that were raised in the State of
California. I've watched the troubles of deregulated energy
markets brewing for several years now. I'm convinced that
partially deregulated electricity market will do more harm to
consumers than good.
California, while unique in some ways, is not the exception
to the rule. Rising wholesale electricity costs can be found
everywhere electricity has been deregulated. The most
ridiculous free market argument is that California only
partially deregulated and complete deregulation would have
prevented the crisis. They are correct that complete
deregulation would have prevented the bankruptcy, but only
because of all of the excessive prices would have been passed
on to the consumer.
Consumers would have shouldered the brunt of the failed
market, and many more families and small businesses would be in
bankruptcy. I have some serious concern with FERC's recent
actions. For example, it took FERC a year to offer any real
relief to California by applying the breaks to a dysfunctional
market with their June 19th order. Yet FERC, in the same
action, decided to illegally expand its jurisdiction to include
public power agencies.
Where are FERC's priorities? FERC took a year to clamp down
on the power producers who are reaping massive profits. In the
same order, FERC illegally attacked the public power agencies
who are nonprofit government agencies owned by the people. This
contradiction amazes me. We all know that these public power
agencies are not large enough to manipulate the market, and we
all know that the large power producers consistently manipulate
the market. Efforts to regulate the wrong party, I would
suspectfully suggest, are misguided. The long-term action FERC
should take is to significantly strengthen FERC Order 2000 to
ensure regional transmission organizations are truly
independent and shielded from market manipulation. Anything
less, and greedy power producers will continually seek ways to
manipulate the market for their profit.
If FERC and the free-marketeers want competition, at least
it should be real competition. The average American cannot
afford to pay electricity bills if large corporations are
allowed to set excessive rates and eliminate competition. If
FERC is to learn one thing today, their mandate is to protect
people from monopolies, not monopolies from competition. I
thank the gentleman.
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
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Mr. Ose. I thank the gentleman. The gentleman from Idaho,
Mr. Otter, for an opening statement.
Mr. Otter. Thank you, Mr. Chairman, and I take--I'm fully
aware of the comments you made earlier about asking us all not
to snipe, but it's hard not to do in this environment, and
considering some of the comments from my good friend, Mr.
Kucinich, I feel compelled to at least make a few statements
out of the rest of my statement, which I will submit for the
record. But I do want to commend you for your leadership in
scheduling this very timely hearing, and I'm pleased that the
House just last night, with bipartisan support, passed the most
important energy legislation in generations, which, by the way,
I might add, included a dimension of whether or not we ought to
have price caps and they rejected that opportunity to introduce
the idea of price capping themselves.
I do want to begin my remarks, though, by expressing
particular outrage at the actions of Governor Gray Davis of
California, who for months now has tried to place the blame of
his State's energy woes at the feet of President Bush, who came
into office long after California created the mess that they
find themselves in. He tried to get away by explaining that
what they had done in California was deregulate, when in fact
they never did deregulate. It was a failure of restructuring.
He's also been quick to criticize other States and power
companies, such as my own State of Idaho, that are outside of
California, yet 2 days ago, the Los Angeles Times reported--and
perhaps this is substance for another hearing of the Government
Reform Committee--where his own consultants may have used
inside information to trade the stock of power companies that
were doing business with the State of California.
This hearing should not be focused on FERC's handling of
the deregulation of electricity markets, but rather on whether
or not Governor Davis himself profited from the power companies
and sold power away from his own constituents.
Before the Governor or any of his fellow defenders here
today try to blame this administration, they should look at the
actual source of his decisions on California energy policy over
the last few years and how he and his advisers made their
money.
As I said, Mr. Chairman, I'm going to submit the balance of
my statement for the record, but I would just conclude by
saying that we've long tried caps. We long tried to manipulate
the marketplace, and for the most part, what we've ended up
doing is not creating any more, as in this case we didn't. We
ended up dividing up scarcity, and we have to use the element
of government, it seems, from time to time, to inflict the
government on the free market, and we ended up dividing up the
scarcity rather than dividing up the planning.
And I'm convinced that for as long as we want to try price
caps, we're always going to end up dividing up scarcity and not
the plenty.
Thank you, Mr. Chairman.
Mr. Ose. The gentleman's statement will be entered in the
record.
[The prepared statement of Hon. C.L. ``Butch'' Otter
follows:]
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Mr. Ose. The gentleman from Tennessee, Mr. Duncan, for an
opening statement.
Mr. Duncan. Well, thank you very much, Mr. Chairman. I'll
be very brief. I thank you for calling this very important
hearing and I agree with the statements by my good friend, Mr.
Otter, who just referred to the landmark energy legislation
which we passed last night. It's not been pointed out by many
people, but that bill, 37 percent of that bill dealt with
conservation and more funding for alternative and renewable
energy sources, and frankly, that is far more than any
President in history has ever done.
Yet some people don't want to give President Bush credit
for that, because they want a political issue on certain other
parts of the bill. But I'm interested in this hearing, and I've
read that California built no new power plants for 10 years or
so, and yet this was at a time when demand kept going up. It
would be interesting to know how people expect you to meet
increased demands with no increased production. As you know,
Mr. Chairman, from the hearing we held 2 days ago, I just have
completed 6 years as chairman of the House Aviation
Subcommittee. We ``deregulated'' the airline industry many
years ago. The airline industry remains, and it should remain,
one of the most heavily regulated industries in the country.
I assume if we do get into utility deregulation, it will
still be one of the most heavily regulated industries in the
country, even after deregulation. So I'm very interested in
this hearing, and I thank you very much for calling it.
Mr. Ose. Thank the gentleman. The gentleman from
Massachusetts, for an opening statement.
Mr. Tierney. Thank you, Mr. Chairman. I want to thank you
for holding this hearing and talk a little bit about those who
advocated deregulation of the electricity markets. When they
did that, they promised lower prices and workable markets.
Twenty-four States and the District of Columbia adopted these
State deregulation plans. However, as these States implement
their plans, prices have been going up, not spiraling down as
was promised to us. In California, one of the first States to
implement deregulation, wholesale prices soared and the entire
West has been thrown into an energy crisis.
The Federal Energy Regulatory Commission [FERC], is charged
with monitoring the wholesale market and making sure that
prices are just and reasonable. However, FERC's response, or
you might say, the lack of response, to the energy crisis in
the West has made me and others concerned that FERC may not be
committed to actually doing its job. When FERC came to the
obvious conclusion that wholesale prices in California were
unjust and unreasonable and the market in the West was flawed,
you would have expected FERC to immediately take action. You
would have hoped that they would have rigorously enforced the
law by ordering sufficient refunds and assessing penalties. You
would have hoped that by imposing measures to prevent further
abuse until a workable market was in place, they'd be doing
their job. And, you would have hoped for monitoring of the
market and you would have hoped they did that closely with
respect to future problems.
Unfortunately, the reality is that FERC has ordered very
few refunds and penalties. Its investigation of some of the
overcharges has been, in the estimate of many, inadequate. In
fact, when conducting an investigation of whether generators
scheduled outages to influence prices, FERC ignored key
evidence and vindicated industry on insufficient grounds. I
look forward to hearing from the Government Accounting Office
[GAO], on this important issue today.
In addition, FERC's attempts to prevent further market
abuses were inadequate. FERC's orders were based on market
principles when it was widely recognized that the market in the
West was so deeply flawed that it was unworkable. Although the
Governors of California, Oregon, and Washington and many others
asked FERC to impose cost of service based rates until there
was a workable market, FERC denied their request. In fact, FERC
did not impose region-wide price caps of any kind until June of
this year, over a year after the market flaws became apparent.
Moreover, FERC is apparently not gathering all the
information needed to monitor the markets now. In June, after
trying to review the status of California's electricity
supplies this summer, the GAO released a report explaining that
it did not have the information about outages that was
necessary to complete its task. Because GAO can access
information that FERC gathers, FERC was apparently not
gathering the important outage information.
Some may argue that FERC simply does not have adequate
staff and expertise to monitor deregulated markets. If this is
the case, we ought to fix that situation. However, I don't
think we should throw money at a problem unless we're confident
that FERC is committed to doing its job. FERC needs to be
committed to ensuring that wholesale prices are just and
reasonable, even if this means abandoning market principles in
the face of a broken market. It needs to be willing to hold
industry's feet to the fire when there are abuses, even if that
requires complicated market analysis. And it needs to monitor
electricity markets carefully to prevent further abuses.
I'm looking forward to hearing about FERC's vision for the
future, where regional transmission organizations are the first
line of defense in market monitoring and how it should help
FERC do its job.
I ask unanimous consent to include relevant materials in
the record, Mr. Chairman. I thank you for the time.
Mr. Ose. Without objection. I thank the gentleman for his
statement.
[The prepared statement of Hon. John F. Tierney follows:]
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Mr. Ose. Now we're going to go ahead and swear our
witnesses in. We do that for all of our panels. We're not just
picking on you. So if you'd all rise.
[Witnesses sworn.]
Mr. Ose. Let the record show that the witnesses all
answered in the affirmative.
Just as an introduction, I'm going to run through everybody
who is here today, and then we're going to come back to Mr.
Madden as our first witness.
Joining us today on your panel are Kevin Madden, who is the
general counsel for the Federal Energy Regulatory Commission.
And Shelton Cannon, also from the FERC. He's the Deputy
Director of Office of Markets, Tariffs and Rates. Gentlemen,
thank you for joining us.
Also we have the Director of the Natural Resources and
Environment for the GAO, Mr. James Wells, Jr. Thank you.
Also joining us is the president and CEO, and if I'm
correct from the testimony, the COO of the California ISO. The
gentleman who has testified before this subcommittee before,
Mr. Terry Winter.
Also joining us is the president and CEO of the PJM
Interconnection Organization. That would be Mr. Phillip Harris.
And also professor William Hogan from the John F. Kennedy
School of Government, Harvard University.
Gentlemen, thank you all for coming. Now, we have your
testimony. We've read it. You can summarize it. I have a strict
5-minute rule.
Mr. Madden, you're recognized for 5 minutes for the purpose
of testimony.
STATEMENTS OF KEVIN MADDEN, GENERAL COUNSEL, FEDERAL ENERGY
REGULATORY COMMISSION; SHELTON CANNON, DEPUTY DIRECTOR, OFFICE
OF MARKETS, TARIFFS, AND RATES, FEDERAL ENERGY REGULATORY
COMMISSION; JAMES E. WELLS, JR., DIRECTOR, NATURAL RESOURCES
AND ENVIRONMENT, GENERAL ACCOUNTING OFFICE; TERRY M. WINTER,
PRESIDENT AND CEO, CALIFORNIA INDEPENDENT SYSTEM OPERATOR;
PHILLIP HARRIS, PRESIDENT AND CEO, PJM INTERCONNECTION, LLC;
AND WILLIAM W. HOGAN, PROFESSOR, JOHN F. KENNEDY SCHOOL OF
GOVERNMENT, HARVARD UNIVERSITY
Mr. Madden. Thank you, Mr. Chairman. I'm quite aware of
your 5-minute rule, and I'll be very brief. I want to
personally thank you and members of the committee for having
what I consider a very, very important hearing. I learned a lot
at the field hearings that this committee held in California in
April, and we applied some of those thoughts to our program. I
believe the time is right now to discuss key issues facing the
electric industry, including how energy markets work, market
monitoring and just how FERC operates in a new competitive
environment.
Shelton and I share your views and want to hear a
constructive dialog between and among the members of the
committee and the panel members here. We may have been a
backwater agency. I didn't think so. I've been there 20 years.
Mr. Ose. That was said with the greatest of respect, I want
you to know that.
Mr. Madden. Well, now that we're not, I have, though, been
hit a number of times by the sniping, and I believe a more
constructive dialog occurs and a program can be improved
substantially quicker, more efficiently than having political
innuendos or the spin doctors in the press attack important
programs.
My job as general counsel is to be the adviser, the chief
legal adviser to the Commission, representing all interests of
parties before us, and when we make the calls from a legal
standpoint, not everyone likes our decisions. Contrary to some,
I believe we've done a pretty damn good job. We may not have
done the things in hindsight that we should have done, but we
are, indeed, out to protect the interests of the consumer. We
are indeed out there to promote a more competitive environment.
We stand ready to improve our program so that the program is
more viable, more competitive in this 21st century. Thank you,
Mr. Chairman.
[The prepared statement of Mr. Madden follows:]
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Mr. Ose. Thank you, Mr. Madden. I just want to make sure,
when I said an obscure backwater agency, my measure of success
is how quietly you do your job, not how loudly. So it was meant
as a measure of respect.
Mr. Madden. Thank you, Mr. Chairman.
Mr. Ose. Mr. Cannon.
Mr. Cannon. I would echo that. I'd like to get back to
being an obscure backwater agency where things are taken care
of.
Good afternoon, Mr. Chairman, members of the subcommittee.
We appreciate the opportunity to be here today. We're pleased
to offer testimony on some of the current challenges that
confront regulators in restructured electricity markets. I have
to add the standard caveat that as staff members, the views
we're going to express today are our own and don't necessarily
reflect the view of any particular Commissioner.
At the Commission, though, we start from the simple premise
that a competitive market--that is, one with adequate supply,
enough sellers, the right organizational structures and sound
market rules--is the best way to protect the public interest
and to ensure that consumers pay the lowest price possible for
reliable electric service. However, for competition to
flourish, it is critical that we have in place adequate market
monitoring and the capability to promptly step in and take
appropriate action if markets malfunction or sellers engage in
market power abuse. The Commission has taken and continues to
take actions to address these important issues.
If we are to achieve and maintain competitive power markets
in the electric industry, a key structural reform necessary to
support such markets is the creation of regional transmission
organizations [RTOs]. We expect a great deal from these new
organizations. But fundamentally--I'm not going to give you the
12 characteristics and functions--but we expect they will
operate the interstate transmission grid on a regional basis,
independent of entities that are buying and selling
electricity. And we expect them to recognize and to facilitate
natural wholesale electricity trading patterns, which are
increasingly regional and multistate in character.
The independence of RTOs from power market participants is
essential to the success of competition. The Commission is
stepping up its efforts to encourage the formation of RTOs that
provide one-stop shopping and fair and nondiscriminatory
pricing and terms and conditions for transmission service over
very large regions.
Now, competitive power markets also must be supported by
effective market monitoring. This is critical to ensure that
wholesale electricity prices remain just and reasonable and
markets run efficiently. Effective market monitoring entails
understanding energy markets, getting the market rules right
and making sure that market participants play by those rules.
The role of the Commission has changed dramatically from the
days of command and control cost of service relation, but as we
rely more and more on competition to discipline the price that
consumers pay for electricity, we remain responsible for
ensuring that wholesale electricity prices are just and
reasonable. This means that we have to be just as good at
monitoring energy markets as we were at auditing a utility's
generation costs and awarding a fair return on plant
investment.
The Commission has made great strides in transforming our
organization into the new role of market monitor, not only
seeking to detect instances of market abuse, but also working
to improve and standardize market trading rules. Thus, our
investigation and oversight of the market we regulate will not
be limited to finding--simply finding someone who is breaking
the rules, but we're also going to be focusing on trying to
find rules that are broken and need to be fixed.
At the same time, we want to establish price signals and
incentives that make the most efficient use of existing
resources and encourage investment in new generation and
transmission facilities where they are most needed.
Based on our experience with the severe market dysfunctions
in California and the west over the past year, we are
continuing to learn and we're working to improve our processes
and capabilities in this critical area and trying to become
more proactive in anticipating and addressing market power
issues before they result in market distortions.
RTOs can help us in this important function of monitoring
electricity markets, and they allow us to limit--excuse me.
They allow us to leverage our limited resources.
But market monitoring by RTOs is not intended to supplant
Commission authority. Rather, we envision them as a first line
of defense that will provide the Commission with an additional
means of detecting market power abuses, identifying market
design flaws, and looking for opportunities for improvements in
market efficiency.
Thank you again for the opportunity to appear before you
today and we look forward to addressing your questions.
Mr. Ose. Thank you, Mr. Cannon.
Mr. Wells for 5 minutes.
Mr. Wells. Thank you, Mr. Chairman. It's true. FERC is many
things to many people. While it's true in the past, it was a
backwater agency, it's certainly not true today. To some it's
almost a household word recently, and to others it may be a
four-letter word. But let me just be brief. The importance of
FERC's monitoring role is illustrated by the situation in
California. In response to concerns about high prices and short
supplies, FERC did undertake a study--it was released in
February 2001--to determine whether generators were, in fact,
using plant outages to physically withhold power and drive up
prices of electricity. FERC's overall conclusion was that the
generators it audited had not physically withheld electricity
supplies. Within days of the release of that study, the press
started with generating companies saying that they had been
vindicated. The officials of the State of California and other
parties insisted that market power had indeed been used to
drive up electricity prices.
The State went into other studies. They claimed to have
found market power and demanded that FERC require generators to
pay refunds. It's at this point the GAO was called in to review
the thoroughness of what that FERC February study said.
In that context, let me say that the FERC study was quick.
It was a few months, and it had a specific scope, and a limited
timeframe. We found that the FERC study was not thorough enough
to support its overall conclusion that the audited generators
were not physically withholding electricity supply to, in fact,
influence prices. They did state that they found no evidence of
withholding power, but went into great detail defining their
findings and that each specific outage that they saw was
examined and had a reasonable cause. The two academic studies
that we looked at and studied did, in fact, use broader
evidence of exercise of market power in the entire market by
comparing wholesale electricity prices to the estimated cost of
producing that electricity. They found in their conclusion that
prices were, in fact, higher than would be expected if the
generators were acting competitively.
The bottom line was that none of the studies that was
presented to the press or to the public was thorough enough to
truly determine the precise extent to which power market was
either used or not used versus other factors that cause the
high electricity prices in California since May 2000.
Let me conclude here and just say that we believe that as
the Federal Government's marketing entity, FERC does have a
very important responsibility to fully investigate the
potential exercise of market power and clearly report its
results of its investigations. Perhaps the point is not that
the FERC study was incomplete or complete, but that it's really
how the market--how the press, and even the Congress reacts.
Anything FERC does in terms of publishing information sends a
message that future studies need to be sharp and clear, and
they need to be issued quickly.
Market monitoring capabilities, the subject of today's
hearing, is critical to the future credibility of FERC. In this
area, we've begun work to review FERC's monitoring and
oversight roles and responsibilities with respect to the energy
market. We hope that this work will include a broad-based
review of FERC's management, existing practices, staffing and
their internal organization. We hope to have this report ready
for the Congress and the result of this study shortly after the
first of the year.
Mr. Chairman, you asked what should FERC do. Let me just
quickly say, my short answer would be they need to have a goal.
What is market success? I think it's unknown today.
Second, they need to know how to monitor a market. I think
that's unknown today.
Third, I think they need to communicate, communicate to the
American people and to the industry clearly and quickly, and I
don't think the past has been great.
Mr. Chairman that, concludes my remarks.
Mr. Ose. Thank you, Mr. Wells.
[The prepared statement of Mr. Wells follows:]
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Mr. Ose. Mr. Winter for 5 minutes. And before you start,
welcome back.
Mr. Winter. I will try not to point fingers. I think a
couple of things historically we ought to remember, and that is
that I don't think we can go back, and I think we need to
understand there was a reason why we went to competitive
markets, why the Congress itself opened up the generation of
electricity to independent power producers, why FERC had its
open access rules of 888 and 889, and I think they play a lot
on what we are doing today.
But what is necessary? I totally agree that regulatory
oversight is probably more demanding in the electric industry
than others. I agree with the gentlemen that spoke on the
aviation area. And why is that? One, it is a very competitive,
capital-intensive market with a lot of barriers to entry, and
when you can't come in and out of the market easily, you have
to have regulatory oversight.
Second, there is no substitutability. If I don't have
enough wheat, I can buy oat bread. It is pretty hard to
substitute electricity, and therefore it does need to be
regulated.
I think State and Federal coordination is extremely
important in this area because markets are not made up of only
the wholesale, but the retail side.
Second, I think that the monitoring of the responsibility
of how the markets work has got to be pushed down to the lowest
level possible. If I have learned one thing from watching those
markets operate for the last 3 years, No. 1, for the first 2
years they operated quite well with prices in the $30 range.
Then I watched the thing become completely disconnected. And
the analysis of that has to take into account generation
outages, which is happening in real-time; how the market is
responding to the rules. And you cannot get that from
Washington, DC, you have got to be there where the operator is
making a decision on a day--minute-by-minute basis.
Second, what is Congress' role? To me, the FPA or the
Federal Power Act, was, in fact, a consumer protection act. I'm
somewhat dismayed when people tell me that they can't go back
and look at the--the activity that occurred that may not be
appropriate or that people got windfall profits and can't go
back. So I think that is something we clearly will try and need
to correct.
Second, I do believe that you cannot have a market with one
set of players playing with one group of rules and another
playing with another. So I would encourage that FERC's
authority over those, and specifically what they do in a
market, be governed by FERC or some common entity so that you
don't have two sets of rules.
OK. What are the effective elements of a market monitoring
program? First, I think one of the things that we all
desperately need is a real-time benchmark so that we can say,
what is the level of pricing that, in fact, is inappropriate.
Do we use market clearing price? Against what benchmark? Do we
allow a percentage of the market to go above what we consider
competitive prices? For how long? To send encouragement, all of
these need to be studied, but
above all, we have to have a safety valve, some way to avoid
the runaway markets that we saw. And I think those only come
through a very strong and dedicated market monitoring element.
And with that, I will conclude my comments.
[The prepared statement of Mr. Winter follows:]
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Mr. Ose. Mr. Harris for 5 minutes.
Mr. Harris. Thank you, Mr. Chairman. PJM is the only fully
functioning, FERC-approved regional transmission organization
in the country. We operate the largest competitive wholesale
electric marketplace in the world, and we are the second
largest centrally dispatched entity in the world. We serve
within five States and the District of Columbia, and will soon
include portions of Ohio and West Virginia. We have 12
transmission owners and over 200 traders involved in our
marketplace. Those five States plus the District of Columbia
are involved in retail choice programs.
The critical test of any economic theory or new business
practice is the test of use, and what we have discovered over
4\1/2\ years of use is that competition has worked in the Mid-
Atlantic region. We have discovered that reliability has
increased, and we have discovered that value has been provided
to customers over the past 4\1/2\ years.
Last year, for example, our wholesale prices were below
$100 over 95 percent of the time. Over 70 percent of the time,
our wholesale prices were below $40 dollars.
So I come to you today to talk to you not as an economic
expert, but simply as someone who has had his shirtsleeves
rolled up trying to do the job over the past 4\1/2\ years in a
system where some things have worked out quite well.
We have certain recommendations that would help FERC's role
as we move forward in electric competition. One, FERC should
have full authority and flexibility to adopt and enforce
reliability standards to integrate market-based solutions for
maintaining and improving the wholesale electricity system.
What we have found is that there are no clear distinctions
between reliability and economics. With the power of technology
today, it is very difficult to say this is a reliability issue
or that is an economic issue. There needs to be clear and
unambiguous authority for the Federal Energy Regulatory
Commission to deal with those issues.
Second, we believe that FERC should ensure that there is a
strong market monitoring function within the regional
transmission organization. Our market monitoring function has
been hailed as one that works quite well, and yet we have no
sanction authority. What our market monitoring unit has is
data. We have over 30 terabytes of real-time data. The amount
of information that is necessary to ensure the robustness of a
market that is trading with hundreds of customers every hour is
massive. We are using new tools. We have research and
artificial intelligence so that our market monitoring unit can
see what is happening, make appropriate analyses of that
information, and then report appropriately to the respective
authorities as necessary. It is the ability to access
information, and it is the ability to have the sophisticated
tools of the 21st century that can convert that data into
information responsibly.
We have been directed by the Federal Energy Regulatory
Commission to be responsive to each of the States, and we are
responsive to our States in order to meet their needs and
information requirements, so that they can understand what is
going on in the market.
Third, we believe that the FERC could take a leadership
role in determining what the RTO Board's responsibility is as
far as market monitoring. Much like the Security and Exchange
Commission has determined what an audit committee of the board
of directors responsibilities are, the FERC should determine
what the Board's responsibilities are for market monitoring
along the same way that the SEC does for internal auditing.
We also believe that there is a clear role for FERC to
adopt some of these newer technologies and these new
authorities. It is through these information technologies that
we find that the State and Federal jurisdictional issues should
not be as contentious. We work very carefully with the States
to ensure that the wholesaler and the retailer are adequately
bonded. And indeed, from a reliability standpoint, 99 percent
of the outages that occur, occur on the distribution level,
which is clearly State jurisdictional.
Electricity is the ultimate e-commerce. It travels at the
speed of light. Electricity doesn't know from the time it
passes wholesale to retail. It is the power of information,
information availability, and the understanding of that dynamic
that enables the public, enables the States and enables this
Congress and the FERC to ensure that competition is working
fairly. And with these improvements, Mr. Chairman, we think
that we can do go ahead and continue to improve in the Mid-
Atlantic region. Thank you.
Mr. Ose. Thank you, Mr. Harris.
[The prepared statement of Mr. Harris follows:]
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Mr. Ose. Dr. Hogan for 5 minutes.
Mr. Hogan. Thank you, Mr. Chairman. I too appreciate the
invitation, and I have remarks that I submitted for the record.
Let me summarize them.
Your interest in market monitoring raises an important
question, which is prior to the evaluation of the success or
failures in market monitoring, and that has to do with the
question of how we design these markets to support competition.
There has been a debate in this country and other
countries, but especially here, for the last few years. One end
of spectrum is an argument that markets more or less take care
of themselves. So if we set a few broad principles, the
institutional structure will evolve naturally through the
interplay of the participants. The FERC doesn't have to do that
much other than announce those broad principles, 1,000 flowers
will bloom to provide different ways to approach the market.
The other approach says that electricity markets are
special because of the technical characteristics of these
markets and that certain functions, the types of things that
are the responsibility of the ISOs that have to be performed,
that have to be performed in a certain way in order to be
consistent with the operation of the market. And this view
dictates that FERC has to get much more into the business of
deciding in the public interest what is the structure of the
institutional design and how are the details going to work, how
are the rules going to operate. And that debate has been going
back and forth in the United States.
I would say that the--the position of the Commission so far
has reflected the debate and the positions that they have
received, and they have been relatively deferential to the
regions in allowing 1,000 flowers to bloom and experiment and
so forth. But I think what we have from the experience in
California, and the experience elsewhere, is plenty of evidence
now to conclude, as I have concluded, that, in fact, we know
that we have to take the view that FERC has to be much more
prescriptive about standard market design in order to make sure
that these markets work.
That makes a big difference if you are thinking about
market monitoring, because if you have a badly designed market
in the first place, it is going to be extremely difficult to
monitor it. And, in fact, I would argue that if it is badly
designed, it may even be impossible to find out exactly what is
going on. And I think much of the experience in California fits
that case, that the--the situation there is so murky, because
the market design is so convoluted, that you have a hard time
actually untangling actually what happened.
So before you can get into the question of how to monitor
these markets you have to address the question of what should
be the design, And I think the evidence points to the fact that
the Commission should be much more aggressive about this.
The good experience in the United States is concentrated in
the Northeast, particularly in New York and PJM where Phil
Harris is. We do have a standard market design that has been
working. It has been working as long or longer than the
failures that you saw in California. And New England recently
decided to embrace this standard market design. The common
elements include bid-based, security-constrained, economic
dispatch with locational prices, bilateral schedules, financial
transmission rights, license-plate access charges, and a broad
scope for market-driven investment.
The details of this I have discussed in my papers, but I
wanted to recite them both to get them on the record here, and
also to indicate that they are at a level of detail which is
quite a bit below the broad principles announced in Order 2000.
So it requires FERC to actually do more and to get more active
in specifying the standard market design.
If FERC were to do so, then that would be--adopt a standard
market design--and recommended it for the other RTOs, it would
be a major step forward. It would make clear that FERC accepts
responsibility for doing what needs to be done to create
effective institutions in support of a competitive market. It
would make clear that FERC recognizes that defining the
essentials of a standard market design is a task that only
government can perform in its role of setting the rules under
which markets can do their magic, and it would set limits on
the scope of government action to supporting the market rather
than dictating the outcomes.
And if we had a sensible standard market design modeled
after this experience in the Northeast, we also would then have
a sensible structure for market monitoring, which is the
question that is before this committee today. That monitoring
structure would be dictated by the design and would follow some
of the principles that have already been developed, for
example, in PJM and New York.
This is a very important question, but--market monitoring,
but I think you can't deal with it until you deal with the
standard market design question that is also before FERC, and I
hope you can encourage them to be more aggressive in this area.
Thank you.
Mr. Ose. Thank you, Dr. Hogan.
[The prepared statement of Mr. Hogan follows:]
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Mr. Ose. I want to thank all of the witnesses for their
summaries, and I'm going to recognize the gentleman from Idaho
for 5 minutes.
Mr. Otter. Thank you, Mr. Chairman.
Dr. Hogan, in the purest sense, and I wasn't here, so I
don't know what, nor was I in California when they thought to
call what they did as ``deregulation'' in 1995, but in the
purest sense in your--from your understanding of deregulation,
I assume that meant we should create a free market, we should
let the marketplace discipline and marketplace controls decide
what happens to price, what happens to quantity, what happens
to need.
Would you agree with that idea of what maybe the Congress
meant by deregulation?
Mr. Hogan. Well, I think you have to be careful about the
terminology. I wouldn't call it ``deregulation'' myself, I
would call it ``restructuring,'' which I tried to use in the
formal remarks that I submitted, because you are changing the
rules, not eliminating the rules, and that is important.
And, second, there are many functions, maybe the most
important functions that make the biggest difference, that can
be left to the market: investment decisions and all of the
kinds of choices that you have described. On the other hand,
there are other characteristics of these markets over a very
short period of time, like a day, hours or minutes, where very
careful coordination of the market is necessary. This is a
little counterintuitive because we are not used to thinking
about it that way, but in order to have the kind of market that
you are talking about, which I think can be done and works well
in many places and can be successful, it is critical that the
functions that the ISOs performed are done and done in a way
that is consistent with the market. The coordination functin is
not something that can be just left to the marketplace to
decide for itself.
Mr. Otter. I guess what I am trying to get back to, Doctor,
is I am trying to get a sense of what the Congress had on its
mind when the Congress said, ``let's let these folks deregulate
if they want to.'' And California was one, and Oregon was
another that said, ``OK, we are going to deregulate.'' And what
they did--I agree with you. In fact, if you recall in my formal
opening statement, I used the term it was a ``failure of
restructuring,'' it wasn't a failure of deregulation. But I
believe what Congress conceived was the academic theory, the
academic idea of what deregulation meant, and I think the end
result was that there would be freedom in the marketplace,
freedom of entry, which California did not allow, freedom of
price control for the market to control the price, which
California did not allow, and freedom to withhold product,
which California says that they didn't allow.
Yet the only thing we really have is we have--under this
restructuring--and the press continues to call it
``deregulation,'' which would suggest that the free market
disciplines were actually in control, and they were not,
because the only freedom that anybody had was in the middle.
The retail price was held at a certain level. They were free to
sell--buy and sell--pardon me. Even the wholesale market wasn't
free to buy and sell, because they were not allowed to buy
except, as I recall, on the spot market. And so when they were
offered long-term contracts--in fact, I have one right here.
When San Diego requested--Duke Energy offered to meet the
supply needs of San Diego Electric and Gas Co. for 5 years at a
price of $55 per megawatt hour, and of course this is a--this
is 55 times what we are--California and Gray Davis is now
selling power for, I'm told, at $1 a megawatt. But this is also
a fraction of the price of $376 paid on the spot market in
December and $314 in January, and that was because they refused
to permit its utilities to buy except on the spot market.
And so where is the marketplace discipline there if you
still have these controls that say, no, you can't go take
advantage of a long-term contract, 5 years at $55? I would
almost guarantee you that in December and January, we in Idaho,
who were forced to run water through our pen stocks and our
dams in order to wheel power down the Pacific grid into
California and displace it, would have loved to have had $55
megawatt power.
My point is, I hope you agree with me, and you can just say
yes or no to this, but did we or did we not have deregulation
in California?
Mr. Hogan. Well, that is an easy statement. The answer is
no.
Mr. Otter. Thank you.
Mr. Ose. Your time has expired.
Mr. Otter. I'm still on yellow, Mr. Chairman.
Mr. Ose. The gentleman's time has expired. The gentleman
from Tennessee. We will have multiple rounds.
Mr. Duncan. Thank you, Mr. Chairman.
You know, the title of this hearing is ``FERC Regulators in
Deregulated Electricity Markets.'' This is my 13th year in the
Congress, and every year I have been visited by companies and
groups that want to talk about utility deregulation, some for
it, some against it. And for several years I told them that I
felt it was such a complicated, difficult problem that I didn't
think we were going to do it that year.
I still wonder, but sometimes I think we may be getting a
little closer to doing something. I do remember, though, when
Congressman Dan Schaefer of Colorado chaired the Appropriations
Subcommittee for the Energy and Commerce Committee as it was
then called, I think, and he is a very good man, but I think he
thought that was going to be his legacy in Congress, and he
retired a few years ago. So it is a complicated, difficult
problem.
But I wonder, and I direct this to any of you who wish to
comment, do you think that we are getting closer to real
deregulation in this industry or now, because of the problems
in California, further away from it? And whatever you think, if
we went to, if we somehow could get to what we would call a
deregulated electricity or power market, do you think it would
end up--there has been so much consolidation and concentration
in almost every industry with most industries going toward the
big giants--would the electricity market in this country end up
being controlled by two or three or four big giants?
Mr. Harris. Yes. I would be pleased to address at least
portions of that.
What we have found out in the Mid-Atlantic is that
restructuring, changing the rules, as Bill said, really has
increased the reliability. We have factual data that shows the
reliability of our power grid has increased because of
introducing competition. We have factual data that shows that
the prices have decreased, as we have seen. We have data that
shows that the customers have benefited.
The Energy Policy Act of 1992, or the amendments to the
Federal Power Act, had as a goal their intention to ensure that
customers have the benefit of competitive price generation. We
have seen that with properly structured markets, customers have
the benefit of competitive price generation.
We are also discovering, and this is almost an epiphany,
that because electricity really is the ultimate e-commerce and
is the only thing that is consumed the very instant it is
produced, that network information technologies are the very
tool that are there to enable electricity to be competitive. We
could not have done this 10 years ago or really even 5 years
ago. It is the ability to take information and make it
ubiquitously available that has enabled competition to work.
That moves us forward. That creates jobs. That creates
business. That creates a new way of dealing with this thing
called electricity.
The sad thing about California, is that it has masked the
value of moving to competition. We have seen it work in the
Mid-Atlantic. We have others that are endorsing and moving
ahead.
I would agree with you, it is extraordinarily complicated,
but one of the things that the power of information does, is it
enables us to make life more simple for the customer and even
more convenient. So it is a challenge worth taking. We have
seen the measurable benefits, and it can work, but it must be
done incrementally. We believe it must be done regionally. It
must be done with appropriate FERC oversight in the monitoring
functions, because if you lose the trust of the public, if you
lose the confidence of business, then you are dead in the
water. And we spent a lot of time ensuring that the trust of
the public and the confidence of the business is maintained as
we proceed and move down this path of restructuring.
Mr. Duncan. Let me ask Mr. Winter a question somewhat
related to the question that I just asked, particularly as to
the consolidation within the industry.
You mentioned barriers to entry, and I have dealt with that
in the aviation area. It is very difficult. But I know almost
nothing about the electricity industry, and it would seem to me
that the barriers to entry here would be even greater.
Is there anything on the horizon, or do any of you envision
a time in the future where it might be possible for even a
small business or a medium-sized business to get into the
business of generating electricity, or is this something that
is going to always have to be dominated by monopoly type
giants?
Mr. Winter. No, I don't think it has to be dominated by
giants at all. Quite honestly, in California we have many
independent power producers called QFs, or qualifying
facilities, with 50-megawatt units. They make up almost 10,000
megawatts in our system. All of these are owned by various
owners, some small, some large. I think that the open markets
are a way to get those people in.
Now, the question is on the huge units that make up the
gas-fired units and some of the efficiencies that we see, they
are very clearly--they are gravitating to probably four, five,
six large entities.
But, no, there is clearly a spot for wind, clearly a spot
for renewables, a spot for the qualifying facilities, and we
see tremendous numbers of those coming into the market.
Mr. Ose. The gentleman's time has expired. We will have
multiple rounds.
Dr. Hogan, in your testimony, if I understand, what you are
saying is you think FERC, from a national standpoint, needs to
define the template that the market works under, and then as it
approves that basic template, perhaps the regional markets that
would work under--submarkets that would work under the national
market template can apply to FERC for the little permutations
that they need to reflect their respective regions.
Is that your basic message on the market structure?
Mr. Hogan. That is right, Mr. Chairman. The first part of
the story is that there is a template. For a long time I have
been arguing that the model that is embraced, for example, by
PJM and New York is a way to approach a competitive market,
that it was internally consistent, it made sense, and it
worked. I think the evidence is accumulating that it is the way
to approach the market, and that anything that is dramatically
different from that is going to be very problematic and will
create enormous costs during the transition.
That doesn't mean that everything has to be precisely
identical, because there are different requirements in
different places for reliability. For example, New York City is
not the same thing as the rest of the Northeast. It has special
reliability requirements and the like. So you have to deal with
those, and those would be somewhat different in every place.
But for the basic structure, I think there is a template.
Mr. Ose. If I understand your testimony further, it is that
having arrived at a template that works, that the market
monitoring function thereby is significantly easier, not
simple, but easier than it otherwise might be?
Mr. Hogan. That is correct.
Mr. Ose. All right.
Mr. Madden, as far as FERC's obvious interest in this
subject, has FERC given any thought to a template, per se, for
market structure?
Mr. Madden. Mr. Chairman, in Order 2000 the Commission gave
its vision in terms of the functions and characteristics of
what our regional transmission organization should look like.
Dr. Hogan, of course, wants to drill down another hundred
feet to get into all of the details, but more recently the
Commission in a number of orders said that it would like to see
in general four regional transmission organizations, one in the
Northeast, one in the Southeast, one in the Midwest, and one in
the West.
PJM, I must say from a personal standpoint, has worked very
well. The Commission recognized in its order about 2 weeks ago
that it should serve as the platform upon which a regional
transmission organization is based.
At the same time there are good things about what is
currently existing in New York as well as in New England, and
we shouldn't necessarily throw out those good things when we
try to establish a regional transmission organization.
What we are doing right now is having settlement
agreements, or mediation agreements, rather, at the Commission
with all of the parties associated with those regional
organizations in the Northeast as well as in the Southeast. But
as to the Northeast, what we are trying to do is to develop a
plan to have one Northeast RTO that has the principles meeting
Order 2000, that is the first thing, and then we will drill
down and get into issues as to license-plate rates, and I don't
want to dwell on that stuff today.
Mr. Ose. Actually, if I understood Order 2000, it is FERC's
desire that the RTO would then get into the regional details,
if you will, that you want to shift that burden to the RTO.
Mr. Madden. We set out general principles initially, and
under those general principles, of course, you have issues
raised in terms of what type of rates, congestion management,
etc. We try to have the parties work together on those
particular issues to reach consensus.
The Commission will ultimately serve as the umpire, calling
the balls and strikes, as to how those details should look. We
set out the parameters. We have addressed some of the details
in individual RTO filings to date, but we have more work to do.
Mr. Ose. I suspect you are going to get more work to do.
Mr. Cannon. I think the Commission is recognizing that
there is going to be a need to start standardizing certain
aspects of market design, things like interconnection policy,
the market rules, particularly where one regional transmission
organization butts up against another. If you have got
inconsistent rules on either side of that seam, then that
becomes an impediment to the efficient operation of the market.
So I think the whole movement that Mr. Madden just alluded
to, the Commission pushing toward even larger regional
transmission organizations, is an effort to reconcile those
rules and to try to standardize them over a much larger area.
Mr. Ose. Thank you.
Mr. Otter for 5 minutes.
Mr. Otter. Let me begin, Mr. Chairman and members of the
panel, by making a disclaimer, which I guess I should have. As
Lieutenant Governor of Idaho the last 14 years, when
deregulation was offered to the States, I was adamantly against
it for the State of Idaho. And the State of Oregon and the
State of California went ahead and did what they thought was
deregulation. But, just for the record, I want you to know that
I didn't think the structure was ready to handle the free
market that was going to be required to set the price either.
And I would just say one thing to a comment by you, Mr.
Harris, that energy is one of these things that is consumed or
used the minute that it is delivered. That may be the case;
however, the effects of that are ongoing. And for a long period
of time, because in Idaho we have got a $32 billion economy
that is reliant almost 90 percent on value-added products, one
of the key elements in that in this day and age happens to be
the energy element. It didn't used to be many years ago. But it
takes 27,000 BTUs to make 1 pound of french fries, and those
french fries won't be consumed for a long time, because they
need to continue to consume energy because they need to be put
in a freezer, and they need to be held until the marketplace is
ready for them.
So I just wanted you to know that in our case we see the
long-term energy use as a long time between the time that we
might pay for it and actually get our money back. So we have
got that in it.
I want to ask either Mr. Madden or Mr. Cannon a question
about your June 18th price mitigation order for California so
far, and whether or not you think that is a success.
Mr. Madden. Mr. Otter, looking at the prices today in
California, as compared to some of the prior mitigation orders,
and recognizing the fact, though, that the weather in
California has been pretty good this year, and that--as
compared to last year, and that Californians did their part and
reduced a substantial amount of consumption, and that the
Governor has added generation, I think our mitigation order, if
you look at all of those factors, has added stability and lower
prices to California.
Mr. Otter. Has it added additional supplies?
Mr. Madden. Our order recognized the importance that we not
have a price cap per se, or hard price cap, to affect the
development of supply.
I understand that the Governor of California has specified
that approximately 5,000 megawatts will be built by October. I
think they are a little bit behind schedule in terms of the
amount, but there has been additional supply added to
California.
Mr. Otter. But, Mr. Madden, I know that part of the action
was to kind of free the market up. Part of the action that was
taken was allowing the market to sort of set the price to the
user, and I don't think it was any regulatory action that
caused the great wave of conservation that suddenly took place.
It was a higher price. It was a price that was starting to
reflect really what the cost of production was.
And so, you know, up in Idaho we started conserving right
away, because our we didn't have a cap on our price. And when
we started exporting that power to California, along with our
water rights, I was concerned about that. Immediately we
started conserving electricity. We started shutting down areas
that weren't necessary to be operating that time of year.
So I think perhaps I would agree with you that the price
and conservation was working, but I think that is a result of
the price going up to the end user. But as far as any
additional supplies, in fact, it has been reported that the
power suppliers are beginning to leave the Northwest. Isn't
that true?
Mr. Madden. There--I don't--I may have to ask Shelton
Cannon if that is true relative to the Northwest, but before I
do, let me make one particular statement. My personal belief is
this, Congressman Otter, that what the market needs today is
certainty in the rules and the structure, and that the
consumers indeed feel comfortable in terms of protection.
Those, to me, are critical things that must happen.
Now, I recognize when we did the mitigation order, we had
to do a balancing, and we had to balance the question of does
this affect supply against how are market rules working? How
are the consumers affected? And the Commission believed for an
interim period, and through September 2002, that mitigation was
the best approach.
Mr. Cannon. I would just echo that with any form of
mitigation you are, by definition, interfering in the workings
of the market, and that can be dangerous, because it can have
impact on entrepreneurial decisions of do I invest or do I not?
Is this a good place to go put money into a new generator?
There certainly have been allegations of--that people are going
to not build generation, or they are going to pull out.
What we have built into that order was an occasion in
October of this year to go back and take another hard look at
the mitigation and see if we have struck this balance
correctly.
Mr. Otter. Does that provide certainty? You are going to go
back and relook at it and maybe change the rules in October?
Mr. Cannon. No, it doesn't. But----
Mr. Otter. Wasn't I just told that certainty was one of the
most important things here?
Mr. Cannon. Certainty is indeed very, very important, but I
guess it does reflect the fact----
Mr. Ose. The gentleman's time has expired. Butch, we'll
come back, if you'd like, on this question.
Mr. Otter. Thank you, Mr. Chairman. Thank you, members of
the committee.
Mr. Ose. Mr. Waxman for 5 minutes.
Mr. Waxman. Thank you, Mr. Chairman. I want to thank you
for holding this hearing, and I will pick up where the
gentleman left off, because I think certainty is an important
ingredient in decisions that will be made.
I think that a lot of the decisions by the industry not to
produce more power plants in California was based on the
uncertainty after the law was passed, unanimously by the
legislature, Democratic legislature, signed by a Republican
Governor. Am I accurate in that, Mr. Cannon? Is that your view?
Mr. Cannon. Yes. I think any time you have that kind of
uncertainty in terms of legislative proposals or regulatory
uncertainty, that is something that very much weighs on the
minds of someone considering that kind of investment.
Mr. Waxman. So we had this law, which I think everyone now
will acknowledge was a serious mistake, on the books. Business
people were trying to make a decision about their investments,
and they didn't see it made sense with all of the uncertainty
to make investments in new power plants.
And then we were caught off guard when the deregulation
went awry, and the way the deregulation went awry is that the
generators saw that they could increase the supply by
withholding electricity, increasing the price by withholding
electricity, and driving up the demand without having enough
supply to meet it. Through this contrivance, they were able to
make a windfall because that law required that the electricity
be purchased at the spot market price.
Is that an accurate evaluation of what went on in
California, Dr. Hogan? You are an academic. Did you come to
that conclusion?
Mr. Hogan. I would certainly agree with parts of that. The
requirement, for example, that utilities had to buy through the
power exchange, the spot market, I think everyone recognized
was a mistake, and it contributed to the financial impact of
the higher prices.
The question as to whether or not generators withheld
supply in order to increase prices and profit from it, I would
echo the comments that Mr. Wells from the GAO made here earlier
today. The bottom line, when you look at all of the studies
that have been done so far, you can't tell.
Mr. Waxman. I suppose that is true. You can't tell for
sure, but it seems like a strange coincidence. It seems to me
also that in this kind of new world that we are living in with
deregulation, some of which is not thought through, the way
that California's was not thought through, there is an even
more important role for FERC.
Under the law FERC is to make sure that wholesale prices
are just and reasonable. The problem we had is that FERC
basically did nothing for a very long time. For months it
ignored repeated pleas from California for assistance. Most of
its orders, such as those in December 2000, April 2001, June
2001, were completely ineffective or even made the problem
worse.
And since FERC's latest order in June, electricity prices
have eased, but we are not so sure whether that is not due to
milder weather and conservation.
Do you have any views of that?
Well, before I ask that question to get your views on it,
let me state that GAO's investigation seems to confirm the
inadequacy of FERC's oversight. In the report released last
month, the General Accounting Office found that, ``FERC's study
of electricity generator outages was not thorough enough to
support its overall conclusion that audited companies were not
physically withholding electricity supply to influence
prices.'' And, furthermore, GAO explained that FERC officials
verbally acknowledged that FERC could not determine whether
generating companies were exercising market power to increase
prices, because FERC only looked at outages and maintenance
records of generators.
The FERC report came at a time when people in this country,
and particularly in California, were paying colossal
electricity prices. Consumers, State officials and industry
experts were looking for answers from FERC about whether
electricity-generating companies had been charging unfair
prices, and unfortunately we did not get such answers from the
FERC report. We are only left with more questions.
So some of us still have a question, now that FERC finally
took action, whether that action is going to be sufficient
should the weather get warm again in California, and we see no
greater conservation than we already have, which is pretty
impressive to this point.
Mr. Madden, do you want to comment on this?
Mr. Madden. Yes, I would, Congressman Waxman. Let me first
say, we at the staff level have been involved in this for the
past year. And, contrary to statements made by many people here
on the Hill or elsewhere, we have taken a lot of actions.
Now, I believe if we looked at our orders, we look at
whether or not the market was dysfunctional first, and we try
to fix those dysfunctions. In that regard----
Mr. Waxman. The market was dysfunctional?
Mr. Madden. Clearly there were market flaws. I'm not
disagreeing with you. Everyone here agrees with that.
The question arises, do you cure the market flaws or the
dysfunctions, or do you go after the refunds from a remedy type
of standpoint? That issue was squarely before the Ninth Circuit
Court of Appeals----
Mr. Waxman. Was it one or the other?
Mr. Madden. Yes. Here is what the court said in its order
mandamus from San Diego: That the Commission was correct in
correcting the market dysfunctions in setting the market rules
first, and that is the appropriate approach, and then look at
what refunds or remedies lie with respect to refunds.
So that issue has already been before the court, and we
have granted refund authority back to October 2nd. So I think,
and you can ask the panelists, the important thing is to get
the rules right, set the structure, and we will have remedial
authority on that.
As to the outages and GAO, I believe GAO in its opening
statement recognized that it wasn't the best study, it was a
quick study, and they recognized that. It was more of an
engineering-related type of study, and it is very difficult to
find physical withholding relative to outages.
As to the other economists' report, they also found faults
with that. There was--we are trying to do a better job. For
example, we have gotten authority from OMB to collect outage
data from all the generators, even nonjurisdictionals. We work
daily now with the ISO on the outages. We are still looking at
the historical patterns of outages. There is not a lot of
history on outages, as the ISO will admit, in terms of a
historical standpoint. We are trying to do a better job.
Mr. Waxman. Thank you.
Thank you, Mr. Chairman.
Mr. Ose. I want to followup on the legislation that I have
introduced, that being H.R. 1941.
If I understand the current statute that FERC operates
under, there is a statutory requirement that FERC allow 60 days
to pass from the date on which a pricing complaint is filed
before any action can be taken. Am I correct on that?
Mr. Madden. It is 60 days from the filing of any type of
complaint, or 60 days after the Commission on its own initiates
the investigation and is placed in the Federal Register. That
is correct.
Mr. Ose. All right. Am I also correct that the remedies
that can be determined by FERC are restricted to mandating
refund of the amount determined to be overcharges above just
and reasonable prices?
Mr. Madden. We--from a refund standpoint, we only have the
authority back to, in this particular case, October 2nd to
those prices above the J&R.
Mr. Ose. Separate and apart from the August 3rd filing.
Mr. Madden. That is J&R level plus any interest owed during
that period. In this particular case, we also got to consider
the offsets, offsets meaning how much do California parties owe
the generators for not being paid.
Mr. Ose. I understand. I am just trying to make sure that I
have got the understanding of the statute.
So it is refund of overcharges plus interest, and that is
the sole financial remedy available to FERC when they find
overcharges?
Mr. Madden. Under 206 of the act. We also have authority to
go after anyone who has violated a particular tariff or
condition and can ask for a disgorgement of profits.
Mr. Ose. Now, the question that I have is whether or not
the proposal to eliminate that 60-day delay has merit, and
whether or not giving the Commission the ability to assess
fines and penalties over and above the overcharges they might
order refunded has merit. I'm particularly interested in Mr.
Harris's response as operator of PJM, and Mr. Winter's response
as the CEO/COO of the Cal ISO.
So, Mr. Harris.
Mr. Harris. Well, Mr. Chairman, we think as we administer
the tariff that certainly you have to have prompt response--
capabilities to respond when a complaint has been filed, and to
be able to be addressed. So we would support such amendments.
As we were discussing earlier, there is just so much money
on the table in administering competitive electricity markets.
Delays do and can create dysfunctions over time. So more prompt
response is always helpful, assuming that the facts and the
merits are available so that FERC can make an informed
decision.
Mr. Ose. Mr. Winter.
Mr. Winter. I think clearly timeliness is of major
importance. Again, I don't want to play attorney, because I am
not one, but I think the 60-day rules were in there to allow
people to comment on it. I think a better approach is rather
than change those that we put in play, the tariffs that allow
for immediate action by FERC, once we as a, quote, ISO or an
RTO bring forward a complaint or something in the market that
we don't think is working right, then if it is clearly a
violation, and we set the rules up right, we ought to be able
to act on that immediately and not go through any 160 days, 60
days, a year, whatever.
So, while I think people need the ability to have their day
before FERC and discuss what they have been accused of; if we
have the documentation, I don't think you can go for a year on
the prices we have been seeing without taking some type of
action immediately to at least forestall it until you can make
your decisions.
Mr. Ose. There was a discussion over in the Senate last
week about conditioning the operating certificates that are
issued to the generators in just such a manner. In other words,
you attach a condition to the certificate that gives the
generators the ability to sell power at market rates, and then
if they violate that provision, you basically pull their
certificate.
Do you have any feedback on how this works?
Mr. Madden, I am going come to you, don't worry.
Mr. Winters. Yeah. I have some immediate feedback, and that
is, if you are sitting in a situation where you don't have
enough generation to serve your load, and I go to a generator
and say, you have been bad, I am going to take your 1,000
megawatts offline, I find myself in a real operating dilemma in
that I am now unable to serve the load that I need to serve. So
I think there has got to be some kind of--rather than just,
quote, yank their license--there has got to be some mechanism
that I can force them to provide that power at the same time
penalizing them. Did I make that clear?
Mr. Ose. I think you are arguing in favor of fines and
penalties as opposed to pulling their certificate.
Mr. Winter. Only because I am in a situation where there is
insufficient supply. To take them out of the market would
really hurt me from a reliability standpoint.
Mr. Ose. Mr. Harris, do you agree with that?
Mr. Harris. Mr. Chairman, I am not directly familiar with
the discussion on the proposal for the licensing conditions for
generating units. I would like to say, though, that what we
have found in operating the market over the past 4\1/2\ years,
that the real secret is spot price transparency of information,
and if you have information, then you have the information to
determine if it was or was not a problem.
One of the discussions that we have is in the approval of
the RTOs, that FERC has approved some RTOs that have spot price
administration capabilities and some that do not. We think this
can create a problem.
If the RTO is administering the spot market, we publish
prices every 5 minutes. They are universally available. If you
want, we will publish the price every 3 to 5 seconds for you.
Having spot price information then allows the market monitoring
units to be able to determine what was going on, and
appropriate information then would lead to appropriate remedy.
So I think my gut sense is I would rather see a system that
would ensure that you had spot price information uniformly
distributed throughout the United States. Then you could take
appropriate remedial action, whatever that may be.
Mr. Ose. We are going to come back and finish this
question.
Mr. Towns for 5 minutes.
Mr. Towns. Mr. Chairman, I would like to ask unanimous
consent to submit some questions and to have them answered. I
have a conflict, and I won't be able to stay throughout, but I
would like to just read the questions and then have them answer
them in writing.
Mr. Ose. We will be happy to submit the questions to
record. The record will be left open for 10 days for such a
purpose. If you would like to read them, that is fine, but we
will be happy to submit them in writing, too.
Mr. Towns. On that note, then, I would just read them real
fast, and then, of course--what studies, economic analysis or
cost-benefit analyses have been done to justify the regional
transmission organization ordered by FERC?
No. 2. What basis is there for setting up this market in
such an expedited fashion? What is the hurry? What is the rush?
What impact will this RTO arrangement have on a State like
New York that has a more sophisticated market?
And then I guess I probably picked this one up out of
Professor Hogan's testimony. In your testimony you set criteria
for RTOs. Which current independent system operator best
fulfills this criteria?
So I would like to have those questions answered. Thank you
very much, Mr. Chairman. I yield back.
Mr. Ose. If I understand, you want the fourth question
directed to Dr. Hogan, the first three questions were directed
to Mr. Madden----
Mr. Towns. For--yes.
Mr. Ose [continuing]. And FERC. Well, we've got the general
counsel and Mr. Cannon. Neither of them are Commissioners here.
Mr. Towns. Either one of them.
Mr. Ose. OK. So we've got three for the FERC folks and one
for Dr. Hogan?
Mr. Towns. That's correct.
Mr. Ose. Any for any of the other witnesses?
Mr. Towns. No. That's it.
Mr. Ose. All right. So ordered.
Mr. Towns. Thank you very much. And I yield back, Mr.
Chairman.
Mr. Ose. Mr. Otter for 5 minutes.
Mr. Otter. Thank you, Mr. Chairman.
Mr. Wells, in GAO's review of the FERC's actions and the
FERC study and the other two studies referenced in your
testimony here, was there any analysis that the GAO did outside
of that, for instance, many of the actions that were taken by
Governor Davis and his representatives during that same time
period? Was there any analysis of what kind of disruption and
what kind of uncertainty that those actions taken by Governor
Davis made in the marketplace?
Mr. Wells. We did not do our own analysis in the outage
work that we did, as well as some other work that we were asked
to do in terms of commenting on whether there was going to be a
surplus or shortage, and it came down to the thorny issue for
us of access to the data. We were not given access to outage
information or information on outages wasn't available. So, we
only relied on the critiquing and looking at what efforts had
been made by others to write their studies.
Mr. Otter. I see. OK. Mr. Madden, in an answer to a
question from the gentleman from California, Mr. Waxman, his
question to you about supply and about suppliers was prefaced
with the fact that there hadn't been any building, nobody had
rushed to build a lot of capacity in California since 1995. But
in fact, did your report discover that there were a lot of
megawatts in the permitting process and in the request for
construction process?
Mr. Madden. Congressman Otter, I believe there hasn't been
any, really, construction at all since 1990, at least a good
decade. I don't know what report you're referring to. Is this
the GAO outage report, or is this our December order?
Mr. Otter. This is the analysis by the GAO of your report
on whether or not there was market manipulation by withholding
supplies from the market.
Mr. Madden. Well, I think we have somewhat of a
disagreement between GAO, although I think they did a very good
report. But the report that staff tried to do was to focus more
on engineering in terms of whether or not the plants went down
for any physical reasons. It didn't focus on--and even though
there's a disagreement between our two agencies, it didn't
focus on whether or not there was influencing of prices, per
se, etc. And maybe--I mean, that is something we've got to look
at.
Mr. Otter. Before we get too involved in that, I'm just
concerned that we're only looking at a very, very small part of
what could have been the reason for some of these things, and I
am told, either by direct reports or by other investigations,
that there were some 14,000 megawatts of new generation
capacity waiting to be permitted and waiting to startup. And if
I'm a supplier and I see a whole bunch of new products coming
some way, I'm going to make sure that my price is going to be
competitive so that there's not a whole lot more enthusiasm for
getting into my market and driving the price even lower.
So it goes to that, in part, but I'm also told there was a
terrific curtailment in some of these plants, which was
legitimized by the fact that they didn't have pollution permits
to a certain level, and so that they could run at 60 percent
capacity or 50 percent capacity, because that's all of the
``pollution'' permits that they had, because they didn't get
the bag houses on or for whatever purpose.
But I think to look at this thing, to go in and look and
see whether or not they were soldering up cooling tubes in one
of the production facilities, and that's why they were shut
down, and if they weren't carrying on some kind of maintenance,
then they were artificially withholding product, curtailing
their production. I think there were a lot of reasons. What I'm
saying is that there was a curtailing of production, and it
wasn't all simply for market manipulation. That's just my
statement. I just want to ask you one question.
We were told last night in the debate on the energy bill
that a public facility, a municipal electric facility, the Los
Angeles Department of Water and Power, was charging during this
time period $285 a megawatt. At the same time period, which
they said was market manipulation by the private sector, they
were charging $245. Have you any information about that?
Mr. Madden. Well, I don't have the figures before me, but I
do have some information, since I usually deal in information
at the Commission. The system was set up in California to have
one clearinghouse with a single price auction, where you buy
and sell into the PX and the ISO. And you had as part of that
framework both public utility sellers, sellers over which we
have direct jurisdiction over, and nonpublic utility sellers,
LADWP for example, over which we do not have direct
jurisdiction, selling in, buying out and getting the same
price. All right? And that, in many cases, it may have sold at
higher rates than what the sellers, the jurisdictional sellers,
may have sold on a bilateral basis or whatever the case may be.
The issue before the Commission is the amount of refunds
now that LADWP and other nonjurisdictional entities may owe,
along with the jurisdictional entities, as a result of them
using that single price clearinghouse and agreeing to be
subject to those rules during the time period.
So the bottom line is this: those nonjurisdictional
entities received the same price through the single price
auction as did the jurisdictional sellers.
Mr. Ose. The gentleman's time has expired. I want to come
back to the question on the 60-day window and the fines and
penalties, and ask Mr. Madden for his input on that particular
proposal.
Mr. Madden. If I may, let me just step back and address the
license certificates for market-based rates. Let me just tell
you that with respect to sellers in the West who have market-
based rates, the Commission has conditioned those market-based
rates now from a prospective basis when it issued its, I
believe, April order, that they're subject to anti-bidding
behavior, and they have retroactive refund conditions attached
to those market-based rates that will give us flexibility to go
after them. We have not done that yet for the rest of the
country, but we're looking at our market-based rate program in
general.
Mr. Ose. Those conditions last until when?
Mr. Madden. We've never set a date.
Mr. Ose. OK.
Mr. Madden. A term date. They're conditional with the
market-based rate.
As to your request for 60 days as to whether or not
Congress would be, or the consumer would be better off in
having a refund effective date from the date of complaint or
when the Commission took action, 60-day action, on its own. I
have a couple thoughts. One, I think it's hard to apply that to
the spot market type of transactions, because they move so
quickly. What I think Mr. Harris said, and I agree with him, is
that what is important on the spot market is the information,
the transparency, etc. In terms of the bilateral market, I
think it could be done, but the problem, from my own personal
view, again, is that you create more certainty as to whether or
not bilateral deals, which were mutually agreed upon by the
parties, get reopened. But should the Congress want to modify
that, I would recommend at the max to only go back to the date
that the complaint was filed.
Mr. Ose. My question is a little more subtle than that.
Even with the 60-day window on a bilateral contract, if there
is a pricing complaint and FERC takes action ordering a refund
and overcharge, you're still voiding a bilateral contract.
All I'm saying is, should the calculation be from the date
of the complaint regarding the pricing, or from 60 days after
that date?
Mr. Madden. It's a policy call, Mr. Chairman. I could go
either way on it. This issue was addressed with the Regulatory
Fairness Act that Congress dealt with in the early 1990's when
it modified the act itself, and what it did before that was it
was prospective from the date of the final order of the
Commission. I could see benefits going back from the date of
the complaint in order to have more certainty and get the
Commission to act very quickly and get the refunds moving.
On the other hand, the question is, is it really a viable
complaint unless you hear from all the parties and the
Commission makes its decision? But I think it has some merit,
but there are pros and cons associated with doing something
like that.
Mr. Ose. How about the issue of assessing fines and
penalties as opposed to just refund of the overcharge plus
interest?
Mr. Madden. Here's my personal opinion, and again I don't
want to speak for the chairman or the commissioners. I
personally believe in penalty authority. The Commission could
have a good stick, to go against those--we may not have
remedial authority with respect to a complaint or a 206, but
it's something that the Commission can use against it. We do
have penalty authority under the Natural Gas Policy Act. We do
have some remedial penalty authority in the Federal Power Act,
but in my opinion, as we move forward and try to monitor these
type of markets and make sure that players play by the rules, I
don't think it's a bad idea to have penalty authority.
Mr. Ose. Mr. Cannon.
Mr. Cannon. I would echo that, again as a personal opinion,
because if you look at how these markets are starting to form
with some sort of single market clearing price auction, the
Commission right now is involved in a very tedious and horrible
exercise of trying to figure out who owes money to whom for the
last several months in California. Trying to go back and
reconstruct what might or might not have happened in a market
is almost impossible.
It's just a very, very difficult task, and going forward,
it seems that refunds don't make as much sense anymore. I mean,
it was a nice paradigm in the days of bilateral cost of service
regulation. You know, I was dealing with you. We could go back,
and if I overcharged you, you could bring a complaint to the
FERC, and we could make sure I gave you back money with
interest. But going back and trying to reconstruct what might
have happened in a market, had certain entities done things
differently, and putting everybody back to where they would
have been under those different actions is very, very hard. So
I'm drawn to some sort of penalty that can be assessed against
the entity that is breaking the rules.
Mr. Ose. Thank you.
Mr. Otter for 5 minutes.
Mr. Otter. Thank you, Mr. Chairman. I recently received
from Mr. Curt a letter stating that the State of Idaho, Idaho
Power, the National Marines Fishery, and FERC had reached an
agreement, and let me refresh you if you're not familiar with
this. I guess you are familiar with it. I can tell by the look
on your face.
Mr. Madden. I'm somewhat familiar with hydro, but my focus
hasn't been on hydro the past couple of----
Mr. Otter. Well, if you don't feel----
Mr. Madden. No, I'll----
Mr. Otter [continuing]. That this is in your area, just
tell me you can't answer this. But what the agreement came down
to, National Marines Fishery came along and they said, ``Idaho
Power, we want you to release 350,000 acre-feet of water out of
Idaho and behind your empowerments, and we're not going to give
you compensation for it, and we need this 350,000 acre-feet of
water for salmon recovery and the continuum under their
scientific study,'' which I might add has not been, as far as
there are many circumstances under which many people are saying
that this is not working. The flush is not working, but we do
know what is working.
But anyway, in an agreement with FERC and NMFS, NMFS backed
off and said, ``OK, we're going to continue the regular flows
through the summer months,'' and you know, I appreciate the
wisdom and not only that, but the logic that NMFS--or that FERC
obviously used to suggest to NMFS that this was not a good
idea. Where I want to go with this is the scarce electricity
months are coming up. Are we going to have that same kind of
consideration in the months to come? Will we continue that,
whether we continue the approach that FERC took for the summer
months into the winter months when the electricity is going to
be a lot more scarce?
Mr. Madden. Commissioner--excuse me, Congressman Otter--I
get used to answering commissioners these days. I'm aware of
the Hells Canyon Project, and I think it was crucial that we
brought all the parties in and we discussed it instead of
having paper flying back and forth, and I think I had to give
NMFS ultimately credit for, you know, pulling back on their
proposal and recognizing the importance of generating energy
and recognizing there is a need to balance environment against
supply.
As to your ultimate question, we are working with other
licensees in order to modify their particular projects to
generate more electricity, both during the summer and for the
next year or so, and working with the environmental agencies,
many of whom support us, by the way, so that more generation
will be able to occur with less environmental constraints, but
yet within the environmental law. So we are pulling together a
dialog with numerous agencies on a number of hydroprojects in
the west.
Mr. Otter. Just to make you aware, I have introduced, along
with several of my colleagues, legislation to actually put the
U.S. Fish and Wildlife back in charge of the Endangered Species
until it hits the ocean, and put NMFS back out in the ocean.
Not only in these circumstances, but we have many, many
circumstances over the Pacific northwest where it's tough to
find a place to go to to surrender, because just about the time
you get permission from U.S. Fish and Wildlife to go ahead with
a problem on the Endangered Species Act, then you have to go
get permission also from NMFS, and NMFS doesn't want to dot the
Is; they don't want to cross the Ts, and so what should take
maybe 60 days working with one agency, you end up spending
years, in fact, running back and forth between the agencies.
So I would be interested some time in a conversation that
we might have in less formal circumstances how you as a
government agency, who has to deal with all of these other
government agencies and the dictates that Congress puts on
them, like the Endangered Species Act, would feel in being able
to go to a one-stop shop when it comes to those kinds of
things.
Mr. Madden. I can give you my opinion now.
Mr. Otter. In public?
Mr. Madden. In public.
Mr. Otter. On the record?
Mr. Madden. On the record.
Mr. Otter. I want to hear it.
Mr. Madden. Under oath. I believe in one-stop shopping. I
am firmly a believer of some agency having the ultimate call on
balls and strikes, working in a collegial fashion with the
other agencies, recognizing the statutory restrictions that
have been imposed on other agencies or the authorities as well.
But I've worked on the pipeline side of the business. I've
worked on the electric side of the business. I used to run the
hydro program in my younger days, and I think it's about time
to cut through the chase and cut through the paperwork and
timing and have a more collegial framework and one-stop
shopping.
Mr. Otter. Thank you. Thank you, Mr. Chairman.
Mr. Ose. I want to return to something having to do with
the RTOs and the manner in which they're operated. FERC put out
an order last week, July 25th, and the order said that while
DWR is a market participant that competes with other suppliers
and purchasers of energy in the ISO markets, unlike other
participants, DWR has had access to the ISO's control room and
associated written materials, visual observations and oral
statements regarding ISO's markets, systems, operations and
activities. This has provided DWR a competitive advantage.
Now, that is a direct quote from an order dated July 25th
from FERC. And Dr. Hogan, I'm trying to figure out, DWR is the
big buyer in California. I mean, in my neighborhood, they're
the big dog, so to speak. How do you run a market if the major
participant is in the same room as the operator of the system?
Mr. Hogan. Well, I think the answer is obvious, and it's
obvious in your question. We do have a short-run problem which
was created by a whole series of mistakes, which led to DWR
buying all this power in the emergency mind-set that appeared
last spring. But going forward, it simply would not pass muster
by any objective analysis that you should have one big buyer,
and you would have one big buyer sitting in the control room
with special access to all the information.
No one would call that a market or a sensible market design
going forward, and I don't think California could call that a
sensible market design going forward.
Mr. Ose. It may well just be a happenstance. And Terry, I'm
going to let you comment. I'm just trying to figure out how we
fix that. Mr. Madden, Mr. Cannon, do the FERC regulations allow
this to occur, or is this happening, again, by happenstance?
Mr. Madden. This is my personal opinion. The DWR buying on
behalf of the State and utilities in the State is a market
participant, and as a market participant, it should not be in
the ISO control room, and it should not have the ability to
cherry-pick the contracts that come in--the lower price
contracts, pull them out of the ISO market and enter into
bilateral sales with them. It gets into the cornerstone
question underlying the RTOs in a lot of things going forward,
and that is independence.
Mr. Ose. You brought this up about 12 or 15 minutes ago. It
was your comment.
Mr. Madden. I don't recall that, but I don't recall a lot
of things these days.
Mr. Ose. FERC has a desire for independence on behalf of
the RTO. How do you go about establishing that?
Mr. Madden. Well, in the RTO, we establish the parameters
upon which we would see an independent RTO, an independent
board. Mr. Harris is operating the PJM, and they have met our
established criteria for independence, and we view their board
as an independent board.
Now, as to looking at a particular California----
Mr. Ose. You have criteria that you've applied?
Mr. Madden. We look at individual cases in the RTOs and
determine whether or not they've met the independence standard
that we specified in Order 2000.
Mr. Ose. Why does it make any difference? Why have you done
it? Why do you want an independent RTO board?
Mr. Madden. I'll pass this to Shelton.
Mr. Cannon. The primary objective is to totally separate
transmission decisionmaking--how this interstate grid is
operated--from decisions of market participants, where any
particular entity that may have a generator and has an interest
in trying to influence decisions about how that transmission
system is operated in its favor. What we want the RTO to do is
administer the interstate transmission system in a totally
unbiased manner so that it's fair to any and all market
participants.
Mr. Ose. Well, I have to admit to some concern, and maybe,
Mr. Winter, you can speak to this. DWR is buying a lot of power
in the State. It's not going to successfully function, at least
on appearance's sake, without them buying the power. I mean,
how do we reconcile this?
Mr. Winter. I guess I have somewhat felt like a patient
laying on the table with everybody dissecting me and wondering
how I'm going to respond. But I would like to comment on
several things, this being certainly one of them.
Just for the record, I am not for standardization. To me,
that's like taking a race car that is running well but it
doesn't have good brakes, so it crashed on the corner.
Therefore, we throw the race car and everything else away.
Mr. Ose. Going back to the question I asked Dr. Hogan.
Mr. Winter. Right. And so I want it on the record that I am
not for standardization. I think innovation will occur, because
we all look at things differently. That does not mean we don't
take the best of what Dr. Hogan has proposed, the best that
other people have proposed, and take our experience and put it
together. But just to do standardization for standardization's
sake, in my opinion, retards innovation and the things that
Phil was talking about that we really need to go forward with.
The supply issue, there were several questions asked about
supply. I made the decision in 1994, along with some other
people, not to build a 500-megawatt power plant in San Diego,
and the sole reason for that was because deregulation was on
the horizon, and we could--we did not know what our
responsibility as a utility would be under that, and we did not
know who was going to pay for it. Without those two things, we
were not going to go forward with generation. That does not
mean that we did not have over 14,000 megawatts of generation
in the queue looking to build in the State.
Where we failed miserably was that we estimated up until
the year 2004 we would have sufficient supply in California. We
made two very critical errors. One, we did not see the
increased growth in the surrounding States, and since we're an
importer of about 30 percent of our power, we got caught when
the other States grew, and they used the resource and we had
not contracted forward for it.
The second mistake that we clearly made was that we didn't
recognize the State was going to grow, and so our demand grew
much more rapidly.
Having said that, the market failure, in my opinion, was
the lack of supply. We had two very good years when we had more
supply. We also got caught with the drought in the year, which
advanced things.
So I think, again, we've got to look at the reason, and I'm
not pointing fingers or looking back. I think we have to learn
from history before we go forward. The whole power plant outage
issue, extremely hard. I have run power plants. At any time, I
could shut the power plant down and have a very good
justification for doing it, because tubes leak. What acceptable
leak rates are there?
I think there you have to go to performance-based criteria
and say give me availability of 92 percent or something that
motivates the people to do it, because they can always find
something that is wrong with it. You asked about DWR on the
floor. That occurred because, No. 1, the market was not
functional. It was not working. And it added an element that we
haven't talked about here and that's bankrupt or creditworthy
entities on the other end.
So, as on the floor when we tried to ask a generator to
supply energy, his first question was, ``Who is the backer of
this purchase?'' And the only way we could get that information
in immediate real-time was to have a DWR operator who could
commit for DWR that they would back those transactions.
We advised FERC of that, and we're working very hard to get
them moved out. Now that the crisis has moved along. I think
the last thing that I would like to say--and I know I'm over my
5 minutes, but we've asked whether the FERC mitigation has, in
fact, worked. I firmly believe it's too early to tell, because
I didn't get in the situation where I don't have enough power
to meet my load, we don't know what the impact is going to be
and whether the market is going to take off. I have high hopes
for it, and I think it's well laid out and will help us, but
until we get to that point, I don't think we're going to know.
Now, on the point of independence, which you asked me----
Mr. Ose. Let me come back. Mr. Otter has been very patient
here. I'm way over my time. We'll come back to that. OK? Mr.
Otter for 10 minutes if he so chooses.
Mr. Otter. Thank you, Mr. Chairman. I would direct my first
question to Mr. Madden and Mr. Cannon, and let's go back and
start in December 2000 when as part of your FERC order you
requested a restructuring of the board. Then, again, certain
times it was mentioned that it was going to be up until, in
fact, a couple of weeks ago or a week ago, that it was part of
the agenda as to when they were going to get the restructuring,
even after the Governor had gone forward and restructured the
board himself.
But yet you continued to put it on the schedule for
addressing what you felt was a problem or at least a concern
that you had. And yet you've continued to drop it off the
schedule as you did this last meeting just before this last
meeting. When does FERC plan on taking action on what they have
since for the last 7 months indicated was a problem?
Mr. Madden. I'm precluded, Congressman Otter, from giving
you a certain date when the Commission would act on the
question of whether or not the board is independent or not
under my regulations. It was on the Commission's agenda last
week, and it was taken off. It was not on any other agenda
prior to that time, at least as I recall. The Commission
recognizes that they have to act swiftly one way or another on
this issue, and there are different positions of the parties,
of course.
California, the ISO believes that they're in compliance
with our December 15th order and that they file bylaws to
implement the new changes that the Governor signed in January.
It's clear from our November order and our December order,
which essentially required that the old stakeholder board
remove itself from service and advisory board, and that the ISO
management under Terry Winter and others serve until such time
as the consultant selected or gave a list of candidates----
Mr. Otter. Why do you feel that was necessary?
Mr. Madden. Because we thought the whole question of
independence was not occurring with respect to the stakeholder
board. Under the order that we authorized back in 1998 that we
allow the State to pick 50 percent of the stakeholders because
the retail--we recognized that there were major problems with
the stakeholder boards where the Commission, in its draft order
in December, recognized the importance of independence and
wanted things to be changed.
Mr. Otter. And why didn't you feel that they were
independent?
Mr. Madden. There were questions as to whether or not they
were--the stakeholder board was representing the particular
interest of their group and not the interests of the ISO, among
other things.
There are a number of party--or pleadings before the
Commission which were scheduled last week which raised concerns
about the independence of the board right now. Like I said, the
Commission had that matter taken off, and it will be before the
Commission quickly, but I can't tell you when.
Mr. Otter. Mr. Winter, how would you characterize the
relationship with the State agencies with the DWR?
Mr. Winter. I guess I don't understand. The relationship
with State agencies and DWR?
Mr. Otter. Your relationship.
Mr. Winter. Oh, our relationship with DWR. Clearly, they
are our biggest purchaser of power, although I should clearly
state that the IOUs self-provide about 48 percent of the power.
DWR buys another 20 and some small real-time, and then the
municipalities provide their own. So they're not in the sense
of being a 60 or 70 percent buyer of power. That is not the
case. They're buying the shortfall, but the investor-owned
utilities cannot purchase with their folks.
Clearly, we have tried to work with them and are working
with them to set up procedures so that they can get the
information they need. When you have utilities with
insufficient credit ratings, they're the only creditworthy
person that is purchasing power, and therefore we work with
them to make sure that we've got the available resources to
meet the load.
Mr. Otter. Do you believe that the CAISO board now meets
the requirements that were laid out for independence?
Mr. Winter. Let's see. I want to be sure I understand your
question. Do I believe that the current board meets the
independent requirements that are laid out in the FERC rules
for independence? I think that we have a concern that as long
as the State has a buyer, that there is an issue in having the
State and the buyer with the board. Beyond that, who a board is
appointed by, just like regulatory agents are appointed by the
President, I think they still function very independently.
So just the fact that the Governor--you say the Governor,
but in fact, legislation was passed that gave him the authority
to appoint the current board. I clearly think that from that
standpoint, they're independent from the market.
Mr. Otter. Thank you, Mr. Chairman.
Mr. Ose. If I might followup. As I understand the
legislation, was it AB 5X?
Mr. Winter. I believe so. I get 5X and 1X confused.
Mr. Ose. That's the problem I have, too. Well, one of them
actually made the pleasure appointments of the Governor? Is
that not correct? They're not subject to Senate confirmation.
Mr. Winter. That is correct.
Mr. Ose. Or anything? And I think that's different. I want
to be sure I understand that difference between, say, a FERC
appointee who is confirmed by the Senate or any of the others.
Mr. Winter. That is correct. That is different.
Mr. Ose. One case here at the Federal level, we have a
Senate confirmation process, but under AB 1X or 5X, whatever it
is, these are pleasure appointments who can be terminated on no
notice, if I understand it correctly, by the Governor.
Mr. Winter. That is my understanding also.
Mr. Ose. OK. I'm trying to figure out what happens if we
cannot satisfy FERC as to the independence of the ISO board.
What transpires? Mr. Madden, maybe I should ask you that.
Mr. Winter. Yeah. Please ask FERC, because I don't know.
Mr. Madden. Mr. Chairman, the matter is pending before the
Commission, but let me give you a scenario. Should the
Commission find that the board is not independent, does not
meet our independence as defined in Order 2000, the Commission
could require--it does have the authority of pre-emption. The
whole Cal ISO is wholesale, is subject to the Federal Power
Act, subject to rates, terms and conditions. The authority
under that and the conditions established there are therefore
under the Federal Power Act.
So what it could do is clearly enforce our rules and
require what we did in December 15th if we wanted to do that,
and that is to establish an advisory board, pending an
independent consultant being given a slate of candidates, etc.
Mr. Ose. Did FERC sign off on having the DWR employee or
the DWR buyers on the floor of the ISO?
Mr. Madden. There has, to my knowledge, never been
Commission action on that matter.
Mr. Ose. Mr. Winter, did somebody request--I'm seriously
concerned about this independence issue, because if we can't
solve it, I mean, it almost seems like everything just gets
gridlocked, and then we're potentially back at square one.
Somebody must have asked whether or not the DWR employees could
come on the floor, or there's got to be some understanding. Is
that accurate?
Mr. Winter. Yeah. Let me give you the scenario of what
transpired. Clearly, the generators were refusing to supply
power based on the fact that, ``the backers of our market were
uncreditworthy.''
Mr. Ose. So they were concerned about getting paid?
Mr. Winter. Correct. DWR, on the other hand, felt that it
had a very strong fiduciary responsibility to be current on
what the prices were for their purchases and also have--give us
immediate response, because I'm buying in 10-minute intervals
here, so it was not a case where we could, in fact, wait around
till people approved a purchase. So DWR said that well, to meet
their requirements, they wished to be on the floor. To meet my
requirements, I had to have a creditworthy entity approving the
contract.
So I made the decision that we would allow them on the
floor during the emergency crisis here and notified FERC with a
letter that they were on the floor and that we were doing this
under the emergency situation that we found ourself.
Mr. Ose. And the concern had to do with the ability of the
alternative buyer, if you will, or the first line of buyers to
be able to pay for the power that they purchased from the
generators?
Mr. Winter. That's correct. DWR was backing all the
purchases that we were making in real-time.
Mr. Ose. Why not extend the same offer to someone other
than DWR, who had the significant liquidity, to stand behind
their purchases?
Mr. Winter. If someone would have stepped up and said they
were willing to back the purchases, I'm sure we would have.
Mr. Ose. Mr. Madden, I don't know how to evaluate this
issue of independence of the board as it relates to the
apparent conflict between DWR's purchasers having access to the
floor and the interests of the consumer in getting the best
price at the end of the day. Is this one of the criteria that
FERC is going to use, or is this one of the things that we need
to fix in California to satisfy FERC about the independence
issue?
Mr. Madden. Mr. Chairman, I think the issue of whether or
not DWR has been the ISO can be easily remedied by Commission
action. So I don't think you need any type of congressional
action on to that particular matter. And as I mentioned to
Congressman Otter, the question of the independence in general
of the board will be before the Commission soon. In Order 888
and Order 2000, independence is the linchpin. You've got to
have independence in order for the market to work. People have
to trust the market. You can't have--you know, we try to
separate out the generators from the transmission. You can't
have them working together. You have to have the confidence, I
believe.
I think the Commission will answer that question very, very
soon.
Mr. Ose. Mr. Otter for 5 minutes.
Mr. Otter. Mr. Winter, how many--how many employees, if any
number, work or consult with both CAISO and the State of
California?
Mr. Winter. I'm sorry. How many employees do what?
Mr. Otter. How many State employees wear two hats, so to
speak? In other words, how many or do you know if there are
employees of the State of California that also consult or work
with CAISO?
Mr. Winter. I'm sorry. People in the--an employee of the
State of California?
Mr. Otter. Yes.
Mr. Winter [continuing]. That works----
Mr. Otter. That also consult with California ISO.
Mr. Winter. Well, when you say ``consult,'' I mean, if a
person from the Electric Oversight Board or the Energy
Commission calls us and asks us about how we came up with our
projection for outages or how we came up with our projection of
loads this summer, is that--I mean, there's many, many of them,
because we're constantly sharing information with all kinds of
people.
So if that's the tenor, then, you know, high numbers within
the company are actually sharing those kind of information with
State employees, as we do with FERC and we do with every other
group that asks us questions.
Mr. Otter. And also with the CW--or CDWR?
Mr. Winter. Correct.
Mr. Otter. Do you have a--when you say high numbers, it
sounds like--could that be----
Mr. Winter. Yeah. That could be 40, 50 people. I mean, we
have Enron call us. We have Reliant call us and ask us
questions. We talk to those folks all the time.
Mr. Otter. Would you have a list of those? Could you make a
list available of those folks?
Mr. Winter. I would have to qualify it by saying, until I
go back and ask if they ever had a phone call from a generator,
I'm not sure how productive that would be, because I'm not
understanding what it is you're really after.
Mr. Ose. If I might interject here.
Mr. Otter. I yield.
Mr. Ose. Is it the gentleman's objective to find out who
has had access to the ISO floor while they are employees of DWR
charged with providing the power to the State? Is that what
you're trying to get at? The name of the people who have been
on the floor?
Mr. Otter. As usual, the chairman has asked the question
much better than I could.
Mr. Ose. OK. Could we get that?
Mr. Winter. Yes. We can give you the names of the DWR
employees who have been on the floor. That is no problem.
Mr. Ose. He's--OK. And you'll be able to tell which of
those have been trading and which of them have not?
Mr. Winter. Yes.
Mr. Ose. I think that's what Congressman Otter's interest
is in.
Mr. Winter. Yes. All right.
Mr. Otter. All right.
Mr. Ose. Mr. Winter, you mentioned that DWR first came on
the floor under an emergency provision. I mean, obviously we
did have a problem.
Mr. Winter. Yes, we did.
Mr. Ose. I live in the State, so I'm familiar with it. They
came on the floor under an emergency provision. Circumstances
at least from a supply or pricing standpoint have changed
significantly from, say, January or February. Does that
emergency order still stand?
Mr. Winter. Yes.
Mr. Ose. DWR employees are still coming on the floor.
Mr. Winter. That is correct under the emergency order of
the Governor.
Mr. Ose. OK. At this point, can you tell me whether any of
those people who--I don't remember if it's the Times or the Bee
or somebody reported they'd been let go. Are any of those
people part of the group of the DWR employees?
Mr. Winter. I do not know. I have not gone back, mainly
because I don't know the list of the--I assume the folks you're
talking about are the ones that were doing something, and I
don't have the list of those names of those people, so I don't
know whether they were ones that were on the floor or not. We
certainly can give you the list of the people that were on the
floor and we----
Mr. Ose. OK. Mr. Harris, at PJM, how do you balance the
independence of the ISO or the RTO with the need to provide
power? I mean, out in California, obviously, we've got some
concerns here. Any suggestions?
Mr. Harris. A few things, yes, sir. I think, first of all,
it begins with the fiduciary duties of the board. The board's
fiduciary duties were very, very important to us when we were
forming our market in the 1995, 1996 timeframe. We had a lot of
discussion with our States. The States did not want a self-
perpetuating board. They wanted a board that was accountable to
the stakeholders. So we set up a board that the articles that
are filed to incorporate the board state that the board has
three fiduciary duties, and upon these three fiduciary duties,
they are subject to all corporate law, practices and so forth.
The first fiduciary duty of our board is to ensure we
operate a safe and reliable interaction. That's very important,
because we want it safe largely because of the nuclear
concerns. We operate more nuclear capacity in our area than any
other area. The second fiduciary duty of our board is to ensure
that we create and operate robust nondiscriminatory electric
power markets.
The third fiduciary duty of our board is to ensure that no
member or group of members has an undue influence over the
interaction.
Additionally to that, our board has adopted a very strict
code of conduct, which we have filed with the Federal Energy
Regulatory Commission. In that code of conduct, no employee,
nor any member of the board, can have any financial interest in
any market participant. That means zero. And with over 200
members in all their subsidiaries, you can imagine the list is
getting quite long.
As far as daily operations, we do not allow any market
participant to even enter the control room building. On certain
occasions for a tour, for example, a company wants to bring
some employees just for information, we will allow them under
escort to the overhead viewer gallery, and then escort them off
so they can at least see the floor, but that's the only time
they have access. Outside of that, they're totally barred from
the control room.
Mr. Ose. In terms of your daily obligations to provide
power, does your operating team meet once a day to talk about
what might be the unique challenges of that day?
Mr. Harris. Yes, sir, we do. We have a schedule of events.
We also have what we call a performance group that actually
oversees and monitors--we log every telephone call that comes
in and out. We have videotape that we have. We have a
performance function that looks at all the operations
previously, and we go over that.
Mr. Ose. I didn't ask my question very well. I'm thinking
more in terms of, say, a management team that meets before the
market opens, so to speak, and says, all right, it's hot over
here. There's low water over there. We've got a bottleneck here
on transmission. Do you meet regularly in a conference setting
where the different teams of the management--different members
of the management team can provide input and you can work out a
lot of these problems?
Mr. Harris. Yes, sir, in short we do. It's a continual
theme, since electricity is 24 by 7, and we have a mobilization
plan, depending on the severity of the events in front of us,
that we mobilize different levels of management to deal with
the situation that is in front of us. And we rehearse and train
on that several times a year on the mobilization plan.
Mr. Ose. Members of this team are all subject to these
parameters that you defined here?
Mr. Harris. Yes, sir, every employee is subject to that. We
audit that, and they also have to fill out certificates
periodically that they've met all the concerns. Every employee
has.
Mr. Ose. OK. Mr. Otter for 5 minutes.
Mr. Otter. Mr. Harris, if I might continue, I appreciate
your reiteration of your three standards of conduct. I don't
know how much information that you have available--I mean, you
were knowledgeable of before this panel and before today, but
recognizing the lack of independence or the apparent lack of
independence, recognizing FERC's early on concern, clear back
in December and their continuing concern for the appearance of
a lack of independence, does the board meet your standard of
conduct for independence?
Mr. Harris. Are you talking about the California board?
Mr. Otter. Yes.
Mr. Harris. No, sir, it would not.
Mr. Otter. Would--I mean, would that----
Mr. Ose. Would the gentleman yield?
Mr. Otter. Yes.
Mr. Ose. I want to be very clear. Mr. Winter did not
appoint the board. All right? I don't want to hang this around
his neck.
Mr. Otter. No.
Mr. Ose. And I yield back.
Mr. Otter. I wasn't suggesting who did. I think I know who
did appoint the board. But let me be clear on this. No. 1--your
No. 1 covenant was you've got to operate a safe operation.
Mr. Harris. Yes, sir.
Mr. Otter. Your operations, you're going to ensure that the
operations that you operate are safe, and I'll assume that's
for the employees but also for the customer base.
Mr. Harris. Yes, sir.
Mr. Otter. So that there's no damage there. Do you feel
that the lack of independence or the apparent lack of
independence of the California board makes the potential for
what they do operate unsafe?
Mr. Harris. I can't opine on that, because I'm just not
that close to the way that California operates.
Mr. Otter. The second principle, ensure that we create an
operation with nondiscriminatory groups. Does the California
board meet that test?
Mr. Harris. Well, from what I've heard today, there
certainly are questions, you know, when you have people that
are bidding and trading there, that makes it questionable. Our
goal is to create and operate robust, nondiscriminatory
electric power markets, and it's very clear and that's what we
have to manage to do.
Mr. Otter. And of course, the No. 3, no undue----
Mr. Harris. Yes, sir. Our board is accountable to the
membership. We're a limited liability company, so they're
elected by the members under staggered terms, and the members
have insisted that they have to ensure that no group or single
group has an undue influence over the operations of the PJM
interconnection.
Mr. Otter. Mr. Hogan, from your perspective, do those seem
to be reasonable covenants that Mr. Harris enumerated?
Mr. Hogan. Yes, I think they're very reasonable, and I
would emphasize particularly the first one, safe and reliable,
is not controversial. The controversial one is the part about
operating robust nondiscriminatory markets with no undo
influence by any participants. And the pressure is always on
the ISO, the pressure has certainly been on the California ISO.
When you get into these tight situations the pressure is to
essentially take sides, to line up with the buyers against the
sellers or the sellers against the buyers or something like
that.
And the trick is to have a set of rules and procedures that
the ISO could administer without taking sides in that matter,
and to try to do so in and even-handed way. That's an extremely
difficult task. It's especially difficult if you have a very
badly designed market, and so I don't envy Terry Winter his job
at all. He didn't design the market. He didn't create this
mess, and he's had to live with it. I have thought for a long
time the California design was simply unworkable, but that's
the task that he has to get back to, which is to meet that
second fiduciary responsibility, which circumstances have made
impossible.
Mr. Otter. Mr. Madden and Mr. Cannon, would FERC agree that
those are good standards of integrity that should be adopted by
most boards to operate with that level of independence that you
obviously suggested in your December 15th report?
Mr. Madden. Congressman Otter, PJM filed those with the
Commission, and the Commission approved those standards as to
PJM. So the Commission has spoken on that. I cannot speak
because of the pending matter on the California independence,
though.
Mr. Otter. I see. And let me not speak--let me not ask you
specifically, then, as it applies to California, but for a
board that needed independence, wouldn't those be three good
pillars of----
Mr. Madden. We approved them, so I assume the Commission
thought they were good.
Mr. Otter. Do you agree with that, Mr. Cannon?
Mr. Cannon. Yes.
Mr. Otter. Let me just ask one other question. And maybe I
have to ask it across the board, and I know I'm over my time,
Mr. Chairman. But when the Governor appointed the board, is
this correct now that there was no requirement for Senate
confirmation, Mr. Winter?
Mr. Winter. That is correct.
Mr. Otter. Was there an investigation of any potential
conflicts of interest of the board members for the board that
they were going on?
Mr. Winter. Clearly, each of the board members had to sign
a certificate saying that they did not hold market positions,
etc., in other corporations.
Mr. Otter. At that time?
Mr. Winter. Market participants.
Mr. Otter. At that time?
Mr. Winter. That's correct.
Mr. Otter. Would they be required to not acquire a stock
which could be considered a conflict of interest during their
time that they were served on the board?
Mr. Winter. Yes. I'm almost positive--I haven't read it in
the last day or two, but that does prohibit them from investing
in stocks that are in the market.
Mr. Otter. Do you know if anybody on the board has invested
in any stock?
Mr. Winter. No, I do not know.
Mr. Otter. Thank you, Mr. Chairman.
Mr. Ose. I might followup. It's my understanding that the
members of the ISO board have to file financial disclosure
statements with FERC. Am I correct?
Mr. Madden. I don't know. I'd have to get back to the
committee on that. They currently have filed their bylaws to
implement--I think it's AX 1, and the Governor's selection of
the boards, and that's pending--as part of an independence
filing. But I don't think they have to file the financial, per
se. I have to get back with you, sir.
Mr. Ose. How about senior staff members such as might exist
at Cal ISO, such as Mr. Winter, or over at PJM, Mr. Harris. Do
they file such statements with FERC?
Mr. Madden. We have general standards of conduct that the
employees of the ISOs are to abide by. I do not think--and,
again, I have to get back to the committee on whether we also
review their financial records.
Mr. Ose. OK. I've always found it helpful, as Mr. Harris
and I discussed, to talk about a challenge amongst the people
that work with me.
Mr. Winter, does that same kind of activity take place at
Cal ISO on any given day? I mean, do you have a regular
gathering or a conference call? And I'll tell you why I asked
that question. We've had some interviews, and it has been
suggested to us that there are daily meetings where spot market
prices and conditions are talked about in advance, potential
this, potential that. I'm just trying to clarify.
Mr. Winter. I don't know specifically that prices are
discussed in those meetings. We have an operational meeting and
during the crises times, those would last 24 hours a day. We
have always been open line with the operators talking. We have
a 9 a.m. meeting that we talk to all the operators. We tell
them what we see as the load. If it looks like we're going to
have a bad day the next day, there's a 7:30 a.m. meeting, as
well as a 2:30 p.m. meeting where they talk about where the
load is going and what kind of demand responsiveness we've got
and whether a rain cloud is coming in, all those kind of things
are discussed.
The actual discussion of prices, I do not believe take part
in those meetings, but I've not sat in all of them, so I can't
tell you that a price wasn't mentioned in some meeting.
Mr. Ose. But you are in those meetings, or some of them at
least?
Mr. Winter. No. My vice president of operations and the
director of operations sit in on those meetings.
Mr. Ose. Help me out here in terms of who might sit in on
those meetings. You have the vice president of operations.
Mr. Winter. The director, the person who is over all the
dispatchers on the floor, the emergency notification people,
because they're impacted if we have to declare an emergency. We
have the investor-owned utilities calling in, who are the
operators who have to implement any load shedding.
Mr. Ose. Of the native generation, such as it still exists?
Mr. Winter. Correct.
Mr. Ose. OK.
Mr. Winter. We have members of the Electric Oversight
Board, the Energy Commission. Matter of fact, just about
everybody sits in on those to hear what the status is during
the day. Then we also--we've recently started publishing our
load information, etc.
Mr. Ose. I have a couple questions. I just need to
understand whether or not the following people are
participating in this. Is Vikram Budhraha?
Mr. Winter. Vikram Budhraha, no, he is not.
Mr. Ose. How about Mark Skowronski?
Mr. Winter. I am not aware that he is.
Mr. Ose. Bruce Willison?
Mr. Winter. No. He's on the EOB board, but he is not in
those calls.
Mr. Ose. How about Richard Ferreiro?
Mr. Winter. No, I do not believe he is. He is a DWR
employee. He may have, but I do not know for a fact that he
did.
Mr. Ose. Is David Freeman in on those meetings?
Mr. Winter. No, he is not.
Mr. Ose. Or Scott Maviglio?
Mr. Winter. No. On Scott or--is it Scott or Steve?
Mr. Ose. Steve Maviglio. You're right.
Mr. Winter. I don't know whether he's ever listened in on
those or not.
Mr. Ose. Are any of the people who are actually making the
decisions as to which power to take or not take involved in
those meetings?
Mr. Winter. There could be, because the people from DWR who
also are the operating people who approve the transactions
occasionally have sat in those, but, again, remember we're
talking about supply and demand, not the prices in those
meetings.
Mr. Ose. Has William Mead ever sat in those meetings?
Mr. Winter. I'm not aware--I'm not even sure I know who he
is.
Mr. Ose. How about Herman Leung?
Mr. Winter. I don't know who he is.
Mr. Ose. Constantine Louie?
Mr. Winter. No. I'm not saying no he didn't sit in. I'm
saying I don't know him.
Mr. Ose. Peggy Cheng.
Mr. Winter. I don't know.
Mr. Ose. Elaine Griffin.
Mr. Winter. I don't know.
Mr. Ose. Bernard Barretto.
Mr. Winter. Again, I do not know.
Mr. Ose. OK. All right. I want to shift back to something,
if Mr. Otter will allow me to, that Mr. Madden brought up some
minutes ago. You had said that FERC and everybody in the room
knows it, FERC's working through a process by which it can
determine what, if any, refunds may or may not be due as a
result of alleged overcharges, they are by the jurisdictional
or nonjurisdictional entities in California, and that's
something that is in process right now.
Mr. Madden. That is in hearing right now.
Mr. Ose. OK. Do you have a list of the--I think the number
that comes to my mind that I'm familiar with is $8.9 billion.
Do you have a breakdown of the $8.9 billion number by--item by
item by company or by entity, the amount of the alleged
overcharge?
Mr. Madden. I do not have that. If the Commission would
have it, it would come at the hearing, because the judge would
require the Cal ISO to specify under its methodology that the
Commission--who owes what.
Terry may be in a better position to----
Mr. Ose. Yeah, but I'm asking the questions here. So----
Mr. Madden. Well, I don't have--I don't have----
Mr. Ose. You don't have it?
Mr. Madden. I don't have it.
Mr. Ose. Terry--or Mr. Winter, do you have it?
Mr. Winter. We clearly have an indication of how we arrived
at those dollars, and I would have to check to be sure, but I'm
quite certain we gave those to the settlement folks.
Mr. Ose. Can we get a copy of it? It's going to be a public
record here soon anyway.
Mr. Winter. Again, I can't answer, because of the FERC
tariffs and the settlement kind of restricted what I could give
out. But clearly I'll check on it and give you an answer based
on what information is available and who it was given to.
Mr. Madden. Mr. Chairman, if it's filed with the judge, I
think there's an August 9th or 10th date for the filing of
information. That is a public hearing, and I will see that if
it's filed, I will provide the committee with a copy of it.
Mr. Ose. The gentleman from Idaho.
Mr. Otter. I have nothing more, Mr. Chairman.
Mr. Ose. All right. Let me work through the rest of my
questions, then. Mr. Winter, do Cal ISO employees have to
submit financial disclosure forms?
Mr. Winter. Yes. I wouldn't characterize it as a disclosure
form. In other words, they don't have to tell us all their
investments and give us criteria. What they have to sign is a
disclosure that they have not traded any stocks that are
controlled by the people whom they are doing the business with,
that they don't have employment with folks and so----
Mr. Ose. It's a code of conduct.
Mr. Winter. Yes, it is.
Mr. Ose. Much like what Mr. Harris has.
Mr. Winter. Yes, it is.
Mr. Ose. Now, are these statements of economic interest or
affidavits saying they will not and they have not?
Mr. Winter. I think they are statements saying they will
not and they have not. I'm familiar with the ones as officers
we sign, which is we divest ourselves of all stocks that are in
the market and don't deal with those. I haven't looked at the
employees signs.
Mr. Ose. Now, those are the Cal ISO employees?
Mr. Winter. Correct.
Mr. Ose. Do you know what conditions apply to the DWR
employees who might be on the floor?
Mr. Winter. No, not at all.
Mr. Ose. OK. I need a moment here.
Mr. Madden, or the balance of the witnesses, I don't have
any more questions, but you can tell from my questions and my
curiosity the degree to which I'm concerned about this issue of
independence of the Cal ISO board. I don't have a solution for
you. I worked a month to make some suggestions to Mr. Madden
and his colleagues over at FERC, and they were kind enough to
take them under advisement, but at some point or another, this
issue of independence has to be resolved, and it has to be
resolved positively so that FERC, No. 1, can be satisfied. And
as important, it has to be resolved positively because of the
difficulty California Members are having here in Congress in
working in the best interests of California.
We get, if you will, blindsided regularly, and it
undermines our credibility here, and it compounds the
difficulty that we have in being representatives for the State
of California. I don't know about this stuff that I've read in
the paper lately, I don't know who's right or who's wrong, but
it's a serious issue for us here to try and resolve this
positively. Think on that.
If any of you have any comments about or suggestions as to
how we could expedite that, I'd certainly appreciate them.
Mr. Harris.
Mr. Harris. Mr. Chairman, I just want to echo the fact of
how extremely important independence is. What we have found is
that because we have the central planning function, we do all
the planning. We operate the market. We have all the functions.
It's the largest wholesale competitive marketplace in the
world. There were only about 300 employees. Without the bedrock
of independence, we wouldn't have the trust of the public or
the customers. It is absolutely crucial for the functioning of
our marketplace.
The other thing that applies to market monitoring, when we
talked earlier about the meetings that we have as we plan the
days and the weeks, our market monitoring function that reports
to our board is integral to that. They have to be coupled with
what is going on. We have some sophisticated tools that can
provide check points and highlight things, and the market
monitoring then can talk freely and understand what is going on
in the system with many different players. And you wouldn't
have that freedom if you didn't have the independence.
So independence is the bedrock upon which the other layers
are built to enable you to have a competitive effective
marketplace.
Mr. Madden. Mr. Chairman, let me just add a couple things.
As I mentioned to you earlier, it is squarely before the
Commission and I will let the Commission know the urgency of
acting quickly, at least based on what I'm hearing today. Terry
Winter is not part of the building. Terry Winter is the CEO,
CEO of the ISO. In my personal opinion, he has done a great job
under very difficult situations. I trust him. He's honest. And
I value his advice.
Mr. Ose. I share your analysis and evaluation.
Anybody else? Dr. Hogan.
Mr. Hogan. I certainly agree with everything about
independence, and I think it's independence on both sides. You
don't want the ISO owning shares and the generators, and you
don't want the ISO representing the State at refund hearings.
The ISO should be providing information for all of those
purposes, but you don't want to get into this taking sides.
Furthermore, you could have the most independent board in
the world, and if you don't have a well designed market, it
isn't going to help. So I think that independence is just the
tip of the iceberg, and it's to easy to think that if I could
just appoint an independent board, that FERC could go home
early and this committee wouldn't have any more work to do. I
just don't think that's right. Independence is just the
beginning, not the end, and you've got to get into these
details, as much as people hate to do it. But we have the
benefit of things that work, and we know that they work, and we
should be using them. If people could innovate and provide
something that is better, I'm all in favor of it. But when they
come forward and they give you something that doesn't work in
theory, that's never been tried any place else, and the only
reason they do it is they say markets are so powerful, markets
can overcome anything--the evidence is, you shouldn't give that
credence. It just isn't that way. This market is too
complicated. We should do what we have experienced actually
works.
Mr. Ose. Mr. Otter.
Mr. Otter. I have nothing.
I want to thank the panel. Thank you very much for being
here.
Mr. Ose. I do want to close. I had the opportunity to go
over to FERC's new market monitoring room the other day, and it
was very interesting. It's probably very much like Mr. Winter's
office, where it's got all the different markets and the
transmission lines and the generation facilities and what have
you. I think that's a great step in the right direction, to
bring the tools that are available to FERC staff into the 21st
century. I know that they exist or similar equipment, similar
technology exists at the Commodity Futures Trading Corp., and
the SEC and similar regulatory bodies, in terms of monitoring
markets, and I know that Enron online has it. I haven't been to
see it, but I know they have it.
What you do in Pennsylvania or PJM in putting your 5-minute
prices on your Web site, it's a great idea. Transparency
galore. Here it is. Love it or leave it kind of thing. I'm
hopeful that we can refine what FERC has from a transparency
standpoint. I haven't figured out the licensing thing with the
provider of the service in terms of aggregating and
dissemination, but I hope we can provide through FERC some
similar vehicle for the RTOs to use to monitor their respective
or regional markets. I think that would be a great step
forward.
I want to thank the witnesses today. This has been very
educational for me, very informative. I know some of you have
travelled a long way to come today. We appreciate that. Thank
you again. This hearing is adjourned.
[Whereupon, at 5:20 p.m., the subcommittee was adjourned.]
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